SCHWAB CAPITAL TRUST, 485BPOS, 1999-02-26

SCHWAB CAPITAL TRUST
485BPOS, 1999-02-26

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<PAGE> 1

File Nos. 33-62470 and 811-7704
As filed with the Securities and
Exchange Commission on February 26,
1999 SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 32 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 34 [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 H. Grady, Jr. Esq. Martin E. Lybecker Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment
1701 Market Street One Franklin Square Management, Inc.
Philadelphia, PA 19103 1301 Franklin, NW, Suite 101 Montgomery Street120K-14-109
800 East San Francisco, CA 94104
Washington, DC 20005
</TABLE>

It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On February 28, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check 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 (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.

[SCHWABFUNDS LOGO]
<PAGE> 3
ABOUT THE PORTFOLIOS

Schwab
MarketTrack Portfolios(TM)

<TABLE>
<S> <C>
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
</TABLE>
<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
investment strategies: asset allocation and indexing. 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 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 seeks 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 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:

- --------------------------------------------------------------------------------
SMALL-CAP SCHWAB SMALL-CAP INDEX FUND.(R) Seeks to track the Schwab
STOCK Small-Cap 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.

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 AMONG FUNDS

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 of 45% in large-cap, 30% in international and 25% in small-cap.

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 good 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 5
<PAGE> 7
PERFORMANCE

Information will appear in a future version of the fund'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. These fees are approximately 0.45% of the portfolio's average net
assets based on current investments, and may fluctuate.

Fee table (%)

<TABLE>
<S> <C>
- --------------------------------------------------------------------------------

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

ANNUAL OPERATING EXPENSES (% of average net assets)

- --------------------------------------------------------------------------------
MANAGEMENT FEES* 0.54
DISTRIBUTION (12b-1) FEES None
OTHER EXPENSES 0.54
----
Total annual operating expenses 1.08

EXPENSE REDUCTION (0.48)
----
NET OPERATING EXPENSES** 0.60
----
</TABLE>

* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 2/29/00.

Estimated Expenses on a $10,000 investment

Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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
- --------------------
<S> <C>
$61 $287
</TABLE>

Because this is a new fund, no performance figures are given.

6 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, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
5/19/98-
10/31/98
- -----------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
- -----------------------------------------------------------------------------------
Net asset value at beginning of period 10.00
-----------
Income from investment operations:
Net investment income (0.01)
Net realized and unrealized gain on investments (0.71)
-----------
Total income from investment operations (0.72)
Less distributions:
Dividends from net investment income --
-----------
Total distributions --
-----------
NET ASSET VALUE AT END OF PERIOD 9.28
===========
Total return (%) (7.20)1

RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.39 2
Expense reductions reflected in above ratio 0.74 2
Ratio of net investment income to average net assets (0.36) 2
Portfolio turnover rate 2
Net assets, end of period ($ x 1,000,000) 117
</TABLE>

1 Not annualized.

2 Annualized.

ALL EQUITY PORTFOLIO 7
<PAGE> 9
SCHWAB MARKETTRACK
GROWTH PORTFOLIO

TICKER SYMBOL: SWHGX

GOAL

The portfolio seeks 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:

ALLOCATION FUND AND INDEX
- --------------------------------------------------------------------------------
LARGE-CAP SCHWAB S&P 500 FUND. Seeks to track the S&P 500 Index,(R) a
STOCK widely 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
STOCK Small-Cap 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.

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 of 80% stocks, 15% bonds and 5%
cash.

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

8 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 the 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 9
<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

Best quarter: 15.70% Q4 1998
Worst quarter: -10.55% Q3 1998

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

<TABLE>
- ----------------------------------------------------------
Since
1 Year inception
- ----------------------------------------------------------
<S> <C> <C>
Portfolio 15.17 17.26 1
S&P 500(R) Index 28.58 28.26 2
Lehman Brothers Aggregate Bond Index 8.67 7.75 2
</TABLE>

1 Inception: 11/20/95.
2 From: 11/20/95.

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. These fees are approximately 0.31% of the portfolio's average net
assets based on current investments, and may fluctuate.

FEE TABLE (%)

<TABLE>
<S> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
MANAGEMENT FEES* 0.54
DISTRIBUTION (12b-1) FEES None
OTHER EXPENSES 0.36
--------
Total annual operating expenses 0.90

EXPENSE REDUCTION (0.30)
--------
NET OPERATING EXPENSES** 0.60
--------
</TABLE>

* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------
<S> <C> <C> <C>
$61 $252 $464 $1,075
</TABLE>

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

10 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 13.59 11.30 10.00
------------------------------
Income from investment operations:

Net investment income 0.16 0.17 0.19
Net realized and unrealized gain on investments 0.99 2.32 1.13
------------------------------
Total income from investment operations 1.15 2.49 1.32
Less distributions:
Dividends from net investment income (0.16) (0.20) (0.02)
Dividends from capital gains (0.62) -- --
------------------------------
Total distributions (0.78) (0.20) (0.02)
------------------------------
Net asset value at end of period 13.96 13.59 11.30
==============================

Total return (%) 8.85 22.33 13.24 1

RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------
Ratio of Net Operating Expenses to Average Net Assets 0.60 0.75 0.89 2
Expense reductions reflected in above ratio 0.50 0.49 0.61 2
Ratio of net investment income to average net assets 1.34 1.58 2.03 2
Portfolio turnover rate 14 113 46
Net assets, end of period ($ x 1,000,000) 276 168 106
</TABLE>

1 Not annualized.

2 Annualized.

GROWTH PORTFOLIO 11
<PAGE> 13
SCHWAB MARKETTRACK
BALANCED PORTFOLIO

TICKER SYMBOL: SWBGX

GOAL

The portfolio seeks 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.

ALLOCATION FUND AND INDEX
- --------------------------------------------------------------------------------
LARGE-CAP SCHWAB S&P 500 FUND. Seeks to track the S&P 500 Index,(R) a
STOCK widely 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
STOCK Small-Cap 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.

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 of 60%
stocks, 35% bonds and 5% cash.

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 the 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.

BALANCED PORTFOLIO 13
<PAGE> 15
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

Best quarter: 11.81% Q4 1998
Worst quarter: -6.85% Q3 1998

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------
SINCE
1 YEAR INCEPTION
- -----------------------------------------------------------
<S> <C> <C>
Portfolio 13.67 14.58 1
S&P500(R) Index 28.58 28.26 2
Lehman Brothers Aggregate Bond Index 8.67 7.75 2
</TABLE>

1 Inception: 11/20/95.

2 From: 11/20/95.

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. These fees are approximately 0.33% of the portfolio's average net
assets based on current investments, and may fluctuate.

FEE TABLE (%)

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ---------------------------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% of average net assets)
- ---------------------------------------------------------------------------------
MANAGEMENT FEES* 0.54
DISTRIBUTION (12b-1) FEES NONE
OTHER EXPENSES 0.36
------
Total annual operating expenses 0.90

EXPENSE REDUCTION (0.30)
------
NET OPERATING EXPENSES** 0.60
------
</TABLE>

* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------
<S> <C> <C> <C>
$61 $252 $464 $1,075
</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>
11/1/97- 11/1/96- 11/20/95-
Investor Shares 10/31/98 10/31/97 10/31/96
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

PER-SHARE DATA ($)
- ----------------------------------------------------------------------------------------------------
Net asset value at beginning of period 12.82 11.05 10.00
-------------------------------------
Income from investment operations:
Net investment income 0.25 0.22 0.25
Net realized and unrealized gain on investments 0.86 1.78 0.83
-------------------------------------
Total income from investment operations 1.11 2.00 1.08

Less distributions:

Dividends from net investment income (0.23) (0.23) (0.03)
Dividends from capital gains (0.31) -- --
-------------------------------------
Total distributions (0.54) (0.23) (0.03)
-------------------------------------
NET ASSET VALUE AT END OF PERIOD 13.39 12.82 11.05
=====================================
Total return (%) 9.02 18.43 10.82 1

RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.59 0.78 0.89 2
Expense reductions reflected in above ratio 0.51 0.52 0.67 2
Ratio of net investment income to average net assets 2.33 2.48 2.79 2
Portfolio turnover rate 32 104 44
Net assets, end of period ($ x 1,000,000) 264 151 81
</TABLE>

1 Not annualized.

2 Annualized.

BALANCED PORTFOLIO 15
<PAGE> 17
SCHWAB MARKETTRACK
CONSERVATIVE PORTFOLIO

TICKER SYMBOL: SWCGX

GOAL

The portfolio seeks 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.

ALLOCATION FUND AND INDEX
- --------------------------------------------------------------------------------
LARGE-CAP SCHWAB S&P 500 FUND. Seeks to track the S&P 500 Index,(R) a
STOCK widely 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
STOCK Small-Cap 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.

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 of 55%
bonds, 40% stocks and 5% cash.

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

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 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. Also, the values of certain types of stocks, such as small-cap stocks
and international stocks, may fluctuate more widely than others.

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.

CONSERVATIVE PORTFOLIO 17
<PAGE> 19
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

Best quarter: 8.49% Q2 1997
Worst quarter: -3.35% Q3 1998

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

<TABLE>
<CAPTION>
- --------------------------------------------------------
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------
<S> <C> <C>
Portfolio 11.56 11.83 1
Lehman Brothers Aggregate Bond Index 8.67 7.75 2
S&P 500(R) Index 28.58 28.26 2
</TABLE>

1 Inception: 11/20/95.

2 From: 11/20/95.

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. These fees are approximately 0.34% of the portfolio's average net
assets based on current investments, and may fluctuate.

FEE TABLE (%)

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ----------------------------------------------------------------------------------
NONE
ANNUAL OPERATING EXPENSES (% of average net assets)
- ----------------------------------------------------------------------------------
MANAGEMENT FEES* 0.54
DISTRIBUTION (12b-1) FEES NONE
OTHER EXPENSES 0.48
---------
Total annual operating expenses 1.02
EXPENSE REDUCTION (0.42)
---------
NET OPERATING EXPENSES** 0.60
---------
</TABLE>

* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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>
$61 $276 $515 $1,203
</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

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
11/1/97- 11/1/96- 11/20/95-
INVESTOR SHARES 10/31/98 10/31/97 10/31/96
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------
Net asset value at beginning of period 11.71 10.51 10.00
-------------------------------------
Income from investment operations:
Net investment income 0.35 0.35 0.33
Net realized and unrealized gain on investments 0.64 1.21 0.48
-------------------------------------
Total income from investment operations 0.99 1.56 0.81
Less distributions:
Dividends from net investment income (0.35) (0.36) (0.30)
Dividends from capital gains (0.24) -- --
-------------------------------------
Total distributions (0.59) (0.36) (0.30)
-------------------------------------
NET ASSET VALUE AT END OF PERIOD 12.11 11.71 10.51
=====================================
Total return (%) 8.64 15.12 8.18 1

RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.58 0.81 0.89 2
Expense reductions reflected in above ratio 0.64 0.84 1.16 2
Ratio of net investment income to average net assets 3.26 3.40 3.49 2
Portfolio turnover rate 58 104 64
Net assets, end of period ($ x 1,000,000) 115 41 22
</TABLE>

1 Not annualized.

2 Annualized.

CONSERVATIVE PORTFOLIO 19
<PAGE> 21
PORTFOLIO MANAGEMENT

The portfolios' investment adviser, Charles Schwab Investment Management, Inc.,
has more than $77 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 3 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 0.26% for the Growth Portfolio, 0.23% for
the Balanced Portfolio and 0.09% 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.
For the All Equity Portfolio, the portfolio's fee is calculated as follows:

<TABLE>
<CAPTION>
MANAGEMENT FEE (% of average daily net assets)
- ------------------------------------------------------
<S> <C>
First $500 million of assets 0.54%
Assets above $500 million 0.49%
</TABLE>

GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of the equity portions of the portfolios. Prior to joining
the firm in 1995, she worked for nearly 15 years 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.
Prior to joining the firm in October 1997, he worked for more than 17 years in
research and asset management.

YEAR 2000 ISSUES

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

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

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

STEP 1

Choose a 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.

OPTION FEATURES
- --------------------------------------------------------------------------------
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
mix distributions are invested in shares of your portfolio.
- --------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain
distributions.

STEP 3

Place your order. Use any of the methods described at right. Make checks payable
to Charles Schwab & Co., Inc.

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 are automatically
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.

22 INVESTING IN THE PORTFOLIOS
<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:

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

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

- - 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.

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.

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.

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. The portfolios calculate their share prices each business day,
after the close of the NYSE (generally 4:00 p.m. Eastern time). 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. Orders to buy, sell
or exchange shares that are received in good order prior to the close of the
fund will be executed at the next share price calculated that day.

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 the
portfolio 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

24 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

If you are investing through a taxable account and purchase shares of a fund
just before it declares a distribution, you may receive a portion of your
investment back as a taxable distribution. This is because when a fund makes a
distribution, the share price is reduced by the amount of the distribution.

You can avoid "buying a dividend," as it is often called, by finding out if a
distribution is imminent and waiting until afterwards to invest. Of course, you
may decide that the opportunity to gain a few days of investment performance
outweighs the tax consequences of buying a dividend.

INVESTING IN THE PORTFOLIOS 25
<PAGE> 27
NOTES

26 NOTES
<PAGE> 28
SCHWAB
MARKETTRACK PORTFOLIOS(TM)

PROSPECTUS
FEBRUARY 29, 1999
SCHWABFUNDS (R)

TO LEARN MORE

This prospectus contains important information on the portfolios 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 portfolio investors, discuss
recent performance and portfolio holdings.

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

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

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 MarketTrack Portfolios 811-7704

<PAGE> 29
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...............................................16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................19
INVESTMENT ADVISORY AND OTHER SERVICES.....................................19
BROKERAGE ALLOCATION AND OTHER PRACTICES...................................21
DESCRIPTION OF THE TRUST...................................................23
PURCHASE, REDEMPTION AND PRICING OF SHARES.................................24
TAXATION...................................................................25
CALCULATION OF PERFORMANCE DATA............................................27

<PAGE> 30
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 at least 50% in other
SchwabFunds(R), which are registered open-end investment companies.

2
<PAGE> 31
issued securities transactions, repurchase agreements, swap agreements and
futures and options contracts. 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. 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.

3
<PAGE> 32
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 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.

4
<PAGE> 33
DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities normally require the issuer to pay a fixed,
variable or floating rate of interest on the amount of money borrowed (the
"principal") until it is paid back upon maturity.

Debt securities experience price changes when interest rates change. 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.

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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 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.

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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.

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.

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.

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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.

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 conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of the portfolios'
investments and/or increase its expenses. While the investment adviser has taken
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.

