SCHWAB CAPITAL TRUST, 485BPOS, 2000-02-25

SCHWAB CAPITAL TRUST
485BPOS, 2000-02-25

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<PAGE> 1

File Nos. 33-62470 and 811-7704
As filed with the Securities and Exchange

Commission on February 25, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Post-Effective Amendment No. 36 [X]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 38 [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 Frances Cole, 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)
/X/ On February 29,2000, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE> 2

SCHWAB
EQUITY INDEX FUNDS

PROSPECTUS
February 29, 2000

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)

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.

[CHARLES SCHWAB LOGO]
<PAGE> 3
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> 4
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> 5
SCHWAB

S&P 500 FUND

TICKER SYMBOLS

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

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 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.

LARGE-CAP STOCKS

Although the 500 companies in the index constitute only about 7% of all the
publicly traded companies in the United States, they represent approximately 80%
of the total value of the U.S. stock market. (All figures are as of 10/31/99.)

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.

S&P 500 FUND 4
<PAGE> 6
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.

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.

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.

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).

5 S&P 500 FUND
<PAGE> 7
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 investments.

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

[BAR GRAPH]

BEST QUARTER: 21.08% Q4 1998
WORST QUARTER: -9.98% Q3 1998

AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares 20.60 26.13 1
Select Shares(R) 20.78 25.69 2
e.Shares(R) 20.68 26.26 3
S&P 500(R) Index 21.04 26.74 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 one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.

FEE TABLE (%)

<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES e.SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
None None None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.17 0.17 0.17
Distribution (12b-1) fees None None None
Other expenses 0.30 0.15 0.16
====================================
Total annual operating expenses 0.47 0.32 0.33

EXPENSE REDUCTION (0.12) (0.13) (0.05)
------------------------------------
NET OPERATING EXPENSES** 0.35 0.19 0.28
====================================
</TABLE>

* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 2/28/01.

EXPENSES ON A $10,000 INVESTMENT

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $36 $139 $251 $580
Select Shares $19 $90 $167 $393
e.Shares $29 $101 $180 $413
</TABLE>

The performance information above shows you how the fund's PERFORMANCE compares
to that of ITS INDEX, which varies OVER TIME.

S&P 500 FUND 6
<PAGE> 8
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, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 17.05 14.17 10.88 10.00
---------------------------------------------------------
Income from investment operations:
Net investment income 0.17 0.16 0.14 0.08
Net realized and unrealized gain on investments 4.10 2.85 3.24 0.80
---------------------------------------------------------
Total income from investment operations 4.27 3.01 3.38 0.88
Less distributions:
Dividends from net investment income (0.15) (0.13) (0.09) --
---------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.17 17.05 14.17 10.88
=========================================================

Total return (%) 25.20 21.39 31.29 8.80 1

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.38 0.49 2
Expense reductions reflected in above ratio 0.27 0.28 0.32 0.40 2
Ratio of net investment income to average net assets 1.01 1.25 1.49 1.89 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 3,183 1,935 923 244
</TABLE>

1 Not annualized.

2 Annualized.

7 S&P 500 FUND
<PAGE> 9
FINANCIAL HIGHLIGHTS (continued)

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 17.09 14.19 12.85
-----------------------------------------------------------------
Income from investment operations:
Net investment income 0.20 0.26 0.05
Net realized and unrealized gain on investments 4.12 2.78 1.29
-----------------------------------------------------------------
Total income from investment operations 4.32 3.04 1.34
Less distributions:
Dividends from net investment income (0.18) (0.14) --
-----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.23 17.09 14.19
=================================================================
Total return (%) 25.42 21.63 10.43 1

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.19 0.19 0.19 2
Expense reductions reflected in above ratio 0.28 0.28 0.34 2
Ratio of net investment income to average net assets 1.17 1.40 1.46 2
Portfolio turnover rate 3 1 3
Net assets, end of period ($ x 1,000,000) 3,750 1,548 486
</TABLE>

1 Not annualized.

2 Annualized.

S&P 500 FUND 8
<PAGE> 10
FINANCIAL HIGHLIGHTS (continued)

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
e.SHARES(R) 10/31/99 10/31/98 10/31/97 10/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 17.08 14.19 10.89 10.00
---------------------------------------------------
Income from investment operations:
Net investment income 0.20 0.15 0.21 0.04
Net realized and unrealized gain on investments 4.09 2.88 3.19 0.85
---------------------------------------------------

Total income from investment operations 4.29 3.03 3.40 0.89
Less distributions:
Dividends from net investment income (0.16) (0.14) (0.10) --
---------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.21 17.08 14.19 10.89
===================================================
Total return (%) 25.28 21.50 31.48 8.90 1

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.28 0.28 0.28 0.28 2
Expense reductions reflected in above ratio 0.20 0.24 0.33 0.91 2
Ratio of net investment income to average net assets 1.08 1.32 1.61 1.82 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 435 281 132 36
</TABLE>

1 Not annualized.

2 Annualized.

9 S&P 500 FUND
<PAGE> 11
SCHWAB

1000 FUND(R)

TICKER SYMBOLS

INVESTOR SHARES SNXFX
SELECT SHARES(R) SNXSX

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.

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.

LARGE- AND
MID-CAP STOCKS

Although there are currently more than 7,100 total stocks in the United States,
the companies represented by the Schwab 1000 Index make up some 87% of the total
value of all U.S. stocks. (Figures are as of 10/31/99.)

These large- and mid-cap stocks cover many industries and represent many sizes:
At $472 billion, the market capitalization of the largest one is approximately
1,435 times that of the smallest one. (Figures are as of 10/31/99.)

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.

SCHWAB 1000 FUND 10
<PAGE> 12
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.

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.

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.

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.

11 SCHWAB 1000 FUND
<PAGE> 13
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
[BAR GRAPH]
<TABLE>

1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>

8.52 9.63 -0.11 36.60 21.57 31.92 27.16 21.00

</TABLE>

<TABLE>
<S> <C> <C> <C>
BEST QUARTER: 21.93% Q4 1998
WORST QUARTER: -10.70% Q3 1998
</TABLE>

AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 21.00 27.51 18.98 1
Select Shares(R) 21.15 -- 25.94 2
S&P 500(R) Index 21.04 28.56 19.46 3
Schwab 1000 Index(R) 21.22 28.04 19.45 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 within 180
days of buying them, and paid
directly to the fund* 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.23 0.23
Distribution (12b-1) fees None None
Other expenses 0.28 0.14
=======================
Total annual operating expenses 0.51 0.37

EXPENSE REDUCTION (0.05) (0.02)
-----------------------
NET OPERATING EXPENSES** 0.46 0.35
=======================
</TABLE>

* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.

** Guaranteed by Schwab and the investment adviser through 2/28/01.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $47 $159 $280 $636
Select Shares $36 $117 $206 $466
</TABLE>

The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.

