SCHWAB CAPITAL TRUST, 485APOS, 2000-12-11

SCHWAB CAPITAL TRUST
485APOS, 2000-12-11

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<PAGE> 1

File Nos. 33-62470 and 811-7704
As filed with the Securities and Exchange
Commission on December 11, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 39 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 41 [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

Jeremiah H. Chafkin
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 Koji Felton, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment
1701 Market Street One Franklin Square Management, Inc.
Philadelphia, PA 19103 1301 K Street NW 101 Montgomery Street
Suite 800 East 120K-14-109
Washington, DC 20005 San Francisco, CA 94104
</TABLE>

It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/ / On (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ On February 28, 2001 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
(Page 1, Cover)

Prospectus
February 28, 2001

SCHWAB
Analytics Fund(R)

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.

CharlesSchwab (logo)

<PAGE> 3
(Page 2)

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> 4
(Page 3)

About The Fund

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> 5
(Page 4)

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 1,500 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.

[Side Bar] 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.

<PAGE> 6
(Page 5)

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.

[Side Bar] 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.

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

<PAGE> 7
(Page 6)

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

<TABLE>
<S> <C> <C> <C>
XX.XX XX.XX XX.XX XX.XX
97 98 99 00

Best quarter: XX.XX% QX 19__
Worst quarter: XX.XX% QX 19__

Average annual total returns (%) as of 12/31/00

Since
1 Year inception
<S> <C> <C>

Fund XX.XX XX.XX 1
S&P 500(R) Index XX.XX XX.XX 1
</TABLE>

1 Inception: 7/1/96.

Fund Fees and Expenses

The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are 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 (%)

SHAREHOLDER FEES None

ANNUAL OPERATING EXPENSES (% of average net assets)

<TABLE>
<S> <C>
Management fees X.XX
Distribution (12b-1) fees None
Other expenses X.XX
Total annual operating expenses X.XX

Expense reduction (X.XX)
Net operating expenses* X.XX

* Guaranteed by Schwab and the investment adviser through 2/28/02 (excluding
interest, taxes and certain non-routine expenses).
</TABLE>

Expenses on a $10,000 investment

Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment 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>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XX $XXX $XXX $XXXX

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
</TABLE>

<PAGE> 8
(Page 7)

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, __________________, audited
these figures. Their full report is included in the fund's annual report (see
back cover).

[Insert Financial Highlights table here]

<PAGE> 9
(Page 8)

Fund 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 __ million shareholder
accounts. (All figures on this page are as of 10/31/00.)

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
10/31/00, these fees were 0.__%. 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 $5
billion under management.

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

[Friendly Voice] The fund's investment adviser, Charles Schwab Investment
Management, Inc., has more than $__ billion under management.

<PAGE> 10
(Page 9)

Investing in the funds

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

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

<PAGE> 11
(Page 10)

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.

The information on these pages outlines how Schwab brokerage account investors
can place "good orders", which are orders made in accordance with the funds'
policies, to buy, sell and exchange shares of the fund. 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

Decide how much you want to invest.

<TABLE>
<CAPTION>
<S> <C>
Minimum initial investment Minimum additional investment

$2,500 $500
($1,000 for retirement and ($100 for Custodial accounts and Automatic
custodial accounts) Investment Plan)
</TABLE>

Step 2
Choose an option for fund distributions. The three options are described below.
If you don't indicate a choice, you will receive the first option.

<TABLE>
<CAPTION>
<S> <C>
Option Features

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

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

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

Step 3
Place your order. Use any of the methods described at right. Make checks payable
to Charles Schwab & Co., Inc.

[Side Bar] 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 fund.

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 Schwab MoneyLink(R), which lets you move money between your Schwab account
and your accounts at other financial institutions, and Automatic Investment Plan
(AIP), which lets you set up periodic investments in mutual funds you already
own.

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

<PAGE> 12
(Page 11)

Selling/Exchanging Shares

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

- The 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.
- The fund reserves the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000 or
1% of the fund's assets, whichever is less.
- Exchange orders are limited to other SchwabFunds that are not Sweep
Investments as well as variable NAV funds and must meet the minimum investment
and other requirements for the fund and share class into which you are
exchanging.
- You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.

Methods for placing direct orders

Internet
www.schwab.com

Schwab By Phone(TM)
Automated voice service or speak with a representative at 800-435-4000 (for TDD
service, call 800-345-2550)

TeleBroker(R)
Automated touch-tone phone service at 800-272-4922

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

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

In person
Visit the nearest Charles Schwab branch office

[Side Bar] When placing orders

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

- Your name or, for Internet orders, your account number/"Login ID."
- Your account number (for SchwabLink transactions, include the master account
and subaccount numbers) or, for Internet orders, your password.
- The name and share class (if applicable) 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.

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

<PAGE> 13
(Page 12)

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 large purchase orders that
may negatively impact its operations, and orders 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.
- To revise the redemption fee criteria.

<PAGE> 14
(Page 13)

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.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.

[Side Bar] 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.

<PAGE> 15
(Page 14, Notes)

<PAGE> 16
(Page 15, Notes)

<PAGE> 17
(Page 16, Back Cover)

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.

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 free copies of these documents by contacting SchwabFunds(R).
You can also review and copy them in person at the SEC's Public Reference Room,
access them online at www.sec.gov or obtain paper copies by sending an
electronic request to [email protected]. You will need to pay a duplicating fee
before receiving paper copies from the SEC.

SEC File Number
Schwab Analytics Fund 811-7704

Securities and Exchange Commission
Washington, D.C. 20549-0102
202-942-8090 (Public Reference Section)
www.sec.gov
[email protected]

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

Prospectus
February 28, 2001

CharlesSchwab (logo)

MKT3758FLT-3

<PAGE> 18
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB ANALYTICS FUND(R)

FEBRUARY 28, 2001

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated February 28, 2001 (as
amended from time to time).

To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the fund at P.O. Box 7575, San
Francisco, California 94120-7575. 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.

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS.........................................
MANAGEMENT OF THE FUND...........................................................................
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..............................................
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................
BROKERAGE ALLOCATION AND OTHER PRACTICES.........................................................
DESCRIPTION OF THE TRUST.........................................................................
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES............................................................................
TAXATION.........................................................................................
CALCULATION OF PERFORMANCE DATA..................................................................
</TABLE>

1
<PAGE> 19

INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVE

The fund's investment objective may be changed only by vote of a majority of its
outstanding voting shares. There is no guarantee the fund will achieve its
objective.

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

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. The fund will invest in securities or
engage in techniques that are intended to help achieve its investment objective.

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. 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.

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

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

2
<PAGE> 20
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.

DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GDSs) 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.

Depositary Receipts also include securities issued by a trust representing an
undivided beneficial ownership interest in the assets of the trust, usually
common stocks of a group of companies. The trust generally holds the deposited
common stocks for the benefit of the holders of the depositary receipts. Issuers
generally are not registered as investment companies under the 1940 Act. The
trustee of a trust is typically limited to performing only administrative and
ministerial duties, for which it is paid out of trust assets. The risks of
investing in depositary receipts generally reflect the risks of the securities
held in the trust. The acquisition and disposal of some depositary receipts is
limited to round-lots or round-lot multiples. Depositary receipts may trade in
the secondary market at prices lower than the aggregate value of the
corresponding underlying securities. In such cases, some depositary receipts
enable the holders to realize the underlying value of the securities by
canceling the receipt and receiving a corresponding amount of underlying
securities, which requires the payment of fees and expenses.

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.

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 though they may carry limited voting rights, and they 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 stocks 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

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<PAGE> 21
ratio. A corporation may issue a convertible security that is subject to
redemption after a specified date and usually under certain circumstances. A
holder of a convertible security that is called for redemption would be required
to tender it for redemption to the issuer, convert it to the underlying common
stock or sell it to a third party. Convertible bonds typically pay a lower
interest rate than nonconvertible bonds of the same quality and maturity,
because of the convertible feature. This structure allows the holder of the
convertible bond to participate in share price movements in the company's common
stock. The actual return on a convertible bond may exceed its stated yield if
the company's common stock appreciates in value and the option to convert to
common shares becomes more valuable.

Convertible preferred stocks are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds, but 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 a company's 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 types of securities 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 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.

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<PAGE> 22
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.

On January 1, 1999, 11 of the 15 member states of the European union introduced
the "euro" as a common currency. During a three-year transitional period, the
euro will coexist with each member state's currency. By July 1, 2002, the euro
will have replaced the national currencies of the following member countries:
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain. During the transition period, each country will
treat the euro as a separate currency from that of any member state.

Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchange and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the participating countries.

The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.

The conversion may impact the trading in securities of issuers located in, or
denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
The introduction of the euro is also expected to affect derivative and other
financial contracts in which the funds may invest in so far as price sources
such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.

The overall impact of the transition of the member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
consequences can be expected, such as changes in economic environment and change
in behavior of investors, all of which will impact each fund's euro-denominated
investments.

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<PAGE> 23

Securities that are acquired by a fund outside the United States and that are
publicly traded in the United States on a foreign securities exchange or in a
foreign securities market, are not considered illiquid provided that: (1) the
fund acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (2) the fund reasonably believes it
can readily dispose of the securities in the foreign trading market or for cash
in the United States, or (3) foreign market and current market quotations are
readily available. Investments in foreign securities where delivery takes place
outside the United States will have to be made in compliance with any applicable
U.S. and foreign currency restrictions and tax laws (including laws imposing
withholding taxes on any dividend or interest income) and laws limiting the
amount and types of foreign investments.

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

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

When buying or selling futures contracts, a fund must place a deposit with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and must be in the form of liquid debt instruments, including
cash, cash-equivalents and U.S. government securities. Subsequent payments to
and from the broker, known as "variation margin" 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.
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, the fund will segregate assets in an
amount equal to the margin requirement that is deposited with the broker for its
outstanding futures contracts.

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.

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<PAGE> 24

identical futures contracts. Such offsetting transactions terminate the original
contracts and cancel the obligation to take or make delivery of the underlying
securities or cash. There may not always be a liquid secondary market at the
time a fund seeks to close out a futures position. If a fund is unable to close
out its position and prices move adversely, the fund would have to continue to
make daily cash payments to maintain its margin requirements. If a fund had
insufficient cash to meet these requirements it may have to sell portfolio
securities at a disadvantageous time or incur extra costs by borrowing the cash.
Also, the fund may be required to make or take delivery and incur extra
transaction costs buying or selling the underlying securities. The 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 fund has valued the instruments. The liquidity of the fund's
investments is monitored under the supervision and direction of the Board of
Trustees. Investments currently not considered liquid include repurchase
agreements not maturing within seven days and certain restricted securities.

LENDING of portfolio securities is a common practice in the securities industry.
The fund may engage in security lending arrangements with the primary objective
of increasing its income. For example, the fund may receive cash collateral, and
it may invest it in short-term, interest-bearing obligations, but will do so
only to the extent that it will not lose the tax treatment available to
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 loaned securities may pass with the lending
of the securities. The fund may loan portfolio securities to qualified
broker-dealers or other institutional investors provided: (1) the loan is
secured continuously by collateral consisting of U.S. government securities,
letters of credit, cash or cash equivalents or other appropriate instruments
maintained on a daily marked-to-market basis in an amount at least equal to the
current market value of the securities loaned; (2) 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, including collateral received from
the loan (at market value computed at the time of the loan).

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

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.

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<PAGE> 25

the call writer, thereby allowing them to profit. If the price of the underlying
security does not rise, the call option buyer's losses are limited to the
premium paid to the call option writer. For call option writers, a rise in the
price of the underlying security will be offset by the premium received from the
call option buyer. If the call option writer does not own the underlying
security, however, the losses that may ensue if the price rises could be
potentially unlimited. If the call option writer owns the underlying security or
commodity, this is called writing a covered call. All call options written by
the portfolios will be covered, which means that the portfolios will own the
securities subject to the option so long as the option is outstanding.

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

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

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

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

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<PAGE> 26

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 (SEC) changes
its position, a fund will treat purchased over-the-counter options and all
assets used to cover written over-the-counter options as illiquid securities,
except that with respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula the staff of the SEC approves.

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

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

REAL ESTATE INVESTMENT TRUSTS (REITS). A REIT is a pooled investment vehicle,
which invests primarily in income producing real estate or real estate related
loans or interests. REITs are sometimes referred to as equity REITs or mortgage
REITs. An equity REIT invests primarily in properties and generates income from
rental and lease properties. Equity REITs also offer the potential for growth as
a result of property appreciation and, in addition, from the sale of appreciated
property. Mortgage REITs invest primarily in real estate mortgages, which may
secure construction, development or long-term loans, and derive income for the
collection of interest payments. REITs are generally organized as corporations
and business trusts but are not taxed as a corporation if they meet certain
requirements of the Code. To qualify, a REIT must, among other things, invest
substantially all of its assets in interests in real estate (including other
REITs), cash and government securities, distribute at least 95% of its taxable
income to its shareholders and receive at least 75% of that income from rents,
mortgages and sales of property.

Like any investment in real estate, a REIT's performance depends on many
factors, such as its ability to find tenants for its properties, to renew
leases, and to finance property purchases and renovations. In general, REITs may
be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent a REIT concentrates its investment in certain
regions or property types. For example, rental income could decline because of
extended vacancies, increased competition from nearby properties, tenants'
failure to pay rent, or incompetent management. Property values could decrease
because of overbuilding, environmental liabilities, uninsured damages caused by
natural disasters, a general decline in the neighborhood, losses due to casualty
or condemnation, increases in property taxes, or changes in zoning laws.
Ultimately, a REIT's performance depends on the types of properties it owns and
how well the REIT manages its properties.

In general, during periods of rising interest rates, REITs may lose some of
their appeal for investors who may be able to obtain higher yields from other
income-producing investments, such as long-term bonds. Higher interest rates
also mean that financing for property purchases and improvements is more costly
and difficult to obtain. During periods of declining interest rates, certain
mortgage REITs may hold mortgages that mortgagors elect to prepay, which can
reduce the yield on securities issued by mortgage REITs. Mortgage REITs may be
affected by

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<PAGE> 27

the ability of borrowers to repay debts to the REIT when due and equity REITs
may be affected by the ability of tenants to pay rent.

Like small-cap stocks in general, certain REITs have relatively small market
capitalization and their securities can be more volatile than -- and at times
will perform differently from -- large-cap stocks. In addition, because
small-cap stocks are typically less liquid than large-cap stocks, REIT stocks
may sometimes experience greater share-price fluctuations than the stocks of
larger companies. Further, REITs are dependent upon specialized management
skills, have limited diversification, and are therefore subject to risks
inherent in operating and financing a limited number of projects. By investing
in REITs indirectly through a fund, a shareholder will bear indirectly a
proportionate share of the REIT's expenses. Finally, REITs could possibly fail
to qualify for tax-free pass-through of income under the Code or to maintain
their exemptions from registration under the 1940 Act.

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. Investment companies generally offer
investors the advantages of diversification and professional investment
management, by combining shareholders' money and investing it in securities such
as stocks, bonds and money market instruments. Investment companies include: (1)
open-end funds (commonly called mutual funds) that issue and redeem their shares
on a continuous basis, (2) closed-end funds that offer a fixed number of shares,
and are usually listed on an exchange, and (3) unit investment trusts that
generally offer a fixed number of redeemable shares. Certain open-end funds and
unit investment trusts are traded on exchanges.

Investment companies may make investments and use techniques designed to enhance
their performance. These may include delayed-delivery and when-issued securities
transactions; swap agreements; buying and selling futures contracts, illiquid,
and/or restricted securities and

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repurchase agreements; and borrowing or lending money and/or portfolio
securities. The risks of investing in a particular investment company will
generally reflect the risks of the securities in which it invests and the
investment techniques it employs. Also, investment companies charge fees and
incur expenses.

The fund may buy securities of other investment companies, including those of
foreign issuers, in compliance with the requirements of federal law or any SEC
exemptive order. The fund intends to vote any investment company proxies in
accordance with instructions received, or in the same proportion as the vote of
all other shareholders. A fund may invest in investment companies that are not
registered with the SEC or privately placed securities of investment companies
(which may or may not be registered), such as hedge funds and offshore funds.
Unregistered funds are largely exempt from the regulatory requirements that
apply to registered investment companies. As a result, unregistered funds may
have a greater ability to make investments, or use investment techniques, that
offer a higher potential investment return (for example, leveraging), but which
may carry high risk. Unregistered funds, while not regulated by the SEC like
registered funds, may be indirectly supervised by the financial institutions
(e.g., commercial and investment banks) that may provide them with loans or
other sources of capital. Investments in unregistered funds may be difficult to
sell, which could cause a fund selling an interest in an unregistered fund to
lose money. For example, many hedge funds require their investors to hold their
investments for at least one year.

Federal law restricts the ability of one registered investment company to invest
in another. As a result, the extent to which a fund may invest in another
investment company may be limited. With respect to investments in other mutual
funds, the SEC has granted the funds an exemption from the limitations of the
1940 Act that restrict the amount of securities of underlying mutual funds a
fund may hold, provided that certain conditions are met. The conditions
requested by the SEC were designed to address certain abuses perceived to be
associated with funds of funds, including unnecessary costs (such as sales
loads, advisory fees and administrative costs), and undue influence by a fund of
funds over the underlying fund. The conditions apply only when a fund and its
affiliates in the aggregate own more than 3% of the outstanding shares of any
one underlying fund.

Under the terms of the exemptive order, the fund and its affiliates may not
control a non-affiliated underlying fund. Under the 1940 Act, any person who
owns beneficially, either directly or through one or more controlled companies,
more than 25% of the voting securities of a company is assumed to control that
company. This limitation is measured at the time the investment is made.

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.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC or FREDDIE MAC),
the Student Loan Marketing Association (SLMA or SALLIE MAE), and the Federal
Home Loan Banks (FHLB), 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 such as obligations issued by the Federal Farm Credit
Banks Funding Corporation (FFCB). 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 debt securities, they are still
sensitive to interest rate changes, which will cause their yields to fluctuate.

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INVESTMENT LIMITATIONS

THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY VOTE OF A MAJORITY
OF THE FUND'S OUTSTANDING VOTING SHARES:

1) The fund may not purchase securities of an issuer, except as consistent
with the maintenance of its status as an open-end diversified company
under the Investment Company Act of 1940 (the 1940 Act), the rules or
regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to time.

2) The fund may not concentrate investments in a particular industry or
group of industries, as concentration is defined under the 1940 Act,
the rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time
to time.

3) The fund may not purchase or sell commodities or real estate, except to
the extent permitted under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.

4) The fund may not make loans to other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

5) The fund may not borrow money, except to the extent permitted under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

6) The fund may not issue senior securities, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

7) The fund may not underwrite securities issued by other persons, except
to the extent permitted under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.

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

Borrowing. The 1940 Act restricts the fund 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, the fund may only make loans if expressly permitted
by its investment policies.

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

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<PAGE> 30

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

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

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.

THE FUND MAY NOT:

1) Purchase more than 10% of any class of securities of any issuer if, as
a result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities. 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 the fund in units or attached to
other securities are deemed to be without value.

3) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the fund's net assets.

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

5) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or
invest in such interests or leases.

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

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

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

13
<PAGE> 31
9) Invest for the purpose of exercising control or management of another
issuer.

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

11) 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.

12) 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).

13) 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.

14) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).

15) Borrow money, except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and the fund will not purchase securities while
borrowings represent more than 5% of its total assets.

MANAGEMENT OF THE FUND

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. and Charles Schwab Investment Management, Inc., are
as follows:

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

14
<PAGE> 32

<TABLE>
<S> <C> <C>
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the Internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).

JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman and
Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President and Chief Executive Officer,
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.

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

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

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and
Chief Executive Officer of North American
Trust (real estate investment trust).

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

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

15
<PAGE> 33

<TABLE>
<S> <C> <C>
Trustee Charles Schwab Investment Management, Inc.
Prior to September 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust Company.

MARIANN BYERWALTER Trustee Vice President for Business Affairs and Chief
August 13, 1960 Financial Officer, Stanford University (higher
education). Prior to February 1996, Ms.
Byerwalter was Chief Financial Officer of Eureka
Bank (savings and loans) and Chief Financial
Officer and Chief Operating Officer of America
First Eureka Holdings, Inc. (holding company).
Ms. Byerwalter also is on the Board of Directors
of America First Companies, Omaha, NE (venture
capital/fund management) and Redwood Trust, Inc.
(mortgage finance), and is a Director of
Stanford Hospitals and Clinics, SRI
International (research) and LookSmart, Ltd. (an
Internet infrastructure company).

WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (bio-pharmaceuticals). Prior to August 1998,
Mr. Hasler was Dean of the Haas School of
Business at the University of California,
Berkeley (higher education). Mr. Hasler also is
on the Board of Directors of Solectron
Corporation (manufacturing), Tenera, Inc.
(services and software), Airlease Ltd. (aircraft
leasing) and Mission West Properties (commercial
real estate).

GERALD B. SMITH Trustee Chairman and Chief Executive Officer and founder
September 28, 1950 of Smith Graham & Co. (investment advisors).
Mr. Smith is also on the Board of Directors of
Pennzoil-Quaker State Company (oil and gas) and
Rorento N.V. (investments - Netherlands), and is
a member of the audit committee of Northern
Border Partners, L.P., a subsidiary of Enron
Corp. (energy).

TAI-CHIN TUNG Treasurer and Principal Senior Vice President, Treasurer, Controller and
March 7, 1951 Financial Officer Chief Financial Officer, Charles Schwab
Investment Management, Inc. From 1994 to 1996,
Ms. Tung was Controller for Robertson Stephens
Investment 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.

KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr.
Felton was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
</TABLE>

16
<PAGE> 34

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.