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

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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" may be
made daily, if necessary, as the value of the futures contracts fluctuate. This
process is known as "marking-to-market." The margin amount will be returned to
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.

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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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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
adviser 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.

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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 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

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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.

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 adviser.

Because the underlying funds are index funds, which intend to track indices and
choose their investments accordingly, the investment adviser generally will not
take into account the extent to which an issuer has prepared or is preparing for
the year 2000 problem when managing the underlying funds' portfolios. It is
possible that an underlying fund's portfolio and performance may be materially
affected by an issuer's year 2000 related problems, and therefore the portfolios
and their performance may be affected as well.

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 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

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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 Securities and Exchange Commission 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.

4) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or the investment adviser
individually own beneficially more than 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.

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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.

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 adviser
individually own beneficially more than one-half of 1% of

15
<PAGE> 44
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 adviser), are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUSTS PRINCIPAL OCCUPATIONS & 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;
</TABLE>

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

* This trustee is an "interested person" of the trusts.
16
<PAGE> 45
<TABLE>
<S> <C> <C>

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).

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.
</TABLE>

17
<PAGE> 46
<TABLE>
<S> <C> <C>
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R), Charles
December 9, 1955 President, Chief 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.

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 Trustee Aggregate Compensation Benefits Compensation from
from each portfolio Accrued as Part Fund Complex
of Portfolio
Expenses
-----------------------------------------------------
All Equity Growth Balanced Conservative
Portfolio Portfolio Portfolio Portfolio
- ------------------ ----------- ----------- ----------- ------------- ---------------- ------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Tom D. Seip 1 0 0 0 0 N/A 0
</TABLE>

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

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

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

18
<PAGE> 47
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Compensation from
from each portfolio Accrued as Part Fund Complex
of Portfolio
Expenses
-----------------------------------------------------
All Equity Growth Balanced Conservative
Portfolio Portfolio Portfolio Portfolio
- ------------------ ----------- ----------- ----------- ------------- ---------------- ------
<S> <C> <C> <C> <C> <C> <C>
Steven L. Scheid 2
William J. Klipp, 0 0 0 0 N/A 0
Donald F. Dorward 867 1,797 1,751 1,452 N/A 99,050
Robert G. Holmes 867 1,797 1,751 1,452 N/A 99,050
Donald R. Stephens 867 1,797 1,751 1,452 N/A 99,050
Michael W. Wilsey 867 1,797 1,751 1,452 N/A 99,050
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 12, 1999, the officers and trustees of the trust(s), as a group
owned of record or beneficially less than 1% of the outstanding voting
securities of each portfolio.

As of February 12, 1999, the following represents persons or entities that
owned, directly or beneficially owned, more than 5% of shares of the portfolios:

The Charles Schwab Trust Co., 1 Montgomery Street, San Francisco, CA 94104 owned
8.08% of the Schwab MarketTrack Balanced Portfolio and 13.74% of the Schwab
MarketTrack Conservative Portfolio.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

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

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

19
<PAGE> 48
Co., Inc. (Schwab) is an affiliate of the investment adviser and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-Chief Executive Officer and Director of The Charles
Schwab Corporation. As a result of his ownership of and interests in The Charles
Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the
investment adviser and Schwab.

For its advisory and administrative services to the portfolios, the investment
adviser is entitled to receive a graduated annual fee, payable monthly, of 0.54%
of each portfolio's average daily net assets not in excess of $500 million and
0.49% of such net assets over $500 million. Prior to February 28, 1999, the
graduated annual fee, payable monthly was 0.74% of the first $1 billion of
average daily net assets, 0.69% of the next $1 billion and 0.64% of such assets
over $2 billion.

The investment adviser and Schwab have guaranteed that, through at least
February 29, 2000, the total operating expenses for each portfolio, including
the impact of underlying SchwabFunds investments, will not exceed 0.60% of its
average daily net assets.

For the fiscal period of May 19, 1998, (commencement of operations) to October
31, 1998, the All Equity Portfolio paid investment advisory fees of $0, (fees
were reduced by $357,000).

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 $553,000, $337,000 and $426,000 (fees
were reduced by $1,157,000, $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 $491,000, $219,000, $352,000
(fees were reduced by $1,095,000, $242,000 and $496,000), respectively.

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 $78,000, $26,000 and $5,000 (fees
were reduced by $504,000, $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,

20
<PAGE> 49
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, PricewaterhouseCoopers LLP, 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 333 Market Street, San
Francisco, CA 94105. 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

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 19, 1998
(commencement of operations) to the fiscal year ended October 31, 1998 was 2%.

21
<PAGE> 50
The Growth Portfolio's turnover rates for the fiscal years ended October 31,
1998 and 1997, were 14% and 113%, respectively.

The Balanced Portfolio's turnover rates for the fiscal years ended October 31,
1998 and 1997, were 32% and 104%, respectively.

The Conservative Portfolio's turnover rates for the fiscal years ended October
31, 1998 and 1997, were 58% 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. 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 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 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 adviser 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.

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 portfolios, the investment
adviser 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 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.

22
<PAGE> 51
BROKERAGE COMMISSIONS

For the fiscal period of May 19, 1998, (commencement of operations) to October
31, 1998, the All Equity Portfolio paid brokerage commissions of $0.

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 $5,838, $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 $5,538, $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 $2,448, $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.

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.

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,

23
<PAGE> 52
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
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.

24
<PAGE> 53
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 adviser 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.

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

25
<PAGE> 54
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.

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 portfolios 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

26
<PAGE> 55
(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 is a standardized measure of performance calculated
using methods prescribed by SEC rules. It is calculated by determining the
ending value of a hypothetical initial investment of $1,000 made at the
beginning of a specified period. The ending value is then divided by the initial
investment, which is annualized and expressed as a percentage. It is reported
for periods of one, five and 10 years or since commencement of operations for
periods not falling on those intervals. In computing average annual total
return, a portfolio assumes reinvestment of all distributions at net asset value
on applicable reinvestment dates.

<TABLE>
<CAPTION>
Portfolio One Year Ended From Commencement of Operations
(Commencement of Operations) October 31, 1998 to October 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
All Equity (5/19/98) N/A (15.24)%
Growth (11/20/95) 8.85% 14.94%
Balanced (11/20/95) 9.02% 12.91%
</TABLE>

27
<PAGE> 56
<TABLE>
<CAPTION>
Portfolio One Year Ended From Commencement of Operations
(Commencement of Operations) October 31, 1998 to October 31, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Conservative (11/20/95) 8.64% 10.79%
</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>
Portfolio Cumulative Total Return
- --------- -----------------------
(Commencement of Operations)
- ----------------------------

<S> <C> <C>
All Equity (5/19/98) (7.20)%
Growth (11/20/95) 50.80%
Balanced (11/20/95) 43.09%
Conservative (11/20/95) 35.30%
</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 and 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 other
asset class performance, performance of indices and mutual funds similar to
their asset categories and sub-categories, and to the performance of "blended
indices" similar to the portfolios' strategies.

The primary index 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.

<PAGE> 57

PROSPECTUS
February 28, 1999

SCHWAB
MARKETMANAGER PORTFOLIOS(TM)

GROWTH PORTFOLIO

BALANCED PORTFOLIO

SMALL CAP PORTFOLIO

INTERNATIONAL PORTFOLIO

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

SCHWABFUNDS(R)
<PAGE> 58
ABOUT THE PORTFOLIOS

Schwab
MarketManager Portfolios(TM)

ABOUT THE PORTFOLIOS

4 Growth Portfolio
8 Balanced Portfolio
12 Small Cap Portfolio
16 International Portfolio
20 Portfolio Management

INVESTING IN THE PORTFOLIOS

22 Buying Shares
23 Selling/Exchanging Shares
24 Transaction Policies
25 Distributions and Taxes
<PAGE> 59
The portfolios in this prospectus share a "MULTI-FUND" investment strategy. Each
portfolio invests primarily in a COMBINATION of other actively managed funds.
Each portfolio's mix of underlying funds is strategically chosen with a SPECIFIC
GOAL in mind.

By using a multi-fund strategy, the portfolios can provide exposure to a variety
of mutual funds in a single investment. This strategy may help to produce a high
level of diversification among securities and industries. As a result, the
portfolios may reduce the risks associated with investing in a single fund, fund
company or investment style.

The portfolio managers analyze economic conditions to identify promising areas
for investment. They review funds according to their investment objectives and
policies, and use quantitative techniques to measure their past performance,
volatility and expenses. The managers then choose each underlying fund by
analyzing its investment style and gaining firsthand knowledge of its manager.

TICKER SYMBOL: SWOGX

GOAL

The portfolio seeks capital growth.

STRATEGY

To pursue its goal, the portfolio invests at least 65% of its total assets in
other mutual funds, including those available through Schwab's Mutual Fund
OneSource(R) service. Typically, the actual percentage is considerably higher.

The portfolio invests in stock, bond and money market funds, which the managers
choose within the framework of an asset allocation strategy. Based on analysis
of economic outlooks and market conditions, the managers determine whether and
how much to adjust the portfolio's allocation.

Within the stock fund allocation, the portfolio managers may allocate their
investment among large-cap, small-cap and international stock funds. Within the
bond fund allocation, the managers allocate investments among bond funds
primarily based on the maturities and credit quality of their holdings.

In choosing the underlying funds, the portfolio managers seek clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/98, the portfolio included 32 underlying funds.

Asset allocation among funds

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

The Growth Portfolio's allocation is designed to provide the growth
opportunities of stock investing while tempering volatility with bond and money
market funds. Over the long term, the portfolio will generally reflect its
target allocation, as shown below.

The table also shows the highest and lowest allocations the portfolio could
assign for each type of fund. The portfolio has the flexibility to adjust its
allocations of large-cap, small-cap and international stock funds as well.

<TABLE>
<CAPTION>
TARGET ALLOCATION
ALLOCATION FLEXIBILITY
- -------------------------------------------------------
<S> <C> <C>
STOCK FUNDS 80% 65 - 95%
large-cap 35%
small-cap 20%
international 25%
BOND FUNDS 15% 0 - 30%
MONEY MARKET FUNDS 5% 0 - 35%
</TABLE>

4 GROWTH PORTFOLIO
<PAGE> 61
When you are investing for the long term, a portfolio that emphasizes stock
investments in its asset allocation may make sense for you.

MAIN RISKS

THE 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 PARTICULAR ASSET ALLOCATION CAN HAVE AN EFFECT ON PERFORMANCE.
The portfolio's neutral allocation is designed with long-term performance in
mind, and does not ensure any particular type of performance over the short
term. Because the risks and returns of different asset classes can vary widely
over both the long term and the short term, the portfolio's performance could
suffer if a particular asset class does not perform as expected.

MANY OF THE RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH STOCK FUNDS. The
same factors that affect stock market performance generally affect stock funds.
Political and economic news can influence marketwide 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.

TO THE EXTENT THAT THE PORTFOLIO INVESTS IN BOND FUNDS, A MAJOR RISK IS THAT
BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE. Underlying funds that focus
on bonds with longer maturities tend to be more sensitive to this risk.
Portfolio performance also could be affected if bonds held by the underlying
funds go into default. To minimize this risk, the portfolio intends to invest in
bond funds that invest primarily in investment-grade quality debt securities.
Another risk is that certain bonds may be paid off, or "called," substantially
earlier or later than expected.

OTHER RISK FACTORS

Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's effective asset allocation or hurt its performance.

For example, if managers of underlying funds tended to favor cash, the
portfolio's exposure to the stock market would be lowered. Similarly, if
underlying funds make investments that don't perform as expected, the
portfolio's performance could be affected.

Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.

GROWTH PORTFOLIO 5
<PAGE> 62
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C> <C>
18.36 15.15
97 98
</TABLE>

BEST QUARTER: 16.93% Q4 1998
WORST QUARTER: -11.73% Q3 1998

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

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- -----------------------------------------------------------------
<S> <C> <C>
Portfolio 15.15 16.14 1
S&P500(R) Index 28.58 29.37 2
Lehman Brothers Aggregate Bond Index 8.67 8.52 2
</TABLE>

1 Inception: 11/18/96.
2 From: 11/18/96.

PORTFOLIO FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
<TABLE>
<CAPTION>
<S> <C>
None

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.54
Distribution (12b-1) fees None
Other expenses 0.43
-----
Total annual operating expenses 0.97

EXPENSE REDUCTION (0.47)
-----
NET OPERATING EXPENSES** 0.50
-----
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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>
$51 $245 $474 $1,131
</TABLE>

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

6 GROWTH PORTFOLIO
<PAGE> 63
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/97- 11/18/96-
10/31/98 10/31/97
<S> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 11.60 10.00
---------------
Income from investment operations:
Net investment income 0.32 0.08
Net realized and unrealized gain on investments 0.11 1.66
---------------
Total income from investment operations 0.43 1.74
Less distributions:
Dividends from net investment income (0.29) (0.14)
Dividends from capital gains (0.31) --
---------------
Total distributions (0.60) (0.14)
---------------
Net asset value at end of period 11.43 11.60
===============
Total return (%) 3.87 17.60 1

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of net operating expenses to average net assets 0.50 0.50 2
Expense reductions reflected in above ratio 0.67 0.77 2
Ratio of net investment income to average net assets 2.66 2.07 2
Portfolio turnover rate 384 192
Net assets, end of period ($ x 1,000,000) 152 124
</TABLE>

1 Not annualized.
2 Annualized.

GROWTH PORTFOLIO 7
<PAGE> 64
SCHWAB MARKETMANAGER
BALANCED PORTFOLIO

TICKER SYMBOL: SWOBX

GOAL

THE PORTFOLIO SEEKS CAPITAL GROWTH AND INCOME.

STRATEGY

ASSET ALLOCATION AMONG FUNDS

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

The Balanced Portfolio's allocation is designed to provide a mix of the growth
opportunities of stock investing with the income opportunities of bond and money
market funds. Over the long term, the portfolio will generally reflect its
target allocation, as shown below.

<TABLE>
<CAPTION>
TARGET ALLOCATION
ALLOCATION FLEXIBILITY
- ------------------------------------------------------
<S> <C> <C>
STOCK FUNDS 60% 50 - 70%
large-cap 30%
small-cap 15%
international 15%
BOND FUNDS 35% 25 - 45%
MONEY MARKET FUNDS 5% 0 - 25%
</TABLE>

8 BALANCED PORTFOLIO
<PAGE> 65
Long-term investors seeking a blend of growth and income investments may want to
consider this portfolio.

MAIN RISKS

THE PORTFOLIO'S PARTICULAR ASSET ALLOCATION CAN HAVE A SIGNIFICANT EFFECT ON
PERFORMANCE. The portfolio's neutral allocation is designed with long-term
performance in mind, and does not ensure any particular type of performance over
the short term. Because the risks and returns of different asset classes can
vary widely over both the long term and the short term, the portfolio's
performance could suffer if a particular asset class does not perform as
expected.