SCHWAB 1000 FUND 12
<PAGE> 14
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 29.90 25.25 24.78 18.14 15.68 13.08
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.26 0.27 0.04 0.28 0.24 0.26
Net realized and unrealized gain on investments 7.21 4.64 0.43 6.62 2.45 2.48
------------------------------------------------------------------------
Total income from investment operations 7.47 4.91 0.47 6.90 2.69 2.74
Less distributions:
Dividends from net investment income (0.25) (0.26) -- (0.26) (0.23) (0.14)
------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.12 29.90 25.25 24.78 18.14 15.68
========================================================================
Total return (%) 25.12 19.63 1.90 1 38.32 17.27 21.23
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.46 0.46 0.46 2 0.47 0.49 0.54
Expense reductions reflected in above ratio 0.05 0.05 0.04 2 0.06 0.08 0.09
Ratio of net investment income to average net assets 0.78 1.02 1.00 2 1.33 1.66 2.03
Portfolio turnover rate 3 2 -- 2 2 2
Net assets, end of period ($ x 1,000,000) 4,925 3,657 2,611 2,499 1,560 827
</TABLE>

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 8/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 29.93 25.26 24.79 22.64
--------------------------------------------------
Income from investment operations:
Net investment income 0.30 0.32 0.04 0.05
Net realized and unrealized gain on investments 7.22 4.63 0.43 2.10
--------------------------------------------------
Total income from investment operations 7.52 4.95 0.47 2.15
Less distributions:
Dividends from net investment income (0.29) (0.28) -- --
--------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.16 29.93 25.26 24.79
==================================================
Total return (%) 25.29 19.79 1.90 1 9.50 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.35 2 0.35 2
Expense reductions reflected in above ratio 0.02 0.04 0.06 2 0.33 2
Ratio of net investment income to average net assets 0.89 1.11 1.11 2 1.26 2
Portfolio turnover rate 3 2 -- 2
Net assets, end of period ($ x 1,000,000) 2,214 1,041 426 347
</TABLE>

1 Not annualized.

2 Annualized.

13 SCHWAB 1000 FUND
<PAGE> 15
SCHWAB

SMALL-CAP INDEX FUND(R)

TICKER SYMBOLS

INVESTOR SHARES SWSMX
SELECT SHARES(R) SWSSX

THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX.(R)

INDEX

THE SCHWAB SMALL-CAP INDEX(R) 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 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.

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 $8 billion to
$15 million in terms of their total market value. (All figures are as of
10/31/99.)

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.

SMALL-CAP INDEX FUND 14
<PAGE> 16
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.

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.

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.

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.

15 SMALL-CAP INDEX FUND
<PAGE> 17
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

[BAR GRAPH]

94 95 96 97 98 99
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
-3.08 27.65 15.49 25.69 -3.57 24.20
</TABLE>

BEST QUARTER: 18.09% Q2 1997
WORST QUARTER: -20.94% Q3 1998

AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 24.20 17.28 13.71 1
Select Shares(R) 24.44 -- 16.38 2
Russell 2000 Index(R) 21.26 16.70 13.54 3
Schwab Small-Cap Index(R) 27.67 19.04 15.41 3
</TABLE>

1 Inception: 12/3/93.

2 Inception: 5/19/97.

3 From 12/3/93.

FUND FEES AND EXPENSES

FEE TABLE (%)

ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
Management fees** 0.31 0.31
Distribution (12b-1) fees None None
Other expenses 0.32 0.18
=========================
Total annual operating expenses 0.63 0.49
EXPENSE REDUCTION (0.14) (0.11)
-------------------------
NET OPERATING EXPENSES*** 0.49 0.38
=========================
</TABLE>

* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.

** Reflects current fees.

*** Guaranteed by Schwab and the investment adviser through 2/28/01.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $50 $188 $337 $773
Select Shares $39 $146 $263 $605
</TABLE>

The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.

SMALL-CAP INDEX FUND 16
<PAGE> 18
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 15.39 17.73 13.59 11.70 10.05
------------------------------------------------------------------
Income from investment operations:
Net investment income 0.06 0.05 0.06 0.07 0.10
Net realized and unrealized gain (loss)
on investments 2.89 (2.33) 4.14 1.88 1.61
------------------------------------------------------------------
Total income from investment operations 2.95 (2.28) 4.20 1.95 1.71
Less distributions:
Dividends from net investment income (0.06) (0.06) (0.06) (0.06) (0.06)
Distributions from realized gains on investments (0.87) -- -- -- --
------------------------------------------------------------------
Total distributions (0.93) (0.06) (0.06) (0.06) (0.06)
------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.41 15.39 17.73 13.59 11.70
==================================================================
Total return (%) 19.96 (12.88) 31.03 16.73 17.11

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.49 0.49 0.52 0.59 0.68
Expense reductions reflected in above ratio 0.30 0.32 0.37 0.35 0.34
Ratio of net investment income to average net assets 0.33 0.35 0.53 0.56 0.68
Portfolio turnover rate 41 40 23 23 24
Net assets, end of period ($ x 1,000,000) 452 480 410 209 122
</TABLE>

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 15.41 17.75 14.50
------------------------------------------
Income from investment operations:
Net investment income 0.07 0.08 0.02
Net realized and unrealized gain (loss)
on investments 2.90 (2.35) 3.23
------------------------------------------
Total income from investment operations 2.97 (2.27) 3.25
Less distributions:
Dividends from net investment income (0.07) (0.07) --
Distributions from realized gains on investments (0.87) -- --
------------------------------------------
Total distributions (0.94) (0.07) --
------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.44 15.41 17.75
==========================================
Total return (%) 20.14 (12.81) 22.41 1

RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.38 0.38 0.38 2
Expense reductions reflected in above ratio 0.27 0.33 0.52 2
Ratio of net investment income to average net assets 0.44 0.46 0.56 2
Portfolio turnover rate 41 40 23
Net assets, end of period ($ x 1,000,000) 447 150 81
</TABLE>

1 Not annualized.

2 Annualized.

17 SMALL-CAP INDEX FUND
<PAGE> 19
SCHWAB

TOTAL STOCK MARKET
INDEX FUND(TM)

TICKER SYMBOLS

INVESTOR SHARES SWTIX
SELECT SHARES(R) SWTSX

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 7,100 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.

Like many index funds, the fund also may invest in futures contracts and lend
securities in seeking to enhance total return and minimize the gap between its
performance and that of the index. However, the fund's performance normally is
below that of the index.

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 98% of its total value. (All figures on this page are as of 10/31/99).

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.

TOTAL STOCK MARKET INDEX FUND 18
<PAGE> 20
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.

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.

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.

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.

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.

19 TOTAL STOCK MARKET INDEX FUND
<PAGE> 21
PERFORMANCE

Because this is a new fund, no performance figures are given. Information will
appear in a future version of the fund's prospectus.

FUND FEES AND EXPENSES

The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in 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 within
180 days of buying them and
paid directly to the fund* 0.75 0.75

ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.30 0.30
Distribution (12b-1) fees None None
Other expenses** 0.61 0.44
=====================
Total annual operating expenses 0.91 0.74
EXPENSE REDUCTION (0.51) (0.47)
---------------------
NET OPERATING EXPENSES*** 0.40 0.27
=====================
</TABLE>

* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.

** Based on estimated expenses for the current fiscal year.

*** Guaranteed by Schwab and the investment adviser through 2/28/01.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares $ 41 $ 239
Select Shares $ 28 $ 189
</TABLE>

TOTAL STOCK MARKET INDEX FUND 20
<PAGE> 22
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
6/1/99 -
INVESTOR SHARES 10/31/99
- --------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------
Net asset value at beginning of period 20.00
-------------------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain on investments 0.80
-------------------
Total income from investment operations 0.87
-------------------
NET ASSET VALUE AT END OF PERIOD 20.87
===================
Total return (%) 4.35 1

RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.40 2
Expense reductions reflected in above ratio 0.51 2
Ratio of net investment income to average net assets 0.92 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 136
</TABLE>

<TABLE>
<CAPTION>
6/1/99 -
SELECT SHARES(R) 10/31/99
- --------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------
Net asset value at beginning of period 20.00
------------------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain on investments 0.82
------------------
Total income from investment operations 0.89
------------------
NET ASSET VALUE AT END OF PERIOD 20.89
==================

Total return (%) 4.45 1

RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.27 2
Expense reductions reflected in above ratio 0.47 2
Ratio of net investment income to average net assets 1.05 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 149
</TABLE>

1 Not annualized.

2 Annualized.

21 TOTAL STOCK MARKET INDEX FUND
<PAGE> 23
SCHWAB

INTERNATIONAL INDEX FUND(R)

TICKER SYMBOLS

INVESTOR SHARES SWINX
SELECT SHARES(R) SWISX

THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL
INDEX.(R)

INDEX

THE SCHWAB INTERNATIONAL INDEX(R) 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.