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, 2000, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 44 funds as of
October 31, 2000.

<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 0 N/A 0
Steven L. Scheid 1 0 N/A 0
William J. Klipp 2 0 N/A 0
Jeremiah H. Chafkin 3 0 N/A 0
John P. Coghlan 4 N/A 0
Mariann Byerwalter 3 N/A
Donald F. Dorward N/A
William A. Hasler 3 N/A
Robert G. Holmes N/A
</TABLE>

1 Mr. Scheid resigned from the Board of Trustees effective November 21, 2000.

2 Mr. Klipp departed Charles Schwab & Co., Inc. and CSIM in 1999 and resigned
from the Board of Trustees effective April 30, 2000.

3 This trustee was first elected by shareholders on June 1, 2000.

4 Elected to the Board on November 21, 2000.

17
<PAGE> 35
<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>
Gerald B. Smith 3 N/A
Donald R. Stephens N/A
Michael W. Wilsey N/A
</TABLE>

1 Mr. Scheid resigned from the Board of Trustees effective November 21, 2000.

2 Mr. Klipp departed Charles Schwab & Co., Inc. and CSIM in 1999 and resigned
from the Board of Trustees effective April 30, 2000.

3 This trustee was first elected by shareholders on June 1, 2000.

4 Elected to the Board on November 21, 2000.

DEFERRED COMPENSATION PLAN

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

CODE OF ETHICS

The fund, its investment adviser and Schwab have adopted a Code of Ethics (Code)
as required under the 1940 Act. Subject to certain conditions or restrictions,
the Code permits the trustees, directors, officers or advisory representatives
of the fund or the investment adviser or the directors or officers of Schwab to
buy or sell securities for their own accounts. This includes securities that may
be purchased or held by the fund. Securities transactions by some of these
individuals may be subject to prior approval of the investment adviser's Chief
Compliance Officer or alternate. Most securities transactions are subject to
quarterly reporting and review requirements.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2001, the officers and trustees of the trust, as a group,
owned of record or beneficially, less than 1% of the outstanding voting
securities of the fund.

As of February 1, 2001, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of the fund: None.

INVESTMENT ADVISORY AND OTHER SERVICES

18
<PAGE> 36
INVESTMENT ADVISER

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

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 years ended October 31, 2000, 1999, and 1998, the fund paid
investment advisory fees of $______, $987,000, and $682,000, respectively (fees
were reduced by $______, $414,000, and $680,000, respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least February 28, 2002, the total fund operating expenses (excluding interest,
taxes and certain non-routine expenses) for the fund will not exceed 0.75% of
its average daily net assets. The amount of the expense cap is determined in
coordination with the Board of Trustees, and the expense cap is intended to
limit the effects on shareholders of expenses incurred in the ordinary operation
of a fund. The expense cap is not intended to cover all fund expenses, and a
fund's expenses may exceed the expense cap. For example, the expense cap does
not cover investment-related expenses, such as brokerage commissions, interest
and taxes, nor does it cover extraordinary or non-routine expenses, such as
shareholder meeting costs.

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.

19
<PAGE> 37
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 supplemental sales literature and advertising.
Schwab receives no fee under the 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. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.

For the services performed as transfer agent under its contract with the fund,
Schwab is entitled to receive an annual fee, payable monthly from the fund, 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
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

PFPC Trust, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, PA 19153,
serves as custodian and SEI Investments, Mutual Fund Services, 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 fund accountant maintains all books and records
related to the fund's transactions.

INDEPENDENT ACCOUNTANTS

The fund's independent accountants, _____________, audit and report on the
annual financial statements of the fund and review certain regulatory reports
and the fund's federal income tax return. They also perform other professional
accounting, auditing, tax and advisory services when the trust engages them to
do so. Their address is ______________. The fund's audited financial statements
for the fiscal year ended October 31, 2000, are included in the fund's annual
report, which is a separate report supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

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

20
<PAGE> 38
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 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, 2000,
and 1999, were _____% and 99%, 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 execution. Subject to the supervision of the Board of Trustees,
the investment adviser will select brokers and dealers for the fund on the basis
of a number of factors, including, for example, price paid for securities,
commission paid for transactions, clearance, settlement, reputation, financial
strength and stability, efficiency of execution and error resolution, block
trading and block positioning capabilities, willingness to execute related or
unrelated difficult transactions in the future, and order of call.

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

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

In an attempt to obtain best execution for the fund, the investment adviser may
place orders directly with market makers or with third market brokers such as
Instinet, which is a computer subscriber service, or brokers on an agency basis.
Placing orders with third market brokers or through Instinet may enable the fund
to trade directly with other institutional holders on a net basis. At times,
this may allow the fund 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 fund on securities
exchanges, the investment adviser follows procedures, adopted by the Board of
Trustees, that are designed to ensure that affiliated brokerage

21
<PAGE> 39

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, 2000, 1999, and 1998, the fund paid
brokerage commissions of $_______, $278,377, and $234,861, 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, which may cause the fund to incur
non-routine expenses. 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.
A majority of the outstanding voting shares of a fund means the affirmative vote
of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. 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.

22
<PAGE> 40

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.

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, DELIVERY OF SHAREHOLDER REPORTS AND
PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUND

The fund is open each day that both the Federal Reserve Bank of New York (New
York Fed) and New York Stock Exchange (NYSE) are open (business days). The
following holiday closings are currently scheduled for 2001: Martin Luther King
Jr.'s Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), Thanksgiving Day and
Christmas Day. On any day that the New York Fed, NYSE or principal government
securities markets close early, such as days in advance of holidays, the funds
reserve the right to advance the time by which purchase, redemption and
exchanges orders must be received on that day.

As long as the fund or Schwab follows reasonable procedures to confirm that your
telephone or Internet 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 or other
confirmation before acting upon any telephone or Internet order, providing
written confirmation of telephone or Internet 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.

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 transaction costs if he
or she were to convert the securities to cash.

23
<PAGE> 41

exchange order which appears to be associated with short-term trading activities
or "market timing." Because market timing decisions to buy and sell securities
typically are based on an individual investor's market outlook, including such
factors as the perceived strength of the economy or the anticipated direction of
interest rates, it is difficult for a fund to determine in advance what purchase
or exchange orders may be deemed to be associated with market timing or
short-term trading activities.

EXCHANGING SHARES OF THE FUNDS

Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund or class purchased, provided the minimum investment and
any other requirements of the fund or class purchased are satisfied. Without
limiting this privilege, "an exchange order," which is a simultaneous order to
sell shares of one fund or class and automatically invest the proceeds in
another fund or class, may not be executed between shares of Sweep
Investments(TM) and shares of non-Sweep Investments. Shares of Sweep
Investments may be bought and sold automatically pursuant to the terms and
conditions of your account agreement or by direct order as long as you meet the
minimums for direct investments.

DELIVERY OF SHAREHOLDER DOCUMENTS

Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.

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

TAXATION

FEDERAL TAX INFORMATION FOR THE FUND

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<PAGE> 42
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 a fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of a fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. 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 its 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
designates to be from dividends received from qualifying domestic corporations
will be eligible for the 70% corporate dividends-received deduction to the
extent they would qualify if the fund were a regular corporation. Distributions
by a fund also may be subject to state, local and foreign taxes, and its
treatment under applicable tax laws may differ from the federal income tax
treatment.

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

25
<PAGE> 43
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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more per year. 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.

Shareholders are urged to consult their tax advisers as to the state and local
tax rules affecting investments in the fund.

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 Operations) One Year ended From Commencement of
October 31, 2000 Operations to October
31, 2000
--------------------------------------------------------------------------------
<S> <C> <C>
Analytics Fund(R) (7/1/96) XX.XX% XX.XX%
</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 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, 2000.

26
<PAGE> 44

<TABLE>
<CAPTION>
Fund (Commencement of Operations) Cumulative Total Return
-------------------------------- -----------------------
<S> <C>
Analytics Fund(R) (7/1/96) XXX.XX%
</TABLE>

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

<PAGE> 45

(Page 1, Cover)

Prospectus

February 28, 2001

SCHWAB
MarketManager

Portfolios(R)

Growth Portfolio

Balanced Portfolio

Small Cap Portfolio

International Portfolio

CharlesSchwab (logo)
<PAGE> 46
(Page 2)

SCHWAB

MarketManager Portfolios(R)

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> 47
(Page 3)

About The Portfolios

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 manager analyzes 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 manager then chooses each underlying fund by
analyzing its investment style and gaining firsthand knowledge from its manager.

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> 48
(Page 4)

SCHWAB
MarketManager
Growth Portfolio

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 manager
chooses within the framework of an asset allocation strategy. Based on analysis
of economic outlooks and market conditions, the manager determines whether and
how much to adjust the portfolio's allocation. The fund may also invest in
short-term securities.

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

In choosing the underlying funds, the portfolio manager seeks clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/00, the portfolio included ___ underlying funds.
The portfolio's turnover rate reflects portfolio changes to take advantage of
market volatility.

[Side Bar] 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>
<PAGE> 49
(Page 5)

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.

[Side Bar] Other risk factors

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

For example, if the manager of the 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.

[Friendly Voice] When you are investing for the long term, a portfolio that
emphasizes stock investments in its asset allocation may make sense for you.
<PAGE> 50
(Page 6)

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

<TABLE>
<CAPTION>
<S> <C> <C> <C>
97 98 99 00
Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Portfolio ___ ___1
S&P 500(R) Index ___ ___2
Lehman Brothers
Aggregate Bond Index ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are 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.

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through ______ (excluding
interest, taxes and certain non-routine expenses).

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>
$ $ $ $
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 51
(Page 7)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 52
(Page 8)

SCHWAB
MarketManager
Balanced Portfolio

TICKER SYMBOL: SWOBX

[Goal] The portfolio seeks capital growth and income.

Strategy

In choosing the underlying funds, the portfolio manager seeks clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/00, the portfolio included ___ underlying funds. The
portfolio's turnover rate reflects portfolio changes to take advantage of market
volatility.

[Side Bar] 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>

<PAGE> 53
(Page 9)

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 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.

[Side Bar] 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.

[Friendly Voice] Long-term investors seeking a blend of growth and income
investments may want to consider this portfolio.

<PAGE> 54
(Page 10)

Performance

Annual total returns (%) as of 12/31

97 98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Portfolio ___ ___1
S&P 500(R) Index ___ ___2
Lehman Brothers
Aggregate Bond Index ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

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

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through ______ (excluding
interest, taxes and certain non-routine expenses).

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>
$ $ $ $
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 55
(Page 11)

Financial Highlights

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 56
(Page 12)

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 fund may also invest in short-term
securities.

The portfolio manager regularly reviews the small-cap segment of the market to
identify sectors or industries that offer the greatest potential for growth. The
manager then screens 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 manager meets 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 manager seeks clearly defined investment
strategies, strong performance histories and stable management, among other
criteria. As of 10/31/00, the portfolio included ___ underlying funds. The
portfolio's turnover rate reflects portfolio changes to take advantage of market
volatility.

Because the small-cap market can be volatile, the portfolio manager monitors and
adjusts the portfolio as necessary. In so doing, he seeks to anticipate upcoming
markets as well as respond to current conditions.

[Side Bar] 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.
<PAGE> 57
(Page 13)

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 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.

[Side Bar] Other risk factors

Because the portfolio manager has no control over the management of the
underlying funds, decisions made by the underlying funds' manager 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.

[Friendly Voice] 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.
<PAGE> 58
(Page 14)

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

<TABLE>
<CAPTION>
<S> <C> <C>
__ __ __
98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q3___19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Portfolio ___ ___1
Russell 2000 Index ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

** Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _______ (excluding
interest, taxes and certain non-routine expenses).

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>

$______ $______ $______ $_______
</TABLE>

[Friendly Voice] The performance information above shows you how the fund's
performance compares to that of an index, which varies over time.
<PAGE> 59
(Page 15)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 60
(Page 16)

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 fund may also invest in short-term
securities.

The portfolio manager analyzes 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 manager then screens 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 manager meets 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 manager seeks clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/00, the portfolio included ___ underlying funds. The
portfolio's turnover rate reflects portfolio changes to take advantage of market
volatility.

Because international markets can be volatile, the portfolio manager monitors
and adjusts the portfolio as necessary. In so doing, he seeks to anticipate
upcoming markets as well as respond to current conditions.

[Side Bar] 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 the portfolio manager to assemble a combination
of underlying funds whose strengths lie in different areas.

<PAGE> 61
(Page 17)

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.

[Side Bar] 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.

[Friendly Voice] International stock funds offer access to many foreign markets
that can be difficult for individual investors to reach.
<PAGE> 62
(Page 18)

Performance

Annual total returns (%) as of 12/31

<TABLE>
<CAPTION>
<S> <C> <C> <C>
__ __ __ __
97 98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Portfolio ___ ___1
MSCI EAFE Index ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER FEES
Redemption fee, charged only
on shares you sell 180
days or less after buying them and paid
directly to the fund. 1.50

ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _____ (excluding
interest, taxes and certain non-routine expenses).

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>

$_____ $______ $______ $_______
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 63
(Page 19)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 64
(Page 20)

Portfolio Management

The investment adviser for the Schwab MarketManager Portfolios(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 ___ million
shareholder accounts. (All figures on this page are as of 10/31/00.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab MarketManager Portfolios(R). As compensation for
these services, the firm receives a management fee from each portfolio. For the
12 months ended 10/31/00, these fees were ___% for the Growth Portfolio, ___%
for the Balanced Portfolio, ___% for the Small Cap Portfolio and ___% 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.

The MarketManager Portfolios may invest in the Excelsior Funds without
limitation, just as the MarketManager Portfolios can invest without limitation
in affiliated SchwabFunds. The advisers to the Excelsior Funds are United
States Trust Company of New York, U.S. Trust Company (Connecticut) and/or other
subsidiaries of U.S. Trust Corporation (U.S. Trust). U.S. Trust and Charles
Schwab Investment Management, Inc. are under the common control of The Charles
Schwab Corporation.

Jeffrey Mortimer, CFA, a vice president of the investment adviser, is
responsible for the overall management of the Schwab MarketManager
Portfolios(R). Prior to joining the firm in October 1997, he worked for more
than eight years in asset allocation and manager selection.

[Friendly Voice] The portfolio's investment adviser, Charles Schwab Investment
Management, Inc., has more than $___ billion under management.

<PAGE> 65
(Page 21)

Investing in the Portfolios

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

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 portfolios. 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 Minimum additional
Portfolio investment investment
<S> <C> <C>
Growth Portfolio $1,000 ($500 for $500 ($100 for
Balanced Portfolio retirement and custodial accounts and
custodial accounts) investments through the
Automatic Investment Plan)

Small Cap Portfolio $2,500 ($1,000 for $500 ($100 for
International Portfolio retirement and custodial accounts and
custodial accounts) investments through the
Automatic Investment Plan)
</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 mix You receive payment for dividends,
while any capital gain distributions 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.

[Side Bar] Schwab accounts

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 Schwab MoneyLink(R), which lets you move money between your Schwab
account and your accounts at other financial institutions, and Automatic
Investment Plan (AIP), which lets you set up periodic investments in mutual
funds you already own.

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
<PAGE> 67
(Page 23)

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 portfolio 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.

- As indicated in its fee table, the International Portfolio charges a
redemption fee, payable to the portfolio, on the sale or exchange of any of its
shares that occurs 180 days or less after purchasing them; in attempting to
minimize this fee, the portfolio will first sell any shares in your account that
aren't subject to the fee (including shares acquired through reinvestment or
exchange).

- The portfolios reserve the right to honor redemptions in portfolio securities.

- Exchange orders are limited to other SchwabFunds that are not Sweep
Investments as well as variable NAV funds and must meet the minimum investment
and other requirements for the portfolio and share class into which you are
exchanging.

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

Methods for placing direct orders

Internet
www.schwab.com

Schwab by Phone(TM)
Automated voice service at or speak with a representative at 800-435-4000 (for
TDD service, call 800-345-2550).

TeleBroker(R)
Automated touch-tone phone service at 800-272-4922

SchwabLink.com

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

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

In person
Visit the nearest Charles Schwab branch office.

[Side Bar] When placing orders

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

- Your name or, for Internet orders, your account number/"LoginID."

-Your account number (for SchwabLink transactions, include the
master account and subaccount numbers) or, for Internet orders, your password.

- The name and share class (if applicable) 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.

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

- For exchanges, the name of the portfolio 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.
<PAGE> 68
(Page 24)

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 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.

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 a 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 large purchase orders that
may negatively impact its operations, and orders 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.

- To revise the redemption fee criteria.

[Side Bar] 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 business day.
<PAGE> 69
(Page 25)

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.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.

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 portfolios 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.

[Side Bar] More on distributions

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

SCHWAB

MarketManager Portfolios(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.

You can obtain free copies of these documents by contacting SchwabFunds(R). You
can also review and copy them in person at the SEC's Public Reference Room,
access them online at www.sec.gov or obtain paper copies by sending an
electronic request to [email protected]. You will need to pay a duplicating fee
before receiving paper copies from the SEC.

SEC File Number

Schwab MarketManager Portfolios(R) 811-7704

Securities and Exchange Commission
Washington, D.C. 20549-0102

202-942-8090 (Public Reference Section)
www.sec.gov
[email protected]

SchwabFunds
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000

www.schwab.com

Prospectus

February 28, 2001

CharlesSchwab (logo)

MKT3756FLD-2

<PAGE> 73
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB MARKETMANAGER PORTFOLIOS(R)

GROWTH PORTFOLIO
BALANCED PORTFOLIO
SMALL CAP PORTFOLIO
INTERNATIONAL PORTFOLIO

FEBRUARY 28, 2001

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 28, 2001 (as
amended from time to time).

To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the portfolios at P.O. Box 7575, San
Francisco, California 94120-7575. 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.

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES,
RISKS AND LIMITATIONS........................................................................ [ ]
MANAGEMENT OF THE PORTFOLIOS................................................................. [ ]
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................................... [ ]
INVESTMENT ADVISORY AND OTHER SERVICES....................................................... [ ]
BROKERAGE ALLOCATION AND OTHER PRACTICES..................................................... [ ]
DESCRIPTION OF THE TRUST..................................................................... [ ]
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES........................................................................ [ ]
TAXATION..................................................................................... [ ]
CALCULATION OF PERFORMANCE DATA.............................................................. [ ]
</TABLE>

1
<PAGE> 74
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 outstanding voting shares. There is no guarantee the portfolios will
achieve their objectives.

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

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 (open-end mutual funds) are registered investment companies which
issue and redeem their shares on a continuous basis. Closed-end funds offer a
fixed number of shares usually listed on an exchange. These 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. These 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 these funds generally reflect the risks of the securities in which
these invest and the investment techniques they may employ. Also, these funds
charge fees and incur operating expenses. However, the portfolios do not intend
to pay any sales loads or transaction fees when buying underlying funds.

2
<PAGE> 75
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.

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

With respect to investments in other mutual funds, the SEC has granted the
portfolios an exemption from the limitations of the Investment Company Act of
1940 (the "1940 Act") restricting the amount of securities of underlying mutual
funds that the portfolios may hold, provided that certain conditions are met.
The conditions requested by the SEC were designed to address certain abuses
perceived to be associated with funds of funds, including unnecessary costs
(such as sales loads, advisory fees and administrative costs), and undue
influence by a fund of funds over its underlying funds. The conditions apply
only when a portfolio and its affiliates in the aggregate own more than 3% of
the outstanding shares of any one underlying fund.

Under the terms of the exemptive order, each of the portfolios and its
affiliates may not control a non-affiliated underlying fund. Under the 1940 Act,
any person who owns beneficially, either directly or through one or more
controlled companies, more than 25% of the voting securities of a company is
presumed to control that company. This limitation is measured at the time the
investment is made. The exemption also allows the portfolios to invest in
affiliated funds under certain conditions.

OTHER TYPES OF FUNDS in which the portfolios may invest include unregistered or
privately-placed funds, such as hedge funds and off-shore funds, and unit
investment trusts. Hedge funds and off-shore funds are not registered with the
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 first-time investors to keep their
investment in a hedge fund for at least one year. This means a portfolio would
not be able to sell its shares of a hedge fund until such time had past. Each
portfolio will normally invest no more than 35% of its total assets in these
other funds.

STOCK FUNDS typically seek growth of capital and invest primarily in equity
securities. Other investments generally include debt securities, such as U.S.
government securities, and some illiquid and restricted securities. Stock funds
typically may enter into delayed-delivery or when-issued securities
transactions, repurchase agreements, swap agreements and futures and options
contracts. Some stock funds invest exclusively in equity securities and may
focus on a specialized segment of the stock market, like stocks of small
companies or foreign issuers, or may focus on a specific industry or group of
industries. The greater a fund's investment in stock,

3
<PAGE> 76

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 or an underlying fund. 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.

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.
For full disclosure of the risks of small-cap stock funds, please refer to this
later in the document. 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.

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. For full discussion
of the risks of international stock funds, please refer to this later in the
document.

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

4
<PAGE> 77
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.

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. For full
discussion of the risks of international bond funds, please refer to this later
in the document.

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.

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.

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

5
<PAGE> 78
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-BACKED SECURITIES are securities that are backed by the loans or accounts
receivable 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 or underlying fund 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. While each portfolio does not intend to
concentrate its investments, it may indirectly concentrate in a particular
industry or group of industries if its underlying fund investments are so
concentrated.

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

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 a 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.

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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
that 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 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, a portfolio or underlying fund could suffer losses.

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

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investment management company. Each portfolio or underlying fund 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.

Convertible securities are typically preferred stocks 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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assets senior to those of stockholders; preferred stockholders have claims
senior to those of common stockholders.

Warrants are types of securities 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 portfolio or underlying 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 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 a portfolio or underlying fund.