TO THE EXTENT THAT THE PORTFOLIO HAS EXPOSURE TO A GIVEN TYPE OF MUTUAL FUND, IT
TAKES ON THE ASSOCIATED RISKS. The same factors that affect stock market
performance generally affect stock funds. Political and economic news can
influence marketwide trends; the outcome may be positive or negative, short term
or long term. The values of certain types of stocks, such as small-cap stocks or
international stocks, may fluctuate more widely in price than others.

WITH BOND FUNDS, ONE MAJOR RISK IS THAT BOND PRICES GENERALLY FALL WHEN INTEREST
RATES RISE. Underlying funds that focus on bonds with longer maturities tend to
be more sensitive to this risk. Portfolio performance also could be affected if
bonds held by its underlying funds go into default. Economic conditions can
cause bond markets to fall in anticipation of greater risk of default, in which
case funds that emphasize lower-quality bonds could suffer disproportionate
losses. To minimize this risk, the portfolio intends to invest primarily in bond
funds that invest primarily in investment-grade quality debt securities.
Another risk is that certain bonds may be paid off, or "called," substantially
earlier or later than expected.

OTHER RISK FACTORS

Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.

BALANCED PORTFOLIO 9
<PAGE> 66
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<CAPTION>
- -------------------------------------------------------------
97 98
<S> <C> <C>
- -------------------------------------------------------------
16.51 13.59
</TABLE>
BEST QUARTER: 13.38% Q4 1998
WORST QUARTER: -8.16% Q3 1998

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

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- -------------------------------------------------------------
<S> <C> <C>
Portfolio 13.59 14.44 1
S&P500(R) Index 28.58 29.37 2
Lehman Brothers Aggregate Bond Index 8.67 8.52 2
</TABLE>

1 Inception: 11/18/96.
2 From: 11/18/96.

PORTFOLIO FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
None

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.54
Distribution (12b-1) fees None
Other Expenses 0.45
-----
Total annual operating expenses 0.99

Expense reduction (0.49)
-----
Net operating expenses** 0.50
-----

* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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>
$51 $258 $491 $1,161
</TABLE>

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

10 BALANCED PORTFOLIO
<PAGE> 67
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/97- 11/18/96-
10/31/98 10/31/97
<S> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 11.38 10.00
----------------
Income from investment operations:
Net investment income 0.36 0.17
Net realized and unrealized gain on investments 0.18 1.34
----------------
Total income from investment operations 0.54 1.51
Less distributions:
Dividends from net investment income (0.34) (0.13)
Dividends from capital gains (0.22) --
----------------
Total distributions (0.56) (0.13)
----------------
NET ASSET VALUE AT END OF PERIOD 11.36 11.38
================
Total return (%) 4.89 15.27 1

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50 2
Expense reductions reflected in above ratio 0.69 0.95 2
Ratio of net investment income to average net assets 3.21 3.03 2
Portfolio turnover rate 353 171
Net assets, end of period ($ x 1,000,000) 93 61
</TABLE>

1 Not annualized.
2 Annualized.

BALANCED PORTFOLIO 11
<PAGE> 68
SCHWAB MARKETMANAGER
SMALL CAP PORTFOLIO

TICKER SYMBOL: SWOSX

GOAL

The portfolio seeks long-term capital appreciation.

STRATEGY

To pursue its goal, the portfolio invests at least 65% of its total assets in
other mutual funds, including those available through Schwab's Mutual Fund
OneSource(R) service. The fund also has a policy of investing at least 65% of
total assets in small-cap stock funds. Typically, the actual percentages for
both policies are considerably higher.

The portfolio managers regularly review the small-cap segment of the market to
identify sectors or industries that offer the greatest potential for growth. The
managers then screen the universe of small-cap funds based on a combination of
quantitative measures -- past performance, volatility, expenses -- and
qualitative evaluations of their investment objectives, management teams and
current holdings.

The portfolio managers meet frequently with the management teams of those
small-cap funds that satisfy the screening criteria in order to gain a more
complete understanding of their investment styles and strategies. In choosing
the underlying funds, the portfolio managers seek clearly defined investment
strategies, strong performance histories and stable management, among other
criteria. As of 10/31/98, the portfolio included 26 underlying funds.

Because the small-cap market can be volatile, the portfolio managers monitor and
adjust the portfolio as necessary. In so doing, they seek to anticipate coming
markets as well as respond to current conditions.

SMALL-CAP STOCKS AND CAPITAL GROWTH

Small-cap companies are those whose market capitalization places them at the
smaller end of the spectrum of publicly traded companies.

There are thousands of small-cap companies, which historically have made up
approximately 20% of the total U.S. market capitalization. These companies are
found in every industry, although they tend to be concentrated in high-growth
sectors such as technology.

Over the past 70 years, stocks of these companies have offered high long-term
growth rates. At the same time, they have often been more volatile than
large-cap stocks, sometimes suffering deep slumps and at other times enjoying
high market enthusiasm.

12 SMALL CAP PORTFOLIO
<PAGE> 69
For the long-term investor, a small-cap stock investment can be important
because of the exposure it provides to a different segment of the stock market.

MAIN RISKS

THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH SMALL-CAP STOCK
FUNDS. The same factors that affect stock market performance generally affect
all stock funds. Political and economic news can influence marketwide trends;
the outcome may be positive or negative, short term or long term. Other factors
may be ignored by the market as a whole but may affect stock prices in one or
more industries (for example, rising oil prices may lead to a decline in airline
stocks).

HISTORICALLY, SMALL-CAP STOCK FUNDS HAVE BEEN RISKIER THAN FUNDS THAT FOCUS ON
LARGE- AND MID-CAP STOCKS. Stock prices of smaller companies may be based in
substantial part on future expectations rather than current achievements and may
move sharply, especially during market upturns and downturns. In addition,
during any period when small-cap stock funds perform less well than funds that
focus on other types of stock or other types of investments -- bonds, for
instance -- the portfolio's performance also will lag these investments.

OTHER RISK FACTORS

Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's investment profile or hurt its performance.

Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.

SMALL CAP PORTFOLIO 13
<PAGE> 70
PERFORMANCE

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

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 17.90% Q4 1998
WORST QUARTER: -18.97% Q3 1998

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

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- -------------------------------------------------------------
<S> <C> <C>
Portfolio 0.61 (0.42) 1
Russell 2000 Index (2.57) (3.08) 2
</TABLE>

1 Inception: 9/16/97.
2 From: 9/16/97.

PORTFOLIO FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
None

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.54
Distribution (12b-1) fees None
Other Expenses 0.45
-----
Total annual operating expenses 0.99

Expense reduction (0.49)
-----
Net operating expenses** 0.50
-----

* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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>
$51 $258 $491 $1,161
</TABLE>

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

14 SMALL CAP PORTFOLIO
<PAGE> 71
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/97- 9/16/97-
INVESTOR SHARES 10/31/98 10/31/97
<S> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 9.93 10.00
---------------
Income from investment operations:
Net investment income 0.21 0.02
Net realized and unrealized gain on investments (1.36) (0.09)
---------------
Total income from investment operations (1.15) (0.07)
Less distributions:
Dividends from net investment income (0.24) --
Dividends from capital gains (0.03) --
---------------
Total distributions (0.27) --
---------------
NET ASSET VALUE AT END OF PERIOD 8.51 9.93
===============
Total return (%) (11.84) (0.70) 1

RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50 2
Expense reductions reflected in above ratio 0.69 0.75 2
Ratio of net investment income to average net assets 2.65 1.29 2
Portfolio turnover rate 166 10
Net assets, end of period ($ x 1,000,000) 129 207
</TABLE>

1 Not annualized.
2 Annualized.

SMALL CAP PORTFOLIO 15
<PAGE> 72
SCHWAB MARKETMANAGER
INTERNATIONAL PORTFOLIO

TICKER SYMBOL: SWOIX

GOAL

The portfolio seeks long-term capital appreciation.

STRATEGY

To pursue its goal, the portfolio invests at least 65% of its total assets in
other mutual funds, including those available through Schwab's Mutual Fund
OneSource(R) service. The fund also has a policy of investing at least 65% of
total assets in international stock funds. Typically, the actual percentages for
both policies are considerably higher.

The portfolio managers analyze global economic trends to target regions and
countries that offer the greatest potential for growth. Based on their findings,
they develop a country-by-country allocation that focuses typically on developed
markets but also may include emerging markets. The managers then screen the
universe of international stock funds based on a combination of quantitative
measures -- past performance, volatility, expenses -- and qualitative
evaluations of their investment objectives, country weightings, sector
diversification, management teams and current holdings.

The portfolio managers meet frequently with the management teams of those
international stock funds that satisfy the screening criteria in order to gain a
more complete understanding of their investment styles and strategies. In
choosing the underlying funds, the portfolio managers seek clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/98, the portfolio included 19 underlying funds.

Because international markets can be volatile, the portfolio managers monitor
and adjust the portfolio as necessary. In so doing, they seek to anticipate
coming markets as well as respond to current conditions.

INTERNATIONAL STOCK FUNDS

Approximately two-thirds of the world's market opportunities lie outside the
United States. These include developed countries whose securities markets are
established and whose economies are industrialized as well as emerging markets,
where industrialization and securities markets are in the process of developing.

With so many opportunities available, it is difficult for any one mutual fund to
maintain expertise in all industries and regions. The multi-fund approach offers
a potential solution by allowing portfolio managers to assemble a combination of
underlying funds whose strengths lie in different areas.

16 INTERNATIONAL PORTFOLIO
<PAGE> 73
International stock funds offer access to many foreign markets that can be
difficult for individual investors to reach.

MAIN RISKS

THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH INTERNATIONAL STOCK
FUNDS. The same factors that affect stock market performance generally affect
all stock funds. Political and economic news can influence marketwide trends;
the outcome may be positive or negative, short term or long term. Other factors
may be ignored by the market as a whole but may affect stock prices in one or
more industries (for example, rising oil prices may lead to a decline in airline
stocks).

INTERNATIONAL STOCK FUNDS CARRY ADDITIONAL RISKS. Changes in currency exchange
rates can erode market gains or widen market losses for the underlying funds.
International markets -- even those that are well established -- are often more
volatile than those of the United States, for reasons ranging from a lack of
reliable company information to the risk of political upheaval. These risks are
more significant in emerging markets, where governments may be less stable,
markets less liquid and economies less highly industrialized. In addition,
during any period when international stock funds perform less well than funds
that focus on other types of stocks or other types of investments -- bonds, for
instance -- the portfolio's performance also will lag these investments.

OTHER RISK FACTORS

Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.

INTERNATIONAL PORTFOLIO 17
<PAGE> 74
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 15.01% Q1 1998
WORST QUARTER: -16.35% Q3 1998

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

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- ------------------------------------------------------------
<S> <C> <C>
Portfolio 13.29 10.54 1
MSCI EAFE Index 20.00 9.92 2
</TABLE>

1 Inception: 10/16/96.
2 From: 10/16/96.

PORTFOLIO FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
None

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.54
Distribution (12b-1) fees None
Other expenses 0.46
-----
Total annual operating expenses 1.00

Expense reduction (0.50)
-----
Net operating expenses** 0.50
-----

* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net 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>
$51 $260 $495 $1,171
</TABLE>

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

18 INTERNATIONAL PORTFOLIO
<PAGE> 75
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/97- 11/1/96- 10/16/96-
INVESTOR SHARES 10/31/98 10/31/97 10/31/96
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 10.86 9.91 10.00
--------------------------------
Income from investment operations:
Net investment income 0.34 0.17 --
Net realized and unrealized gain on investments 0.02 0.95 (0.09)
--------------------------------
Total income from investment operations 0.36 1.12 (0.09)
Less distributions:
Dividends from net investment income (0.34) (0.17) --
Dividends from capital gains (0.30) -- --
--------------------------------
Total distributions (0.64) (0.17) --
--------------------------------
NET ASSET VALUE AT END OF PERIOD 10.58 10.86 9.91
================================
Total return (%) 3.55 11.47 (0.90)1

RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.70 0.80 2.91 2
Ratio of net investment income to average net assets 2.96 1.40 0.52 2
Portfolio turnover rate 236 179 --
Net assets, end of period ($ x 1,000,000) 74 81 59
</TABLE>

1 Not annualized.
2 Annualized.

INTERNATIONAL PORTFOLIO 19
<PAGE> 76
PORTFOLIO MANAGEMENT

The portfolios' investment adviser, Charles Schwab Investment Management, Inc.,
has more than $77 billion under management.

The investment adviser for the Schwab MarketManager 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 3 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 MarketManager 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 0.32% for the Growth Portfolio, 0.30% for
the Balanced Portfolio, 0.30% for the Small Cap Portfolio and 0.29% for the
International 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.

Cynthia Liu, CFA, a senior vice president of the investment adviser, is
responsible for the overall management of the Schwab MarketManager Portfolios.
Prior to joining the firm in 1996, she worked for 13 years in international
securities research and asset management.

JEFFREY MORTIMER, CFA, also is a portfolio manager with day-to-day
responsibility for the Growth and Balanced Portfolios. Prior to joining the firm
in October 1997, he worked for more than eight years in asset allocation and
manager selection.

YEAR 2000 ISSUES

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

20 PORTFOLIO MANAGEMENT
<PAGE> 77
INVESTING IN THE PORTFOLIOS

As a SchwabFunds(R) investor, you have a number of ways to do business with us.

INVESTING IN THE PORTFOLIOS 21
<PAGE> 78
BUYING SHARES

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 & Co., Inc.

SCHWAB ACCOUNTS

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

22 INVESTING IN THE PORTFOLIOS
<PAGE> 79
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:

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

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

- - These portfolios reserve the right to honor redemptions in portfolio
securities instead of cash.

- - 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> 80
TRANSACTION POLICIES

THE PORTFOLIOS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE
(NYSE) IS OPEN. The portfolios calculate their share prices each business day,
after the close of the NYSE (generally 4:00 p.m. Eastern time). 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. Orders to buy, sell
or exchange shares that are received in good order prior to the close of the
portfolio will be executed at the next share price calculated that day.

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 a portfolio 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 the portfolio 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

DAILY NAV REPORTING

Each day, reporting services, such as newspapers, may publish the share prices
of mutual funds from the close of business on the previous day. For multi-fund
portfolios, these prices are generally reported one day behind other mutual
funds. This is because a multi-fund portfolio uses the share prices of its
underlying funds to calculate its NAV, and this information is typically
received and calculated after the publishing deadlines of reporting services.
Each portfolio still calculates its share price daily, and this is the price at
which you may buy and sell shares each day.