INTERNATIONAL STOCKS

Over the past several decades, foreign stock markets have grown rapidly. The
market value of foreign stocks today represents approximately 43% of the world's
total market capitalization. (All figures are as of 10/31/99.)

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.

INTERNATIONAL INDEX FUND 22
<PAGE> 24
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.

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.

OTHER RISK FACTORS

23 INTERNATIONAL INDEX FUND
<PAGE> 25
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

[BAR GRAPH]

94 95 96 97 98 99
3.84 14.22 9.12 7.31 15.85 33.62

BEST QUARTER: 19.88% Q4 1999
WORST QUARTER: -14.93% Q3 1998

AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 33.62 15.67 13.06 1
Select Shares(R) 33.79 -- 17.88 2
MSCI-EAFE(R) Index 26.96 12.83 10.99 3
Schwab International
Index(R) 33.81 16.21 13.62 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 within 180
days of buying them and paid
directly to the fund* 1.50 1.50

ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees** 0.42 0.42
Distribution (12b-1) fees None None
Other expenses 0.35 0.22
------------------------
Total annual operating expenses 0.77 0.64
EXPENSE REDUCTION (0.19) (0.17)
------------------------
NET OPERATING EXPENSES*** 0.58 0.47
========================
</TABLE>

* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.

** Reflects current fees.

*** Guaranteed by Schwab and the investment adviser through 2/28/01.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $59 $227 $409 $936
Select Shares $48 $188 $340 $782
</TABLE>

The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.

INTERNATIONAL INDEX FUND 24
<PAGE> 26
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.21 13.31 12.23 11.13 10.89
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.17 0.17 0.16 0.14
Net realized and unrealized gain
on investments 3.66 0.88 1.08 1.07 0.22
--------------------------------------------------------------------
Total income from investment operations 3.85 1.05 1.25 1.23 0.36
Less distributions:
Dividends from net investment income (0.13) (0.15) (0.17) (0.13) (0.12)
--------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.93 14.21 13.31 12.23 11.13
====================================================================
Total return (%) 27.31 8.02 10.33 11.07 3.35
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.58 0.58 0.61 0.69 0.85
Expense reductions reflected in above ratio 0.41 0.46 0.52 0.48 0.37
Ratio of net investment income to average net assets 1.24 1.35 1.36 1.50 1.45
Portfolio turnover rate 5 6 13 6 --
Net assets, end of period ($ x 1,000,000) 447 428 318 247 180
</TABLE>

<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 14.23 13.32 13.59
--------------------------------------------
Income from investment operations:
Net investment income 0.18 0.22 0.04
Net realized and unrealized gain (loss)
on investments 3.70 0.85 (0.31)
--------------------------------------------
Total income from investment operations 3.88 1.07 (0.27)
Less distributions:
Dividends from net investment income (0.15) (0.16) --
--------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.96 14.23 13.32
============================================
Total return (%) 27.49 8.16 (1.99) 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.47 0.47 0.47 2
Expense reductions reflected in above ratio 0.39 0.48 0.80 2
Ratio of net investment income to average net assets 1.57 1.49 0.17 2
Portfolio turnover rate 5 6 13
Net assets, end of period ($ x 1,000,000) 449 94 50
</TABLE>

1 Not annualized.

2 Annualized.

25 INTERNATIONAL INDEX FUND
<PAGE> 27
FUND MANAGEMENT

The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $100 billion under 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 4 million shareholder
accounts. (All figures on this page are as of 10/31/99.)

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 10/31/99, these fees were 0.12% for the Schwab S&P 500 Fund, 0.21% for the
Schwab 1000 Fund,(R) 0.20% for the Schwab Small-Cap Index Fund(R) and 0.25% 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. For Schwab Total Stock Market Index
Fund, this fee is calculated as follows:

<TABLE>
<CAPTION>
MANAGEMENT FEE (% of average daily net assets)
- -------------------------------------------------------------------------------
<S> <C>
First $500 million of assets 0.30%
Assets above $500 million 0.22%
</TABLE>

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 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 1998, he
worked for 20 years in equity index management, most recently at Wilshire
Associates, Inc.

FUND MANAGEMENT 26
<PAGE> 28
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.

27 INVESTING IN THE FUNDS
<PAGE> 29
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.

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 funds.

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

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

STEP 1

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.

MINIMUM INITIAL MINIMUM ADDITIONAL
SHARE CLASS INVESTMENT INVESTMENT MINIMUM BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares $2,500 ($1,000 for $500 ($100 for $1,000 ($500 for
retirement and Automatic retirement and
custodial accounts) Investment Plan) custodial accounts)

- --------------------------------------------------------------------------------
Select Shares(R) $50,000 $1,000 $40,000
- --------------------------------------------------------------------------------
e.Shares(R) $1,000 ($500 for $100 $1,000 ($500 for
retirement and retirement and
custodial accounts) 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.

<TABLE>
<CAPTION>
OPTION FEATURES
- --------------------------------------------------------------------------------
<S> <C>
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your fund and share class.
- --------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix 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.

INVESTING IN THE FUNDS 28
<PAGE> 30
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, excluding S&P 500 Fund, each fund
charges a redemption fee, payable to the fund, on the sale or exchange of any
shares that have been held for less than 180 days; 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 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

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

INTERNET
www.schwab.com/schwabfunds

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

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

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

IN PERSON
Visit the nearest Charles Schwab branch office.

WHEN PLACING ORDERS

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

- - Your name

- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers)

- - The name and share class of the fund whose shares you want to buy or sell

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

- - For exchanges, the name 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.

29 INVESTING IN THE FUNDS
<PAGE> 31
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

INVESTING IN THE FUNDS 30
<PAGE> 32
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, 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.

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 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.

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

MORE ON DISTRIBUTIONS

If you are investing through a taxable account and purchase shares of a fund
just before it declares a distribution, you will end up receiving a portion of
your investment back as a taxable distribution. This is because when a fund
makes a distribution, the amount of the distribution is subtracted from the
share price.

INVESTING IN THE FUNDS 21
<PAGE> 124
NOTES

22 NOTES
<PAGE> 125
NOTES 23
<PAGE> 126
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.

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

You can obtain copies of these documents by contacting Institutional Select(TM)
Funds or the SEC. All materials from Institutional Select Funds are free; the
SEC charges a duplicating fee. You can also review these materials in person at
the SEC's Public Reference Room or by computer using the SEC's EDGAR database at
www.sec.gov.

INSTITUTIONAL SELECT FUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]

SEC FILE NUMBER
Institutional Select Funds 811-7704

MKT 3643-2

[BOX GRAPHIC]

INSTITUTIONAL SELECT(TM) FUNDS

Prospectus - February 29, 2000

[BOX GRAPHIC]
<PAGE> 127

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 29, 2000

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated February 29, 2000 (as
amended from time to time).