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

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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 or underlying
fund securities purchased or sold, but awaiting 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. Forwards involve certain risks. For
example, if the counterparties to the contracts are unable to meet the terms of
the contracts or if the value of the foreign currency changes unfavorably, the
portfolio or underlying fund could sustain a loss.

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

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settlement price of the contract. A portfolio or an 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 Future Trading Commission (the "CFTC") licenses and
regulates on foreign exchanges.

Each portfolio or underlying fund that engages in futures contracts 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 or
underlying fund may purchase futures contracts. Such transactions allow the
portfolio's 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, a portfolio or underlying fund may purchase or sell futures contracts on a
specified foreign currency to "fix" the price in U.S. dollars of the foreign
security it has acquired or sold or expects to acquire or sell. A portfolio or
underlying fund may enter into futures contracts for other reasons as well.

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 an amount equal to the
margin requirement that is deposited with the broker for its outstanding futures
contracts. Underlying funds may have the same or different arrangements.

While a portfolio intends to purchase and sell futures contracts in order to
simulate full investment, there are risks associated with these transactions.
Adverse market movements could cause a portfolio to experience substantial
losses when buying and selling futures contracts. Of course, barring significant
market distortions, similar results would have been expected if a portfolio 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 portfolio incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading. To the extent a portfolio also invests in futures
in order to simulate full investment, these same risks apply.

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

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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 a 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, a portfolio or underlying fund may be required to make or take
delivery and incur extra transaction costs buying or selling the underlying
securities. A portfolio or underlying fund seeks 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 a 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. For example, a fund may receive cash
collateral, and it may invest it in short-term, interest-bearing obligations,
but will do so only to the extent that 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 may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) 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, including collateral received from the loan (at
market value computed at the time of the loan).

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

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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 and time deposits are 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.

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
underlying 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
Fannie Mae, 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 however, such guarantees do not
extend to the value or yield of the mortgage-related securities themselves or of
a portfolio's shares.

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

A portfolio or an underlying fund 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." A portfolio or underlying fund 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

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

The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the 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 a portfolio, does not exceed 5% of its net
assets.

OTHER SECURITIES may be held by a portfolio or underlying fund under certain
circumstances. For example, a portfolio or 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 or underlying fund rather than payment in cash. In
such a case, a portfolio or underlying fund may hold the securities distributed
until the investment adviser determines that it is appropriate to sell them.

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.

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 or an underlying fund invests in restricted securities that
are deemed liquid, its general level of illiquidity

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may be increased if qualified institutional buyers become uninterested in
purchasing these securities.

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

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

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 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.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac),
the Student Loan Marketing Association (SLMA or Sallie Mae), and the Federal
Home Loan Banks (FHLB), 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 such as obligations issued by the Federal Farm Credit
Banks Funding Corporation (FFCB). 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 debt securities, they are still
sensitive to interest rate changes, which will cause their prices to fluctuate.

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INVESTMENT LIMITATIONS

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

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

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

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

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

THE INTERNATIONAL PORTFOLIO MAY NOT:

1) Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

2) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the 1940 Act, the rules
or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to time.

3) Purchase or sell commodities or real estate, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

4) Make loans to other persons, except to the extent permitted under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

5) Borrow money, except to the extent permitted under the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time
to time.

6) Issue senior securities, except to the extent permitted under the 1940
Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from
time to time.

7) Underwrite securities issued by other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

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<PAGE> 91

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.

THE GROWTH ALLOCATION, BALANCED ALLOCATION AND SMALL CAP 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.

IN ADDITION, THE INTERNATIONAL PORTFOLIO MAY NOT:

1. As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities or investments in other registered investment
companies) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.

2. Purchase securities (other than securities issued or guaranteed by the
U.S. government, its

19
<PAGE> 92

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 any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).

5. Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and the fund will not purchase securities while
borrowings represent more than 5% of its total assets.

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 &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
--------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the Internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).
</TABLE>

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

20
<PAGE> 93

<TABLE>
<S> <C> <C>
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman and
Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President and Chief Executive Officer,
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.

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

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

JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee Charles Schwab Investment Management, Inc.
Prior to September 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust Company.
</TABLE>

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

21
<PAGE> 94

<TABLE>
<S> <C> <C>
MARIANN BYERWALTER Trustee Vice President for Business Affairs and Chief
August 13, 1960 Financial Officer, Stanford University (higher
education). Prior to February 1996, Ms.
Byerwalter was Chief Financial Officer of Eureka
Bank (savings and loans) and Chief Financial
Officer and Chief Operating Officer of America
First Eureka Holdings, Inc. (holding company).
Ms. Byerwalter also is on the Board of Directors
of America First Companies, Omaha, NE (venture
capital/fund management) and Redwood Trust, Inc.
(mortgage finance), and is a Director of
Stanford Hospitals and Clinics, SRI
International (research) and LookSmart, Ltd. (an
Internet infrastructure company).

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.
</TABLE>

22
<PAGE> 95

<TABLE>
<S> <C> <C>
KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
</TABLE>

Each portfolio is overseen by a Board of Trustees. The Board of Trustees meets
regularly to review each portfolio's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of the portfolio's shareholders. The following table provides information as of
October 31, 2000 concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 44 funds as of
October 31, 2000.

<TABLE>
<CAPTION>
Pension or
Retirement ($)
Benefits Total
($) Accrued as Compensation
Name of Trustee Aggregate Compensation Part of from Fund
From Each Portfolio Portfolio 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
Steve L. Scheid 1 0 0 0 0 N/A 0
William J. Klipp 2 0 0 0 0 N/A 0
Jeremiah H. 0 0 0 0 N/A 0
Chafkin 3
John P. Coghlan 4 0 0 0 0 N/A 0
Mariann $____ $____ $____ $____ N/A $____
Byerwalter 3
</TABLE>

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

1 Resigned from the Board effective November 21, 2000.
2 Mr. Klipp departed from Schwab and CSIM in 1999 and resigned from the Board
of Trustees effective April 30, 2000.
3 This trustee was first elected by shareholders on June 1, 2000.
4 Elected to the Board on November 21, 2000.

23
<PAGE> 96

<TABLE>
<CAPTION>
Pension or
Retirement ($)
Benefits Total
($) Accrued as Compensation
Name of Trustee Aggregate Compensation Part of from Fund
From Each Portfolio Portfolio Complex
Expenses
-------------------------------------------------------
Growth Balanced Small-Cap International
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald F. Dorward $____ $____ $____ $____ N/A $____
William A. Hasler 3 $____ $____ $____ $____ N/A $____
Robert G. Holmes $____ $____ $____ $____ N/A $____
Gerald B. Smith 3 $____ $____ $____ $____ N/A $____
Donald R. Stephens $____ $____ $____ $____ N/A $____
Michael W. Wilsey $____ $____ $____ $____ N/A $____
</TABLE>

DEFERRED COMPENSATION PLAN

CODE OF ETHICS

The portfolios, their investment adviser and Schwab have adopted a Code of
Ethics (Code) as required under the 1940 Act. Subject to certain conditions or
restrictions, the Code permits the trustees, directors, officers or advisory
representatives of the portfolios or the investment adviser or the directors or
officers of Schwab to buy or sell securities for their own accounts. This
includes securities that may be purchased or held by the portfolios. Securities
transactions by some of these individuals may be subject to prior approval of
the investment adviser's Chief Compliance Officer or alternate. Most securities
transactions are subject to quarterly reporting and review requirements.

24
<PAGE> 97
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2001, the officers and trustees of the portfolios, as a group
owned of record, directly or beneficially, less than 1% of the outstanding
voting securities of each portfolio.

As of February 1, 2001, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of portfolio.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

CSIM, 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. 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(R) are actively managed by a team of
dedicated investment professionals, led by a portfolio manager, 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 has 0.74% of the first $1 billion of average daily
net assets, 0.69% of the next billion and 0.64% of such assets over $2 billion.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Growth Portfolio
paid investment advisory fees of $______, $718,000 and $471,000, respectively
(fees were reduced by $______, $297,000 and $612,000, respectively).

For the fiscal years ended October 31, 2000, 1999 and 1998, the Balanced
Portfolio paid investment advisory fees of $______, $438,000 and $247,000,
respectively (fees were reduced by $______, $211,000 and $361,000,
respectively).

For fiscal years ended October 31, 2000, 1999 and 1998, the Small Cap Portfolio
paid investment advisory fees of $______, $434,000 and $534,000, respectively
(fees were reduced by $______, $331,000 and $774,000, respectively).

For fiscal years ended October 31, 2000, 1999, 1998, the International Portfolio
paid investment advisory fees of $______, $312,000 and $233,000, respectively
(fees were reduced by $______, $184,000 and $362,000, respectively).

25
<PAGE> 98

The investment adviser and Schwab have contractually guaranteed that, through at
least _______, the total fund operating expenses (excluding interest, taxes and
certain non-routine expenses) for each portfolio will not exceed ___% of its
average daily net assets. The amount of the expense cap is determined in
coordination with the Board of Trustees, and the expense cap is intended to
limit the effects on shareholders of expenses incurred in the ordinary operation
of a fund. The expense cap is not intended to cover all fund expenses, and a
fund's expenses may exceed the expense cap. For example, the expense cap does
not cover investment-related expenses, such as brokerage commissions, interest
and taxes, nor does it cover extraordinary or non-routine expenses, such as
shareholder meeting costs.

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 supplemental sales
literature and advertising. Schwab receives no fee under the agreement.

SHAREHOLDER SERVICES AND TRANSFER AGENT

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

For the services performed as transfer agent under 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 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 _______, to waive its transfer
agent and shareholder service fees for the portfolios. After _______, the
guarantee may be terminated, modified or continued.

CUSTODIAN AND FUND ACCOUNTANT

Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, serves as
custodian and SEI Investments, Mutual Fund Services, One Freedom Valley Drive,
Oaks, PA 19456, serves as fund accountant for the portfolios.

26
<PAGE> 99
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the portfolios. The fund accountant maintains all books and
records related to each portfolio's transactions.

INDEPENDENT ACCOUNTANTS

The portfolios' independent accountants, _______________, audits and reports on
the annual financial statements of the portfolios and reviews certain regulatory
reports and each portfolio's federal income tax return. They also perform other
professional accounting, auditing, tax and advisory services when the trusts
engage them to do so. Their address is _________________. Each portfolio's
audited financial statements for the fiscal year ended October 31, 2000, 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 Growth Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999, were ____% and 284%, respectively.

The Balanced Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999, were ____% and 244%, respectively.

The Small Cap Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999, were ____% and 145%, respectively.

The International Portfolio's turnover rates for the fiscal years ended October
31, 2000 and 1999, were ____% and 249%, respectively.

The higher portfolio turnover rates for the portfolios are attributed to a
portfolio management strategy that includes both a component of "core" 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.

27
<PAGE> 100
PORTFOLIO TRANSACTIONS

In effecting securities transactions for a portfolio, the investment adviser
seeks to obtain best execution. Subject to the supervision of the Board of
Trustees, the investment adviser will select brokers and dealers for the
portfolio on the basis of a number of factors, including, for example, price
paid for securities, commission paid for transactions, clearance, settlement,
reputation, financial strength and stability, efficiency of execution and error
resolution, block trading and block positioning capabilities, willingness to
execute related or unrelated difficult transactions in the future, and order of
call.

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.

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, 2000, 1999 and 1998, the MarketManager
International Portfolio paid brokerage commissions of $______, $17,445 and
$1,020, respectively.

For the fiscal year ended October 31, 2000, 1999 and 1998 the MarketManager
Small-Cap Portfolio paid a brokerage commission of $______, $______ and $______,
respectively.

28
<PAGE> 101
DESCRIPTION OF THE TRUST

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

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

The portfolios may hold special meetings, which may cause the portfolios to
incur non-routine expenses. 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.
A majority of the outstanding voting shares of a portfolio means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a portfolio are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a portfolio. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. The
Declaration of Trust specifically authorizes the Board of Trustees to terminate
the trust (or any of its investment portfolios) by notice to the shareholders
without shareholder approval.

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

As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses

29
<PAGE> 102
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, DELIVERY OF SHAREHOLDER REPORTS AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

The portfolios are open each day that both the Federal Reserve Bank of New
York (New York Fed) and New York Stock Exchange (NYSE) are open (business days).
The following holiday closings are currently scheduled for 2001: Martin Luther
King Jr.'s Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), Thanksgiving Day and
Christmas Day. On any day that the New York Fed, NYSE or principal government
securities markets close early, such as days in advance of holidays, the
portfolios reserve the right to advance the time by which purchase, redemption
and exchanges orders must be received on that day.

As long as the portfolios or Schwab follows reasonable procedures to confirm
that your telephone or Internet 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 or confirmation before acting upon any telephone or Internet
order, providing written confirmation of telephone or Internet 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.

The International Portfolio reserves the right to waive the early redemption fee
for certain tax-advantaged retirement plans.

Under certain circumstances a portfolio or underlying fund may determine to make
payment of a redemption by the portfolio or underlying fund wholly or in part by
a distribution in-kind of securities from its portfolio in lieu of cash. In such
cases, a portfolio or underlying fund may hold securities distributed by the
portfolio or underlying fund until the investment adviser determines that it is
appropriate to dispose of such securities.

Each portfolio is designed for long-term investing. Because short-term trading
activities can disrupt the smooth management of a portfolio and increase its
expenses, each portfolio reserves the right to refuse any purchase or exchange
order or large purchase or exchange orders, including any purchase or exchange
order which appears to be associated with short-term trading activities or
"market timing." Because market timing decisions to buy and sell securities
typically are based on an individual investor's market outlook, including such
factors as the perceived strength of the economy or the anticipated direction of
interest rates, it is difficult for a portfolio to determine in advance what
purchase or exchange orders may be deemed to be associated with market timing or
short-term trading activities. The portfolios and Schwab reserve the right to
refuse any purchase or exchange order, including large orders that may
negatively impact their operations.

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<PAGE> 103

EXCHANGING SHARES OF THE PORTFOLIOS

Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund or class purchased, provided the minimum investment and
any other requirements of the portfolio or fund or class purchased are
satisfied. Without limiting this privilege, "an exchange order," which is a
simultaneous order to sell shares of one portfolio or fund or class and
automatically invest the proceeds in another portfolio or fund or class, may not
be executed between shares of Sweep Investments(TM) and shares of non-Sweep
Investments. Shares of Sweep Investments may be bought and sold automatically
pursuant to the terms and conditions of your account agreement or by direct
order as long as you meet the minimums for direct investments.

DELIVERY OF SHAREHOLDER DOCUMENTS

Typically once a year, an updated prospectus will be mailed to shareholders
describing each portfolio's investment strategies, risks and shareholder
policies. Twice a year, financial reports will be mailed to shareholders
describing each portfolio's performance and investment holdings. In order to
eliminate duplicate mailings of shareholder documents, each household may
receive one copy of these documents, under certain conditions. This practice is
commonly called "householding." If you want to receive multiple copies, you may
write or call your portfolio at the address or telephone number on the front of
this SAI. Your instructions will be effective within 30 days of receipt by
Schwab.

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.

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

31
<PAGE> 104
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, 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 a portfolio's
assets, convert short-term capital losses into long-term capital losses or
otherwise affect the character of a portfolio's income. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. The portfolios will endeavor to make any available elections
pertaining to these transactions in a manner believed to be in the best interest
of the portfolios and their shareholders.

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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

Any dividends declared by a portfolio in October, November or December and paid
the following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gain distributions are taxable as long-term capital gains, regardless of
how long you have held your shares. However, if you receive a long-term capital
gain distribution with respect to portfolio shares held for six months or less,
any loss on the sale or exchange of those shares shall, to the extent of the
long-term capital gain distribution, be treated as a long-term capital loss. For
corporate investors in the portfolios, dividend distributions the portfolios
designate to be from dividends received from qualifying domestic corporations
will be eligible for the 70% corporate dividends-received deduction to the
extent they would qualify if the portfolios were regular corporations.
Distributions by a portfolio also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.

32
<PAGE> 105
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 either (1) who meets
the Code's definition of "resident alien" or (2) who is physically present in
the U.S. for 183 days or more per year. Different tax consequences may result if
the foreign shareholder is engaged in a trade or business within the United
States. In addition, the tax consequences to a foreign shareholder entitled to
claim the benefits of a tax treaty may be different than those described above.

Income that the portfolios receive from sources within various foreign countries
may be subject to foreign income taxes withheld at the source. If a portfolio
has at least 50% of its assets invested in foreign securities at the end of its
taxable year, it may elect to "pass through" to its shareholders the ability to
take either the foreign tax credit or the deduction for foreign taxes. Pursuant
to this election, U.S. shareholders must include in gross income, even though
not actually received, their respective pro rata share of foreign taxes, and may
either deduct their pro rata share of foreign taxes (but not for alternative
minimum tax purposes) or credit the tax against U.S. income taxes, subject to
certain limitations described in Code sections 901 and 904 (but not both). A
shareholder who does not itemize deductions may not claim a deduction for
foreign taxes. It is expected that the portfolios will not have 50% of their
assets invested in foreign securities at the close of their taxable years, and
therefore will not be permitted to make this election. Also, to the extent a
portfolio invests in an underlying fund that elects to pass through foreign
taxes, the fund 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

33
<PAGE> 106
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.

Shareholders are urged to consult their tax advisers as to the state and local
tax rules affecting investments in the portfolios.

CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Portfolio One Year Life of Portfolio
(Commencement of Operations)
---------------------------------- ---------------- -------------------
<S> <C> <C>
MarketManager Portfolios
Growth (11/18/96) _____% _____%
Balanced (11/18/96) _____% _____%
Small Cap (9/16/97) _____% _____%
International (10/16/96) _____% _____%
</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, 2000.

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

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

The 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.

34
<PAGE> 107

Examples of indices used for comparison purposes and the asset categories they
represent are as follows: for large company stocks, 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
Lehman Aggregate Bond indices.

35
<PAGE> 108
(Page 1, Cover)

Prospectus
February 28, 2001

SCHWAB
MarketTrack Portfolios(R)

All Equity Portfolio

Growth Portfolio

Balanced Portfolio

Conservative Portfolio

CharlesSchwab (logo)

<PAGE> 109
(Page 2)

SCHWAB
MarketTrack Portfolios(R)

About The Portfolios

4 All Equity Portfolio
8 Growth Portfolio
12 Balanced Portfolio
16 Conservative Portfolio
20 Portfolio Management

Investing In The Portfolios

22 Buying Shares
23 Selling/Exchanging Shares
24 Transaction Policies
25 Distributions and Taxes
<PAGE> 110
(Page 3)

About The Portfolios

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> 111
(Page 4)

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:

<TABLE>
<CAPTION>
<S> <C>
Allocation Fund and Index

Large-cap Schwab S&P 500 Fund. Seeks to track the S&P 500 Index,(R) a
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 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 International Index,(R) which includes the
largest 350 stocks (as measured by market
capitalization) that are publicly traded in developed
securities markets outside the United States.
</TABLE>

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

[Side Bar] 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 have an investment policy that requires it to
change its stock segment allocations. The portfolio 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.
<PAGE> 112
(Page 5)

Main Risks

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.

[Side Bar] Other risk factors

While the portfolio's underlying funds seek to track the returns of various
indices, in each case an underlying fund's 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.

[Friendly Voice] 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.
<PAGE> 113
(Page 6)

Performance

Annual total returns (%) as of 12/31

___ ___
99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Portfolio ___ ___1
S&P 500(R) Index ___ ___2
</TABLE>

1 Inception: 5/19/98.
2 From 5/19/98.

Portfolio Fees and Expenses

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)

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

Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current fees and expenses.

**Guaranteed by Schwab and the investment adviser through ________ (excluding
interest, taxes and certain non-routine expenses).

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>
$___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how the portfolio's
performance compares to that of an index, which varies over time.

<PAGE> 114
(Page 7)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 115
(Page 8)

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:

<TABLE>
<CAPTION>
<S> <C>
Allocation Fund and Index

Large-cap Schwab S&P 500 Fund. Seeks to track the S&P 500 Index,(R) a
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 Small-Cap Index,(R) which includes the
second-largest 1,000 U.S. stocks as measured by
market capitalization.

Bond Schwab Total Bond Market Index Fund. Seeks to track the
Lehman Brothers Aggregate Bond Index, which includes a
broad-based mix of U.S. investment-grade bonds with
maturities greater than one year.
</TABLE>

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

[Side Bar] 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 have an investment policy that requires it to 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.
<PAGE> 116
(Page 9)

Main Risks

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.

[Side Bar] 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 an underlying fund's performance normally is below that of
the index.

[Friendly Voice] 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.
<PAGE> 117
(Page 10)

Performance

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___ ___ ___ ___ ___
96 97 98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Year inception
<S> <C> <C> <C>
Portfolio ___ ___ ___1
S&P 500(R) Index ___ ___ ___2
Lehman Brothers
Aggregate Bond Index ___ ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees* ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current fees and expenses.

** Guaranteed by Schwab and the investment adviser through _______ (excluding
interest, taxes and certain non-routine expenses).

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>
$___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 118
(Page 11)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 119
(Page 12)

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.

<TABLE>
<CAPTION>
<S> <C>
Allocation Fund and Index

Large-cap Schwab S&P 500 Fund. Seeks to track the S&P 500 Index,(R) a
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 Small-Cap Index,(R) which includes the
second-largest 1,000 U.S. stocks as measured by
market capitalization.

[Side Bar] 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 have an investment policy that requires it to
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.
<PAGE> 120
(Page 13)

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.

[Side Bar] Other risk factors

While the portfolio's underlying funds seek to track the returns of various
indices, in each case an underlying fund's 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.