24 INVESTING IN THE PORTFOLIOS
<PAGE> 81
DISTRIBUTIONS AND TAXES

MORE ON DISTRIBUTIONS

INVESTING IN THE PORTFOLIOS 25
<PAGE> 82
NOTES

26 NOTES
<PAGE> 83
TO LEARN MORE

This prospectus contains important information on the portfolios 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 portfolio investors, discuss
recent performance and portfolio 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 MarketManager Portfolios 811-7704

Schwab
MarketManager Portfolios(TM)

PROSPECTUS
February 28, 1999

SCHWABFUNDS(R)

<PAGE> 84

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
Page
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES,
RISKS AND LIMITATIONS.......................................................2
MANAGEMENT OF THE PORTFOLIOS...............................................20
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................23
INVESTMENT ADVISORY AND OTHER SERVICES.....................................24
BROKERAGE ALLOCATION AND OTHER PRACTICES...................................26
DESCRIPTION OF THE TRUST...................................................27
PURCHASE, REDEMPTION AND PRICING OF SHARES.................................28
TAXATION...................................................................29
CALCULATION OF PERFORMANCE DATA............................................32

1
<PAGE> 85
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. However, 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

2
<PAGE> 86
Commission (SEC). Mutual fund investments for each portfolio are currently
restricted under 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.

FUNDS in which the portfolios may invest include mutual funds, as well as
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 of a hedge fund until such time had past.

Each portfolio will normally invest no more than 35% of its total assets in
non-mutual 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. 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.

3
<PAGE> 87
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 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 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
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.

4
<PAGE> 88
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 employ similar types
of investment techniques as other bond funds, except they focus on debt
securities of foreign issuers. 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.

Asset Allocation is a strategy of investing specific percentages of a portfolio
in various asset classes. The Growth Portfolio and Balanced Portfolio follow
asset allocation strategies and their target allocations and allocation
flexibility are set forth in the prospectus. During neutral market conditions,
the portfolios may tend to track their target allocations. At all times, the
portfolios may utilize their allocation flexibility.

Asset Allocation is a strategy of investing specific percentages of a portfolio
in various asset classes. The Growth Portfolio and Balanced Portfolio follow
asset allocation strategies and their target allocations and allocation
flexibility are set forth in the prospectus. During neutral market conditions,
the portfolios may tend to allocate assets according to their target
allocations. The portfolios also will allocate assets within the flexibility
provided by their respective ranges.

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

5
<PAGE> 89
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.

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.

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

6
<PAGE> 90
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.

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.

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.

7
<PAGE> 91
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.

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.

8
<PAGE> 92
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 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

9
<PAGE> 93
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 conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union ("EMU"). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of the portfolios'
investments and/or increase its expenses. While the investment adviser has taken
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.

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 transactions simply establish a rate of exchange that can be
expected when the portfolio or underlying fund settles its securities
transactions in the future.

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

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<PAGE> 94
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 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" may be
made daily, if necessary, as the value of the futures contracts fluctuate. This
process is known as "marking-to-market." The margin amount will be returned to
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.

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<PAGE> 95
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 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.

12
<PAGE> 96
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.

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.

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

13
<PAGE> 97
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 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

14
<PAGE> 98
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.

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 adviser 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

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<PAGE> 99
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.

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<PAGE> 100
on the portfolios, however, minimizing year 2000 risk for the portfolios is a
priority of the investment adviser.

The investment adviser generally attempts to take into account all material
information about the underlying funds, including the extent to which they have
prepared or are preparing for the Year 2000 problem. The degree to which the
investment adviser inquires into an underlying fund's Year 2000 preparedness
falls within the discretion of the particular representatives of
credit/investment research and portfolio management involved and generally
depends on various factors, including the size of a portfolio's holdings in the
underlying fund and the investment adviser's assessment of the significance of
the Year 2000 problem to the underlying fund. Underlying funds that represent a
significant portion of a portfolio's holdings or for which the Year 2000
problem is seen as posing the most material risks generally receive the
greatest scrutiny, while underlying funds at the other end of the continuum
receive lesser (if any) scrutiny.

The investment adviser obtains information about underlying fund's Year 2000
preparedness from underlying funds, reports filed with the SEC, rating
agencies, securities analysts and various publications. The investment adviser
generally is not in a position to verify and cannot guarantee the completeness
or accuracy of this information.

Information regarding underlying funds' Year 2000 preparedness may be of
limited usefulness in many important respects. Some underlying funds may not
file reports with the SEC and may not have made meaningful disclosure about
Year 2000 preparedness. Disclosure by underlying funds that do file reports
with the SEC has varied in level of detail, may be qualified without providing
sufficient information to assess the significance of the qualifications, and
may convey the magnitude of possible problems but not the probability of their
occurrence.

Altogether, these constraints limit the investment adviser's ability to form an
accurate, independent judgment of underlying fund Year 2000 preparedness and may
require the investment adviser to rely on publicly-available assessments made by
underlying funds and others. These assessments may prove incorrect. Accordingly,
the investment adviser's assessment of any underlying fund's Year 2000
preparedness does not assure that the underlying fund is or will be Year 2000
compliant or that Year 2000 related problems will not result in a material
adverse effect on the underlying fund's business and, correspondingly, on a
portfolio.

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.

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<PAGE> 101
THE FOLLOWING DESCRIPTIONS 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.

THE INTERNATIONAL PORTFOLIO 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 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.

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<PAGE> 102
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 adviser
individually own beneficially more than 1/2 of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.

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.

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.

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<PAGE> 103
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

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

STEVEN L. SCHEID* President and Trustee Executive Vice President and Chief
June 28, 1953 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
</TABLE>

- --------

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

20
<PAGE> 104
<TABLE>
<S> <C> <C>
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
September 23, 1931 Director, Grey Advertising. From 1990 to
1996, Mr. Dorward was President and
Chief Executive Officer, Dorward &
Associates (advertising and
marketing/consulting firm).

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

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 Officer and
August 18, 1943 Director, Wilsey Bennett, Inc. (truck
and air transportation, real estate
investment, management and investments).

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and
March 7, 1951 Controller, 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.
</TABLE>

- --------

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

21
<PAGE> 105
<TABLE>
<S> <C> <C>
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>

22
<PAGE> 106
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
from the as Part of Fund Fund Complex
Expenses
----------------------------------------------------
Growth Balanced Small Cap International
Portfolio Portfolio Portfolio Portfolio
- ------------------- ------------ ------------ ------------ ------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Tom D. Seip 1 0 0 0 0 N/A 0
Steven L. Scheid 2 0 0 0 0 N/A 0
William J. Klipp, 0 0 0 0 N/A 0
Donald F. Dorward 1,630 1,482 1,705 2,262 N/A 99,050
Robert G. Holmes 1,630 1,482 1,705 2,262 N/A 99,050
Donald R. Stephens 1,630 1,482 1,705 2,262 N/A 99,050
Michael W. Wilsey 1,630 1,482 1,705 2,262 N/A 99,050
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 12, 1999, the officers and trustees of the portfolios, except
International Portfolio, as a group owned of record or beneficially less than 1%
of the outstanding voting securities of each portfolio. As of February 12, 1999,
the officers and trustees of the International Portfolio as a group owned of
record or beneficially approximately 2.7% of the outstanding voting securities
of the portfolio.

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

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.

23
<PAGE> 107
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 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 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.

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 each portfolio the investment
adviser is entitled to receive a graduated annual fee, payable monthly, of 0.54%
of the first $500 million of each portfolio's average daily net assets and 0.49%
of net assets over $500 million. Prior to February 28, 1999, the graduated
annual fee, payable monthly was 0.74% of the first $1 billion of average daily
net assets, 0.69% of the next $1 billion and 0.64% of such assets over $2
billion.

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 $471,000 (fees were reduced by $612,000) 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 $247,000 (fees were reduced by $361,000) and $23,000
(fees were reduced by $321,000), respectively.

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 $534,000 (fees were reduced by $774,000) and $58,000
(fees were reduced by $124,000), respectively.

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 $233,000, (fees were reduced by $362,000),
$147,000 (fees were reduced by $423,000) and $0 (fees were reduced by $17,000),
respectively.

The investment adviser and Schwab have guaranteed that, through at least
February 29, 2000, 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

24
<PAGE> 108
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 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.

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, PricewaterhouseCoopers LLP, 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 333 Market Street, San
Francisco, CA 94105. 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.

25
<PAGE> 109
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 384% and 192%, respectively.

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 353% 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 166% and 10%, respectively.

The International Portfolio's turnover rates for the fiscal years ended October
31, 1998 and 1997, were 236% 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

26
<PAGE> 110
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.

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

27
<PAGE> 111
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 fund could become liable for a misstatement in the prospectus or SAI
about another fund.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

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
not want to receive consolidated mailings, you may write to your fund and
request that your mailings not be consolidated.

28
<PAGE> 112
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
adviser 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.

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

29
<PAGE> 113
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

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 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 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.

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.

30
<PAGE> 114
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.

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.

31
<PAGE> 115
CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Portfolio One Year Ended From Commencement
(Commencement of Operations) October 31, 1998 of Operations to
October 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
MarketManager Portfolios
Growth (11/18/96) 3.87% 10.79%
Balanced (11/18/96) 4.89% 10.21%
Small Cap (9/16/97) (11.84)% (11.14)%
International (10/16/96) 3.55% 6.79%
</TABLE>

<TABLE>
<CAPTION>
Portfolio (Commencement of Operations) Cumulative Total Return
- -------------------------------------- -----------------------
<S> <C>
Growth (11/18/96) 22.16%
Balanced (11/18/96) 20.92%
Small Cap (9/16/97) (12.46)%
International (10/16/96) 14.38%
</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 Aggregate Bond indices.

32
<PAGE> 116
PROSPECTUS

February 28, 1999

SCHWAB
ANALYTICS FUND(R)

SCHWABFUNDS(R)
<PAGE> 117
ABOUT THE FUND

Schwab Analytics Fund(R)

ABOUT THE FUND

4 Strategy

5 Main Risks

6 Performance

6 Fund Fees and Expenses

7 Financial Highlights

8 Fund Management

INVESTING IN THE FUND

10 Buying Shares

11 Selling/Exchanging Shares

12 Transaction Policies

13 Distributions and Taxes
<PAGE> 118
The Schwab Analytics Fund(R) uses a strategy that is primarily QUANTITATIVE
rather than one based on individual company research. This strategy employs a
range of PROPRIETARY TECHNIQUES to select stocks, construct a portfolio and
manage overall risk.

The fund uses software models to screen stocks, based on factors that
historically have been associated with above-average performance. The fund also
looks at indicators of how those who are closest to a given company -- analysts
and company insiders --currently view the company's near-term prospects. Before
making its actual investment decisions, the fund consults another technical
model, this one designed to manage risk.

Taken together, these techniques are designed to complement each other in
creating a portfolio with risk similar to that of the S&P 500(R) Index but with
returns that are intended to be greater.

The fund is designed for long-term investors. Its performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
<PAGE> 119
SCHWAB ANALYTICS FUND(R)

TICKER SYMBOL: SWANX

GOAL

THE FUND SEEKS LONG-TERM CAPITAL GROWTH.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS PRIMARILY IN U.S. STOCKS. Under normal
circumstances, the fund expects to hold the common stocks of approximately 100
large- and mid-cap U.S. companies. The fund seeks to assemble a portfolio with
long-term performance that will exceed that of the S&P 500(R) Index.

The portfolio managers monitor more than 1,300 companies that have market values
of $500 million or more. Using a variety of quantitative techniques, the
managers screen and rank these companies based on numerous factors. These
include fundamental characteristics, such as a company's size and valuation and
its history of earnings and dividends, as well as technical characteristics,
such as its stock price movements. The rankings also take into account various
analysts' earnings estimates and revisions, and also purchases and sales of the
stock by corporate insiders.

Once the rankings are complete, the managers select the highest-ranked stocks
(approximately 100) for inclusion in the fund's portfolio. The managers use a
risk management model to construct a diversified portfolio with the goal of
keeping the fund's volatility similar to that of the S&P 500. While the fund may
include stocks that are outside the S&P 500 or weight its stock holdings
differently from the index, it normally seeks to have the same industry
weightings as the index.

RISK MANAGEMENT

The fund approaches risk management from the perspective of its benchmark, the
S&P 500 Index. The S&P 500 includes the common stocks of 500 leading U.S.
companies from a broad range of industries.

The fund's risk management model is designed to estimate how much return a given
investment might produce compared to the benchmark and how much risk it might
involve compared to the benchmark. The model is designed to help the fund invest
for returns that exceed the S&P 500 while maintaining a risk profile that is
very similar to that of the index.

4 ANALYTICS FUND
<PAGE> 120
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 fund will fluctuate,
which means that you could lose money.

MANY OF THE RISKS OF THIS FUND ARE ASSOCIATED WITH THE LARGE- AND MID-CAP
SEGMENTS OF THE U.S. STOCK MARKET. While the fund is not an index fund, its
management techniques are likely to result in performance that correlates with
the S&P 500, during upturns as well as downturns. The fund can take only limited
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. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).

The fund includes stocks from many different sectors of the economy, which
reduces the impact of the performance of any given industry or stock. But
whenever large- and mid-cap U.S. stocks fall behind other types of investments
- -- bonds or small-cap stocks, for instance -- the fund's performance also will
lag these investments. In addition, because the values of mid-cap stocks may
fluctuate more widely than those of large-cap stocks, the fund could be more
volatile if it were to increase its holdings of mid-cap stocks.

This fund could be appropriate for long-term investors seeking a quantitative
approach designed to outperform the S&P 500(R) Index.

OTHER RISK FACTORS

The fund's management model is based largely on past market behavior. To the
extent that market dynamics shift over time, the model may fail to anticipate
these shifts, which could affect the fund's ability to outperform its benchmark.

Although the fund's main risks are those associated with its stock investments,
the fund uses other strategies that also may involve risks.

For example, futures contracts, which the fund uses to gain exposure to the
stock market for its cash balances, could hurt the fund's performance if they
don't perform as expected.

Additionally, the fund may actively buy and sell portfolio securities, which
will increase its portfolio turnover rate and expenses, and increase the
likelihood of capital gain distributions.

ANALYTICS FUND 5
<PAGE> 121
PERFORMANCE

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

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 23.09% Q4 1998

WORST QUARTER: -10.79% Q3 1998

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

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- -----------------------------------------------------
<S> <C> <C>
Fund 28.03 29.64 1

S&P500(R) Index 28.58 29.62 2
</TABLE>

1 Inception: 7/1/96.

2 From: 7/1/96.

FUND FEES AND EXPENSES

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

FEE TABLE (%)

<TABLE>
<S> <C>
SHAREHOLDER FEES
- ---------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% of average net assets)
- ---------------------------------------------------------------
Management fees* 0.54

Distribution (12b-1) fees None

Other Expenses 0.38
----

Total annual operating expenses 0.92

EXPENSE REDUCTION (0.17)
----
NET OPERATING EXPENSES** 0.75
----
</TABLE>

* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/29/00.