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

The 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
Page
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS.............................. 2
MANAGEMENT OF THE FUNDS................................................... 16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 20
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 20
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 23
DESCRIPTION OF THE TRUSTS................................................. 25
PURCHASE, REDEMPTION, DELEIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES..................................................... 26
TAXATION.................................................................. 28
CALCULATION OF PERFORMANCE DATA........................................... 30

<PAGE> 128

INVESTMENT STRATEGIES, RISKS AND LIMITATIONS

The following investment strategies, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of 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.

INVESTMENT OBJECTIVES

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

2
<PAGE> 129

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.

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, 1999, the aggregate market capitalization of the stocks
included in the Schwab 1000 Index was approximately $12.2 trillion. This
represents approximately 87% 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 attempt to track
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). Pursuant to
a policy that may be changed only by vote of a majority of its shareholders, the
Schwab Small-Cap Index Fund will invest at least 65% of its total assets in
common stocks, or other equity securities including preferred stocks, rights and
warrants.

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 7,400 stocks. The fund may purchase securities of companies with
which it is affiliated to the extent these companies are represented in its
index.

3
<PAGE> 130

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. 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 attempt to
track 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. Pursuant to a policy that may
be changed only by vote of a majority of its shareholders, the Schwab
International Index Fund will invest at least 65% of its total assets in common
stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three countries other than the 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 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, subject to shareholder approval,
may select another index should it decide that taking such action would be in
the best interest of a fund's shareholders.

4
<PAGE> 131

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

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.

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 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 a fund sells a security on a
delayed-delivery basis, the fund 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.

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

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

5
<PAGE> 132

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.

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

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

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

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

6
<PAGE> 133

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

Warrants are a type of security usually issued with bonds and preferred stock
that entitles the holder to a proportionate amount of common stock at 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.

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

Foreign securities typically have less volume and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the 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 the 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

7
<PAGE> 134

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.

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift away
from European countries, thereby making the European market less liquid. All of
these factors could affect the value of a fund's investments and/or increase its
expenses. While the investment adviser has taken steps to minimize the impact of
the conversion on the funds, it is not possible to know precisely what impact
the conversion will have on the funds, if any, nor is it possible to eliminate
the risks completely.

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.

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 waiting settlement. These
transactions do not seek to eliminate any fluctuations in the underlying prices
of the securities involved. Instead, the transactions simply establish a rate of
exchange that can be expected when the fund settles its securities transactions
in the future.

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<PAGE> 135

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. 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, 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 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.

9
<PAGE> 136

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 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.

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.

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<PAGE> 137

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.
Repurchase agreements will be collateralized by First Tier Securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.

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.

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
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.

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<PAGE> 138

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

INVESTMENT LIMITATIONS

The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.

EACH OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND, AND
SCHWAB INTERNATIONAL FUND MAY NOT:

1) 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 half of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.

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

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

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

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

EACH OF THE SCHWAB S&P 500 FUND, SCHWAB SMALL-CAP INDEX FUND AND SCHWAB
INTERNATIONAL INDEX FUND 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.

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<PAGE> 139

2) Purchase securities (other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except that each fund may purchase securities
under such circumstances only to the extent that its index is also so
concentrated).

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

4) Purchase or 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 Schwab S&P 500 Fund, purchase securities
of companies that deal in precious metals or interests therein.

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

6) Borrow money or issue senior securities, except that each fund may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that each fund will not purchase securities
while borrowings represent more than 5% of its total assets.

THE SCHWAB 1000 FUND MAY NOT:

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

2) Purchase securities (other then 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 to the extent that the Schwab 1000
Index(R) is also so concentrated). Securities issued by governments or
political subdivisions or authorities of governments are not considered
to be securities subject to this concentration restriction.

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

4) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that the fund may (i)
purchase securities of companies that deal in real estate or interests
therein, and (ii) purchase or sell futures contracts, options
contracts, equity index participations and index participation
contracts.

5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.

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<PAGE> 140

6) Borrow money except from banks as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and then
only in an amount not to exceed one-third of the value of its total
assets (including the amount borrowed), provided that the fund will not
purchase securities while borrowings represent more than 5% of its
total assets.

With respect to limitation (3), the Schwab 1000 Fund(R) may not invest so that
more than 15% of its net assets in illiquid securities.

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 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 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.

The following additional limitations have been adopted by THE SCHWAB S&P 500
FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND AND SCHWAB INTERNATIONAL FUND.
These limitations may be more restrictive than the limitations listed above, and
may be changed by the board of trustees without shareholder approval or notice.

EACH OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND AND
SCHWAB INTERNATIONAL FUND MAY NOT:

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<PAGE> 141

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.

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.

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.

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<PAGE> 142

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.

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.

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,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:

<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUSTS
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Co-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., Vodaphone
AirTouch PLC (a
</TABLE>

- --------

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

16
<PAGE> 143

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

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

DONALD F. DORWARD Trustee 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) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).

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

- --------

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

17
<PAGE> 144

<TABLE>
<S> <C> <C>
WILLIAM J. KLIPP* Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.

JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R), Charles
May 5, 1959 President and Chief Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.

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

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

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

Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the 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 a fund's shareholders. The following table provides information as of October
31, 1999, concerning compensation of the trustees. Unless otherwise stated,
information is for the fund complex, which included 40 funds as of December 31,
1999.

18
<PAGE> 145

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation
from the as Part of Fund from Fund
Expenses Complex
Schwab Schwab Schwab Schwab Schwab
S&P 500 1000 Small- Total International
Fund Fund(R) Cap 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
Steven L. Scheid 0 0 0 0 0 N/A 0
William J. Klipp 0 0 0 0 0 N/A 0
Donald F. Dorward $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Robert G. Holmes $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Donald R. Stephens $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Michael W. Wilsey $8,193 $11,579 $1,671 $246 $1,684 N/A $109,450
</TABLE>

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 has elected to participate in this plan.

CODE OF ETHICS

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.

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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2000, 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, 2000, 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:

Schwab International Index Fund (R) - Select Shares(R)
Schwab MarketTrack All Equity Portfolio 14.03%
Schwab MarketTrack Balanced Portfolio 11.46%
Schwab MarketTrack Growth Portfolio 17.44%

Schwab S&P 500 Fund - Investor Shares
Charles Schwab Trust Co. 16.15%

S&P 500 Fund - e.Shares(R)
Charles Schwab Trust Co. 10.57%

S&P 500 Fund - Select Shares(R)
Charles Schwab Trust Co. 14.49%

Schwab Small-Cap Index Fund(R) - Select Shares(R)
Schwab MarketTrack Growth II 6.73%
Schwab MarketTrack All Equity Portfolio 11.74%
Schwab MarketTrack Balanced Portfolio 11.44%
Schwab MarketTrack Growth Portfolio 17.39%

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the funds' investment adviser and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) between it and each trust. Charles Schwab & Co., Inc.
(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 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%

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<PAGE> 147

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, 1999, 1998 and 1997, the Schwab S&P 500
Fund paid investment advisory fees of $7,536,000, $2,525,000 and $429,000,
respectively (fees were reduced by $11,794,000, $6,509,000 and $2,410,000,
respectively).

The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares, the e.Shares(R) and the
Select Shares(TM) will not exceed 0.35%, 0.19% and 0.28% 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, 1999, 1998, and 1997, the Schwab 1000
Fund paid investment advisory fees of $13,006,000, $7,610,000 and $967,000,
respectively (fees were reduced by $1,336,000, $1,552,000, $220,000 and
$1,179,000, respectively).

The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
1000 Fund(R) will not exceed 0.46% and 0.35%, 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 year ended October 31, 1999, the Schwab Total Stock Market Index
Fund paid investment advisory fees of $0 (fees were reduced by $284,000).