[Friendly Voice] 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.
<PAGE> 121
(Page 14)
Performance

Annual total returns (%) as of 12/31

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___ ___ ___ ___ ___
96 97 98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q___ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Year inception
<S> <C> <C> <C>
Portfolio ___ ___ ___1
S&P 500(R) Index ___ ___ ___2
Lehman Brothers Aggregate
Bond Index ___ ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current fees and expenses.
**Guaranteed by Schwab and the investment adviser through ______ (excluding
interest, taxes and certain non-routine expenses).

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>
$___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 122
(Page 15)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 123
(Page 16)

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.

<TABLE>
<CAPTION>
<S> <C>
Allocation Fund and Index

Large-cap Schwab S&P 500 Fund. Seeks to track the S&P 500 Index,(R) a
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 Small-Cap Index,(R) which includes the
second-largest 1,000 U.S. stocks as measured by
market capitalization.

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 maturi-
ties greater than one year.
</TABLE>

[Side Bar] 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 have an investment policy that requires it to
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.
<PAGE> 124
(Page 17)

Main Risks

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.

[Side Bar] Other risk factors

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

[Friendly Voice] Conservative investors and investors with shorter time horizons
are among those for whom this portfolio was created.
<PAGE> 125
(Page 18)

Performance

Annual total returns (%) as of 12/31

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___ ___ ___ ___ ___
96 97 98 99 00

Best quarter: ___% Q___ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Year inception
<S> <C> <C> <C>
Portfolio ___ ___ ___1
Lehman Brothers
Aggregate Bond Index ___ ___ ___2
S&P 500(R) Index ___ ___ ___2
</TABLE>

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

Portfolio Fees and Expenses

Fee table (%)

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

ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees* ___
Distribution (12b-1) fees None
Other expenses* ___
Total annual operating expenses ___
Expense reduction (___)
Net operating expenses** ___
</TABLE>

* Restated to reflect current fees and expenses.
**Guaranteed by Schwab and the investment adviser through ______ (excluding
interest, taxes and certain non-routine expenses).

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.

1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year to year and how it averages out over time.
<PAGE> 126
(Page 19)

Financial Highlights

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

FINANCIAL HIGHLIGHTS WILL BE INSERTED

<PAGE> 127
(Page 20)

Portfolio Management

The investment adviser for the Schwab MarketTrack Portfolios(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 ___ million
shareholder accounts. (All figures on this page are as of 10/31/00.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab MarketTrack Portfolios.(R) As compensation for
these services, the firm receives a management fee from each portfolio. For the
12 months ended 10/31/00, these fees were ___% for the All Equity Portfolio,
___% for the Growth Portfolio, ___% for the Balanced Portfolio and ___% for the
Conservative Portfolio. These figures, which are expressed as a percentage of
each portfolio's average daily net assets, represent the actual amounts paid,
including the effects of reductions.

Geri Hom, a vice president of the investment adviser, is responsible for the
day-to-day management of the equity portions of the portfolios. Prior to joining
the firm in March 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.

[Friendly Voice] The portfolio's investment adviser, Charles Schwab Investment
Management, Inc., has more than $___ billion under management.

<PAGE> 128
(Page 21)

Investing in the Portfolios

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

Buying Shares

Step 1

Choose a portfolio, then decide how much you want to invest.

Minimum initial investment Minimum additional investment

<S> <C>
$1,000 $500
($500 for retirement and ($100 for custodial accounts and
custodial accounts) investments through the
Automatic Investment Plan)
</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 mix You receive payment for dividends,
while any capital gain distributions 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.

[Side Bar] Schwab accounts

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 Schwab MoneyLink,(R) which lets you move money between your Schwab
account and your accounts at other financial institutions, and Automatic
Investment Plan (AIP), which lets you set up periodic investments in mutual
funds you already own.

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
<PAGE> 130
(Page 23)

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 portfolio 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.

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

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

Methods for placing direct orders

Internet
www.schwab.com

Schwab by Phone(TM)
Automated voice service at or speak with a representative at 800-435-4000
(for TDD service, call 800-345-2550).

TeleBroker(R)
Automated touch-tone phone service at 800-272-4922

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

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

In person
Visit the nearest Charles Schwab branch office.

[Side Bar] When placing orders

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

- Your name or, for Internet orders, your account number/"LoginID."

- Your account number (for SchwabLink transactions, include the master account
and subaccount numbers) or, for Internet orders, your password.

- The name and share class (if applicable) 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.

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

- For exchanges, the name of the portfolio 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.

<PAGE> 131
(Page 24)

Transaction Policies

The portfolios and Schwab reserve certain rights, including the following:

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

- To refuse any purchase or exchange order, including large purchase orders that
may negatively impact its operations, and orders 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.

- To revise the redemption fee criteria.

<PAGE> 132
(Page 25)

Distributions and Taxes

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 portfolios is
considered a sale.

[Side Bar] More on distributions

SCHWAB
MarketTrack Portfolios(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.

You can obtain free copies of these documents by contacting SchwabFunds.(R) You
can also review and copy them in person at the SEC's Public Reference Room,
access them online at www.sec.gov or obtain paper copies by sending an
electronic request to [email protected]. You will need to pay a duplicating fee
before receiving paper copies from the SEC.

SEC File Number

Schwab MarketTrack Portfolios(R) 811-7704

Securities and Exchange Commission
Washington, D.C. 20549-0102

202-942-8090 (Public Reference Section)
www.sec.gov
[email protected]

SchwabFunds
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000

www.schwab.com

Prospectus

February 28, 2001

CharlesSchwab (logo)

MKT3757FLD-2

<PAGE> 136
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB MARKETTRACK PORTFOLIOS(R)

ALL EQUITY PORTFOLIO
GROWTH PORTFOLIO
BALANCED PORTFOLIO
CONSERVATIVE PORTFOLIO

FEBRUARY 28, 2001

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 28, 2001 (as
amended from time to time).

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...................................................[ ]
MANAGEMENT OF THE PORTFOLIOS......................................[ ]
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...............[ ]
INVESTMENT ADVISORY AND OTHER SERVICES............................[ ]
BROKERAGE ALLOCATION AND OTHER PRACTICES..........................[ ]
DESCRIPTION OF THE TRUST..........................................[ ]
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES.............................................[ ]
TAXATION..........................................................[ ]
CALCULATION OF PERFORMANCE DATA...................................[ ]

1
<PAGE> 137
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 outstanding voting shares. There is no guarantee the portfolios will
achieve their objectives.

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

MUTUAL FUNDS (open-end mutual funds) are registered investment companies which
issue and redeem their shares on a continuous basis. Close-end funds offer a
fixed number of shares usually listed on an exchange. These 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. These 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 these funds generally reflect the risks of the securities in which
these funds invest and the investment techniques they may employ. Also, these
funds charge fees and incur operating expenses. Each portfolio will normally
invest at least 50% of their assets in other SchwabFunds,(R) which are
registered open-end investment companies.

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

2
<PAGE> 138

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 on a specialized segment of the
stock market, like stocks of small companies or foreign issuers, or may focus on
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) and the
Schwab Total Stock Market Index Fund. 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.
For full discussion of the risks of small-cap stock funds, please refer to this
later in the document. 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. For full discussion of the risks of
international stock funds, please refer to this later in the document.

3
<PAGE> 139
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. The SchwabFunds(R) bond fund that the
portfolios may currently invest in is the Schwab Total Bond Market Index Fund.

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.

4
<PAGE> 140
industry's securities. Each portfolio will not concentrate its investments in a
particular industry or group of industries, unless its underlying fund
investments are so concentrated.

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

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.

5
<PAGE> 141

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, a 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, a portfolio or underlying fund could suffer losses.

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

6
<PAGE> 142

share price movements in the company's common stock. The actual return on a
convertible bond may exceed its stated yield if the company's common stock
appreciates in value and the option to convert to common shares becomes more
valuable.

Convertible preferred stocks are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds, but 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.

Warrants are types of securities 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 portfolio or underlying fund will lose
the purchase price it paid for the warrant and the right to purchase the
underlying security.

7
<PAGE> 143
achieve the most favorable overall results on portfolio transactions. There is
generally less government supervision and regulation of foreign securities
exchanges, brokers, dealers and listed companies than in the United States, thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. There may be difficulties in obtaining or
enforcing judgments against foreign issuers as well. These factors and others
may increase the risks with respect to the liquidity of a portfolio or
underlying fund containing foreign investments, and its ability to meet a large
number of shareholder redemption requests.

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

8
<PAGE> 144

such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.

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 or underlying
fund securities purchased or sold, but awaiting 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. Forwards involve risks. For example, if
the counterparties to the contracts are unable to meet the terms of the
contracts or if the value of the foreign currency changes unfavorably, the
portfolio or underlying fund could sustain a loss.

9
<PAGE> 145

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 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 or 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's 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, a portfolio or underlying fund may
purchase or sell futures contracts on a specified foreign currency to "fix" the
price in U.S. dollars of the foreign security it has acquired or sold or expects
to acquire or sell. The underlying funds may enter into futures contracts for
other reasons as well.

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 an amount equal to
the margin requirement that is deposited with the broker for its outstanding
futures contracts. Underlying funds may have the same or different arrangements.

While a portfolio intends to purchase and sell futures contracts in order to
simulate full investment in their respective indices, there are risks associated
with these transactions. Adverse market movements could cause a portfolio to
experience substantial losses when buying and selling futures contracts. Of
course, barring significant market distortions, similar results would have been
expected if a portfolio 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 portfolio incurs transaction
costs (i.e. brokerage fees) when engaging in futures trading. To the extent a
portfolio also invests in futures in order to simulate full investment, these
same risks apply.

When interest rates are rising or securities prices are falling, a portfolio or
underlying fund may seek, through the sale of futures contracts, to offset a
decline in the value of their current

10
<PAGE> 146
portfolio securities. When rates are falling or prices are rising, a portfolio
or underlying fund, through the purchase of futures contracts, may attempt to
secure better rates or prices than might later be available in the market when
they effect anticipated purchases. Similarly, a portfolio or underlying fund 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. A portfolio or underlying fund may purchase futures contracts
on a foreign currency to fix the price in U.S. dollars of a security denominated
in that currency that a portfolio or underlying fund 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 fund
seeks to close out a futures position. If a portfolio or an 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 a portfolio or an 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, a
portfolio or an underlying fund may be required to make or take delivery and
incur extra transaction costs buying or selling the underlying securities. A
portfolio or an underlying fund seeks 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 a 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. For example, a fund may receive
cash collateral, and it may invest it in short-term, interest-bearing
obligations, but will do so only to the extent that it will not lose the tax
treatment available to 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.

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<PAGE> 147

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

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
Fannie Mae, 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

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<PAGE> 148

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 however, such guarantees do not extend to the value or yield of the
mortgage-related securities themselves or of a portfolio's shares.

OTHER SECURITIES may be held by a portfolio or underlying fund under certain
circumstances. For example, a portfolio or 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 or underlying fund rather than payment in cash. In
such a case, a portfolio or an underlying fund 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 or underlying fund, under the direction and
supervision of the Board of Trustees, will take into account the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). To the extent a portfolio or an underlying fund invests in restricted
securities that are deemed liquid, its 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 at the lower of the total U.S. market.
Historically, small-cap stocks have been riskier than stocks issued by large- or
mid-cap companies for a variety of reasons. Small-cap companies may have less
certain growth prospects and are typically less diversified and less able to
withstand changing economic conditions than larger capitalized companies.
Small-cap companies also may have more limited product lines, markets or
financial resources than companies with larger capitalizations, and may be more
dependent on a relatively small management group. In addition, small-cap
companies may not be well known to the investing public, may not have
institutional ownership and may have only cyclical, static or moderate growth
prospects. Most small-cap company stocks pay low or no dividends.

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<PAGE> 149
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.

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.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac),
the Student Loan Marketing Association (SLMA or Sallie Mae), and the Federal
Home Loan Banks (FHLB), 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 such as obligations issued by the Federal Farm Credit
Banks Funding Corporation (FFCB). 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 debt securities, they are still
sensitive to interest rate changes, which will cause their prices to fluctuate.

INVESTMENT LIMITATIONS

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

THE ALL EQUITY PORTFOLIO MAY NOT:

1) Purchase securities of any issuer unless consistent with the
maintenance of its status as a diversified company under the Investment
Company Act of 1940 (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> 150
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.

EACH OF THE GROWTH PORTFOLIO, BALANCED PORTFOLIO AND CONSERVATIVE PORTFOLIO MAY
NOT:

2) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the Investment Company
Act of 1940 (the "1940 Act"), the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

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

5) Make loans to other persons, except to the extent permitted under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

6) Borrow money, except to the extent permitted under the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time
to time.

7) Issue senior securities, except to the extent permitted under the 1940
Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from
time to time.

8) Underwrite securities issued by other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.

EACH PORTFOLIO MAY NOT:

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<PAGE> 151
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.

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

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.

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.

3) Invest more than 15% of its net assets in illiquid securities.

4) 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.

5) Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).

6) Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and the fund will not purchase securities while
borrowings represent more than 5% of its total assets.

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<PAGE> 152
THE 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 the
securities of such issuer and together beneficially own more than 5% of
the securities of such issuer.

3) 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 the portfolio 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, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc. (full-service
audio solutions for the Internet), Vodaphone
</TABLE>

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

17
<PAGE> 153

<TABLE>
<S> <C> <C>
AirTouch PLC (a telecommunications company)
and Siebel Systems (a software company).

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). Prior to 1996, Chairman and Chief
Executive Officer of North American Trust (real
estate investment trust).

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

________________________________

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

18
<PAGE> 154

<TABLE>
<S> <C> <C>
Officer and Chief Operating Officer of America
First Eureka Holdings, Inc. (holding company).
Ms. Byerwalter also is on the Board of Directors
of America First Companies, Omaha, NE (venture
capital/fund management) and Redwood Trust, Inc.
(mortgage finance), and is a Director of
Stanford Hospitals and Clinics, SRI
International (research) and LookSmart, Ltd. (an
Internet infrastructure company).

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.

KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
</TABLE>

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<PAGE> 155
table provides information as of October 31, 2000 concerning compensation of the
trustees. Unless otherwise stated, information is for the fund complex, which
included 44 funds as of October 31, 2000.

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

Steve L. Scheid 1 0 0 0 0 N/A 0

William J. Klipp 2 0 0 0 0 N/A 0

Jeremiah H. Chafkin 3 0 0 0 0 N/A 0

John P. Coghlan 4 0 0 0 0 N/A 0

Mariann Byerwalter 3 $____ $____ $____ $____ N/A $____

Donald F. Dorward $____ $____ $____ $____ N/A $____

William A. Hasler 3 $____ $____ $____ $____ N/A $____

Robert G. Holmes $____ $____ $____ $____ N/A $____

Gerald B. Smith 3 $____ $____ $____ $____ N/A $____

Donald R. Stephens $____ $____ $____ $____ N/A $____

Michael W. Wilsey $____ $____ $____ $____ N/A $____
</TABLE>

DEFERRED COMPENSATION PLAN

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

1 Resigned from the Board effective November 21, 2000.
2 Mr. Klipp departed from Schwab and CSIM in 1999 and resigned from the Board of
Trustees effective April 30, 2000.
3 This trustee was first elected by shareholders on June 1, 2000.
4 Elected to the Board on November 21, 2000.

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<PAGE> 156
independent trustees has elected to participate in this plan.

CODE OF ETHICS

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2001, 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 1, 2001, the following represents persons or entities that owned,
directly or beneficially, more than 5% of shares of the portfolios.

____%

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

CSIM, 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. 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 0.44%
of each portfolio's average daily net assets not in excess of $500 million and
0.39% of such net assets over $500 million. Prior to June 30, 2000, the
graduated annual fee, payable monthly was 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

21
<PAGE> 157
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 years ended October 31, 2000, 1999, and 1998 the All Equity
Portfolio paid investment advisory fees of $______ , $255,000, and _____,
respectively (fees were reduced by $______ , $647,000, and $_______,
respectively).

For the fiscal years ended October 31, 2000, 1999 and 1998, the Growth Portfolio
paid investment advisory fees of $______, $927,000 and $553,000, respectively
(fees were reduced by $______, $1,116,900 and $1,157,000, respectively).

For the fiscal years ended October 31, 2000, 1999 and 1998, the Balanced
Portfolio paid investment advisory fees of $______, $876,000 and $491,000,
respectively (fees were reduced by $______, $1,119,000 and $1,095,000,
respectively).

For fiscal years ended October 31, 2000, 1999 and 1998, the Conservative
Portfolio paid investment advisory fees of $______, $358,000 and $78,000,
respectively (fees were reduced by $______, $501,000 and $504,000,
respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least ____________, the total operating expenses (excluding interest, taxes and
certain non-routine expenses) for each portfolio, including the impact of
underlying SchwabFunds investments, will not exceed ___% of its average daily
net assets. The amount of the expense cap is determined in coordination with the
Board of Trustees, and the expense cap is intended to limit the effects on
shareholders of expenses incurred in the ordinary operation of a fund. The
expense cap is not intended to cover all fund expenses, and a fund's expenses
may exceed the expense cap. For example, the expense cap does not cover
investment-related expenses, such as brokerage commissions, interest and taxes,
nor does it cover extraordinary or non-routine expenses, such as shareholder
meeting costs.

DISTRIBUTOR

SHAREHOLDER SERVICES AND TRANSFER AGENT

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

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<PAGE> 158
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

Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109 serves as
custodian and SEI Investments, Mutual Fund Services, One Freedom Valley Drive,
Oaks, PA 19456, serves as fund accountant for the portfolios.

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

INDEPENDENT ACCOUNTANTS

The portfolios' independent accountants, _______________, audits and reports on
the annual financial statements for the portfolios and reviews certain
regulatory reports and each portfolio's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trusts engage them to do so. Their address is _____________________. Each
portfolio's audited financial statements for the fiscal year ended October 31,
2000 are included in the portfolios' annual report, which is a separate report
supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year.

The All Equity Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999 were ____% and 6%, respectively.

The Growth Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999 were ____% and 7%, respectively.

The Balanced Portfolio's turnover rates for the fiscal years ended October 31,
2000 and 1999 were ____% and 7%, respectively.

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<PAGE> 159

The Conservative Portfolio's turnover rates for the fiscal years ended October
31, 2000 and 1999 were ____% and 8%, respectively.

PORTFOLIO TRANSACTIONS

In effecting securities transactions for a fund, the investment adviser seeks to
obtain best execution. Subject to the supervision of the Board of Trustees, the
investment adviser will select brokers and dealers for the funds on the basis of
a number of factors, including, for example, price paid for securities,
commission paid for transactions, clearance, settlement, reputation, financial
strength and stability, efficiency of execution and error resolution, block
trading and block positioning capabilities, willingness to execute related or
unrelated difficult transactions in the future, and order of call.

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.

BROKERAGE COMMISSIONS

For the fiscal years ended October 31, 2000, 1999, and 1998, the All Equity
Portfolio paid brokerage commissions of $______ , $0, $_____, respectively.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Growth
Portfolio, paid brokerage commissions of $______, $2,289 and $5,838,
respectively.

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<PAGE> 160

For the fiscal years ended October 31, 2000, 1999 and 1998, the Balanced
Portfolio, paid brokerage commissions of $______, $1,928 and $5,538,
respectively.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Conservative
Portfolio, paid brokerage commissions of $______, $362 and $2,448, 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 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.
A majority of the outstanding voting shares of a portfolio means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a portfolio are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a portfolio. 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

25
<PAGE> 161
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.

PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS AND
PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

The portfolios are open each day that both the Federal Reserve Bank of New York
(New York Fed) and New York Stock Exchange (NYSE) are open (business days). The
following holiday closings are currently scheduled for 2001: Martin Luther King
Jr.'s Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), Thanksgiving Day and
Christmas Day. On any day that the New York Fed, NYSE or principal government
securities markets close early, such as days in advance of holidays, the
portfolios reserve the right to advance the time by which purchase, redemption
and exchanges orders must be received on that day.

As long as each portfolio or Schwab follows reasonable procedures to confirm
that your telephone or Internet 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 or other confirmation before acting upon any telephone or
Internet order, providing written confirmation of telephone or Internet 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.

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 transaction
costs if he or she were to convert the securities to cash.

EXCHANGING SHARES OF THE PORTFOLIOS

Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other

26
<PAGE> 162

SchwabFund or class purchased, provided the minimum investment and any other
requirements of the portfolio or fund or class purchased are satisfied. Without
limiting this privilege, "an exchange order," which is a simultaneous order to
sell shares of one portfolio or fund or class and automatically invest the
proceeds in another portfolio or fund or class, may not be executed between
shares of Sweep Investments(TM) and shares of non-Sweep Investments. Shares of
Sweep Investments may be bought and sold automatically pursuant to the terms and
conditions of your account agreement or by direct order as long as you meet the
minimums for direct investments.

DELIVERY OF SHAREHOLDER DOCUMENTS

PRICING OF SHARES

TAXATION

FEDERAL TAX INFORMATION FOR THE PORTFOLIOS

27
<PAGE> 163

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 a portfolio's
assets, convert short-term capital losses into long-term capital losses or
otherwise affect the character of a 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

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."

28
<PAGE> 164
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 either (1) meets the
Code's definition of "resident alien" or (2) who is physically present in the
U.S. for 183 days or more per year. Different tax consequences may result if the
foreign shareholder is engaged in a trade or business within the United States.
In addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.