EXPENSES ON A $10,000 INVESTMENT

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------
<S> <C> <C> <C>
$77 $273 $490 $1,113
</TABLE>

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

6 ANALYTICS FUND
<PAGE> 122
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
11/1/97 - 11/1/96 - 7/1/96 -
10/31/98 10/31/97 10/31/96
- -------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 13.72 11.01 10.00
--------------------------------
Income from investment operations:

Net investment income 0.10 0.13 0.05

Net realized and unrealized gain on investments 2.20 2.79 0.96
--------------------------------
Total income from investment operations 2.30 2.92 1.01

Less distributions:

Dividends from net investment income (0.12) (0.08) --

Distributions from realized gain on investments (1.33) (0.13) --
--------------------------------
Total distributions (1.45) (0.21) --
--------------------------------
NET ASSET VALUE AT END OF PERIOD 14.57 13.72 11.01
================================
Total return (%) 18.37 26.83 10.10 1

RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.75 0.74 0.75 2

Expense reductions reflected in above ratio 0.37 0.41 0.76 2

Ratio of net investment income to average net assets 0.70 1.04 1.41 2

Portfolio turnover rate 115 120 33

Net assets, end of period ($ x 1,000,000) 192 150 98
</TABLE>

1 Not annualized.
2 Annualized.

ANALYTICS FUND 7
<PAGE> 123
FUND MANAGEMENT

The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $77 billion under management.

THE INVESTMENT ADVISER for the Schwab Analytics Fund(R) 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 3 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 Analytics Fund. As compensation for these services,
the firm receives a management fee from the fund. For the 12 months ended
10/31/98, these fees were 0.37%. This figure, which is expressed as a percentage
of the fund's average daily net assets, represents the actual amount paid,
including the effects of reductions. A portion of the management fee is used to
pay the subadviser.

THE SUBADVISER is Symphony Asset Management, Inc., 555 California Street, San
Francisco, CA 94104. Founded in 1994, Symphony is owned by BARRA, Inc., which
was founded in 1975 and is a leading provider of analytical models. Symphony and
its affiliate, Symphony Asset Management, LLC, currently have more than $2.7
billion under management.

GERI HOM, a vice president of the investment adviser, has overall responsibility
for fund management. Prior to joining the firm in 1995, she worked for nearly 15
years in equity management.

PRAVEEN GOTTIPALLI handles the fund's day-to-day management and has been
Director of Investment for the subadviser since 1994. Prior to this position, he
was at BARRA, Inc. for nine years.

YEAR 2000 ISSUES

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

8 FUND MANAGEMENT

<PAGE> 124
INVESTING IN THE FUND

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

INVESTING IN THE FUND 9
<PAGE> 125
BUYING SHARES

Shares of the fund 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.

SCHWAB ACCOUNTS

For example, when you sell shares in a fund, the proceeds automatically are paid
to your Schwab brokerage account. From your account, you can use features such
as MoneyLink, 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.

STEP 1

DECIDE HOW MUCH YOU WANT TO INVEST.

STEP 2

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

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

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

STEP 3

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

10 INVESTING IN THE FUND
<PAGE> 126
SELLING/EXCHANGING SHARES

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

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

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

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

- - 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.

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.

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 fund whose shares you want to buy or sell

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

- - For exchanges, the name 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.

INVESTING IN THE FUND 11
<PAGE> 127
TRANSACTION POLICIES

THE FUND IS OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. The fund calculates its share prices each business day, after the close
of the NYSE (generally 4 p.m. Eastern time). The fund's share price is its net
asset value per share, or NAV, which is the fund's net assets divided by the
number of its shares outstanding. Orders to buy, sell or exchange shares that
are received in good order prior to the close of the fund will be executed at
the next share price calculated that day.

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

THE FUND 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 the fund 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 the fund's investment minimums

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

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

12 INVESTING IN THE FUND
<PAGE> 128
DISTRIBUTIONS AND TAXES

ANY INVESTMENT IN THE FUND 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 the fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.ustreas.gov.

AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND EARNS. Every year, the fund 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.

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

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 FUND PROVIDES SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year. Schwab brokerage account customers also receive information on
distributions and transactions in their monthly account statements.

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

MORE ON DISTRIBUTIONS

INVESTING IN THE FUND 13
<PAGE> 129
NOTES

14 NOTES
<PAGE> 130
SCHWAB

ANALYTICS FUND(R)

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

PROSPECTUS

February 28, 1999

SCHWABFUNDS(R)

MKT3758FLT
<PAGE> 131
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..................... 12
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> 132
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 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> 133
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> 134
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> 135
exchange was set between the euro and the currency of each converting country
and the European Central Bank, all national central banks and all stock
exchanges and depositories began pricing, trading and settling in euro even if
the securities traded are not denominated in euro. Each securities transaction
that requires converting to euro may involve rounding that could affect the
value of the security converted. In addition, issuers of securities that require
converting may experience increased costs as a result of the conversion, which
may affect the value of their securities. It is possible that uncertainties
related to the conversion will affect investor expectations and cause
investments to shift from or to European countries, thereby making the European
market less liquid and more expensive. All of these factors could affect the
value of the fund's investments and/or increase its expenses. While the
investment adviser has taken 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.

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" may be made daily, if
necessary, as the value of the futures contracts fluctuate. This process is
known as "marking-to-market." The margin amount will be returned to 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.

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

5
<PAGE> 136
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 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.

6
<PAGE> 137
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.

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.

Because the fund applies quantitative analysis techniques as opposed to the
fundamentals of an issuer, the investment adviser generally will not take into
account the extent to which an issuer has prepared or is preparing for the year
2000 problem when managing the fund's portfolio. It is possible that the fund's
portfolio and performance may be materially affected by an issuer's year 2000
related problems.

INVESTMENT LIMITATIONS

THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY VOTE OF A MAJORITY
OF 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(R) 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.

7
<PAGE> 138
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 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
<PAGE> 139
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.

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 & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
- -------------------------------------------------------------------------------------------------------

<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 Trustee Executive Vice President and Chief
June 28, 1953 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,
</TABLE>

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

9
<PAGE> 140
<TABLE>
<S> <C>
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 Officer
May 15, 1931 and Director, Semloh Financial,
Inc. (international financial
services and investment advisory
firm).

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 Officer
August 18, 1943 and Director, Wilsey Bennett, Inc.
(truck and air transportation,
real estate investment,
management, and investments).

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and
March 7, 1951 Financial Officer Controller, 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,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Officer and Co., Inc.; President and Chief
Trustee Operating Officer, Charles Schwab
Investment Management, Inc.
</TABLE>

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

10
<PAGE> 141
<TABLE>
<S> <C> <C>
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief
April 5, 1955 and Chief Investment Investment Officer, Charles Schwab
Officer Investment Management, Inc.

FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel and 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.
Schwab N/A 0

Tom D. Seip 1 N/A 0

Steven L. N/A 0
Scheid 2

William J. N/A 0
Klipp,

Donald F. 1,719 N/A 99,050
Dorward

Robert G. 1,719 N/A 99,050
Holmes

Donald R. 1,719 N/A 99,050
Stephens

Michael W. 1,719 N/A 99,050
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.

11
<PAGE> 142
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 12, 1999, the officers and trustees of the trust(s), as a group
owned of record or beneficially less than 1% of the outstanding voting
securities of the fund.

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 manager and Schwab.

For its advisory and administrative services to the fund, the investment adviser
is entitled to receive a graduated annual fee, payable monthly, of 0.54% of the
fund's average daily net assets not in excess of $500 million and 0.49% of such
net assets over $500 million. Prior to February 28, 1999, the graduated annual
fee, payable monthly was 0.74% of the first $1 billion of average daily net
assets, 0.69% of the next $1 billion and 0.64% of such 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 $682,000 (fees were reduced by $680,000), $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 29, 2000, 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 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(R). 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.

12
<PAGE> 143
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 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.

13
<PAGE> 144
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.

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. 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

14
<PAGE> 145
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 $234,861, $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.

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

15
<PAGE> 146
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.

16
<PAGE> 147
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 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.

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 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.

17
<PAGE> 148
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 of a specified period. The ending value is then divided by the initial
investment, which is annualized and expressed as a percentage. It is reported
for periods of one, five and 10 years or since commencement of operations for
periods not falling on those intervals. In computing average annual total
return, a fund assumes reinvestment of all distributions at net asset value on
applicable reinvestment dates.

<TABLE>
<CAPTION>
Fund (Commencement of One Year ended From Commencement
Operations) October 31, 1998 of Operations to
October 31, 1998
- -----------------------------------------------------------------------------------

<S> <C> <C>
Analytics Fund(R) (7/1/96) 18.37% 23.99%
</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. 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

18
<PAGE> 149
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.

Fund (Commencement of Operations) Cumulative Total Return
- --------------------------------- -----------------------

Analytics Fund(R) (7/1/96) 65.29%

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.

19
<PAGE> 150

EXHIBIT INDEX

EXH. NO. DOCUMENT
- -------- --------
(d)(ii) Schedules A and B to the Investment Advisory and Administration
Agreement

(d)(iv) Forms of Schedule A and B to the Investment Advisory and
Administration Agreement

(e)(ii) Schedule A to the Distribution Agreement

(g)(v) Amended Schedule A to the Accounting Services Agreement

(g)(viii) Schedule A to the Custodian Services Agreement

(g)(xiii) Schedules A and C to the Transfer Agency Agreement

(g)(xvi) Schedules A and C to the Shareholder Service Agreement

(h) Standard & Poor's License Agreement

(i) Opinion of Morgan, Lewis and Bockius LLP

(j) Consent of PricewaterhouseCoopers LLP

(l)(x) Purchase Agreement for Institutional Select S&P 500 Fund,
Institutional Select Large-Cap Value Index Fund and
Institutional Select Small-Cap Value Index Fund

<PAGE> 1

AMENDED SCHEDULE A
TO THE INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993

Schwab Small-Cap Index Fund October 14, 1993

Schwab MarketTrack Growth Portfolio (formerly known as September 25, 1995
Schwab Asset Director-High Growth Fund)

Schwab MarketTrack Balanced Portfolio (formerly known as September 25, 1995
Schwab Asset Director-Balanced Growth Fund)

Schwab MarketTrack Conservative Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Conservative Growth Fund)

Schwab S&P 500 Fund February 28, 1996

Schwab Analytics Fund May 21, 1996

Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996

OneSource Portfolios-International)

Schwab MarketManager Growth Portfolio (formerly known as Schwab OneSource October 13, 1996

Portfolios-Growth Allocation)

Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)

Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)

Schwab Market Track All Equity Portfolio (formerly known as Schwab Asset April 16, 1998
Director-Aggressive Growth Fund)

Institutional Select S&P 500 Fund February 1, 1999

Institutional Select Large Cap-Value Index Fund February 1, 1999

Institutional Select Small-Cap Value Index Fund February 1, 1999
</TABLE>

<PAGE> 2

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
-------------------------------------
Name: William J. Klipp
Title: Executive Vice
President and Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: /s/ Stephen B. Ward
-------------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

<PAGE> 3

AMENDED SCHEDULE B
TO THE INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB CAPITAL TRUST

ADVISORY FEE SCHEDULE

THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND ARE TO
BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:

Fund Fee
---- ---
Schwab International Index Fund Seventy one-hundredths of one percent
(0.70%) of the Fund's average daily net
assets not in excess of $300,000,000 and
sixty one-hundredths of one percent (0.60%)
of such assets over $300,000,000

Schwab Small-Cap Index Fund Fifty one-hundredths of one percent (0.50%)
of the Fund's average daily net assets not
in excess of $300,000,000 and forty-five
one-hundredths of one percent (0.45%) of
such assets over $300,000,000

Schwab MarketTrack Growth Seventy-four one-hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab Asset Director-High assets not in excess of $1 billion;
Growth Fund) sixty-nine one-hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one-hundredths of one percent (0.64%) of
such net assets over $2 billion

Schwab MarketTrack Balanced Seventy-four one-hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab Asset Director-Balanced assets not in excess of $1 billion;
Growth Fund) sixty-nine one-hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one-hundredths of one percent (0.64%) of
such net assets over $2 billion

Schwab MarketTrack Conservative Seventy-four one-hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab Asset Director- assets not in excess of $1 Fund) billion;
Conservative Growth Fund) sixty-nine one-hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one-hundredths of one percent (0.64%) of
such net assets over $2 billion

<PAGE> 4
Fund Fee
---- ---

Schwab S&P 500 Fund Thirty-six one-hundredths of one percent
(0.36%) of the Fund's average daily net
assets not in excess of $1 billion;
thirty-three one hundredths of one percent
(0.33%) of such net assets over $1 billion,
but not more than $2 billion; and thirty-one
one hundredths of one percent (0.31%) of
such net assets over $2 billion.

Schwab Analytics Fund Seventy-four one hundredths of one percent
(0.74%) of the Fund's average daily net
assets not in excess of $1 billion;
sixty-nine one hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one hundredths of one percent (0.64%) of
such net assets over $2 billion.

Schwab MarketManager Seventy-four one hundredths of one percent
International Portfolio (0.74%) of known as Schwab OneSource
(formerly known as Schwab Portfolios-International) the Fund's average
OneSource Portfolios- daily net assets not in excess of $1
International) billion; sixty-nine one hundredths of one
percent (0.69%) of such net assets over $1
billion, but not more than $2 billion; and
sixty-four one hundredths of one percent
(0.64%) of such net assets over $2 billion.

Schwab MarketManager Growth Seventy-four one hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $1 billion;
Growth Allocation) sixty-nine one hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one hundredths of one percent (0.64%) of
such net assets over $2 billion.

Schwab MarketManager Balanced Seventy-four one hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $1 Allocation)
Balanced Allocation) billion; sixty-nine one hundredths of one
percent (0.69%) of such net assets over $1
billion, but not more than $2 billion; and
sixty-four one hundredths of one percent
(0.64%) of such net assets over $2 billion.

Schwab MarketManager Small Cap Seventy-four one hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $1 billion;
Small Company) sixty-nine one hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one hundredths of one percent (0.64%) of
such net assets over $2 billion.

<PAGE> 5

Fund Fee
---- ---

Schwab Market Track All Equity Seventy-four one hundredths of one percent
Portfolio (formerly known as (0.74%) of the Fund's average daily net
Schwab Asset Director- assets not in excess of $1 billion;
Aggressive Growth Fund) sixty-nine one hundredths of one percent
(0.69%) of such net assets over $1 billion,
but not more than $2 billion; and sixty-four
one hundredths of one percent (0.64%) of
such net assets over $2 billion.