The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares and Select Shares for the
fund will not exceed 0.40%, and 0.27%, 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%

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<PAGE> 148

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, 1999, 1998, 1997, the Schwab Small-Cap
Index Fund paid investment advisory fees of $1,502,000, $921,000 and $540,000,
respectively (fees were reduced by $2,099,000, $1,911,000 and $1,000,000,
respectively).

The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
Small-Cap Index Fund will not exceed 0.49% and 0.38%, 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, 1999, 1998 and 1997, the Schwab
International Index Fund paid investment advisory fees of $1,755,000, $940,000
and $643,000, respectively (fees were reduced by $2,625,000, $2,127,000 and
$1,503,000, respectively).

The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
International Index Fund will not exceed 0.58% and 0.47%, respectively, of the
average daily net assets of each class.

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 supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.

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<PAGE> 149

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, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
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 333 Market Street, San
Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended October 31, 1999, 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, 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.

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<PAGE> 150

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 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 generally 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 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.

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 clients.

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.

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.

BROKERAGE COMMISSIONS

For the fiscal years ended October 31, 1999, 1998 and 1997, the Schwab S&P 500
Fund paid brokerage commissions of $1,266,303, $898,196 and $583,314,
respectively.

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<PAGE> 151

For the fiscal year ended October 31, 1999, 1998, the fiscal period of September
1, 1997 through October 31, 1997, the Schwab 1000 Fund(R) paid brokerage
commissions of $743,826, $641,226 and $92,582, respectively.

For the fiscal years ended October 31, 1999, 1998, 1997, the Schwab Small-Cap
Index Fund paid brokerage commissions of $858,379, $710,856 and $281,321,
respectively.

For the fiscal year ended October 31, 1999, the Schwab Total Stock Market Index
Fund paid brokerage commissions of $152,679.

For the fiscal years ended October 31, 1999, 1998, and 1997, the Schwab
International Index Fund paid brokerage commissions of $205,007, $208,087, and
$83,632, respectively.

Of brokerage commissions paid by the Schwab S&P 500 Fund in 1998 and 1999,
$11,550 (1.34% of the total) and $13,000 (1.03% of the total), respectively, was
paid to Schwab.

Of brokerage commission paid by the Schwab 1000 Fund in 1998 and 1999, $14,360
(2.24% of the total) and $5,040 (0.68% 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)

Each 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. 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 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

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<PAGE> 152

majority of the outstanding shares of a fund means the affirmative vote, at an
annual or special meeting of shareholders (a) where 67% or more of the voting
securities are present at the meeting or represented by proxy, of shareholders
owning more than 50% of the outstanding securities of a fund or (b) of more than
50% of the outstanding voting securities of a fund, whichever is less. 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 AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUNDS

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

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

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<PAGE> 153

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 brokerage expenses 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
that 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.

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

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<PAGE> 154

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 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.

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 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.

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

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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<PAGE> 155

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.

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

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

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<PAGE> 156

(but not both). A shareholder who does not itemize deductions may not claim a
deduction for foreign taxes.

CALCULATION OF PERFORMANCE DATA

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

<TABLE>
<CAPTION>
Fund (Commencement of Operations) One Year ended Five Years ended October From Commencement of
October 31, 1999 31, 1999 Operations to October 31,
1999
- ---------------------------------- ------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) 25.20% - 24.76%
e.Shares (5/1/96) 25.28% - 24.90%
Select Shares (5/19/97) 25.42% - 23.70%
Schwab 1000 Fund -
Investor Shares (5/2/91) 25.12% 24.66% 18.17%
Select Shares (5/19/97) 25.29% - 23.40%
Schwab Small-Cap Index Fund -
Investor Shares (12/3/93) 19.96% 13.36% 11.31%
Select Shares (5/19/97) 20.14% - 10.67%
Schwab Total Stock Market Index
Fund
Investor Shares (5/28/99) - - 4.35%
Select Shares (5/28/99) - - 4.45%
Schwab International Index Fund -
Investor Shares (9/9/93) 27.31% 11.74% 11.08%
Select Shares (5/19/97) 27.49% - 13.07%
</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.

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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, 1999.

<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------- -----------------------
<S> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) 117.09%
e.Shares (5/1/96) 117.95%
Select Shares (5/19/97) 68.46%
Schwab 1000 Fund -
Investor Shares (5/2/91) 319.01%
Select Shares (5/19/97) 67.45%
Schwab Small-Cap Fund -
Investor Shares (12/3/93) 88.39%
Select Shares (5/19/97) 28.23%
Schwab Total Stock Market Index Fund
Investor Shares (5/28/99) 4.35%
Select Shares (5/28/99) 4.45%
Schwab International Index Fund -
Investor Shares (9/9/93) 90.73%
Select Shares (5/19/97) 35.15%
</TABLE>

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

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<PAGE> 158

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> 159

STATEMENT OF ADDITIONAL INFORMATION

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

FEBRUARY 29, 2000

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 29, 2000 (as
amended from time to time).

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

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

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

TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES,
RISKS AND LIMITATIONS..................................................... 2
MANAGEMENT OF THE PORTFOLIOS.............................................. 19
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 23
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 23
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 25
DESCRIPTION OF THE TRUST.................................................. 27
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES..................................................... 28
TAXATION.................................................................. 29
CALCULATION OF PERFORMANCE DATA........................................... 31

<PAGE> 160

INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

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

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<PAGE> 161

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 1940 Act (the "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.

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.

Under the terms of the exemptive order, each of the portfolios and its
affiliates may not control a non-affiliated underlying fund. Under the 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.

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

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<PAGE> 162

may focus in a specific industry or group of industries. The greater a fund's
investment in stock, the greater exposure it will have to stock risk and stock
market risk. Stock risk is the risk that a stock may decline in price over the
short or long term. When a stock's price declines, its market value is lowered
even though the intrinsic value of the company may not have changed. Some
stocks, like small company and international stocks, are more sensitive to stock
risk than others. Diversifying investments across companies can help to lower
the stock risk of a portfolio. Market risk is typically the result of a negative
economic condition that affects the value of an entire class of securities, such
as stocks or bonds. Diversification among various asset classes, such as stocks,
bonds and cash, can help to lower the market risk of a portfolio 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.
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.

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

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<PAGE> 163

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.

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

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<PAGE> 164

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 account
receivables of an entity, such as a bank or credit card company. These
securities are obligations that the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment may depend largely on the
cash flows generated by the assets backing the securities. The rate of principal
payments on asset-backed securities generally depends on the rate of principal
payments received on the underlying assets, which in turn may be affected by a
variety of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision, and actual yield
to maturity may be more or less than the anticipated yield to maturity.
Sometimes the credit support for asset-backed securities is limited to the
underlying assets, but, in other cases, may be provided by a third party via a
letter of credit or insurance guarantee.

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

CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities. 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 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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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, the 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 is a series of an
open-end investment management company. Each portfolio is a diversified mutual
fund.

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

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

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

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

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

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

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union ("EMU"). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift away
from European countries, thereby making the European market less liquid. All of
these factors could affect the value of the portfolios' investments and/or
increase its expenses. While the investment adviser has taken steps to minimize
the impact of the conversion on the portfolios, it is not possible to know
precisely what impact the conversion will have on the portfolios, if any, nor is
it possible to eliminate the risks completely.

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

Underlying funds also may engage in forward foreign currency exchange contracts
to protect the value of specific portfolio positions, which is called "position
hedging." When engaging in position hedging, an underlying fund may enter into
forward foreign currency exchange transactions to protect against a decline in
the values of the foreign currencies in which portfolio securities are
denominated (or against an increase in the value of currency for securities that
the underlying fund expects to purchase).