Income that the portfolios receive from sources within various foreign countries
may be subject to foreign income taxes withheld at the source. If a portfolio
has at least 50% of its assets invested in foreign securities at the end of its
taxable year, it may elect to "pass through" to its shareholders the ability to
take either the foreign tax credit or the deduction for foreign taxes. Pursuant
to this election, U.S. shareholders must include in gross income, even though
not actually received, their respective pro rata share of foreign taxes, and may
either deduct their pro rata share of foreign taxes (but not for alternative
minimum tax purposes) or credit the tax against U.S. income taxes, subject to
certain limitations described in Code sections 901 and 904 (but not both). A
shareholder who does not itemize deductions may not claim a deduction for
foreign taxes. It is expected that the portfolios will not have 50% of their
assets invested in foreign securities at the close of their taxable years, and
therefore will not be permitted to make this election. Also, to the extent a
portfolio invests in an underlying mutual fund that elects to pass through
foreign taxes, the portfolio 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

29
<PAGE> 165
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.

Shareholders are urged to consult their tax advisers as to the state and local
tax rules affecting investments in the portfolios.

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, 2000 to October 31, 2000
--------------------------------------------------------------------------------------------
<S> <C> <C>
All Equity (5/19/98) _____% _____%
Growth (11/20/95) _____% _____%
Balanced (11/20/95) _____% _____%
Conservative (11/20/95) _____% _____%
</TABLE>

<TABLE>
<CAPTION>
Portfolio (Commencement of Operations) Cumulative Total Return
-------------------------------------- -----------------------
<S> <C>
All Equity (5/19/98) _____%
Growth (11/20/95) _____%
Balanced (11/20/95) _____%
Conservative (11/20/95) _____%
</TABLE>

The performance of the portfolios may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices of investment performance, U.S. government obligations, bank
certificates of deposit, the consumer price index 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.

Examples of indices used for comparison purposes and the asset categories they
represent are as follows: for large company stocks, the S&P 500 Index; for small
company stocks, the Ibbottson,

30
<PAGE> 166

the BARRA Small-Cap Index and the Russell 2000(R) Index; for foreign stocks,
the MSCI-EAFE Index; and for bonds, the Lehman Aggregate Bond indices.

31
<PAGE> 167
(Page 1, Cover)

Prospectus
February 28, 2001

SCHWAB
Equity Index Funds

Schwab S&P 500 Fund

Schwab 1000 Fund(R)

Schwab Small-Cap Index Fund(R)

Schwab Total Stock Market Index Fund(TM)

Schwab International Index Fund(R)

CharlesSchwab (logo)
<PAGE> 168
(Page 2)

SCHWAB
Equity Index Funds

About The Funds

4 Schwab S&P 500 Fund
10 Schwab 1000 Fund(R)
14 Schwab Small-Cap Index Fund(R)
18 Schwab Total Stock Market Index Fund(TM)
22 Schwab International Index Fund(R)
26 Fund Management

Investing In The Funds

28 Buying Shares
29 Selling/Exchanging Shares
30 Transaction Policies
31 Distributions and Taxes
<PAGE> 169
(Page 3)

About The Funds

The funds in this prospectus share the same basic investment strategy: They are
designed to track the performance of a stock market index. Each fund tracks a
different index.

This strategy distinguishes an index fund from an "actively managed" mutual
fund. Instead of choosing investments based on judgment, a portfolio manager
looks to an index to determine which securities the fund should own.

Because the composition of an index tends to be comparatively stable, index
funds historically have shown low portfolio turnover compared to actively
managed funds.

The funds 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> 170
(Page 4)

SCHWAB
S&P 500 Fund

TICKER SYMBOLS

INVESTOR SHARES SWPIX
SELECT SHARES(R) SWPPX
E.SHARES(R) SWPEX

[Goal] The fund's goal is to track the total return of the S&P 500(R) Index.

Index

The S&P 500 Index includes the common stocks of 500 leading U.S. companies from
a broad range of industries. Standard & Poor's, the company that maintains the
index, uses a variety of measures to determine which stocks are listed in the
index. Each stock is represented in proportion to its total market value.

Strategy

Like many index funds, the fund also may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.

[Side Bar] Large-cap stocks

Although the 500 companies in the index constitute only about __% of all the
publicly traded companies in the United States, they represent approximately __%
of the total value of the U.S. stock market. (All figures are as of 10/31/00.)

Companies of this size are generally considered large-cap stocks. Their
performance is widely followed, and the index itself is popularly seen as a
measure of overall U.S. stock market performance.

Because the index weights a stock according to its market capitalization (total
market value of all shares outstanding), larger stocks have more influence on
the performance of the index than do the index's smaller stocks.
<PAGE> 171
(Page 5)

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.

Your investment follows the large-cap portion of the U.S. stock market, as
measured by the index. It follows these stocks during upturns as well as
downturns. Because of its indexing strategy, the fund cannot 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 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
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).

Although the S&P 500(R) Index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large-cap stocks. As a
result, whenever these stocks perform less well than mid- or small-cap stocks,
the fund may underperform funds that have exposure to those segments of the U.S.
stock market. Likewise, whenever large-cap U.S. stocks fall behind other types
of investments -- bonds, for instance -- the fund's performance also will lag
those investments.

[Side Bar] Other risk factors

Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund tracks the performance of the index.

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

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

[Side Bar] Index ownership

Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by the fund. The fund 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 fund. More complete information may be found in the
Statement of Additional Information (see back cover).

[Friendly Voice] Long-term investors who want to focus on large-cap U.S. stocks
or who are looking for performance that is linked to a popular index may want to
consider this fund.
<PAGE> 172
(Page 6)

Performance

The fund has three share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Annual total returns (%) as of 12/31

Investor Shares

<TABLE>
<CAPTION>
<S> <C> <C> <C>
___ ___ ___ ___
97 98 99 00

Best quarter: ___% Q__ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Investor Shares ___ ___1
Select Shares(R) ___ ___2
e.Shares(R) ___ ___3
S&P 500(R) Index ___ ___4
</TABLE>

1 Inception: 5/1/96.
2 Inception: 5/19/97.
3 Inception: 5/1/96.
4 From 5/1/96.

Fund Fees and Expenses

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

Fee table (%)

<TABLE>
<CAPTION>
Investor Select
Shares Shares e.Shares
<S> <C> <C> <C>
SHAREHOLDER FEES

Redemption fee, charged only
on shares you sell 180 days
or less after buying them,
and paid directly to the fund
0.75 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)

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

Expense reduction (___) (___) (___)

Net operating expenses** ___ ___ ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _________ (excluding
interest, taxes and certain non-routine expenses).

Expenses on a $10,000 investment

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $___ $___ $___ $___
Select Shares $___ $___ $___ $___
e.Shares $___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how the fund's
performance compares to that of its index, which varies over time.
<PAGE> 173
(Page 7)

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 174
(Page 8)

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 175
(Page 9)

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 176
(Page 10)

SCHWAB
1000 Fund(R)

TICKER SYMBOLS
INVESTOR SHARES SNXFX
SELECT SHARES(R) SNXSX

[Goal] The fund's goal is to match the total return of the Schwab 1000 Index(R).

Index

The Schwab 1000 Index(R) includes the common stocks of the largest 1,000
publicly traded companies in the United States, with size being determined by
market capitalization (total market value of all shares outstanding). The index
is designed to be a measure of the performance of large- and mid-cap U.S.
stocks.

Strategy

The fund may make use of certain management techniques in seeking to enhance
after-tax performance. For example, it may adjust its weightings of certain
stocks, continue to hold a stock that is no longer included in the index or
choose to realize certain capital losses and use them to offset capital gains.
These strategies may help the fund reduce taxable capital gains distributions.

[Side Bar] Large- and mid-cap stocks

Although there are currently more than ____ total stocks in the United States,
the companies represented by the Schwab 1000 Index make up some __% of the total
value of all U.S. stocks. (Figures are as of 10/31/00.)

These large- and mid-cap stocks cover many industries and represent many sizes:
At $____ billion, the market capitalization of the largest one is approximately
____ times that of the smallest one. (Figures are as of 10/31/00.)

Because large- and mid-cap stocks can perform differently from each other at
times, a fund that invests in both categories of stocks may have somewhat
different performance than a fund that invests only in large-cap stocks.
<PAGE> 177
(Page 11)

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.

Your investment follows the large- and mid-cap portions of the U.S. stock
market, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot 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 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
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).

Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the
fund is broadly diversified, 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, for instance -- the fund's performance also
will lag these investments.

[Side Bar] Other risk factors

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

[Friendly Voice] Because it includes so many U.S. stocks and industries, this
fund could make sense for long-term investors seeking broad diversification in a
single investment. It's also a logical choice for stock investors who want
exposure beyond the large-cap segment of the U.S. stock market.
<PAGE> 178
(Page 12)

Performance

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

The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Annual total returns (%) as of 12/31

Investor Shares

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
___ ___ ___ ___ ___ ___ ___ ___ ___
92 93 94 95 96 97 98 99 00

Best quarter: ___% Q__ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
<S> <C> <C> <C>
Investor Shares ___ ___ ___1
Select Shares(R) ___ ___ ___2
S&P 500(R) Index ___ ___ ___3
Schwab 1000 Index(R) ___ ___ ___3
</TABLE>

1 Inception: 4/2/91.
2 Inception: 5/19/97.
3 From 4/2/91.

Fund Fees and Expenses

Fee table (%)

<TABLE>
<CAPTION>
Investor Select
Shares Shares
<S> <C> <C>
SHAREHOLDER FEES

Redemption fee, charged only
on shares you sell 180 days
or less after buying them,
and paid directly to the fund 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)

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

Expense reduction (___) (___)
Net operating expenses** ___ ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _________ (excluding
interest, taxes and certain non-routine expenses).

Expenses on a $10,000 investment

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $___ $___ $___ $___
Select Shares $___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year-to-year and how it averages out over time.
<PAGE> 179
(Page 13)

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, _______________________________,
audited these figures. Their full report is included in the fund's annual report
(see back cover).

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 180
(Page 14)

SCHWAB
Small-Cap Index Fund(R)

TICKER SYMBOLS
INVESTOR SHARES SWSMX
SELECT SHARES(R) SWSSX

[Goal] The fund's goal is to track the performance of a benchmark index that
measures total return of small capitalization U.S. stocks.

Index

The fund intends to achieve its investment objective by tracking the total
return of the Schwab Small-Cap Index(R). The index includes the common stocks of
the second-largest 1,000 publicly traded companies in the United States, with
size being determined by market capitalization (total market value of all shares
outstanding). The index is designed to be a measure of the performance of
small-cap U.S. stocks.

Strategy

Like many index funds, the fund also may invest in futures and lend securities
to minimize the gap in performance that naturally exists between any index fund
and its index. This gap occurs mainly because, unlike the index, the fund incurs
expenses and must keep a small portion of its assets in cash for business
operations. By using futures, the fund potentially can offset the portion of the
gap attributable to its cash holdings. Any income realized through securities
lending may help reduce the portion of the gap attributable to expenses. Because
some of the effect of expenses remains, however, the fund's performance normally
is below that of the index.

[Side Bar] Small-cap stocks

In measuring the performance of the second-largest 1,000 companies in the U.S.
stock market, the index may be said to focus on the "biggest of the small" among
America's publicly traded stocks. These stocks range in size from $___ billion
to $__ million in terms of their total market value. (All figures are as of
10/31/00.)

Historically, the performance of small-cap stocks has not always paralleled that
of large-cap stocks. For this reason, some investors use them to diversify a
portfolio that invests in larger stocks.

With its small-cap focus, this fund may make sense for long-term investors who
are willing to accept greater risk in the pursuit of potentially higher
long-term returns.
<PAGE> 181
(Page 15)

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.

Your investment follows the small-cap portion of the U.S. stock market, as
measured by the index. It follows the market during upturns as well as
downturns. Because of its indexing strategy, the fund cannot 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 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
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).

Historically, small-cap stocks have been riskier than 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 stocks perform less well than large- or mid-cap stocks, the fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever U.S. small-cap stocks fall behind other types of
investments -- bonds, for instance -- the fund's performance also will lag these
investments.

[Side Bar] Other risk factors

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

[Friendly Voice] With its small-cap focus, this fund may make sense for
long-term investors who are willing to accept greater risk in the pursuit of
potentially higher long-term returns.
<PAGE> 182
(Page 16)

Performance

The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Annual total returns (%) as of 12/31

Investor Shares

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
___ ___ ___ ___ ___ ___ ___
94 95 96 97 98 99 00

Best quarter: ___% Q__ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
<S> <C> <C> <C>
Investor Shares ___ ___ ___1
Select Shares(R) ___ ___ ___2
Schwab Small-Cap Index(R) ___ ___ ___3
Russell 2000 Index(R) ___ ___ ___3
</TABLE>

1 Inception: 12/3/93.
2 Inception: 5/19/97.
3 From 12/3/93.

Fund Fees and Expenses

Fee table (%)

<TABLE>
<CAPTION>
Investor Select
Shares Shares
<S> <C> <C>
SHAREHOLDER FEES
Redemption fee, charged only
on shares you sell 180 days
or less after buying them
and paid directly to the fund 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees ___ ___
Distribution (12b-1) fees None None
Other expenses* ___ ___
Total annual operating expenses ___ ___
Expense reduction (___) (___)
Net operating expenses** ___ ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _________ (excluding
interest, taxes and certain non-routine expenses).

Expenses on a $10,000 investment

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $___ $___ $___ $___
Select Shares $___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year-to-year and how it averages out over time.
<PAGE> 183
(Page 17)

Financial Highlights

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 184
(Page 18)

SCHWAB
Total Stock Market
Index Fund(TM)

TICKER SYMBOLS
INVESTOR SHARES SWTIX
SELECT SHARES(R) SWTSX

[Goal] The fund seeks to track the total return of the entire U.S. stock market,
as measured by the Wilshire 5000 Equity Index.

Index

The fund's benchmark index includes all publicly traded common stocks of
companies headquartered in the United States for which pricing information is
readily available -- currently more than ____ stocks. The index weights each
stock according to its market capitalization (total market value of all shares
outstanding).

Strategy

Because it would be impractical to invest in every company in the U.S. stock
market, the fund uses statistical sampling techniques to assemble a portfolio
whose performance is expected to resemble that of the index. The fund generally
expects that its portfolio will include the largest 2,500 to 3,000 U.S. stocks
(measured by market capitalization), and that its industry weightings, dividend
yield and price/earnings ratio will be similar to those of the index.

The fund may use certain techniques in seeking to enhance after-tax performance,
such as adjusting its weightings of certain stocks or choosing to realize
certain capital losses and use them to offset capital gains. These strategies
may help the fund reduce taxable capital gain distributions.

[Side Bar] The U.S. stock market

The U.S. stock market is commonly divided into three segments, based on market
capitalization.

Mid- and small-cap stocks are the most numerous, but make up only about
one-third of the total value of the market. In contrast, large-cap stocks are
relatively few in number but make up approximately two-thirds of the market's
total value. In fact, the largest 3,000 of the market's listed stocks represent
about __% of its total value. (All figures on this page are as of 10/31/00.)

In terms of performance, these segments can behave somewhat differently from
each other, over the short term as well as the long term. For that reason, the
performance of the overall stock market can be seen as a blend of the
performance of all three segments.
<PAGE> 185
(Page 19)

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.

Your investment follows the U.S. stock market, as measured by the index. It
follows these stocks during upturns as well as downturns. Because of its
indexing strategy, the fund will not take steps to reduce market exposure or to
lessen the effects of a declining market.

Many factors can affect stock market performance. 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
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).

Because the fund encompasses stocks from across the economy, it is broadly
diversified, which reduces the impact of the performance of any given industry,
individual stock or market segment. But whenever any particular market segment
outperforms the U.S. stock market as a whole, the fund may underperform funds
that have greater exposure to that segment. Likewise, whenever U.S. stocks fall
behind other types of investments -- bonds, for instance -- the fund's
performance also will lag these investments. Because the fund gives greater
weight to larger stocks, most of its performance will reflect the performance of
the large-cap segment.

[Side Bar] Other risk factors

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

For example, the fund's use of sampling may increase the gap between the
performance of the fund and that of the index. Futures contracts, which the fund
uses to gain exposure to stocks for its cash balances, also could cause the fund
to track the index less closely if they don't perform as expected.

[Side Bar] Index ownership

Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates,
Inc. The fund is not sponsored, endorsed, sold or promoted by Wilshire
Associates, and Wilshire Associates is not in any way affiliated with the fund.
Wilshire Associates makes no representation regarding the advisability of
investing in the fund or in any stock included in the Wilshire 5000.

[Friendly Voice] With its very broad exposure to the U.S. stock market, this
fund is designed for long-term investors who want exposure to all three tiers of
the market: large-, mid- and small-cap.
<PAGE> 186
(Page 20)

Performance

The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Annual total returns (%) as of 12/31

Investor Shares

<TABLE>
<CAPTION>
<S> <C>
___ ___
99 00

Best quarter: ___% Q__ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year inception
<S> <C> <C>
Investor Shares ___ ___1
Select Shares(R) ___ ___1
</TABLE>

1 Inception: 6/1/99.

Fund Fees and Expenses

The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are charged to you directly by the fund. "Annual Operating
Expenses" are paid out of fund assets, so their effect is included in the total
return for each share class.

The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Fee table (%)

<TABLE>
<CAPTION>
Investor Select
Shares Shares(R)
<S> <C> <C>
SHAREHOLDER FEES
Redemption fee, charged
only on shares you sell
180 days or less after buying
them and paid directly to
the fund 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)

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

Expense reduction (___) (___)
Net operating expenses** ___ ___
</TABLE>

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _________ (excluding
interest, taxes and certain non-routine expenses).

Expenses on a $10,000 investment

<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Investor Shares $___ $___
Select Shares $___ $___
</TABLE>

<PAGE> 187
(Page 21)

Financial Highlights

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 188
(Page 22)

SCHWAB
International Index Fund(R)

TICKER SYMBOLS
INVESTOR SHARES SWINX
SELECT SHARES(R) SWISX

[Goal] The fund's goal is to track the performance of a benchmark index that
measures the total return of large, publicly traded non-U.S. companies from
countries with developed equity markets outside of the United States.

Index

The fund intends to achieve its investment objective by tracking the total
return of the Schwab International Index.(R) The index includes common stocks of
the 350 largest publicly traded companies from selected countries outside the
United States. The selected countries all have developed securities markets and
include most Western European countries, as well as Australia, Canada, Hong Kong
and Japan -- currently 15 countries in all. Within these countries, Schwab
identifies the 350 largest companies according to their market capitalizations
(total market value of all shares outstanding), in U.S. dollars. The index does
not maintain any particular country weightings, although any given country
cannot represent more than 35% of the index.

Strategy

To pursue its goal, the fund invests in stocks that are included in the index.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does, and does not hedge its exposure to foreign currencies beyond
using forward contracts to lock in transaction prices until settlement. In
seeking to enhance after-tax performance, the fund may choose to realize certain
capital losses and use them to offset capital gains. This strategy may help the
fund reduce taxable capital gain distributions.

Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.

[Side Bar] International stocks

Over the past several decades, foreign stock markets have grown rapidly. The
market value of foreign stocks today represents approximately ___% of the
world's total market capitalization. (All figures are as of 10/31/00.)

For some investors, an international index fund represents an opportunity for
low-cost access to a variety of world markets in one fund. Others turn to
international stocks to diversify a portfolio of U.S. investments, because
international stock markets historically have performed somewhat differently
from the U.S. market.
<PAGE> 189
(Page 23)

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.

Your investment follows the performance of a mix of international large-cap
stocks, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of market declines.

Many factors can affect stock market performance. 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 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).

International stocks carry additional risks. Changes in currency exchange rates
can erode market gains or widen market losses. 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. In addition, during any period when large-cap
international stocks perform less well than other types of stocks or other types
of investments -- bonds, for instance -- the fund's performance also will lag
these investments.

[Side Bar] Other risk factors

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

[Friendly Voice] For long-term investors who are interested in the potential
rewards of international investing and who are prepared for the additional
risks, this fund could be worth considering.
<PAGE> 190
(Page 24)

Performance

The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.

Annual total returns (%) as of 12/31

Investor Shares

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
___ ___ ___ ___ ___ ___ ___
94 95 96 97 98 99 00

Best quarter: ___% Q__ 19___
Worst quarter: ___% Q__ 19___
</TABLE>

Average annual total returns (%) as of 12/31/00

<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
<S> <C> <C> <C>
Investor Shares ___ ___ ___1
Select Shares(R) ___ ___ ___2
Schwab International
Index(R) ___ ___ ___3
MSCI-EAFE(R) Index ___ ___ ___3
</TABLE>

1 Inception: 9/9/93.
2 Inception: 5/19/97.
3 From 9/9/93.

Fund Fees and Expenses

Fee table (%)

<TABLE>
<CAPTION>
Investor Select
Shares Shares(R)
<S> <C> <C>
SHAREHOLDER FEES
Redemption fee, charged only
on shares you sell 180 days
or less after buying them and
paid directly to the fund 1.50 1.50

* Restated to reflect current expenses.

** Guaranteed by Schwab and the investment adviser through _________ (excluding
interest, taxes and certain non-routine expenses).

Expenses on a $10,000 investment

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $___ $___ $___ $___
Select Shares $___ $___ $___ $___
</TABLE>

[Friendly Voice] The performance information above shows you how performance has
varied from year-to-year and how it averages out over time.
<PAGE> 191
(Page 25)

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, _______________________________,
audited these figures. Their full report is included in the fund's annual report
(see back cover).

FINANCIAL HIGHLIGHTS TABLE WILL BE INSERTED

<PAGE> 192
(Page 26)

Fund Management

The investment adviser for the Schwab Equity Index Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than ___ million shareholder
accounts. (All figures on this page are as of 10/31/00.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab Equity Index Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 10/31/00, these fees were ___% for the Schwab S&P 500 Fund, ___% for the
Schwab 1000 Fund,(R) ___% for the Schwab Small-Cap Index Fund,(R) ___% for the
Schwab Total Stock Market Index Fund, and ___% for the Schwab International
Index Fund.(R) These figures, which are expressed as a percentage of each fund's
average daily net assets, represent the actual amounts paid, including the
effects of reductions.