Institutional Select S&P Twenty one hundredths of one percent (0.20%)
500 Fund of the Fund's average daily net assets not
in excess of $1 billion; and eighteen one
hundredths of one percent (0.18%) of such
net assets over $1 billion.

Institutional Select Large-Cap Twenty one hundredths of one percent (0.20%)
Value Index Fund of the Fund's average daily net assets not
in excess of $1 billion; and eighteen one
hundredths of one percent (0.18%) of such
net assets over $1 billion.

Institutional Select Small-Cap Twenty-five one hundredths of one percent
Value Index Fund (0.25%) of the Fund's average daily net
assets not in excess of $1 billion; and
twenty-three one hundredths of one percent
(0.23%) of such net assets over $1 billion.

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Executive Vice
President and
Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: /s/ Stephen B. Ward
------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

<PAGE> 1

FORM OF AMENDED SCHEDULE A
TO THE INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.

<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993
Schwab International Index Fund - Select Shares April 30, 1997
Schwab Small-Cap Index Fund - Investor Shares October 14, 1993
Schwab Small-Cap Index Fund - Select Shares April 30, 1997
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Conservative Growth Fund)
Schwab S&P 500 Fund - e.Shares February 28, 1996
Schwab S&P 500 Fund - Investor Shares February 28, 1996
Schwab S&P 500 Fund - Select Shares April 30, 1997
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab OneSource October 13, 1996
Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
Schwab Market Track All Equity Portfolio (formerly known as Schwab Asset April 16, 1998
Director-Aggressive Growth Fund)
Institutional Select S&P 500 Fund October 28, 1998
Institutional Select Large Cap-Value Index Fund October 28, 1998
Institutional Select Small-Cap Value Index Fund October 28, 1998
Schwab Total Stock Market Index Fund - Investor Shares April 15, 1999
Schwab Total Stock Market Index Fund - Select Shares April 15, 1999
</TABLE>

<PAGE> 2

SCHWAB CAPITAL TRUST

By: ______________________________
Name: William J. Klipp
Title: Executive Vice President and
Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: _______________________________
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

<PAGE> 3

FORM OF SCHEDULE B
TO THE INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.

ADVISORY FEE SCHEDULE

THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND ARE TO
BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:

Fund Fee
- ---- ---

Schwab International Index Fund Seventy one-hundredths of one percent
(0.70%) of the Fund's average daily net
assets not in excess of $300,000,000 and
sixty one-hundredths of one percent (0.60%)
of such assets over $300,000,000

Schwab MarketTrack Growth Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director-High assets not in excess of $500 million, and
Growth Fund) forty nine-one hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab MarketTrack Balanced Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director- assets not in excess of $500 million, and
Balanced Growth Fund) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab MarketTrack Conservative Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director- assets not in excess of $500 Fund) million,
Conservative Growth Fund) and forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

<PAGE> 4

Fund Fee
- ---- ---

Schwab Analtics Fund Fifty four-one-hundredths of one percent
(0.54%) of the Fund's average daily net
assets not in excess of $500 million, and
forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab MarketManager International Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 million, and
International) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab MarketManager Growth Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 million, and
Growth Allocation) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab MarketManager Balanced Fifty four one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 Allocation)
Balanced Allocation) million, and forty nine-one-hundredths of
one percent (0.49%) of such net assets over
$500 million

Schwab MarketManager Small Cap Fifty four one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 million, and
Small Company) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Schwab Market Track All Equity Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director- assets not in excess of $500 million, and
Aggressive Growth Fund) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million

Institutional Select S&P 500 Fund Twenty one hundredths of one percent (0.20%)
of the Fund's average daily net assets not
in excess of $1 billion; and eighteen one
hundredths of one percent (0.18%) of such
net assets over $1 billion.

<PAGE> 5

Fund Fee
- ---- ---

Schwab Total Stock Market Thirty one hundredths of one percent (0.30%)
Index Fund of the Fund's average daily net assets not
in excess of $500 million; and twenty-two
one hundredths of one percent (0.22%) of
such net assets over $500 million.

SCHWAB CAPITAL TRUST

By: _______________________
Name: William J. Klipp
Title: Executive Vice
President and Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: _______________________
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

<PAGE> 1
AMENDED SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
FOR SCHWAB CAPITAL TRUST

Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Conservative Growth Fund)
Schwab S&P 500 Fund February 28, 1996
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab OneSource October 13, 1996
Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
MarketTrack All Equity Fund May 19, 1998
Institutional Select S&P 500 Fund February 1, 1999
Institutional Select Large Cap-Value Index Fund February 1, 1999
Institutional Select Small-Cap Value Index Fund February 1, 1999
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ Willian J. Klipp
-------------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Ron Carter
-------------------------------
Name: Ron Carter
Title: Senior Vice President

<PAGE> 1

SCHEDULE A

LIST OF FUNDS

(As revised on December 17, 1998)

Name of Fund Date
------------ ----
MarketTrack Growth Portfolio 4/30/98
MarketTrack Balanced Portfolio 4/30/98
MarketTrack Conservative Portfolio 4/30/98
MarketTrack All Equity Portfolio 4/15/98
International Index Fund: Investor Shares, Select Shares 4/30/98
Small-Cap Index Fund: Investor Shares, Select Shares 4/30/98
MarketManager International Portfolio 4/30/98
MarketManager Balanced Portfolio 4/30/98
MarketManager Growth Portfolio 4/30/98
MarketManager Small Cap Portfolio 4/30/98
MarketTrack Growth Portfolio II 4/30/98
Schwab S&P 500 Fund: Select Shares, Investor Shares, e.Shares 11/1/98
Schwab S&P 500 Portfolio 11/1/98
Schwab 1000 Fund: Select Shares, Investor Shares 11/1/98
Schwab Analytics Fund 11/1/98
Institutional Select S&P 500 Fund 2/1/99
Institutional Select Large-Cap Value Index Fund 2/1/99
Institutional Select Small-Cap Value Index Fund 2/1/99

SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS

By /s/ Tai-Chin Tung
---------------------------
Name: Tai-Chin Tung
Title: Principal Financial Officer

SEI FUND RESOURCES

By /s/ Todd Cipperman
---------------------------
Name: Todd Cipperman
Title: Vice President

<PAGE> 1

Schedule A

Custodian Services Agreement

Portfolios

Schwab S&P 500 Fund
Schwab Analytics Fund
Institutional Select S&P 500 Fund
Institutional Select Large-Cap Value Index Fund
Institutional Select Small-Cap Value Index Fund

Dated: 1/28/99
----------------------------
PNC BANK, NATIONAL ASSOCIATION

By: /s/ David E. Fritz
----------------------------------------
David E. Fritz

Title: Ass't Vice President

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
----------------------------------------
William J. Klipp

Title: Executive Vice President
and Chief Operating Officer

<PAGE> 1

AMENDED SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993

Schwab International Index Fund - Select Shares May 19, 1997

Schwab Small-Cap Index Fund - Investor Shares October 14, 1993

Schwab Small-Cap Index Fund - Select Shares May 19, 1997

Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)

Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)

Schwab MarketTrack Conservative Portfolio (formerly known as Schwab September 25, 1995
Asset Director-Conservative Growth Fund)

Schwab S&P 500 Fund - Investor Shares February 28, 1996

Schwab S&P 500 Fund - e.Shares February 28, 1996

Schwab S&P 500 Fund - Select Shares May 19, 1997

Schwab Analytics Fund May 21, 1996

Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)

Schwab MarketManager Growth Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Growth Allocation)

Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
</TABLE>

<PAGE> 2

<TABLE>
<S> <C>
Schwab Market Track All Equity Portfolio (formerly known as Schwab April 16, 1998
Asset Director-Aggressive Growth Fund)

Institutional Select S&P 500 Fund February 1, 1999

Institutional Select Large-Cap Value Index Fund February 1, 1999

Institutional Select Small-Cap Value Index Fund February 1, 1999
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
---------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Ron Carter
---------------------------
Name: Ron Carter
Title: Senior Vice President

<PAGE> 3

AMENDED SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

FEES

THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND ARE TO
BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:

FUND FEE
- ---- ---

Schwab International Index Fund Five one-hundredths of one percent (.05%) of
the Fund's average daily net assets

Schwab Small-Cap Index Fund Five one-hundredths of one percent (.05%) of
the Fund's average daily net assets

Schwab MarketTrack Growth Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets
Schwab Asset Director-High
Growth Fund)

Schwab MarketTrack Balanced Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets
Schwab Asset Director-Balanced
Growth Fund)

Schwab MarketTrack Conservative Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets
Schwab Asset Director-Conservative
Growth Fund)

Schwab S&P 500 Fund Five one-hundredths of one percent (.05%) of
the Fund's average daily net assets

Schwab Analytics Fund Five one-hundredths of one percent (.05%) of
the Fund's average daily net assets.

Schwab MarketManager Five one-hundredths of one percent (.05%) of
International Portfolio (formerly the Fund's average daily net assets.
known as Schwab OneSource
Portfolios-International)

Schwab MarketManager Growth Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets.
Schwab OneSource Portfolios-
Growth Allocation)

Schwab MarketManager Balanced Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets.
Schwab OneSource Portfolios-
Balanced Allocation)

Schwab MarketManager Small Cap Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets.
Schwab OneSource Portfolios-Small
Company)

Schwab Market Track All Equity Five one-hundredths of one percent (.05%) of
Portfolio (formerly known as the Fund's average daily net assets.
Schwab Asset Director-Aggressive
Growth Fund)

Institutional Select S&P 500 Fund Five one-hundredths of one percent (.05%) of
the Fund's average daily net assets.

<PAGE> 4

Institutional Select Large-Cap Five one-hundredths of one percent (.05%) of
Value Index Fund the Fund's average daily net assets.

Institutional Select Small-Cap Five one-hundredths of one percent (.05%) of
Value Index Fund the Fund's average daily net assets.

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Ron Carter
----------------------------
Name: Ron Carter
Title: Senior Vice President

<PAGE> 1

AMENDED SCHEDULE A
TO THE SHAREHOLDER SERVICE AGREEMENT
FOR SCHWAB CAPITAL TRUST

Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993

Schwab International Index Fund - Select Shares May 19, 1997

Schwab Small-Cap Index Fund - Investor Shares October 14, 1993

Schwab Small-Cap Index Fund - Select Shares May 19, 1997

Schwab MarketTrack Growth Portfolio (formerly known as September 25, 1995
Schwab Asset Director-High Growth Fund)

Schwab MarketTrack Balanced Portfolio September 25, 1995
(formerly known as Schwab Asset
Director-Balanced Growth Fund)

Schwab MarketTrack Conservative Portfolio (formerly known as September 25, 1995
Schwab Asset Director-Conservative Growth Fund)

Schwab S&P 500 Fund - Investor Shares February 28, 1996

Schwab S&P 500 Fund - e.Shares February 28, 1996

Schwab S&P 500 Fund - Select Shares May 19, 1997

Schwab Analytics Fund May 21, 1996

Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)

Schwab MarketManager Growth Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Growth Allocation)

Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)

Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)

Schwab MarketTrack All Equity Portfolio (formerly known as Schwab Asset April 16, 1998
Director-Aggressive Growth Fund)
</TABLE>

<PAGE> 2

<TABLE>
<S> <C>
Institutional Select S&P 500 Fund February 1, 1999

Institutional Select Large-Cap Value Index Fund February 1, 1999

Institutional Select Small-Cap Value Index Fund February 1, 1999
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
-----------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Ron Carter
-----------------------------
Name: Ron Carter
Title: Senior Vice President

<PAGE> 3

AMENDED SCHEDULE C
TO THE SHAREHOLDER SERVICE AGREEMENT
FOR SCHWAB CAPITAL TRUST

THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND ARE TO
BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:

Fund Fee
- ---- ---

Schwab International Index Fund - Twenty one-hundredths of one percent (.20%)
Investor Shares of the class' average daily net assets

Schwab International Index Fund - Five one-hundredths of one percent (0.05%)
Select Shares of the class' average daily net assets

Schwab Small-Cap Index Fund - Twenty one-hundredths of one percent (.20%)
Investor Shares of the class' average daily net assets

Schwab Small-Cap Index Fund - Five one-hundredths of one percent (0.05%)
Select Shares of the class' average daily net assets

Schwab MarketTrack Growth Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily net assets
Schwab Asset Director-High
Growth Fund)

Schwab MarketTrack Balanced Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily assets
Schwab Asset Director-Balanced
Growth Fund)

Schwab MarketTrack Conservative Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily net assets
Schwab Asset Director-Conservative
Growth Fund)

Schwab S&P 500 Fund - Twenty one-hundredths of one percent (.20%)
Investor Shares of the class' average daily net assets

Schwab S&P 500 Fund - e.Shares Five one-hundredths of one percent (0.05%)
of the class' average daily net assets

Schwab S&P 500 Fund - Five one-hundredths of one percent (0.05%)
Select Shares of the class' average daily net assets
<PAGE> 4

Schwab Analytics Fund Twenty one-hundredths of one percent (.20%)
of the Fund's average daily net assets.

Schwab MarketManager Twenty one-hundredths of one percent (.20%)
International Portfolio (formerly of the Fund's average daily net assets.
known as Schwab OneSource
Portfolios-International)

Schwab MarketManager Growth Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily net assets.
Schwab OneSource Portfolios-
Growth Allocation)

Schwab MarketManager Balanced Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily net assets.
Balanced Allocation)

Schwab MarketManager Small Cap Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily assets.
Schwab OneSource Portfolios-
Small Company)

Schwab Market Track All Equity Twenty one-hundredths of one percent (.20%)
Portfolio (formerly known as of the Fund's average daily net assets
Schwab Asset Director-
Aggressive Growth Fund)

Institutional Select S&P 500 Fund Five one-hundredths of one percent (0.05%)
of the Fund's average daily net assets

Institutional Select Large-Cap Five one-hundredths of one percent (0.05%)
Value Index Fund of the Fund's average daily net assets

Institutional Select Small-Cap Five one-hundredths of one percent (0.05%)
Index Fund of the Fund's average daily net assets

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Ron Carter
----------------------------
Name: Ron Carter
Title: Senior Vice President

<PAGE> 1
LICENSE AGREEMENT

LICENSE AGREEMENT, dated as of November 1, 1998 (the "Commencement
Date") by and between STANDARD & POOR'S, a division of The McGraw-Hill
Companies, Inc. ("S&P"), a New York corporation, having an office at
25 Broadway, New York, NY 10004, Schwab Capital Trust, on behalf of the
Institutional SelectTM S&P 500 Fund, the Institutional SelectTM Large-Cap
Value Index Fund, and the Institutional SelectTM Small-Cap Value Index Fund
("Licensee"), a Massachusetts business trust having an office at 101 Montgomery
Street, San Francisco, CA 94104.