Buying and selling foreign currency exchange contracts involves costs and may
result in losses. The ability an underlying fund to engage in these transactions
may be limited by tax considerations. Although these techniques tend to minimize
the risk of loss due to decline in the value of the hedged currency, they tend
to limit any potential gain that might result from an

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

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

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

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

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

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<PAGE> 170

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

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

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

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

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<PAGE> 171

MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
certificates of deposit, banker's acceptances, notes and time deposits.
Certificates of deposit are certificates issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
Banker's acceptances are credit instruments evidencing a bank's obligation to
pay a draft drawn on it by a customer. These instruments reflect the obligation
both of the bank and of the drawer to pay the full amount of the instrument upon
maturity. Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs.

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

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

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<PAGE> 172

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.

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

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

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

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

An exchange-traded currency option position may be closed out only on an options
exchange that provides a secondary market for an option of the same series.
Although the portfolios generally will purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option or at any
particular

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<PAGE> 173

time. If a portfolio or underlying fund is unable to effect a closing purchase
transaction with respect to options it has written, it will not be able to sell
the underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised. Similarly, if a portfolio or
underlying fund is unable to effect a closing sale transaction with respect to
options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.

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

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

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

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

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

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

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<PAGE> 174

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

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

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

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.

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<PAGE> 175

There can be no assurance that the U.S. government will provide financial
support to U.S. government securities of its agencies and instrumentalities if
it is not obligated to do so under law. Of course U.S. government securities,
including U.S. Treasury securities, are among the safest securities, however,
not unlike other fixed-income securities, they are still sensitive to interest
rate changes, which will cause their yields to fluctuate.

INVESTMENT LIMITATIONS

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

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

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

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

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

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

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

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

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

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

THE INTERNATIONAL PORTFOLIO MAY NOT:

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<PAGE> 176

2) Purchase securities (other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except the portfolio will invest 25% or more
of its total assets in other investment companies).

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

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

5) Borrow money or issue senior securities, except that the portfolio may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that the portfolio will not purchase
securities while borrowings represent more than 5% of its total assets.

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

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

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

EACH PORTFOLIO MAY NOT:

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

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

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<PAGE> 177

government securities and the securities of other investment companies,
including private investment companies and qualified purchaser funds.

6) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by a portfolio in units or attached to
other securities are deemed to be without value.

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

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

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

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

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

MANAGEMENT OF THE PORTFOLIOS

<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.,
</TABLE>

- --------

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

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<PAGE> 178

<TABLE>
<S> <C> <C>
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).

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

- --------

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

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<PAGE> 179

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

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

FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab

Investment Management, Inc.
</TABLE>

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

Each portfolio is overseen by a board of trustees. The board of trustees meets
regularly to review each portfolio's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the portfolio's shareholders. The following table provides information as of
October 31, 1999, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 40 funds as of
October 31, 1999.

- --------

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

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<PAGE> 180

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Compensation from
from each portfolio Accrued as Fund Complex
Part of
Portfolio
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
Steven L. Scheid 0 0 0 0 N/A 0
William J. Klipp 0 0 0 0 N/A 0
Donald F. Dorward $1,101 $1,005 $1,052 $970 N/A $118,150
Robert G. Holmes $1,101 $1,005 $1,052 $970 N/A $118,150
Donald R. Stephens $1,101 $1,005 $1,052 $970 N/A $118,150
Michael W. Wilsey $1,041 $952 $994 $918 N/A $109,450
</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.

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<PAGE> 181

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2000, the officers and trustees of the portfolios, except
International Portfolio, as a group owned of record, directly or beneficially,
less than 1% of the outstanding voting securities of each portfolio.

With respect to International Portfolio, the officers and trustees as a group
owned of record, directly or beneficially, 3.6% of the outstanding voting
securities of the portfolio.

As of February 1, 2000, the following represents persons or entities that owned,
directly of beneficially, more than 5% of shares of a portfolio:

Balanced Portfolio
Orange County Community Foundation 7.81%

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

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

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

For its advisory and administrative services to each portfolio, the investment
adviser is entitled to receive a graduated annual fee, payable monthly, of 0.54%
of the first $500 million of each portfolio's average daily net assets and 0.49%
of net assets over $500 million. Prior to February 28, 1999, the graduated
annual fee, payable monthly 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, 1999 and 1998, and for the fiscal period
November 8, 1996 (commencement of operations) to October 31, 1997, Growth
Portfolio paid investment advisory fees of $718,000, $471,000 and $211,000,
respectively (fees were reduced by $297,000, $612,000 and $499,000,
respectively).

For the fiscal years ended October 31, 1999 and 1998, and for the fiscal period
November 8, 1996 (commencement of operations) to October 31, 1997, Balanced
Portfolio paid investment advisory

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<PAGE> 182
fees of $438,000, $247,000 and $23,000, respectively (fees were reduced by
$211,000, $361,000 and $321,000, respectively).

For fiscal years ended October 31, 1999 and 1998, and for the fiscal period
September 16, 1997 (commencement of operations) to October 31, 1997, Small Cap
Portfolio paid investment advisory fees of $434,000, $534,000 and $58,000,
respectively (fees were reduced by $331,000, $774,000 and $124,000,
respectively).

For fiscal year ended October 31, 1999, 1998, and 1997, International Portfolio
paid investment advisory fees of $312,000, $233,000, and $147,000, respectively
(fees were reduced by $184,000, $362,000 and $423,000, respectively).

The investment adviser and Schwab have guaranteed that, through at least
February 28, 2001, the total fund operating expenses (excluding interest, taxes
and extraordinary expenses) for each portfolio will not exceed 0.50% of its
average daily net assets.

DISTRIBUTOR

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

SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
portfolios' prospectuses, financial reports and other informational literature
about the portfolios. Schwab maintains the office space, equipment and personnel
necessary to provide these services. 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 December 31, 2001, to waive
its transfer agent and shareholder service fees for the portfolios. After
December 31, 2001, the guarantee may be terminated, modified or continued.

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<PAGE> 183

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, PricewaterhouseCoopers LLP, audit and
report on the annual financial statements of the portfolios and review 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 333 Market Street, San
Francisco, CA 94105. Each portfolio's audited financial statements for the
fiscal year ended October 31, 1999, 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,
1999 and 1998, were 284% and 384%, respectively.

The Balanced Portfolio's turnover rates for the fiscal year ended October 31,
1999 and 1998, were 244% and 353%, respectively.

The Small Cap Portfolio's turnover rates for the fiscal year ended October 31,
1999 and 1998, were 145% and 166%, respectively.

The International Portfolio's turnover rates for the fiscal years ended October
31, 1999 and 1998, were 249% and 236%.

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<PAGE> 184

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

PORTFOLIO TRANSACTIONS

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.

BROKERAGE COMMISSIONS

For the fiscal years ended October 31, 1999, 1998 and 1997, the MarketManager
International Portfolio paid brokerage commissions of $17,445, $1,020 and $0,
respectively.

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<PAGE> 185

For the fiscal year ended October 31, 1999, the MarketManager Small-Cap
Portfolio paid a brokerage commission of $10,335.

DESCRIPTION OF THE TRUST

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

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

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

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 shares of a fund means the affirmative vote, at an
annual meeting or special meeting of shareholders, (a) where 67% or more of the
voting securities are present at the meeting or represented by proxy, of
shareholders owning more than 50% of the outstanding securities of a portfolio
or (b) of more than 50% of the outstanding voting securities of a portfolio,
whichever is less. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. The
Declaration of Trust specifically authorizes the board of trustees to terminate
the trust (or any of its investment portfolios) by notice to the shareholders
without shareholder approval.