Geri Hom, a vice president of the investment adviser, is responsible for the
day-to-day management of each of the funds. Prior to joining the firm in March
1995, she worked for nearly 15 years in equity index management.

Larry Mano, a portfolio manager, is responsible for the day-to-day management of
Schwab Total Stock Market Index Fund. Prior to joining the firm in November
1998, he worked for 20 years in equity index management, most recently at
Wilshire Associates, Inc.

[Friendly Voice] The fund's investment adviser, Charles Schwab Investment
Management, Inc., has more than $___ billion under management.

<PAGE> 193
(Page 27)

Investing in the Funds

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

On the following pages, you will find information on buying, selling and
exchanging shares using the method that is most convenient for you. You also
will see how to choose a share class and a distribution option for your
investment. Helpful information on taxes is included as well.
<PAGE> 194
(Page 28)

Buying Shares

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

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

Step 1

Choose a fund and a share class. Your choice may depend on the amount of your
investment. Currently, e.Shares(R) are available only for the S&P 500 Fund and
are offered to clients of Schwab Institutional, The Charles Schwab Trust Company
and certain retirement plans. The minimums shown below are for each fund and
share class.

<TABLE>
<CAPTION>
Minimum initial Minimum additional
Share class investment Investment Minimum balance
<S> <C> <C> <C>
Investor Shares $2,500 ($1,000 for $500 ($100 for --- ---
retirement and custodial accounts and
custodial accounts) investments through the
Automatic Investment Plan)

Select Shares(R) $50,000 $1,000 $40,000

e.Shares(R) $1,000 ($500 for $100 --- ---
retirement and
custodial accounts)
</TABLE>

Step 2

Choose an option for fund distributions. The three options are described below.
If you don't indicate a choice, you will receive the first option.

Option Features
<S> <C>
Reinvestment All dividends and capital gain distributions are
invested automatically in shares of your fund and
share class.

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

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. Remember that
e.Shares are available only through SchwabLink. Make checks payable to Charles
Schwab & Co., Inc.

[Side Bar] Schwab accounts

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

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
<PAGE> 195

(Page 29)

Selling/Exchanging Shares

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

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

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

-As indicated in each fund's fee table, each fund charges a redemption fee,
payable to the fund, on the sale or exchange of any shares that occurs 180 days
or less after purchasing them; in attempting to minimize this fee, a fund will
first sell any shares in your account that aren't subject to the fee (including
shares acquired through reinvestment or exchange).

-There is no redemption fee when you exchange between share classes of the same
fund.
-The funds reserve the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000 or 1%
of a fund's assets, whichever is less.

-Exchange orders are limited to other SchwabFunds that are not Sweep Investments
as well as variable NAV funds and must meet the minimum investment and other
requirements for the fund and share class into which you are exchanging.

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

Methods for placing direct orders

Internet
www.schwab.com

Schwab by Phone(TM)
Automated voice service or speak with a representative at 800-435-4000
(for TDD service, call 800-345-2550).

TeleBroker(R)
Automated touch-tone phone service at 800-272-4922

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

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

In person
Visit the nearest Charles Schwab branch office.

[Side Bar] When placing orders

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

-Your name or, for Internet orders, your account number/"LoginID."

-Your account number (for SchwabLink transactions, include the master account
and subaccount numbers) or, for Internet orders, your password.

-The name and share class (if applicable) 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.

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

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

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

Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
<PAGE> 196
(Page 30)

Transaction Policies

The funds are open for business each day that the New York Stock Exchange (NYSE)
is open.

The funds calculate their share prices each business day, for each share class,
after the close of the NYSE. A fund's share price is its net asset value per
share, or NAV, which is the fund's net assets divided by the number of its
shares outstanding. Orders to buy, sell or exchange shares that are received in
good order prior to the close of the fund (generally 4 p.m. Eastern time) will
be executed at the next share price calculated that day.

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

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

The funds and Schwab reserve certain rights, including the following:

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

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

-To refuse any purchase or exchange order, including large purchase orders that
may negatively impact their operations and orders that appear to be associated
with short-term trading activities.

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

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

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

-To revise the redemption fee criteria.

<PAGE> 197
(Page 31)

Distributions and Taxes

As a shareholder, you are entitled to your share of the dividends and gains your
fund earns. Every year, each 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. Each fund's net investment
income and short-term capital gains are distributed as dividends and are taxable
as ordinary income. Other capital gain distributions are taxable as long-term
capital gains, regardless of how long you have held your shares in the fund.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.

For tax purposes, an exchange between funds is different from an exchange
between classes. An exchange between funds is considered a sale. An exchange
between classes within a fund is not reported as a taxable sale.

Shareholders in the Schwab International Index Fund(R) may have additional tax
considerations as a result of foreign tax payments made by the fund. Typically,
these payments will reduce the fund's dividends but will still be included in
your taxable income. You may be able to claim a tax credit or deduction for your
portion of foreign taxes paid by the fund, however.

At the beginning of every year, the funds provide shareholders with information
detailing the tax status of any distributions the fund paid during the previous
calendar year. Schwab brokerage account customers also receive information on
distributions and transactions in their monthly account statements.

[Side Bar] More on distributions

SCHWAB
Equity Index Funds

To Learn More

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

Shareholder reports, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.

SEC File Numbers
Schwab S&P 500 Fund 811-7704
Schwab 1000 Fund(R) 811-6200
Schwab Small-Cap Index Fund(R) 811-7704
Schwab Total Stock Market Index Fund(TM) 811-7704
Schwab International Index Fund(R) 811-7704

Securities and Exchange Commission
Washington, D.C. 20549-0102

202-942-8090 (Public Reference Section)
www.sec.gov
[email protected]

SchwabFunds
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000

www.schwab.com

Prospectus

February 28, 2001

CharlesSchwab (logo)

MKT3644FLT-2

<PAGE> 199
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB EQUITY INDEX FUNDS

SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB TOTAL STOCK MARKET INDEX FUND(TM)
SCHWAB INTERNATIONAL INDEX FUND(R)

FEBRUARY 28, 2001

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated February 28, 2001 (as
amended from time to time).

To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the funds at P.O. Box 7575, San
Francisco, California 94120-7575. 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.

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

Schwab S&P 500 Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market
Index Fund and Schwab International Index Fund are series of Schwab Capital
Trust (a trust), and Schwab 1000 Fund is a series of Schwab Investments (a
trust).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS................. [ ]
MANAGEMENT OF THE FUNDS.................................................. [ ]
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...................... [ ]
INVESTMENT ADVISORY AND OTHER SERVICES................................... [ ]
BROKERAGE ALLOCATION AND OTHER PRACTICES................................. [ ]
DESCRIPTION OF THE TRUSTS................................................ [ ]
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES.................................................... [ ]
TAXATION................................................................. [ ]
CALCULATION OF PERFORMANCE DATA.......................................... [ ]
</TABLE>

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INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES AND INDEXES

Each fund's investment objective may be changed only by vote of a majority of
its outstanding voting shares.

There is no guarantee the funds will achieve their objectives.

THE SCHWAB S&P 500 FUND'S investment objective is to seek to track the price and
dividend performance (total return) of common stocks of U. S. companies, as
represented by Standard & Poor's 500 Composite Stock Price Index (the S&P
500(R)).

The S&P 500 is representative of the performance of the U.S. stock market. The
index consists of 500 stocks chosen for market size, liquidity and industry
group representation. It is a market value weighted index (stock price times
number of shares outstanding), with each stock's weight in the index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
index are among the largest, it also includes some relatively small companies.
Those companies, however, generally are established companies within their
industry group. Standard & Poor's (S&P) identifies important industry groups
within the U.S. economy and then allocates a representative sample of stocks
with each group to the S&P 500. There are four major industry sectors within the
index: industrials, utilities, financial and transportation. The fund may
purchase securities of companies with which it is affiliated to the extent these
companies are represented in its index.

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

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

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THE SCHWAB 1000 FUND'S investment objective is to match the price and dividend
performance (total return) of the Schwab 1000 Index,(R) an index created to
represent to performance of publicly traded common stocks of the 1,000 largest
U.S. companies.

To be included in the Schwab 1000 Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the NASDAQ/NMS and
(3) its market value must place it among the top 1,000 such companies as
measured by market capitalization (share price times the number of shares
outstanding). The fund may purchase securities of companies with which it is
affiliated to the extent these companies are represented in its index.

As of October 31, 2000, the aggregate market capitalization of the stocks
included in the Schwab 1000 Index was approximately $ ____ trillion. This
represents approximately ___% of the total market value of all publicly traded
U.S. companies, as represented by the Wilshire 5000 Index.

THE SCHWAB SMALL-CAP INDEX FUND'S investment objective is to seek to track
performance of a benchmark index that measures total return of small
capitalization U.S. stocks.

The Schwab Small Cap Index Fund intends to achieve its investment objective by
tracking the price and dividend performance (total return) of the Schwab
Small-Cap Index(R) (Small-Cap Index), an index created to represent the
performance of common stocks of the second 1,000 largest U.S. companies, ranked
by market capitalization (share price times the number of shares outstanding).

To be included in the Schwab Small-Cap Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the NYSE,
AMEX or the NASDAQ/NMS and (3) its market value must place it among the
second-largest 1,000 such companies as measured by market capitalization (i.e.,
from the company with a rank of 1,001 through the company with a rank of 2,000).
The fund may purchase securities of companies with which it is affiliated to the
extent these companies are represented in its index.

THE SCHWAB TOTAL STOCK MARKET INDEX FUND'S investment objective is to seek to
track the total return of the entire U.S. stock market.

In pursuing its objective, the fund uses the Wilshire 5000 Equity Index to
measure the total return of the U.S. stock market. The Wilshire 5000 Equity
Index is representative of the performance of the entire U.S. stock market. The
index measures the performance of all U.S. headquartered equity securities with
readily available price data. It is a market-value weighted index consisting of
approximately _____ stocks. The fund may purchase securities of companies with
which it is affiliated to the extent these companies are represented in its
index.

Because it would be too expensive to buy all of the stocks included in the
index, the investment adviser may use statistical sampling techniques in an
attempt to replicate the total return of the U.S.

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stock market using a smaller number of securities. These techniques use a
smaller number of index securities than that included in the index, which, when
taken together, are expected to perform similarly to the index. These techniques
are based on a variety of factors, including capitalization, dividend yield,
price/earnings ratio, and industry factors.

THE SCHWAB INTERNATIONAL INDEX FUND'S investment objective is to seek to track
performance of a benchmark index that measures the total return of large,
publicly traded non-U.S. companies from countries with developed equity markets
outside of the United States.

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

To be included in the International Index the securities must be issued by an
operating company (i.e., not an investment company) whose principal trading
market is in a country with a major developed securities market outside the
United States. In addition, the market value of the company's outstanding
securities must place the company among the top 350 such companies as measured
by market capitalization (share price times the number of shares outstanding).
The fund may purchase securities of companies with which it is affiliated to the
extent these companies are represented in its index. By tracking the largest
companies in developed markets, the index represents the performance of what
some analysts deem the "blue chips" of international markets. The index also is
designed to provide a broad representation of the international market, by
limiting investments by country to no more than 35% of the total market
capitalization of the index. The International Index was first made available to
the public on July 29, 1993.

The Schwab 1000 Index(R), Small-Cap Index and International Index were developed
and are maintained by Charles Schwab & Co. Inc. ("Schwab"). Schwab receives no
compensation from the funds for maintaining the indexes. Schwab reviews and, as
necessary, revises the lists of companies whose securities are included in the
Schwab 1000 Index, the Small-Cap Index and the International Index usually
annually. Companies known by Schwab to meet or no longer meet the inclusion
criteria may be added or deleted as appropriate. Schwab also will modify each
index as necessary to account for corporate actions (e.g., new issues,
repurchases, stock dividends/splits, tenders, mergers, stock swaps, spin-offs or
bankruptcy filings made because of a company's inability to continue operating
as a going concern).

Schwab may change the Schwab 1000 Index and the Small-Cap Index inclusion
criteria if it determines that doing so would cause the Schwab 1000 Index and
the Small-Cap Index to be more representative of the domestic equity market.
Schwab also may change the International Index inclusion criteria if it
determines that doing so would cause the International Index to be more
representative of the large, publicly traded international company equity
market. In the future, the Board of Trustees, may take necessary and timely
action to change the benchmark index for the Schwab Small-Cap Index Fund,
including selecting a new one, should it decide that such changes would better
enable the fund to seek its objective of tracking the small-cap U.S. stock
sector and taking such action would be in the best interest of the fund's
shareholders. The Board of Trustees also may take necessary and timely action to
change the benchmark index for the Schwab International Index Fund, including
selecting a new one, should it decide that such changes would better enable the
fund to seek its objective of tracking the international stock sector and taking
such action would be in the best interest of the fund's shareholders. The Board
of Trustees may select another index for the Schwab 1000 Fund, subject to
shareholder approval, should it decide that taking such action would be in the
best interest of the fund's shareholders.

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A particular stock's weighting in the International Index, Small-Cap Index or
Schwab 1000 Index is based on its relative total market value (i.e., its market
price per share times the number of shares outstanding), divided by the total
market capitalization of its Index.

INVESTMENT STRATEGIES AND RISKS

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
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 each fund. A fund will invest in
securities or engage in techniques that are intended to help achieve its
investment objective.

BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.

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

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

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

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

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settlement period for that type of security. When purchasing securities on a
delayed-delivery basis, a fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. Typically, no interest will
accrue to a fund until the security is delivered. A 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.

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

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 though they may carry limited voting rights, though they normally
have preference over the corporation's assets and earnings. For example,
preferred stocks have

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preference over common stock in the payment of dividends. Preferred stocks also
may pay specified dividends.

Convertible securities are typically preferred stocks or bonds that are
exchangeable for a specific number of another form of security (usually the
issuer's common stock) at a specified price or ratio. A corporation may issue a
convertible security that is subject to redemption after a specified date and
usually under certain circumstances. A holder of a convertible security that is
called for redemption would be required to tender it for redemption to the
issuer, convert it to the underlying common stock or sell it to a third party.
Convertible bonds typically pay a lower interest rate than nonconvertible bonds
of the same quality and maturity because of the convertible feature. This
structure allows the holder of the convertible bond to participate in share
price movements in the company's common stock. The actual return on a
convertible bond may exceed its stated yield if the company's common stock
appreciates in value and the option to convert to common shares becomes more
valuable.

Convertible preferred stocks are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds, but 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.

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 declines, 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 types of securities usually issued with bonds and preferred stock
that entitle the holder to a proportionate amount of common stock at a 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.

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

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

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

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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, the Schwab International Index Fund normally engages in forward
foreign currency exchange contracts in order to secure exchange rates for
portfolio securities purchased or sold, but awaiting 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 fund settles its securities transactions
in the future. Forwards involve certain risks. For example, if the
counterparties to the contracts are unable to meet the terms of the contracts or
if the value of the foreign currency changes unfavorably, the fund could sustain
a loss.

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 funds may purchase and sell
futures contracts based on securities, securities indices and foreign currencies
or any other futures contracts traded on U.S.

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exchanges or boards of trade that the Commodities Futures Trading Commission
(CFTC) licenses and regulates on foreign exchanges.

Each 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
ability to track the performance of its index as closely as possible, a fund may
purchase futures contracts representative of its index or the securities in its
index. 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. Also, the Schwab International Index Fund may purchase or
sell futures contracts on a specified foreign currency to "fix" the price in
U.S. dollars of the foreign security it has acquired or sold or expects to
acquire or sell. In regards to the Schwab Total Stock Market Index Fund, because
there is not currently available any futures contract tied directly to either
the total return of the U.S. stock market or the fund's index, there is no
guarantee that this strategy will be successful.

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

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

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

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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 a fund has valued the instruments. The liquidity of a 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 fund normally will invest at least 80% 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 fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, a fund may receive cash collateral, and
it may invest it in short-term, interest-bearing obligations, but will do so
only to the extent that it will not lose the tax treatment available to
regulated investment companies. Lending portfolio securities involves 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 fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) 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 including collateral received from the loan (at market value computed
at the time of the loan).

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

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

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market securities include commercial paper, certificates of deposit, banker's
acceptances, notes and time deposits.

PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent obligations issued by banks in large denominations.

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

RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. Restricted securities may be considered to be liquid if an
institutional or other market exists for these securities. In making this
determination, a fund, under the direction and supervision of the Board of
Trustees, will take into account the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent a fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in 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 funds,
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
a fund may cause shareholders to pay duplicative fees.

SHORT TERM INVESTMENTS include U.S. dollar denominated short-term bonds and
money market instruments. Each fund must keep a small portion of its assets in
cash for business operations. In order to reduce the effect this otherwise
uninvested cash would have on its performance, a fund may invest in short-term
investments such as certificates of deposit, time deposits and bankers'
acceptances. A fund also may buy commercial paper if the commercial paper has
one of an NRSRO's top two ratings or has comparable quality if it is unrated. A
fund may enter into repurchase agreements using any of these debt securities.

SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that place them below the largest 1,000 such companies.
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

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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
the Schwab Small-Cap Index Fund's and the Schwab Total Stock Market Index Fund's
respective positions in securities of such companies may be substantial in
relation to the market for such securities. Accordingly, it may be difficult for
the Schwab Small-Cap Index Fund and the Schwab Total Stock Market Index 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 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 fund that
invests in small-cap stocks (like the Schwab Small-Cap Index Fund and the Schwab
Total Stock Market Index Fund) may change sharply during the short term and long
term.

STOCK SUBSTITUTION STRATEGY is a strategy, whereby each fund may, in
extraordinary circumstances, substitute a similar stock for a security in its
index.

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.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac),
the Student Loan Marketing Association (SLMA or Sallie Mae), and the Federal
Home Loan Banks (FHLB), 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 such as obligations issued by the Federal Farm Credit
Banks Funding Corporation (FFCB). 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 debt securities, they are still
sensitive to interest rate changes, which will cause their prices to fluctuate.

INVESTMENT LIMITATIONS

The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares

EACH OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP INDEX FUND,
AND SCHWAB INTERNATIONAL INDEX FUND MAY NOT:

1) Borrow money, except to the extent permitted under the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time
to time.

13
<PAGE> 212

2) Make loans to other persons, except to the extent permitted under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

3) Issue senior securities, except to the extent permitted under the 1940
Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from
time to time.

4) Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company under the
1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.

5) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the 1940 Act, the rules
or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to time.

6) Purchase or sell commodities or real estate, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.

IN ADDITION, EACH OF THE SCHWAB S&P 500 FUND, SCHWAB SMALL-CAP INDEX FUND AND
SCHWAB INTERNATIONAL INDEX FUND MAY NOT:

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

IN ADDITION, THE SCHWAB 1000 FUND MAY NOT:

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

THE SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT:

1) Purchase securities of any issuer, except as consistent with the
maintenance of its status as a diversified company under the Investment
Company 1940 Act (the "1940 Act") ;

2) Concentrate investments in a particular industry or group of
industries, except as permitted under the 1940 Act, or the rules or
regulations thereunder; and

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

THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE

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<PAGE> 213
POLICIES AND RESTRICTIONS.

Diversification. Under the 1940 Act and the rules, regulations and
interpretations thereunder, a "diversified company," as to 75% of its total
assets, may not purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government or its agencies, or instrumentalities or
securities of other registered investment companies) if, as a result, more than
5% of its total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's voting securities would be held by the fund.

Concentration. The Securities and Exchange Commission defines concentration as
investing 25% or more of an investment company's total assets in an industry or
group of industries, with certain exceptions.

Borrowing. The 1940 Act restricts a fund 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, a fund may only make loans if expressly permitted
by its investment policies.

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.

EACH OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP INDEX FUND
AND SCHWAB INTERNATIONAL INDEX FUND MAY NOT:

1) Purchase more than 10% of any class of securities of any issuer if, as
a result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities.

2) Invest more than 5% of its 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 NYSE or the AMEX, provided,
however, that for purposes of this restriction, warrants acquired by a
fund in units or attached to other securities are deemed to be without
value.

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 for the purpose of exercising control or management of another
issuer.

8) Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination

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<PAGE> 214

do not exceed 33 1/3% of its total assets (any borrowings that come to
exceed this amount will be reduced to the extent necessary to comply
with the limitation within three business days) and the fund will not
purchase securities while borrowings represent more than 5% of its
total assets.

9) Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).

10) 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.

11) Invest more than 15% of its net assets in illiquid securities.

12) 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 each fund may purchase securities
under such circumstances only to the extent that its index is also so
concentrated).

13) Purchase or sell commodities, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that
each fund may (i) purchase securities of companies that deal in real
estate or interests therein, (ii) purchase or sell futures contracts,
options contracts, equity index participations and index participation
contracts, and (iii) for the S&P 500 Fund, purchase securities of
companies that deal in precious metals or interests therein.

IN ADDITION, THE SCHWAB 1000 FUND MAY NOT:

1) Purchase securities that would cause more that 5% of its net assets to
be invested in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of
1933 that have been determined to be liquid under procedures adopted by
the Board of Trustees based upon the trading markets for the
securities.

THE SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT:

1) Purchase securities of any issuer, if as a result, more than 15% of its
net assets would be invested in illiquid securities, including
repurchase agreements with maturities in excess of 7 days.

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

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

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<PAGE> 215
4) Sell securities short unless it owns the security or the right to
obtain the security or equivalent securities (transactions in futures
contracts and options are not considered selling securities short).

5) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities and
provided that margin payments in connection with futures contracts and
options on futures shall not constitute purchasing securities on
margin.

7) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time except to the
extent the investments of its index are concentrated.

8) Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of securities or repurchase
agreements).