WHEREAS, S&P compiles, calculates, maintains and owns rights in and
to and the S&P SmallCap 600/BARRA Value Index, and to the proprietary data
contained in each of the foregoing indices (such rights being hereinafter
referred to individually as an "S&P Index" and collectively as the "S&P
Indices" and

WHEREAS, S&P uses in commerce and has trade name and trademark
rights to the designations "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)",
"Standard & Poor's 500", "500", "S&P 500/BARRA Value Index", and "S&P
SmallCap 600/BARRA Value Index", (such rights being hereinafter individually
and collectively referred to as the "S&P Marks"); and

WHEREAS, Licensee wishes to use an S&P Index as a component of the
product or products described in Exhibit A attached hereto and made a part
hereof (individually and collectively referred to as the "Product"); and

WHEREAS, Licensee wishes to use the S&P Marks in connection with the
marketing and/or promotion of the Product and in

<PAGE> 2
connection with making disclosure about the Product under applicable law, rules
and regulations in order to indicate that S&P is the source of the S&P Indices;
and

WHEREAS, Licensee wishes to obtain S&P's authorization to use the S&P
Indices and the S&P Marks in connection with the Product pursuant to the terms
and conditions hereinafter set forth.

NOW, THEREFORE, the parties hereto agree as follows:

1. Grant of License.
(a) Subject to the terms and conditions of this
Agreement, S&P hereby grants to Licensee a non-transferable, non-exclusive
license (i) to use the S&P Indices as a component of the Product to be
marketed and/or promoted by Licensee and (ii) to use and refer to the S&P
Marks in connection with the distribution, marketing and promotion of the
Product (including in the name of the Product) and in connection with making
such disclosure about the Product as Licensee deems necessary or
desirable under any applicable law, rules, regulations or provisions of
this Agreement, but, in each case, only to the extent necessary to indicate
the source of the S&P Indices. It is expressly agreed and understood by
Licensee that no rights to use the S&P Indices and the S&P Marks are granted
hereunder other than those specifically described and expressly granted
herein.

(b) S&P agrees that no person or entity (other than the Licensee)
shall need to obtain a license from S&P with respect to the Product.

-2-
<PAGE> 3
2. Term.
The term of this Agreement shall commence on the Commencement Date and
shall continue in effect thereafter until it is terminated in accordance with
its terms.

3. License Fees.
(a) Licensee shall pay to S&P the license fees ("License Fees")
specified and provide the data called for in Exhibit B, attached hereto and made
a part hereof.

(b) During the term of this Agreement and for a period of one (1)
year after its termination, S&P shall have the right, during normal business
hours and upon reasonable notice to Licensee, to audit on a confidential basis
the relevant books and records of Licensee to determine that License Fees have
been accurately determined. The costs of such audit shall be borne by S&P unless
it determines that it has been underpaid by five percent (5%) or more; in such
case, costs of the audit shall be paid by Licensee. (c) Licensee agrees and
acknowledges that the license granted pursuant to this Agreement is limited to
the Product(s) identified and described in Exhibit A and that if Licensee wishes
to use an S&P Index and/or S&P Marks in connection with any additional
Product(s), it shall first be required to enter into a written amendment to this
Agreement on terms mutually acceptable to S&P and Licensee.

4. Termination.
(a) At any time during the term of this Agreement, either party may
give the other party sixty (60) days prior written notice of termination if the
terminating party reasonably believes that material damage or harm is occurring
to the reputation or goodwill of that party by reason of its continued

-3-

<PAGE> 4
performance hereunder, and such notice shall be effective on the date specified
therein of such termination, unless the other party shall correct the condition
causing such damage or harm within the notice period.

(b) In the case of breach of any of the material terms or conditions
of this Agreement by either party, the other party may terminate this Agreement
by giving sixty (60) days prior written notice of its intent to terminate, and
such notice shall be effective on the date specified therein for such
termination unless the breaching party shall correct such breach within the
notice period.

(c) S&P shall have the right, in its sole discretion, to cease
compilation and publication of an S&P Index and, in such event, to terminate
this Agreement if S&P does not offer a replacement or substitute index. In the
event that S&P intends to discontinue an S&P Index, S&P shall give Licensee at
least one (1) year's written notice prior to such discontinuance, which notice
shall specify whether a replacement or substitute index will be made available.

Licensee shall have the option hereunder within sixty (60) days after
receiving such written notice from S&P to notify S&P in writing of its intent to
use the replacement or substitute index, if any, under the terms of this
Agreement. In the event that Licensee does not exercise such option or no
substitute or replacement index is made available, this Agreement shall be
terminated as of the date specified in the S&P notice and the License Fees to
the date of such termination shall be computed as provided in Subsection 4(f).

-4-

<PAGE> 5
(d) Licensee may terminate this Agreement upon ninety (90) days prior
written notice to S&P if (i) Licensee is informed of the final adoption of any
legislation or regulation or the issuance of any interpretation that in
Licensee's reasonable judgment materially impairs Licensee's ability to market
and/or promote the Product; (ii) any material litigation or regulatory
proceeding regarding the Product is threatened or commenced; or (iii) Licensee
elects to terminate the public offering or other distribution of the Product, as
may be applicable. In such event the License Fees to the date of such
termination shall be computed as provided in Subsection 4(f).

(e) S&P may terminate this Agreement upon ninety (90) days (or upon
such lesser period of time if required pursuant to a court order) prior written
notice to Licensee if (i) S&P is informed of the final adoption of any
legislation or regulation or the issuance of any interpretation that in S&P's
reasonable judgment materially impairs S&P's ability to license and provide an
S&P Index and S&P Marks under this Agreement in connection with such Product; or
(ii) any litigation or proceeding is threatened or commenced and S&P reasonably
believes that such litigation or proceeding would have a material and adverse
effect upon the S&P Marks and/or an S&P Index or upon the ability of S&P to
perform under this Agreement. In such event the License Fees to the date of such
termination shall be computed as provided in Subsection 4(f).

(f) In the event of termination of this Agreement as provided in
Subsections 4(a), (b), (c), (d) or (e), the License Fees to the date of such
termination shall be computed by prorating the amount of the applicable License
Fees shown in Exhibit B on the basis of the number of elapsed days in the
current term.

-5-
<PAGE> 6
(g) Upon termination of this Agreement, Licensee shall cease to use
the S&P Index and the S&P Marks in connection with the Product; provided that
Licensee may continue to utilize any previously printed materials which contain
the S&P Marks for a period of ninety (90) days following such termination.

(h) For avoidance of doubt, a termination of the License Agreement
with respect to an individual S&P Index shall not affect the parties' respective
representations, warranties, rights, obligations, covenants and agreements with
respect to the S&P Indexes (if any) that are not affected by such termination.

5. S&P's Obligations.
(a) It is the policy of S&P to prohibit its employees who are
directly responsible for changes in the components of the S&P Indices from
purchasing or beneficially owning any interest in the Product and S&P believes
that its employees comply with such policy. Licensee shall have no
responsibility for ensuring that such S&P employees comply with such S&P policy
and shall have no duty to inquire whether any investors or sellers of the
Product are such S&P employees. S&P shall have no liability to the Licensee with
respect to its employees' adherence or failure to adhere to such policy.

(b) S&P shall not and is in no way obliged to engage in any marketing
or promotional activities in connection with the Product or in making any
representation or statement to investors or prospective investors in connection
with the promotion by Licensee of the Product.

(c) S&P agrees to provide reasonable support for Licensee's
development and educational efforts with respect to the Product as follows:
(i) S&P shall provide Licensee, upon request but subject to any agreements of
confidentiality with respect thereto, copies of the results of any marketing
research conducted by or on behalf of S&P with respect to the

-6-
<PAGE> 7
Product as follows: (i) S&P shall provide Licensee, upon request but subject to
any agreements of confidentiality with respect thereto, copies of the results of
any marketing research conducted by or behalf of S&P with respect to the S&P
Indices; and (ii) S&P shall respond in a timely fashion to any reasonable
requests for information by Licensee regarding the S&P Indices.

(d) S&P or its agent shall calculate and disseminate the S&P Indices
at least once each fifteen (15) seconds in accordance with its current
procedures, which procedures may be modified by S&P.

(e) S&P shall promptly correct or instruct its agent to correct any
mathematical errors made in S&P's computations of an S&P Index which are brought
to S&P's attention by Licensee, provided that nothing in this Section 5 shall
give Licensee the right to exercise any judgment or require any changes with
respect to S&P's method of composing, calculating or determining the
S&P Indices; and, provided further, that nothing herein shall be deemed to
modify the provisions of Section 9 of this Agreement.

6. Informational Materials Review.
Licensee shall use its best efforts to protect the goodwill and
reputation of S&P and of the S&P Marks in connection with its use of the S&P
Marks under this Agreement. Licensee shall submit to S&P for its review and
approval all informational materials pertaining to and to be used in connection
with the Product, including, where applicable, all prospectuses, plans,
registration statements, application forms, contracts, videos, advertisements,
brochures and promotional and any other similar informational materials
(including documents required to be filed with governmental or regulatory
agencies) that in any way use or refer to S&P, the S&P Indices, or the S&P Marks
(the

-7-

<PAGE> 8
"Informational Materials"). S&P's approval shall be required with respect
to the use of and description of S&P, the S&P Marks and the S&P Indices and
shall not be unreasonably withheld or delayed by S&P. Specifically, S&P shall
notify Licensee, by facsimile transmission in accordance with Subsection 12(d)
hereof, of its approval or disapproval of any Informational Materials within
twenty-four (24) hours (excluding Saturday, Sunday and New York Stock Exchange
Holidays) following receipt thereof from Licensee. Any disapproval shall
indicate S&P's reasons therefor. Any failure by S&P to respond within such
twenty-four (24) hour period shall be deemed to constitute a waiver of S&P's
right to review such Informational Materials. Informational Materials shall
be addressed to S&P, c/o Jacqueline Meziani, Specialist - Index
Licensing/Marketing, Equity Index Services, at the address specified in
Subsection 12(d). Informational Materials may be submitted via facsimile (to
212-208-8911 or 212-412-0429) if they are less than 20 pages and legible after
transmission. Once Informational Materials have been approved by S&P, subsequent
Informational Materials which do not alter the use or description of S&P, the
S&P Marks or the S&P Indices need not be submitted for review and approval by
S&P.

7. Protection of Value of License.
(a) During the term of this Agreement, S&P shall use its best efforts
to maintain in full force and effect federal registrations for "Standard &
Poor's(R)", "S&P(R)", and "S&P 500(R)". S&P shall at S&P's own expense and sole
discretion exercise S&P's common law and statutory rights against infringement
of the S&P Marks, copyrights and other proprietary rights.

(b) Licensee shall cooperate with S&P in the maintenance of such
rights and registrations and shall take such actions and execute such
instruments as S&P may from time to time

-8-
<PAGE> 9
reasonably request, and shall use the
following notice when referring to the S&P Indices or the S&P Marks in any
Informational Material:

"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", "500", S&P 500/BARRA Value Index, S&P SmallCap 600/BARRA
Growth Index, S&P SmallCap 600/BARRA Value Index are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed for use by
Schwab Capital Trust and the following series: Institutional SelectTM
S&P 500 Fund, the Institutional SelectTM Large-Cap Value Index Fund,
and the Institutional SelectTM Small-Cap Value Index Fund. The Product
is not sponsored, endorsed, sold or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Product.

or such similar language as may be approved in advance by S&P, it being
understood that such notice need only refer to the specific S&P Index and
related S&P Marks to which the relevant Informational Materials relate.

8. Proprietary Rights.
(a) Licensee acknowledges that the S&P Indices are selected,
coordinated, arranged and prepared by S&P through the application of methods and
standards of judgment used and developed through the expenditure of considerable
work, time and money by S&P. Licensee also acknowledges that the S&P Indices and
the S&P Marks are the exclusive property of S&P, that S&P has and retains all
proprietary rights therein (including, but not limited to trademarks and
copyrights) and that the S&P Indices and

-9-
<PAGE> 10
their compilation and composition and changes therein are in the control and
discretion of S&P.

(b) S&P reserves all rights with respect to the S&P Indices and the
S&P Marks except those expressly licensed to Licensee hereunder.

(c) Each party shall treat as confidential and shall not disclose or
transmit to any third party any documentation or other written materials that
are marked as "Confidential and Proprietary" by the providing party
("Confidential Information"). Confidential Information shall not include (i) any
information that is available to the public or to the receiving party hereunder
from sources other than the providing party (provided that such source is not
subject to a confidentiality agreement with regard to such information) or
(ii) any information that is independently developed by the receiving party
without use of or reference to information from the providing party.
Notwithstanding the foregoing, either party may reveal Confidential Information
to any regulatory agency or court of competent jurisdiction if such information
to be disclosed is (a) approved in writing by the other party for disclosure or
(b) required by law, regulatory agency or court order to be disclosed by a
party, provided, if permitted by law, that prior written notice of such required
disclosure is given to the other party and provided further that the providing
party shall cooperate with the other party to limit the extent of such
disclosure. The provisions of this Subsection 8(c) shall survive any termination
of this Agreement for a period of five (5) years from disclosure by either party
to the other of the last item of such Confidential Information.

9. Warranties; Disclaimers.

-10-
<PAGE> 11
(a) S&P represents and warrants that S&P has the right to grant the
rights granted to Licensee herein and that, subject to the terms and conditions
of this Agreement, the license granted herein shall not infringe any trademark,
copyright or other proprietary right of any person not a party to this
Agreement. (b) Licensee agrees expressly to be bound itself by and furthermore
to include all of the following disclaimers and limitations in each prospectus
or each Statement of Additional Information ("SAI") relating to the Product,
provided the SAI is incorporated by reference into the prospectus and the
prospectus contains disclosure regarding the S&P Indices that conforms to the
notice in Subsection 7(b), including a cross reference to the SAI disclosure.
Licensee shall furnish a copy of the prospectus and SAI thereof to S&P:

The Product is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the Product or
any member of the public regarding the advisability of investing in securities
generally or in the Product particularly or the ability of the the S&P 500
Composite Stock Price Index, the S&P 500/BARRA Value Index, and the S&P SmallCap
600/BARRA Value Index to track general stock market performance. S&P's only
relationship to the Licensee is the licensing of certain trademarks and trade
names of S&P and of the the S&P 500 Composite Stock Price Index, the S&P
500/BARRA Value Index, and the S&P SmallCap 600/BARRA Value Index which is
determined, composed and calculated by S&P without regard to the Licensee or the
Product. S&P has no obligation to take the needs of the Licensee or the owners
of the Product into consideration in determining, composing or calculating the
S&P 500 Composite Stock Price Index, the S&P 500/BARRA Value Index, and the S&P
SmallCap 600/BARRA Value Index. S&P is not responsible for and has not

-11-
<PAGE> 12
participated in the determination of the prices and amount of the Product or the
timing of the issuance or sale of the Product or in the determination or
calculation of the equation by which the Product is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Product.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 COMPOSITE STOCK PRICE INDEX, THE S&P 500/BARRA VALUE INDEX, AND THE S&P
SMALLCAP 600/BARRA VALUE INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE
NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS
OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
COMPOSITE STOCK PRICE INDEX, THE S&P 500/BARRA VALUE INDEX, AND THE S&P SMALLCAP
600/BARRA VALUE INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 COMPOSITE
STOCK PRICE INDEX, THE S&P 500/BARRA VALUE INDEX, AND THE S&P SMALLCAP 600/BARRA
VALUE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.