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

27
<PAGE> 186

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

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

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

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

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

DELIVERY OF SHAREHOLDER DOCUMENTS

PRICING OF SHARES

In accordance with the 1940 Act, the underlying funds are valued at their
respective net asset values as determined by those funds. The underlying funds
that are money market funds may value their portfolio securities based on the
value or amortized cost method. The other underlying funds value their portfolio
securities based on market quotes if they are readily available. The investment
adviser assigns fair values to the portfolios' other investments in good faith
under board of trustees guidelines. The board of trustees regularly reviews
these values. Securities traded on stock exchanges are valued at the last quoted
sales price on the exchange on which such securities are primarily traded, or,
lacking any sales, at the mean between the bid and

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<PAGE> 187

ask prices. Securities traded in the over-the-counter market are valued at the
last sales price that day, or if no sales that day, at the mean between the bid
and ask prices.

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

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

TAXATION

FEDERAL TAX INFORMATION FOR THE PORTFOLIOS

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

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

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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<PAGE> 188

(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 fund shares held for six months or less, any
loss on the sale or exchange of those shares shall, to the extent of the
long-term capital gain distribution, be treated as a long-term capital loss. For
corporate investors in the portfolios, dividend distributions the portfolios
designate to be from dividends received from qualifying domestic corporations
will be eligible for the 70% corporate dividends-received deduction to the
extent they would qualify if the portfolios were regular corporations.
Distributions by a portfolio also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.

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 funds generally are not subject to U.S.
taxation, unless the recipient is an individual either (1) who meets the Code's
definition of "resident alien" or (2) who are physically present in the U.S. for
183 days or more. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.

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

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<PAGE> 189

foreign taxes the portfolio pays will, therefore, be netted against their share
of the portfolio's gross income.

The portfolios may invest in a non-U.S. corporation that could be treated as a
passive foreign investment company ("PFIC") or become a PFIC under the Code.
This could result in adverse tax consequences upon the disposition of, or the
receipt of "excess distributions" with respect to, such equity investments. To
the extent the portfolios do invest in PFICs, they may elect to treat the PFIC
as a "qualified electing fund" or mark-to-market its investments in PFICs
annually. In either case, the portfolios may be required to distribute amounts
in excess of realized income and gains. To the extent that the portfolios do
invest in foreign securities that are determined to be PFIC securities and are
required to pay a tax on such investments, a credit for this tax would not be
allowed to be passed through to portfolios' shareholders. Therefore, the payment
of this tax would reduce the portfolios' economic return from their PFIC shares,
and excess distributions received with respect to such shares are treated as
ordinary income rather than capital gains.

An underlying fund may invest in non-U.S. corporations, which would be treated
as PFICs or become a PFIC. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
such equity investments. To the extent an underlying fund does invest in PFICs,
it may elect to treat the PFIC as a "qualified electing fund" or mark-to-market
its investments in PFICs annually. In either case, the underlying fund may be
required to distribute amounts in excess of its realized income and gains. To
the extent that the underlying fund itself is required to pay a tax on income or
gain from investment in PFICs, the payment of this tax would reduce the
portfolios' economic return.

CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Portfolio One Year Life of Portfolio
(Commencement of Operations)
- ---------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
MarketManager Portfolios
Growth (11/18/96) 27.38% 16.15%
Balanced (11/18/96) 21.28% 13.84%
Small Cap (9/16/97) 30.38% 6.42%
International (10/16/96) 41.92% 17.25%
</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, 1999.

Name of Portfolio (Commencement of Operations) Cumulative Total Return
- ---------------------------------------------- -----------------------

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<PAGE> 190

Growth (11/18/96) 55.60%
Balanced (11/18/96) 46.64%
Small Cap (9/16/97) 14.14%
International (10/16/96) 62.32%

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

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

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

<PAGE> 191

STATEMENT OF ADDITIONAL INFORMATION

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

FEBRUARY 29, 2000

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 29, 2000 (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........................................................... 2
MANAGEMENT OF THE PORTFOLIOS.............................................. 16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 19
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 20
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 22
DESCRIPTION OF THE TRUST.................................................. 23
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES..................................................... 24
TAXATION.................................................................. 26
CALCULATION OF PERFORMANCE DATA........................................... 28

<PAGE> 192

INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

Each portfolio's investment objective may be changed only by vote of a majority
of its shareholders. 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 are registered investment companies, which may issue and redeem
their shares on a continuous basis (open-end mutual funds) or may offer a fixed
number of shares usually listed on an exchange (closed-end mutual funds). Mutual
funds generally offer investors the advantages of diversification and
professional investment management, by combining shareholders' money and
investing it in various types of securities, such as stocks, bonds and money
market securities. Mutual funds also make various investments and use certain
techniques in order to enhance their performance. These may include entering
into delayed-delivery and when-issued securities transactions or swap
agreements; buying and selling futures contracts, illiquid and restricted
securities and repurchase agreements and borrowing or lending money and/or
portfolio securities. The risks of investing in mutual funds generally reflect
the risks of the securities in which the mutual funds invest and the investment
techniques they may employ. Also, mutual funds charge fees and incur operating
expenses. Each portfolio will normally invest at least 50% of their assets in
other SchwabFunds(R), which are registered open-end investment companies.

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<PAGE> 193

STOCK FUNDS typically seek growth of capital and invest primarily in equity
securities. Other investments generally include debt securities, such as U.S.
government securities, and some illiquid and restricted securities. Stock funds
typically may enter into delayed-delivery or when-issued securities
transactions, repurchase agreements, swap agreements and futures and options
contracts. Some stock funds invest exclusively in equity securities and may
focus in a specialized segment of the stock market, like stocks of small
companies or foreign issuers, or may focus in a specific industry or group of
industries. The greater a fund's investment in stock, the greater exposure it
will have to stock risk and stock market risk. Stock risk is the risk that a
stock may decline in price over the short or long term. When a stock's price
declines, its market value is lowered even though the intrinsic value of the
company may not have changed. Some stocks, like small company and international
stocks, are more sensitive to stock risk than others. Diversifying investments
across companies can help to lower the stock risk of a portfolio. Market risk is
typically the result of a negative economic condition that affects the value of
an entire class of securities, such as stocks or bonds. Diversification among
various asset classes, such as stocks, bonds and cash, can help to lower the
market risk of a portfolio. The SchwabFunds(R) stock funds that the portfolios
may currently invest in are the Schwab S&P 500 Fund, Schwab Small-Cap Index
Fund(R) and Schwab International Index Fund(R) or Schwab Total Stock Market
Index Funds. A stock fund's other investments and use of investment techniques
also will affect its performance and portfolio value.

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<PAGE> 194
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 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.

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,

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<PAGE> 195

the automobile industry may have a greater exposure to a single factor, such as
an increase in the price of oil, which may adversely affect the sale of
automobiles and, as a result, the value of the industry's securities. Each
portfolio will not concentrate its investments in a particular industry or group
of industries, unless its underlying fund investments are so concentrated.

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

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<PAGE> 196

delayed-delivery purchase obligations. When a fund sells a security on a
delayed-delivery basis, the portfolio does not participate in further gains or
losses with respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund or underlying
fund could suffer losses.

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

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

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

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<PAGE> 198

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

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

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

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of the portfolios'
investments and/or increase its expenses. While the investment adviser has taken
steps to minimize the impact of the conversion on the portfolios, it is not
possible to know precisely what impact the conversion will have on the
portfolios, if any, nor is it possible to eliminate the risks completely.