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. Except with respect to
non-fundamental limitations (1) illiquid securities and (6) borrowing, any
subsequent change in net assets or other circumstances will not be considered
when determining whether the investment complies with the fund's investment
policies and limitations.

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<PAGE> 216

MANAGEMENT OF THE FUNDS

The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Schwab, and CSIM are as follows:

<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUSTS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the Internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).

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

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

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

18
<PAGE> 217

<TABLE>
<S> <C> <C>
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee Charles Schwab Investment Management, Inc.
Prior to September 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust Company.

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

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<PAGE> 218

<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.

KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
</TABLE>

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

Each fund is overseen by a Board of Trustees. The Board of Trustees meets
regularly to review each 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, 2000 concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 44 funds as of
October 31, 2000.

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

Schwab Schwab Schwab Schwab Schwab
S&P 500 1000 Fund Small-Cap Total International
Fund Index Stock Index Fund
Fund Market
Index
Fund
------------------ --------- ---------- ----------- --------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 0 N/A 0

Steve L. Scheid 1 0 0 0 0 0 N/A 0

William J. Klipp 2 0 0 0 0 0 N/A 0

Jeremiah H. 0 0 0 0 0 N/A 0
Chafkin 3
</TABLE>

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

1 Resigned from the Board effective November 21, 2000.

2 Mr. Klipp departed from Schwab and CSIM in 1999 and resigned from the Board of
Trustees effective April 30, 2000.

3 This trustee was first elected by shareholders on June 1, 2000.

20
<PAGE> 219

Mariann $____ $____ $____ $____ $____ N/A $____
Byerwalter 3

Donald F. Dorward $____ $____ $____ $____ $____ N/A $____

William A. Hasler 3 $____ $____ $____ $____ $____ N/A $____

Robert G. Holmes $____ $____ $____ $____ $____ N/A $____

Gerald B. Smith 3 $____ $____ $____ $____ $____ N/A $____

Donald R. Stephens $____ $____ $____ $____ $____ N/A $____

Michael W. Wilsey $____ $____ $____ $____ $____ N/A $____
</TABLE>

1 Resigned from the Board effective November 21, 2000.

2 Mr. Klipp departed from Schwab and CSIM in 1999 and resigned from the Board of
Trustees effective April 30, 2000.

3 This trustee was first elected by shareholders on June 1, 2000.

4 Elected to the Board on November 21, 2000.

DEFERRED COMPENSATION PLAN

CODE OF ETHICS

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<PAGE> 220
The funds, their investment adviser and Schwab have adopted a Code of Ethics
(Code) as required under the 1940 Act. Subject to certain conditions or
restrictions, the Code permits the trustees, directors, officers or advisory
representatives of the funds or the investment adviser or the directors or
officers of Schwab to buy or sell securities for their own accounts. This
includes securities that may be purchased or held by the funds. Securities
transactions by some of these individuals may be subject to prior approval of
the investment adviser's Chief Compliance Officer or alternate. Most securities
transactions are subject to quarterly reporting and review requirements.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2001, the officers and trustees of the trusts, as a group
owned, of record or beneficially, less than 1% of the outstanding voting
securities of the classes and series of each trust.

As of February 1, 2001, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of any class of any of the
funds:

<TABLE>
<CAPTION>
<S> <C>
Schwab International Index Fund (R) - Select Shares(R)
Schwab MarketTrack All Equity Portfolio ____%
Schwab MarketTrack Balanced Portfolio ____%
Schwab MarketTrack Growth Portfolio ____%

Schwab S&P 500 Fund - Investor Shares
Charles Schwab Trust Co. ____%

S&P 500 Fund - e.Shares(R)
Charles Schwab Trust Co. ____%

S&P 500 Fund - Select Shares(R)
Charles Schwab Trust Co. ____%

Schwab Small-Cap Index Fund(R) - Select Shares(R)
Schwab MarketTrack Growth II ____%
Schwab MarketTrack All Equity Portfolio ____%
Schwab MarketTrack Balanced Portfolio ____%
Schwab MarketTrack Growth Portfolio ____%
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

CSIM, a wholly owned subsidiary of The Charles Schwab Corporation, 101
Montgomery Street, San Francisco CA 94104, serves as the funds' investment
adviser and administrator pursuant to Investment Advisory and Administration
Agreements (Advisory Agreements) between it and each trust. Schwab is an
affiliate of the investment adviser and is the trusts' 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

22
<PAGE> 221
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 Schwab S&P 500 Fund, the
investment adviser is entitled to receive an annual fee, accrued daily and paid
monthly, based on the Schwab S&P 500 Fund's average daily net assets as
described below.

First $500 million - 0.20%
More than $500 million - 0.17%

Prior to February 29, 2000, for its advisory and administrative services to the
Schwab S&P 500 Fund, the investment adviser was entitled to receive an annual
fee, accrued daily and paid monthly, of 0.36% of the fund's average daily net
assets not in excess of $1 billion, 0.33% of the next $1 billion and 0.31% of
such net assets over $2 billion.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab S&P 500
Fund paid investment advisory fees of $______, $7,536,000 and $2,525,000,
respectively (fees were reduced by $______, $11,794,000 and $6,509,000,
respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least ________, the total operating expenses (excluding interest, taxes and
certain non-routine expenses) of the Investor Shares, the e.Shares(R) and the
Select Shares(TM) will not exceed __%, __% and __% respectively, of the
average daily net assets of each class.

For its advisory and administrative services to the Schwab 1000 Fund the
investment adviser is entitled to receive an annual fee, accrued daily and paid
monthly, of 0.30% of the fund's average daily net assets not in excess of $500
million and 0.22% of such assets over $500 million.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab 1000 Fund
paid investment advisory fees of $______, $13,006,000 and $7,610,000,
respectively (fees were reduced by $______, $1,336,000 and $1,552,000,
respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least _______, total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Investor Shares and Select Shares for the Schwab
1000 Fund(R) will not exceed ___% and ___%, respectively, of the average daily
net assets of each class.

For its advisory and administrative services to the Schwab Total Stock Market
Index Fund, the investment adviser is entitled to receive an annual fee, accrued
daily and paid monthly, of 0.30% of the fund's average daily net assets not in
excess of $500 million, and 0.22% of such net assets over $500 million.

For the fiscal years ended October 31, 2000 and 1999, the Schwab Total Stock
Market Index Fund paid investment advisory fees of $__ and $0 (fees were reduced
by $______ and $284,000, respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least ________, the total operating expenses (excluding interest, taxes and
certain non-routine expenses) of the

23
<PAGE> 222

Investor Shares and Select Shares for the fund will not exceed ___%, and ___%,
respectively, of the average daily net assets of each class.

For its advisory and administrative services to the Schwab Small-Cap Index Fund,
the investment adviser is entitled to receive an annual fee, accrued daily and
paid monthly, based on the Schwab Small-Cap Index Fund's average daily net
assets as described below.

First $500 million - 0.33%
More than $500 million - 0.28%

Prior to February 29, 2000 for its advisory and administrative services to the
Schwab Small-Cap Index Fund, the investment adviser was entitled to receive an
annual fee, accrued daily and paid monthly, of 0.50% of the fund's average daily
net assets not in excess of $300 million and 0.45% of such assets over $300
million.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab Small-Cap
Index Fund paid investment advisory fees of $______, $1,502,000 and $921,000,
respectively (fees were reduced by $______, $2,099,000 and $1,911,000,
respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least _____, total operating expenses (excluding interest, taxes and certain
non-routine) of the Investor Shares and Select Shares for the Schwab Small-Cap
Index Fund will not exceed ___% and ___%, respectively, of the average daily net
assets of each class.

Prior to February 29, 2000, for its advisory and administrative services to the
International Index Fund, the investment adviser was entitled to receive an
annual fee, accrued daily and paid monthly, of 0.70% of the fund's average daily
net assets not in excess of $300 million and 0.60% of such assets over $300
million.

For its advisory and administrative services to the Schwab International Index
Fund, the investment advisor is entitled to receive an annual fee, accrued daily
and paid monthly, based on the Schwab International Index Fund's average daily
net assets as described below.

First $500 million - 0.43%
More than $500 million - 0.38%

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab
International Index Fund paid investment advisory fees of $______, $1,755,000
and $940,000, respectively (fees were reduced by $______, $2,625,000 and
$2,127,000, respectively).

The investment adviser and Schwab have contractually guaranteed that, through at
least ________, the total operating expenses (excluding interest, taxes and
certain non-routine expenses) of the Investor Shares and Select Shares for the
Schwab International Index Fund will not exceed ___% and ___%, respectively, of
the average daily net assets of each class.

The amount of the expense cap of a fund is determined in coordination with the
Board of Trustees, and the expense cap is intended to limit the effects on
shareholders of expenses incurred in the ordinary operation of a fund. The
expense cap is not intended to cover all fund expenses, and a fund's expenses
may exceed the expense cap. For example, the expense cap does not cover
investment-related expenses, such as brokerage commissions, interest and taxes,
nor does it cover extraordinary or non-routine expenses, such as shareholder
meeting costs.

24
<PAGE> 223
DISTRIBUTOR

Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the funds and is the trusts' agent for the purpose of the continuous
offering of the funds' shares. Each fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplemental sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement.

SHAREHOLDER SERVICES AND TRANSFER AGENT

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

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

For the services performed as shareholder services agent under its contract with
each share class of each fund, Schwab is entitled to receive an annual fee,
payable monthly from each share class of each fund, in the amount of 0.20% of
Investor Shares' and 0.05% of Select Shares'(R) and e.Shares'(R) average
daily net assets.

CUSTODIANS AND FUND ACCOUNTANT

Brown Brothers Harriman & Co., 40 Water Street, Boston MA 02109, serves as
custodian for the Schwab International Index Fund and the Schwab Small-Cap Index
Fund. PFPC Trust Company, 8800 Tinicum Blvd. Third Floor Suite 200,
Philadelphia, PA 19153 serves as custodian to the Schwab S&P 500 Fund, Schwab
1000 Fund, and Schwab Total Stock Market Fund. SEI Investments, Mutual Fund
Services, One Freedom Valley Dr. Oaks, Pennsylvania 19456, serves as fund
accountant for the funds.

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

INDEPENDENT ACCOUNTANTS

The funds' independent accountants, ________________, audits and reports on the
annual financial statements of each series of the trusts and reviews certain
regulatory reports and each fund's federal income tax return. They also perform
other professional accounting, auditing, tax and advisory services when the
trusts engage them to do so. Their address is _______________. Each fund's
audited financial statements for the fiscal year ended October 31, 2000, are
included in the fund's annual report, which is a separate report supplied with
the SAI.

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<PAGE> 224
BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

For reporting purposes, each fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities 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. The funds do not expect that their
respective portfolio turnover rates will exceed 100% in any given year, a
turnover rate lower than that of most non-index mutual funds. The funds'
portfolio turnover rates are in the financial highlight tables in the
prospectus.

PORTFOLIO TRANSACTIONS

In assessing these criteria, the investment adviser will, among other things,
monitor the performance of brokers effecting transactions for the funds to
determine the effect, if any, that the funds' transactions through those brokers
have on the market prices of the stocks involved. This may be of particular
importance for the funds' investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
funds will seek to buy and sell securities in a manner that causes the least
possible fluctuation in the prices of those stocks in view of the size of the
transactions.

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

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<PAGE> 225
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, 2000, 1999 and 1998, the Schwab S&P 500
Fund paid brokerage commissions of $______, $1,266,303 and $898,196,
respectively.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab 1000
Fund(R) paid brokerage commissions of $______, $743,826 and $641,226,
respectively.

For the fiscal years ended October 31, 2000, 1999 and 1998, the Schwab Small-Cap
Index Fund paid brokerage commissions of $______, $858,379 and $710,856,
respectively.

For the fiscal years ended October 31, 2000 and 1999, the Schwab Total Stock
Market Index Fund paid brokerage commissions of $______ and $152,679,
respectively.

For the fiscal years ended October 31, 2000, 1999, and 1998, the Schwab
International Index Fund paid brokerage commissions of $______, $205,007 and
$208,087, respectively.

Of brokerage commissions paid by the Schwab S&P 500 Fund in 1999 and 2000,
$13,000 (1.03% of the total) and $______ (____% of the total), respectively, was
paid to Schwab.

Of brokerage commission paid by the Schwab 1000 Fund in 1999 and 2000, $5,040
(0.68% of the total) and $______ (____% of the total), respectively, was paid to
Schwab. Schwab is an affiliated person of each of the funds.

DESCRIPTION OF THE TRUSTS

Each fund, except the Schwab 1000 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 Schwab 1000 Fund is a series of Schwab Investments, an
open-end investment management company organized as a Massachusetts business
trust on October 26, 1990. Each fund is composed of multiple classes of shares:
Select Shares,(TM) Investor Shares and, for the Schwab S&P 500 Fund,
e. Shares.(R)

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 fund
or share class. Each fund's initial and subsequent minimum investment and
balance requirements are set forth in the prospectus. These minimums may be
waived for certain investors, including trustees, officers and employees of
Schwab, or changed without prior notice.

The funds may hold special meetings, which may cause the funds to incur
non-routine expenses. 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

27
<PAGE> 226
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 each 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. A majority of the outstanding voting shares of a fund means the
affirmative vote of the lesser of: (a) 67% or more of the voting shares
represented at the meeting, if more than 50% of the outstanding voting shares of
a fund are represented at the meeting or (b) more than 50% of the outstanding
voting shares of a fund. 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.
Each 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. Each 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, each 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,
each trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. There is a remote possibility
that a fund could become liable for a misstatement in the prospectus or SAI
about another fund.

As more fully described in each 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, DELIVERY OF SHAREHOLDER REPORTS AND
PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUNDS

28
<PAGE> 227

Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day (observed),
Thanksgiving Day and Christmas Day. On any day that the New York Fed, NYSE or
principal government securities markets close early, such as days in advance of
holidays, the funds reserve the right to advance the time by which purchase,
redemption and exchanges orders must be received on that day.

As long as the funds or Schwab follows reasonable procedures to confirm that
your telephone or Internet 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 or other confirmation before acting upon any telephone or
Internet order, providing written confirmation of telephone or Internet 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.

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

The funds 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 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 transaction costs if he
or she were to convert the securities to cash.

Each fund is designed for long-term investing. Because short-term trading
activities can disrupt the smooth management of a fund and increase its
expenses, each fund reserves the right to refuse any purchase or exchange order,
or large purchase or exchange orders, including any purchase or exchange order
which appears to be associated with short-term trading activities or "market
timing." Because market timing decisions to buy and sell securities typically
are based on an individual investor's market outlook, including such factors as
the perceived strength of the economy or the anticipated direction of interest
rates, it is difficult for a fund to determine in advance what purchase or
exchange orders may be deemed to be associated with market timing or short-term
trading activities.

EXCHANGING SHARES OF THE FUNDS

29
<PAGE> 228

as long as you meet the minimums for direct investments.

DELIVERY OF SHAREHOLDER DOCUMENTS

PRICING OF SHARES

TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

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

30
<PAGE> 229

A 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 a fund's assets, convert short-term capital losses
into long-term capital losses or otherwise affect the character of a fund's
income. These rules could therefore affect the amount, timing and character of
distributions to shareholders. The funds will endeavor to make any available
elections pertaining to these transactions in a manner believed to be in the
best interest of the funds and their shareholders.

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

The discussion of federal income taxation presented below supplements the
discussion in the funds' prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the funds.
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 funds, dividend distributions the funds
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 funds were regular corporations. Distributions
by a fund also may be subject to state, local and foreign taxes, and their
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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more per year. 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.

31
<PAGE> 230
Income that the Schwab International Index Fund receives from sources within
various foreign countries may be subject to foreign income taxes withheld at the
source. If a fund 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. It is expected that the Schwab International Index Fund will have more
than 50% of the value of its total assets at the close of its taxable year
invested in foreign securities, and it will make this election. 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 credit the tax against U.S. income taxes, subject to certain limitations
described in the Code or deduct their pro rata share of foreign taxes, but not
for alternative minimum tax purposes (but not both). A shareholder who does not
itemize deductions may not claim a deduction for foreign taxes.

The Schwab International Index Fund may invest in a non-U.S. corporation, which
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 Schwab International Index Fund does
invest in PFICs, it may elect to treat the PFIC as a "qualified fund" or
mark-to-market its investments in PFICs annually. In either case, the Schwab
International Index Fund may be required to distribute amounts in excess of
realized income and gains. To the extent that the Schwab International Index
Fund does invest in foreign securities which are determined to be PFIC
securities and is required to pay a tax on such investments, a credit for this
tax would not be allowed to be passed through to the fund's shareholders.
Therefore, the payment of this tax would reduce the Schwab International Index
Fund's economic return from its PFIC shares, and excess distributions received
with respect to such shares are treated as ordinary income rather than capital
gains.

Shareholders are urged to consult their tax advisers as to the state and local
tax rules affecting investments in the funds.

CALCULATION OF PERFORMANCE DATA

32
<PAGE> 231

<TABLE>
<CAPTION>
From Commencement of
One Year ended Five Years ended Operations to
Fund (Commencement of Operations) -- October 31, 2000 October 31, 2000 October 31, 2000
---------------------------------- -------------------------------------------------------------
<S> <C> <C> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) ____% - ____%
e.Shares (5/1/96) ____% - ____%
Select Shares (5/19/97) ____% - ____%
Schwab 1000 Fund -
Investor Shares (5/2/91) ____% ____% ____%
Select Shares (5/19/97) ____% - ____%
Schwab Small-Cap Index Fund -
Investor Shares (12/3/93) ____% ____% ____%
Select Shares (5/19/97) ____% - ____%

Schwab Total Stock Market Index
Fund
Investor Shares (5/28/99) - - ____%
Select Shares (5/28/99) - - ____%
Schwab International Index Fund -
Investor Shares (9/9/93) ____% ____% ____%
Select Shares (5/19/97) ____% - ____%
</TABLE>

An after-tax total return for each fund may be calculated by taking that fund's
total return and subtracting applicable federal taxes from the portions of each
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.

Each 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.

A fund also may advertise its cumulative total return. This number is calculated
using the same formula that is used for average annual total return except that,
rather than calculating the total return based on a one-year period, cumulative
total return is calculated from commencement of operations to the fiscal year
ended October 31, 2000.

<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
----------------------------------------- -----------------------
<S> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) _____%
e.Shares (5/1/96) _____%
Select Shares (5/19/97) _____%
Schwab 1000 Fund -
Investor Shares (5/2/91) _____%
Select Shares (5/19/97) _____%
Schwab Small-Cap Fund -
Investor Shares (12/3/93) _____%
Select Shares (5/19/97) _____%
Schwab Total Stock Market Index Fund
Investor Shares (5/28/99) _____%
Select Shares (5/28/99) _____%
Schwab International Index Fund -
Investor Shares (9/9/93) _____%
Select Shares (5/19/97) _____%
</TABLE>

33
<PAGE> 232
The performance of the funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices, 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
funds 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 funds' performance to be higher or lower than that of an index.

TAX EFFICIENCY

Taxes can erode the returns a shareholder earns from a mutual fund investment
and are an important, and often overlooked, factor when evaluating a mutual
fund's performance. For many mutual funds, shareholder tax liability is of
minimal concern in the investment management process. In contrast, the
investment adviser of the Schwab 1000, International and Total Stock Market
Funds employs specific investment strategies designed to minimize capital gain
distributions while achieving each fund's investment objective. These strategies
include selling the highest tax cost securities first, not re-balancing the
portfolio to reflect changes in their indexes, trading only round-lots or large
blocks of securities and focusing on individual tax lots in deciding when and
how to manage the realization of capital gains. In addition, the investment
adviser monitors, analyzes and evaluates each fund's portfolio as well as market
conditions to carefully manage necessary trading activity and to determine when
there are opportunities to realize capital losses, which offset realized capital
gains. These policies will be utilized to the extent they do not have a material
effect on each fund's ability to track or match the performance of its index.
They may affect the composition of a fund's index holdings as compared to the
index. By deferring or avoiding the realization of capital gains, where
possible, until an investor sells shares, unrealized gains can accumulate in a
fund, helping to build the value of a shareholder's investment. In addition,
shareholders are given greater control over the timing of the recognition of
such gains and the impact on their tax situations. There can be no assurance
that the investment adviser will succeed in avoiding realized net capital gains.

The Schwab 1000, International and Total Stock Market Funds may refer to recent
studies that analyze certain techniques and strategies these funds may use or
promote the advantages of investing in a series that is part of a large, diverse
mutual fund complex. From time to time, a fund may include discussions in
advertisements of the income tax savings shareholders may experience as a result
of their policy of limiting portfolio trading in order to reduce capital gains.
This information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of the funds. In addition, such
advertisements may include comparisons of the funds' performance against that of
investment products that do not employ the funds' policy of seeking to limit
capital gains.

<PAGE> 233

PART C
OTHER INFORMATION
SCHWAB CAPITAL TRUST

Item 23. Exhibits.
--------

(a) Articles of Agreement and Declaration of Trust, dated May 6,
Incorporation 1993 is incorporated by reference to Exhibit 1,
File No. 811-7704, of Post-Effective Amendment
No. 21 to Registrant's Registration on Form
N-1A, electronically filed on December 17, 1997.

(b) By-Laws Amended and Restated Bylaws are incorporated by
reference to Exhibit 2, File No. 811-7704, of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27, 1996.

(c) Instruments (i) Article III, Section 5, Article V, Article VI,
Defining Article VIII, Section 4 and Article IX, Sections
rights of 1, 5 and 7 of the Agreement and Declaration of
Security Trust, dated May 6, 1993, referenced in Exhibit
Holders (a) above, are incorporated herein by reference
to Exhibit 1, File No. 811-7704, to
Post-Effective Amendment No. 21 of Registrant's
registration Statement on Form N-1A
electronically filed on December 17, 1997.