Any changes in the foregoing disclaimers and limitations must be
approved in advance in writing by an authorized officer of S&P.

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<PAGE> 13
to its terms and that its performance does not violate any laws, regulations or
agreements applicable to it.

(d) Licensee represents and warrants to S&P that the Product shall at
all times comply with the description in Exhibit A.

(e) Licensee represents and warrants to S&P that the Product shall
not violate any material applicable law, which violation has or can be expected
to have a material adverse effect on S&P, including but not limited to any
material banking, commodities and securities laws.

(f) Neither party shall have any liability for lost profits or
indirect, punitive, special, or consequential damages arising out of this
Agreement, even if notified of the possibility of such damages. Without
diminishing the disclaimers and limitations set forth in Subsection 9(b), or the
indemnification obligations of either party under Subsections 10(a) or 10(b), in
no event shall the cumulative liability of either party exceed the average
annual License Fees actually paid to S&P hereunder.

(g) Use of any marks by Licensee in connection with its Product
(including in the name of such Product) which are not the S&P Marks is at
Licensee's sole risk.

(h) The provisions of this Section 9 shall survive any termination of
this Agreement.

10. Indemnification.
(a) Licensee shall indemnify and hold harmless S&P, its affiliates
judgments, damages, costs or losses of any

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<PAGE> 14
kind (including reasonable attorneys' and experts' fees) as a result of any
claim, action, or proceeding that arises out of or relates to (a) any breach by
Licensee of its representations or warranties under this Agreement, or (b) the
Product; provided, however, that S&P notifies Licensee promptly of any such
claim, action or proceeding. Licensee shall periodically reimburse S&P for its
reasonable expenses incurred under this Subsection 10(a). S&P shall have the
right, at its own expense, to participate in the defense of any claim, action or
proceeding against which it is indemnified hereunder; provided, however, it
shall have no right to control the defense, consent to judgment, or agree to
settle any such claim, action or proceeding without the written consent of
Licensee without waiving the indemnity hereunder. Licensee, in the defense of
any such claim, action or proceeding except with the written consent of S&P,
shall not consent to entry of any judgment or enter into any settlement which
either (a) does not include, as an unconditional term, the grant by the claimant
to S&P of a release of all liabilities in respect of such claims or (b)
otherwise adversely affects the rights of S&P. This provision shall survive the
termination or expiration of this Agreement.

(b) S&P shall indemnify and hold harmless Licensee, its affiliates
and their officers, directors, employees and agents against any and all
judgments, damages, costs or losses of any kind (including reasonable attorneys'
and experts' fees) as a result of any claim, action, or proceeding that arises
out of or relates to any breach by S&P of its representations or warranties
under this Agreement; provided, however, that (a) Licensee notifies S&P promptly
of any such claim, action or proceeding; (b) Licensee grants S&P control of its
defense and/or settlement; and (c) Licensee cooperates with S&P in the defense
thereof. S&P shall periodically reimburse Licensee for its reasonable expenses
incurred under this Subsection 10(b). Licensee shall have the

-14-
<PAGE> 15
proceeding against which it is indemnified hereunder; provided, however, it
shall have no right to control the defense, consent to judgment, or agree to
settle any such claim, action or proceeding without the written consent of S&P
without waiving the indemnity hereunder. S&P, in the defense of any such claim,
action or proceeding, except with the written consent of Licensee, shall not
consent to entry of any judgment or enter into any settlement which either
(a) does not include, as an unconditional term, the grant by the claimant to
Licensee of a release of all liabilities in respect of such claims or (b)
otherwise adversely affects the rights of Licensee. This provision shall survive
the termination or expiration of this Agreement.

11. Suspension of Performance.
Neither S&P nor Licensee shall bear responsibility or liability for any
losses arising out of any delay in or interruptions of their respective
performance of their obligations under this Agreement due to any act of God, act
of governmental authority, act of the public enemy or due to war, the outbreak
or escalation of hostilities, riot, fire, flood, civil commotion, insurrection,
labor difficulty (including, without limitation, any strike, or other work
stoppage or slow down), severe or adverse weather conditions, communications
line failure, or other similar cause beyond the reasonable control of the party
so affected.

12. Other Matters.
(a) This Agreement is solely and exclusively between the parties
hereto and shall not be assigned or transferred by either party, without prior
written consent of the other party, and any attempt to so assign or transfer
this Agreement without such written consent shall be null and void.

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<PAGE> 16
(b) This Agreement constitutes the entire agreement of the parties
hereto with respect to its subject matter and may be amended or modified only by
a writing signed by duly authorized officers of both parties. This Agreement
supersedes all previous agreements between the parties with respect to the
subject matter of this Agreement. There are no oral or written collateral
representations, agreements, or understandings except as provided herein.

(c) No breach, default, or threatened breach of this Agreement by
either party shall relieve the other party of its obligations or liabilities
under this Agreement with respect to the protection of the property or
proprietary nature of any property which is the subject of this Agreement.

(d) Except as set forth in Section 6 hereof with respect to
Informational Materials, all notices and other communications under this
Agreement shall be (i) in writing, (ii) delivered by hand, by registered or
certified mail, return receipt requested, or by facsimile transmission to the
address or facsimile number set forth below or such address or facsimile number
as either party shall specify by a written notice to the other and (iii) deemed
given upon receipt.

Notice to S&P: Standard & Poor's
25 Broadway
New York, NY 10004
Attn.: Robert Shakotko
Senior Vice President
Index Services
Fax #: (212) 208-8911

Notice to Licensee: Schwab Capital Trust
101 Montgomery Street
San Francisco, CA 94104

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<PAGE> 17
Attn: Frances Cole, Secretary
Fax #: 415-667-3440

(e) This Agreement shall be interpreted, construed and enforced in
accordance with the laws of the State of New York.

(f) Each party agrees that in connection with any legal action or
proceeding arising with respect to this Agreement, they will bring such action
or proceeding only in the United States District Court for the Southern District
of New York or in the Supreme Court of the State of New York in and for the
First Judicial Department or the United States District Court for the Northern
District of California or state court in the City and County of San Francisco,
and each party agrees to submit to the jurisdiction of such court and venue in
such court and to waive any claim that such court is an inconvenient forum.

(g) The name "Schwab Capital Trust" refers to the Schwab Capital Trust
and its Trustees, as Trustees but not individually or personally, acting under a
Declaration of Trust dated May 7, 1993. The obligations of the Schwab Capital
Trust entered into in the name of or on behalf of the Schwab Capital Trust by
any of the Trustees, representatives or agents are made not individually, but in
such Schwab Fund Family capacities. Such obligations are not binding upon any of
the Trustees, shareholders or representatives of the Schwab Capital Trust
personally, but bind only the assets of the Schwab Capital Trust belonging to
such series for the enforcement of any claims against the Schwab Fund family.

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<PAGE> 18
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first set forth above.

<TABLE>
<S> <C>
SCHWAB CAPITAL TRUST STANDARD & POOR'S
on behalf of The Funds a division of
listed on Exhibit A hereto The McGraw-Hill Companies, Inc.

BY: ___________________________ BY: ___________________________

_______________________________ _______________________________
(Print Name) (Print Name)

_______________________________ _______________________________
(Print Title) (Print Title)

</TABLE>
-18-

<PAGE> 19
EXHIBIT A

PRODUCT DESCRIPTION

Product: The Institutional SelectTM S&P 500 Fund, the Institutional SelectTM
Large-Cap Value Index Fund, and the Institutional SelectTM Small-Cap Value
Index Fund of Schwab Capital Trust (each, a "Product") are publicly offered
mutual funds each of whose investment objective is to seek high total return by
tracking the price and yield performance of publicly-traded common stocks of
companies as represented by an S&P Index.

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<PAGE> 20
EXHIBIT B
LICENSE FEES

Licensee shall pay S&P License Fees computed as follows:

With respect to each individual Product issued pursuant to this Agreement, the
annual License Fee shall be the greater of the applicable Minimum Annual Fee
(as defined below) or one-tenth basis point (.00001) of the average daily net
assets of the Product computed quarterly.

<TABLE>
<CAPTION>
<S> <C>
Product Minimum Annual Fee
S&P 500 Fund $5,000 in year one of the Agreement
$7,500 in year two of the Agreement
$10,000 in year three and each subsequent year of the Agreement

Large-Cap Value Index Fund $2,500 in year one of the Agreement
$5,000 in year two of the Agreement
$7,500 in year three of the Agreement
$10,000 in year four and each subsequent year of the Agreement

Small-Cap Value Index Fund $2,500 in year one of the Agreement
$5,000 in year two of the Agreement
$7,500 in year three of the Agreement
$10,000 in year four and each subsequent year of the Agreement
</TABLE>

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<PAGE> 21
The Minimum Annual Fee shall be payable on the Commencement Date and each
one-year anniversary thereof. Amounts in excess of the Minimum Annual Fee shall
be paid to S&P within thirty (30) days after the close of each calendar quarter
in which they are incurred; each such payment shall be accompanied by a
statement setting forth the basis for its calculation.

-21-

<PAGE> 1
February 25, 1999

Schwab Capital Trust
101 Montgomery Street
San Francisco, CA 94104

Re: Opinion of Counsel regarding Post-Effective Amendment No. 32 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-62470).

Ladies and Gentlemen:

We have acted as counsel to Schwab Capital Trust, a Massachusetts trust
(the "Trust"), in connection with the above-referenced Registration Statement
(as amended, the "Registration Statement") which relates to the Trust's units of
beneficial interest, par value $.00001 per share (collectively, the "Shares").
This opinion is being delivered to you in connection with the Trust's filing of
Post-Effective Amendment No. 32 to the Registration Statement (the "Amendment")
to be filed with the Securities and Exchange Commission pursuant to Rule 485(b)
of the Securities Act of 1933 (the "1933 Act"). With your permission, all
assumptions and statements of reliance herein have been made without any
independent investigation or verification on our part except to the extent
otherwise expressly stated, and we express no opinion with respect to the
subject matter or accuracy of such assumptions or items relied upon.

In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:

(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;

(b) the Agreement and Declaration of Trust for the Trust and all
amendments and supplements thereto (the "Declaration of
Trust");

(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated

<PAGE> 2
By-Laws (the "By-Laws"), and certain resolutions adopted by
the Board of Trustees of the Trust authorizing the issuance of
the Shares; and

(d) a printer's proof of the Amendment.

In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Amendment, as filed with
the Securities and Exchange Commission, will be in substantially the form of the
printer's proof referred to in paragraph (d) above.

Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.

Very truly yours,

/s/ Morgan, Lewis and Bockius LLP

<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 32 to the registration statement on Form N-1A of Schwab Capital
Trust (the "Registration Statement") of our reports dated December 8, 1998,
relating to the financial statements and financial highlights appearing in the
October 31, 1998 Annual Reports to Shareholders of Schwab MarketTrack All Equity
Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced
Portfolio, Schwab MarketTrack Conservative Portfolio, Schwab MarketManager
Growth Portfolio, Schwab MarketManager Balanced Portfolio, Schwab MarketManager
Small Cap Portfolio, Schwab MarketManager International Portfolio, and Schwab
Analytics Fund(R) which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectuses and under the heading "Independent Accountant"
in the Statements of Additional Information.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
February 24, 1999

<PAGE> 1
PURCHASE AGREEMENT

Schwab Capital Trust (the "Trust"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree on
February 1, 1999 as follows:

1. The Trust hereby offers and Schwab hereby purchases 1 unit of
beneficial interest for Series M, N, and O of the Trust representing interests
in each of the series of shares known as Institutional Select S&P 500 Fund,
Institutional Select Large-Cap Value Index Fund and Institutional Select
Small-Cap Value Index Fund (such 1 unit of beneficial interest being hereafter
collectively known as a "Share") at a price of $10.00 per Share. Schwab hereby
acknowledges purchase of the Shares, and the Trust hereby acknowledges receipt
from Schwab of funds in the amount of $10.00 for each such series of the Trust
in full payment for the Shares. It is further agreed that no certificate for the
Shares will be issued by the Trust.

2. Schwab represents and warrants to the Trust that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.

3. The names "Schwab Capital Trust" and "Trustees of Schwab
Capital Trust" refer, respectively to the Trust created and the Trustees as
Trustees but not individually or personally, acting from time to time under an
Agreement and Declaration of Trust dated as of May 6, 1993, to which reference
is hereby made and a copy of which is on file at the Office of the Secretary of
State of the Commonwealth of Massachusetts and elsewhere as required by law, and
to any and all amendments thereto so filed or hereafter filed. The obligations
of "Schwab Capital Trust" entered into in the name or on behalf thereof by any
of the Trustees, representatives or agents are not made individually, but only
in such capacities, and are not binding upon any of the Trustees, Shareholders
or representatives of the Trust personally, but bind only the assets of the
Trust, and all persons dealing with any series of Shares of the Trust must look
solely to the assets for the Trust belonging to such series for the enforcement
of any claims against the Trust.

<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed day and year first written above.

Attest: SCHWAB CAPITAL TRUST

/s/ Christopher Webb By: /s/ Stephen B. Ward
---------------- ------------------------
Christopher Webb Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

Attest: CHARLES SCHWAB & CO., INC.

/s/ Christopher Webb By: /s/ Ron Carter
----------------- ----------------------
Christopher Webb Name: Ron Carter
Title: Senior Vice President

<PAGE> 3
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant certifies that it meets all of the requirements for effectiveness of
this Post Effective Amendment No. 32 to Registrant's Registration Statement on
Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post-Effective Amendment No. 32 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Washington, District of Columbia, on
the 26th day of February, 1999.

SCHWAB CAPITAL TRUST
Registrant

Charles R. Schwab*
---------------------------
Charles R. Schwab, Chairman

Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 32 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 26th day of February, 1999.

Signature Title
- --------- -----
Charles R. Schwab* Chairman 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.
</TABLE>