(ii) Articles 9 and 11 of the Amended and Restated
Bylaws are incorporated herein by reference to
Exhibit 2, File No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 27, 1996.

(d) Investment (i) Investment Advisory and Administration Agreement
Advisory between Registrant and Charles Schwab Investment
Contracts Management, Inc. (the "Investment Adviser"),
dated June 15, 1994, is incorporated herein by
reference to Exhibit 5(a) , File No. 811-7704,
of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17, 1997.

(ii) Amended Schedules A and B to Investment Advisory
and Administration Agreement referenced in
Exhibit (d)(i) above is incorporated herein by
reference to Exhibit (d)(ii), File No. 811-7704,
of Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form
N-1A, electronically filed on February 26, 1999.

(iii) Amended Schedules A and B to the Investment
Advisory and Administration Agreement between
Registrant and the Investment Adviser,
referenced in Exhibit (d)(i) above, is
incorporated herein by reference to Exhibit
(d)(iii), File No. 811-7704, of Post-Effective
Amendment No. 38 to Registrant's Registration
Statement on Form N-1A, electronically filed on
May 15, 2000.

</TABLE>

Part C

<PAGE> 234

(vi) Investment Sub-Advisory Agreement between
Investment Adviser, on behalf of the Schwab
Analytics Fund(R), and Symphony Asset Management
is incorporated herein by reference to Exhibit
5(d), File No. 811-7704, of Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A, electronically filed on
May 17, 1996.

(e) Underwriting (i) Distribution Agreement between Registrant and
Contracts Charles Schwab & Co., Inc. ("Schwab"), dated
July 21, 1993, is incorporated herein by
reference to Exhibit 6(a), File No. 811-7704, of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A,
electronically filed on December 17, 1997.

(ii) Amended Schedule A to the Distribution
Agreement, referenced at Exhibit (e)(i) above,
is incorporated herein by reference to Exhibit
(e)(ii), File No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 26, 1999.

(iii) Amended Schedule A to the Distribution Agreement
between Registrant and Schwab, referenced at
Exhibit (e)(i) above, is incorporated herein by
reference to Exhibit (e)(iii), File No.
811-7704, of Post-Effective Amendment No. 38 to
Registrant's Registration Statement on Form
N-1A, electronically filed on May 15, 2000.

(f) Bonus or Inapplicable
Profit
Sharing
Contracts

(g) Custodian (i) Custodian Agreement between Registrant and
Agreements Morgan Stanley Trust Company, dated April 4,
1997, is incorporated herein by reference to
Exhibit 8(a), File No. 811-7704, of
Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A,
electronically filed on April 14, 1997.

(ii) Amended Appendix 2 to Custodian Agreement
between the Registrant and Morgan Stanley Trust
Company referred to at Exhibit (g)(i) above, is
incorporated herein by reference to Exhibit
(g)(ii), File No. 811-7704, of Post-Effective
Amendment No. 30 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 29, 1998.

(iii) Amended Custodian Agreement referenced at
Exhibit (g)(i) above, between Registrant and
Morgan Stanley Trust Company, is incorporated
herein by reference to Exhibit 8(c), File No.
811-7704, of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17, 1997.

</TABLE>

Part C

<PAGE> 235

(iv) Accounting Services Agreement between Registrant
and SEI Investments, dated April 1, 1998, is
incorporated herein by reference to Exhibit
8(d), File No. 811-7704, of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(v) Amended Schedule A to the Accounting Services
Agreement referenced at Exhibit (g)(iv) above,
is incorporated herein by reference to Exhibit
(g)(v), File No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 26, 1999.

(vi) Amended Schedule A to the Accounting Services
Agreement referenced at Exhibit (g)(iv) above,
is incorporated herein by reference to Exhibit
(g)(vi), File No. 811-7704, of Post Effective
Amendment No. 34 to Registrant's Registration
Statement on Form N-1A, electronically filed on
September 14, 1999.

(vii) Custodian Services Agreement between Registrant,
on behalf of the Schwab S&P 500 Fund, and PNC
Bank, National Association ("PNC Bank"), dated
February 21, 1996, is incorporated herein by
reference to Exhibit 8(c), File No. 811-7704, of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27, 1996.

(viii) Schedule A to the Custodian Services Agreement
referenced at Exhibit (g)(vii) above between
Registrant, on behalf of the Institutional
Select Index Funds is incorporated herein by
reference to Exhibit (g)(viii), File No.
811-7704, of Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form
N-1A, electronically filed on February 26, 1999.

(ix) Schedule I to the Custodian Services Agreement
referenced at Exhibit (g)(vii) above, is
incorporated herein by reference to Exhibit
(a)(ix), File No. 811-7704, of Post-Effective
Amendment No. 36 to the Registrant's
Registration Statement on Form N-1A,
electronically filed on or about February 25,
2000.

(x) Accounting Services Agreement between
Registrant, on behalf of the Schwab S&P 500
Fund, and PFPC Inc., dated February 21, 1996, is
incorporated herein by reference to Exhibit
8(d), File No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 27, 1996.

</TABLE>

Part C

<PAGE> 236

(xi) Amended Schedule to the Accounting Services
Agreement referenced at Exhibit (g)(viii) above
between Registrant, on behalf of the Schwab S&P
500 Fund and the Schwab Analytics Fund, and PFPC
Inc. is incorporated herein by reference to
Exhibit 8(f), File No. 811-7704, of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A,
electronically filed on May 17, 1996.

(xii) Transfer Agency Agreement between Registrant and
Schwab, dated July 21, 1993, is incorporated
herein by reference to Exhibit 8(j), File No.
811-7704, of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17, 1997.

(xiii) Amended Schedules A and C to the Transfer Agency
Agreement referenced at Exhibit (g)(xii) above,
is incorporated herein by reference to Exhibit
(g)(xiii), File No. 811-7704, of Post-Effective
Amendment No. 38 to Registrant's Registration
Statement on Form N-1A, electronically filed on
May 15, 2000.

(xiv) Amended Schedules A and C to the Transfer Agency
Agreement between Registrant and Schwab
referenced at Exhibit (g)(xii) above, are
incorporated herein by reference to Exhibit
(g)(xiv), File No. 811-7704, of Post Effective
Amendment No. 33 to Registrant's Registration
Statement on Form N-1A electronically filed on
April 15, 1999.

(xv) Shareholder Service Agreement between Registrant
and Schwab, dated July 21, 1993 is incorporated
herein by reference to Exhibit 8(l), File No.
811-7704, of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17, 1997.

(xvi) Amended Schedules A and C to the Shareholder
Service Agreement between Registrant and Schwab
referenced at Exhibit (g)(xv) above, is
incorporated herein by reference to Exhibit
(g)(xvi), File No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 26, 1999.

(xvii) Amended Schedules A and C to the Shareholder
Service Agreement between Registrant and Schwab
referenced at Exhibit (g)(xv) above, are
incorporated herein by reference to Exhibit
(g)(xvii), File No. 811-7704, of Post-Effective
Amendment No. 38 to Registrant's Registration
Statement on Form N-1A, electronically filed on
May 15, 2000.

(xviii) Amended Custodian Services Agreement by and
between Registrant and PNC Bank, National
Association, dated November 1, 1998, referenced
as Exhibit (g)(vii) above, is incorporated
herein by reference to Exhibit (g)(xv), File No.
811-7704, of Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 29, 1998.

</TABLE>

Part C

<PAGE> 237

(h) Other Material License Agreement between Schwab Capital Trust
Contracts and Standard & Poor's is incorporated herein by
reference to Exhibit (h), File No. 811-7704, of
Post-Effective Amendment No. 32 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 26, 1999.

(i) Legal Opinion To be filed by amendment.

(j) Other Opinions To be filed by amendment.

(k) Omitted Inapplicable.
Financial
Statements

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

(ii) Purchase Agreement for the Schwab Small-Cap
Index Fund(R), dated October 13, 1993, is
incorporated herein by reference to Exhibit
13(b), File No. 811-7704, of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(iii) Purchase Agreement for the Schwab MarketTrack
Portfolios - Growth Portfolio, Balanced
Portfolio and Conservative Portfolio (formerly
Schwab Asset Director(R)- High Growth, Schwab
Asset Director - Balanced Growth, and Schwab
Asset Director - Conservative Growth Funds) is
incorporated herein by reference to Exhibit
13(c), File No. 811-7704, of Post-Effective
Amendment No. 6 to registrant's Registration
Statement on Form N-1A, electronically filed on
December 15, 1996.

(iv) Purchase Agreement for the Schwab S&P 500
Fund-Investor Shares and e.Shares(R) is
incorporated herein by reference to Exhibit
13(d), File No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 27, 1996.

(v) Purchase Agreement for the Schwab Analytics
Fund(R) is incorporated herein by reference to
Exhibit 13(e), File No. 811-7704, to
Post-Effective Amendment No. 13 of Registrant's
Registration Statement on Form N-1A,
electronically filed on October 10, 1996.

(vi) Purchase Agreement for Schwab MarketManager
International Portfolio (formerly Schwab
OneSource(R) Portfolios-International) is
incorporated herein by reference to Exhibit
13(f), File No. 811-7704, of Post-Effective
Amendment No. 13 to Registrant's Registration
Statement on Form N-1A, electronically filed on
October 10, 1996.

</TABLE>

Part C

<PAGE> 238

(vii) Purchase Agreement for Schwab MarketManager(TM)
Growth Portfolio and Balanced Portfolio
(formerly Schwab OneSource Portfolios-Growth
Allocation and Schwab OneSource
Portfolios-Balanced Allocation) is incorporated
herein by reference of Exhibit 13(g), File No.
811-7704, to Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A,
electronically filed on December 18, 1996.

(viii) Purchase Agreement for Schwab MarketManager
Small Cap Portfolio (formerly Schwab
OneSource(R) Portfolios-Small Company) is
incorporated herein by reference to Exhibit
13(h), File No. 811-7704, of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(ix) Purchase Agreement for MarketTrackTM All Equity
Portfolio is incorporated herein by reference to
Exhibit 13(i), File No. 811-7704, of
Post-Effective Amendment No. 26 to Registrant's
Registration Statement on Form N-1A,
electronically filed on August 14, 1998.

(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 is incorporated herein by
reference to Exhibit (l)(x), File No. 811-7704,
of Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form
N-1A, electronically filed on February 26, 1999.

(xi) Purchase Agreement for Schwab Total Stock Market
Index Fund is incorporated herein by reference
to Exhibit (l)(xi), File No. 811-7704, of Post
Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A
electronically filed on April 15, 1999.

(xii) Purchase Agreement for Schwab Focus Funds, is
herewith filed as Exhibit (l)(xii), File No.
811-7704.

(m) Rule 12b-1 Plan Inapplicable.

(n) Financial Data (i) Inapplicable.
Schedule

(o) Rule 18f-3 Plan (i) Amended and Restated Multiple Class Plan, dated
April 10, 1997, for Schwab International Index
Fund, Schwab Small-Cap Index Fund and Schwab S&P
500 Fund is incorporated herein by reference to
Post Effective Amendment 18, File No. 811-7704,
to Registrant's Registration Statement on Form
N-1A, electronically filed on April 14, 1997.

</TABLE>

Part C

<PAGE> 239

(ii) Amended Schedule A to the Amended and Restated
Multiple Class Plan and the Amended and Restated
Multiple Class Plan, referenced at Exhibit
(o)(i) above, for Schwab Total Stock Market
Index are incorporated herein by reference to
Exhibit (o)(ii), File No. 811-7704, of Post
Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A
electronically filed on April 15, 1999.

(p) Power of (i) Power of Attorney executed by Mariann
Attorney Byerwalter, August 4, 2000, is herewith filed as
Exhibit (p)(i), File No. 811-7704.

(ii) Power of Attorney executed by William A. Hasler,
August 4, 2000, is herewith filed as Exhibit
(p)(ii), File No. 811-7704.

(iii) Power of Attorney executed by Gerald B. Smith,
August 4, 2000, is herewith filed as Exhibit
(p)(iii), File No. 811-7704.

(iv) Power of Attorney executed by Charles R. Schwab,
November 21, 2000, is herewith filed as Exhibit
(p)(iv), File No. 811-7704.

(v) Power of Attorney executed by Jeremiah H.
Chafkin, November 21, 000, is herewith filed as
Exhibit (p)(v), File No. 811-7704.

(vi) Power of Attorney executed by John Coglan,
November 21, 2000, is herewith filed as Exhibit
(p)(vi), File No. 811-7704.

(vii) Power of Attorney executed by Donald F. Dorward,
November 21, 2000, is herewith filed as Exhibit
(p)(vii), File No. 811-7704.

(viii) Power of Attorney executed by Robert G. Holmes,
November 21, 2000, is herewith filed as Exhibit
(p)(viii), File No. 811-7704.

(ix) Power of Attorney executed by Donald R.
Stephens, November 21, 2000, is herewith filed
as Exhibit (p)(ix), File No. 811-7704.

(x) Power of Attorney executed by Michael W. Wilsey,
November 21, 2000, is herewith filed as Exhibit
(p)(x), File No. 811-7704.

(xi) Power of Attorney executed by Tai-Chin Tung,
November 21, 2000, is herewith filed as Exhibit
(p)(xi), File No. 811-7704.

(q) Code of Ethics Code of Ethics adopted by Registrant, Charles
Schwab Investment Management Inc. and Charles
Schwab & Co., Inc. is incorporated herein by
reference to Exhibit (q), File No. 811-7704, of
Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A
electronically filed on February 25, 2000.

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

The Charles Schwab Family of Funds, Schwab Investments and Schwab
Annuity Portfolios each are Massachusetts business trusts registered under the
Investment Company Act

</TABLE>

Part C

<PAGE> 240

of 1940, as amended (the "1940 Act"), are advised by the Investment Adviser, and
employ Schwab as their principal underwriter, transfer agent and shareholder
services agent. As a result, The Charles Schwab Family of Funds, Schwab
Investments and Schwab Annuity Portfolios may be deemed to be under common
control with Registrant.

Item 25. Indemnification.

Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit
(1) hereto, which is incorporated by reference) provides in effect that
Registrant will indemnify its officers and trustees against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees reasonably
incurred by any such officer or trustee in connection with the defense or
disposition of any action, suit, or other proceeding. However, in accordance
with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement
and Declaration of Trust does not protect any person against any liability to
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. In any event,
Registrant will comply with 1940 Act Releases No. 7221 and 11330 respecting the
permissible boundaries of indemnification by an investment company of its
officers and trustees.

Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Manager

Registrant's investment adviser, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as investment manager
to Registrant, also serves as the investment manager to The Charles Schwab
Family of Funds, Schwab Investments, and Schwab Annuity Portfolios, each an
open-end, management investment company. The principal place of business of the
investment adviser is 101 Montgomery Street, San Francisco, California 94104.
The only business in which the investment adviser engages is that of investment
adviser and administrator to Registrant, The Charles Schwab Family of Funds,
Schwab Investments, Schwab Annuity Portfolios and any other investment companies
that Schwab may sponsor in the future as well as provider of advisory services
to the Schwab Fund for Charitable Giving and to Charles Schwab Asset Management
(Ireland) Limited.

The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the investment adviser
(CSIM) is or has been engaged during the past two fiscal years is listed below.
The name of any company for which any director

Part C

<PAGE> 241

and/or senior or executive officer of the investment adviser serves as director,
officer, employee, partner or trustee is also listed below. In addition, the
name and position of each director and/or senior or executive officer of the
Registrant's principal underwriter Schwab & Co. Inc. is listed below.

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

Charles Schwab Investment Chairman, Director
Management,
Inc.
The Charles Schwab Trust Company Director

Schwab Holdings, Inc. Chief Executive Officer, Director

Charles Schwab Limited (U.K.) Chairman and Chief Executive Officer

Schwab International Holdings, Inc. Chairman and Chief Executive Officer

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

The Gap, Inc. Director

Audiobase, Inc. Director

Vodaphone AirTouch PLC Director

Siebel Systems Director

Mayer & Schweitzer, Inc. Chairman and Director until January 1999

Schwab Retirement Plan Services, Inc. Chairman, Director until January 1999

Performance Technologies, Inc. Chairman, Director until January 1999
</TABLE>

Part C

<PAGE> 242

David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer, Director

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

Charles Schwab Investment Director
Management,
Inc.
Schwab Retirement Plan Services, Inc. Director until January 1999

Charles Schwab Limited (U.K.) Director until January 1999

Mayer & Schweitzer, Inc. Director until January 1999

Performance Technologies, Inc. Director until January 1999

TrustMark, Inc. Director until January 1999

John P. Coghlan Charles Schwab & Co., Inc. Vice Chairman and Enterprise President -
President and Trustee Retirement Plan Services and Services
for Investment Managers

Charles Schwab Investment Chief Executive Officer and Director
Management,
Inc.
The Charles Schwab Corporation Vice Chairman and Executive Vice
President

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

Charles Schwab Asset Management Director
(Ireland) Ltd.

Charles Schwab Worldwide Funds PLC Director

Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary

Charles Schwab & Co., Inc. Vice President and Assistant Corporate
Secretary
</TABLE>

Part C

<PAGE> 243

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab Investment Assistant Corporate Secretary
Management,
Inc.
The Charles Schwab Trust Company Assistant Corporate Secretary until
February 2000

Jeremiah H. Chafkin, Charles Schwab & Co., Inc. Executive Vice President, Asset
Executive Vice Management Products and Services. Prior
President, to September 1999, Mr. Chafkin was
Chief Operating Senior Managing Director, Bankers Trust
Officer Company.
and Trustee

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

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

Koji E. Felton, Charles Schwab Investment Vice President, Chief Counsel and
Secretary Management, Inc. Assistant Corporate Secretary

Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President and Chief
Financial Officer

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

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

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

James M. Hackley Charles Schwab & Co., Inc. Executive Vice President - Retail Client
Services

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

Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer
</TABLE>

Part C

<PAGE> 244

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
----------------------------------------------------------------------------------------------------------
<S> <C> <C>

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

Susanne D. Lyons Charles Schwab & Co., Inc. Executive Vice President and Chief
Marketing Officer

Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services

John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Mutual Funds

Geoffrey Penney Charles Schwab & Co., Inc. Executive Vice President - Financial
Products and International Technology

George A. Rich Charles Schwab & Co., Inc. Executive Vice President - Human
Resources

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

Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President and Chief
Administrative Officer

Tai-Chin Tung, Charles Schwab Investment Senior Vice President and Chief
Treasurer and Management, Financial Officer
Principal Financial Inc.
Officer

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

Item 27. Principal Underwriter.

(a) Schwab acts as principal underwriter and distributor of Registrant's
shares. Schwab currently also acts as principal underwriter for The Charles
Schwab Family of Funds, Schwab Investments and Schwab Annuity Portfolios, and
intends to act as such for any other investment company which Schwab may sponsor
in the future.

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

Part C

<PAGE> 245

Item 28. Location of Accounts and Records.

All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of Registrant; Registrant's investment adviser and
administrator, Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, California 94104; Registrant's former sub-investment
adviser, Dimensional Fund Advisors Inc., 1299 Ocean Avenue, Suite 1100, Santa
Monica, California 90401; Registrant's sub-investment adviser for the Schwab
Analytics Fund(R) is Symphony Asset Management, Inc., 555 California Street,
Suite 2975, San Francisco, California 94104; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's custodian for the Schwab International Index Fund and the
Schwab Small-Cap Index Fund, Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, Registrant's custodian for the balance of the funds
and fund accountants, PNC Bank, National Association/PFPC Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809, Chase Manhattan Bank, 1 Pierrepont Plaza,
Brooklyn, New York 11201, and SEI Fund Resources, Oaks Pennsylvania 19456;
Registrant's former custodians and fund accountants, Federated Services Company,
1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02180; or Ropes & Gray, 1301
K Street, N.W., Suite 800 East, Washington, District of Columbia 20005.

Item 29. Management Services.

Not applicable.

Item 30. Undertakings.

Not applicable.

Part C

<PAGE> 246
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, Registrant
has duly caused this Post Effective Amendment No. 39 to be signed on its behalf
by the undersigned, duly authorized, in the City of Philadelphia, Commonwealth
of Pennsylvania, on this 11th day of December, 2000.

SCHWAB CAPITAL TRUST
Registrant

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

Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 39 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 11th day
of December, 2000.

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

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

John Coghlan* President and Trustee
----------------------
John Coghlan

Jeremiah H. Chafkin* Executive Vice President, Chief Operating Officer
---------------------- and Trustee
Jeremiah H. Chafkin

Mariann Byerwalter* Trustee
----------------------
Mariann Byerwalter

Donald F. Dorward* Trustee
----------------------
Donald F. Dorward

William A. Hasler* Trustee
----------------------
William A. Hasler

Robert G. Holmes* Trustee
----------------------
Robert G. Holmes

Gerald B. Smith* Trustee
----------------------
Gerald B. Smith

Donald R. Stephens* Trustee
----------------------
Donald R. Stephens

Michael W. Wilsey* Trustee
----------------------
Michael W. Wilsey

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

*By:/s/John H. Grady, Jr.
---------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney

<PAGE> 247

EXHIBIT INDEX

EXH. NO. DOCUMENT

(l)(xii) Purchase Agreement
(p)(i) Power of Attorney
(p)(ii) Power of Attorney
(p)(iii) Power of Attorney
(p)(iv) Power of Attorney
(p)(v) Power of Attorney
(p)(vi) Power of Attorney
(p)(vii) Power of Attorney
(p)(viii) Power of Attorney
(p)(ix) Power of Attorney
(p)(x) Power of Attorney
(p)(xi) Power of Attorney

Part C