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<PAGE> 199

eliminate any fluctuations in the underlying prices of the securities involved.
Instead, the transactions simply establish a rate of exchange that can be
expected when the portfolio or fund settles its securities transactions in the
future.

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

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

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

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

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<PAGE> 200

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

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

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

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

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<PAGE> 201

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
Federal National Mortgage Association, and private entities, such as banks. The
income paid on mortgage-backed securities depends upon the income received from
the underlying pool of mortgages. Mortgage-backed securities include
collateralized mortgage obligations, mortgage-backed bonds and stripped
mortgage-backed securities. These securities are subject to interest rate risk,
like other debt securities, in addition to prepayment and extension risk.
Prepayments occur when the holder of an individual mortgage prepays the
remaining principal before the mortgage's scheduled maturity date. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity indicates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular issue of
mortgage-backed securities. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for mortgage-backed securities purchased at a premium
(i.e., a price in excess of principal amount) and may involve additional risk of
loss of principal because the premium may not be fully amortized at the time the
obligation is repaid. The opposite is true for mortgage-backed securities
purchased at a discount. The portfolios may purchase mortgage-related securities
at a premium or at a discount. When interest rates rise, extension risk
increases and may affect the value of a portfolio or underlying fund. Principal
and interest payments on the mortgage-related securities are guaranteed by the
government 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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<PAGE> 202

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

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

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 underlying fund invests in restricted
securities that are deemed liquid, is general level of illiquidity may be
increased if qualified institutional buyers become uninterested in purchasing
these securities.

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

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

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<PAGE> 203

agreements are subject to the risk that the counterparty will not fulfill its
obligations. The risk of loss in a swap agreement can be substantial due to the
degree of leverage that can be involved. In order to help minimize this risk, a
portfolio or underlying fund will segregate appropriate assets as necessary.

INVESTMENT LIMITATIONS

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

THE ALL EQUITY PORTFOLIO MAY 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.

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

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

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<PAGE> 204

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

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

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

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

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

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

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

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

9) Borrow money or issue senior securities, except that each portfolio may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that each portfolio will not purchase
securities while borrowings represent more than 5% of its total assets.

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

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<PAGE> 205

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

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

EACH PORTFOLIO MAY NOT:

1) Purchase more than 10% of any class of securities of any issuer if, as
a result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities. The definition of "securities" does not
include cash and cash items (including receivables), government
securities and the securities of other investment companies, including
private investment companies and qualified purchaser funds.

2) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by a portfolio in units or attached to
other securities are deemed to be without value.

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

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

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

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

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) 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.

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<PAGE> 206

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

MANAGEMENT OF THE PORTFOLIOS

- --------

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

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<PAGE> 207

<TABLE>
<S> <C> <C>
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) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).

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

WILLIAM J. KLIPP* Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Charles Schwab Investment Management,
</TABLE>

- --------

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

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<PAGE> 208

<TABLE>
<S> <C> <C>
Financial Officer Inc. From 1994 to 1996, Ms. Tung was Controller for
Robertson Stephens Investment Management, Inc. From 1993
to 1994, she was Vice President of Fund Accounting,
Capital Research and Management Co.

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

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

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

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Compensation from
from each portfolio Accrued as Part Fund Complex
of Portfolio
Expenses
All Equity Growth Balanced Conservative
Portfolio Portfolio Portfolio Portfolio
- ------------------- ------------ ------------ ------------ -------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Steven L. Scheid 0 0 0 0 N/A 0
William J. Klipp, 0 0 0 0 N/A 0
Donald F. Dorward $1,047 $1,334 $1,311 $1,046 N/A $118,150
</TABLE>

18
<PAGE> 209

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Compensation from
from each portfolio Accrued as Part Fund Complex
of Portfolio
Expenses
All Equity Growth Balanced Conservative
Portfolio Portfolio Portfolio Portfolio
- ------------------- ------------ ------------ ------------ -------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Holmes $1,047 $1,334 $1,311 $1,046 N/A $118,150
Donald R. Stephens $1,047 $1,334 $1,311 $1,046 N/A $118,150
Michael W. Wilsey $991 $1,264 $1,242 $991 N/A $109,450
</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 independent trustees has elected to participate in this plan.

CODE OF ETHICS

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2000, 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, 2000, the following represents persons or entities that owned,
directly or beneficially, more than 5% of shares of the portfolios:

Conservative Portfolio
Charles Schwab Trust Co. 13.93%

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<PAGE> 210
Balanced Portfolio
Charles Schwab Trust Co. 9.12%

Growth Portfolio
Charles Schwab Trust Co. 7.44%

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

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

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

The investment adviser and Schwab have guaranteed that, through at least
February 28, 2001, the total operating expenses for each portfolio, including
the impact of underlying SchwabFunds investments, will not exceed 0.60% of its
average daily net assets.

For the fiscal year ended October 31, 1999, and for the fiscal period of May 19,
1998, (commencement of operations) to October 31, 1998, the All Equity Portfolio
paid investment advisory fees of $255,000 and $0, respectively (fees were
reduced by $647,000 and $357,000, respectively).

For the fiscal years ended October 31, 1999, 1998 and 1997, the Growth Portfolio
paid investment advisory fees of $927,000, $553,000 and $337,000, respectively
(fees were reduced by $1,116,900, $1,157,000 and $296,000, respectively).

For the fiscal years ended October 31, 1999, 1998 and 1997, the Balanced
Portfolio paid investment advisory fees of $876,000, $491,000 and $219,000,
respectively (fees were reduced by $1,119,000, $1,095,000 and $242,000,
respectively).

For fiscal years ended October 31, 1999, 1998 and 1997, the Conservative
Portfolio paid investment advisory fees of $358,000, $78,000 and $26,000,
respectively (fees were reduced by $501,000, $504,000 and $118,000,
respectively).

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DISTRIBUTOR

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 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.

INDEPENDENT ACCOUNTANTS

The portfolios' independent accountants, PricewaterhouseCoopers LLP, audit and
report on the annual financial statements for the portfolios and review 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 333 Market Street, San
Francisco, CA 94105. Each portfolio's audited financial statements for the
fiscal year ended October 31, 1999 are included in the portfolios' annual
report, which is a separate report supplied with the SAI.

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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 rate for the fiscal year ended October 31,
1999 and for the fiscal period of May 19, 1998 (commencement of operations) to
the fiscal year ended October 31, 1998, was 6% and 2%, respectively.

The Growth Portfolio's turnover rates for the fiscal years ended October 31,
1999 and 1998, were 7% and 14%, respectively.

The Balanced Portfolio's turnover rates for the fiscal years ended October 31,
1999 and 1998, were 7% and 32%, respectively.

The Conservative Portfolio's turnover rates for the fiscal years ended October
31, 1999 and 1998, were 8% and 58%, respectively.

PORTFOLIO 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)

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utilize the services of broker-dealers that provide it with investment
information and other research resources. Such resources also may be used by the
investment adviser when providing advisory services to other investment advisory
clients, including mutual funds.

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

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

BROKERAGE COMMISSIONS

For the fiscal year ended October 31, 1999 and for the fiscal period of May 19,
1998, (commencement of operations) to October 31, 1998, the All Equity Portfolio
paid brokerage commissions of $0 and $0, respectively.

For the fiscal years ended October 31, 1999, 1998 and 1997, the Growth
Portfolio, paid brokerage commissions of $2,289, $5,838 and $32,365,
respectively.

For the fiscal years ended October 31, 1999, 1998 and 1997, the Balanced
Portfolio, paid brokerage commissions of $1,928, $5,538 and $27,084,
respectively.

For the fiscal years ended October 31, 1999, 1998 and 1997, the Conservative
Portfolio, paid brokerage commissions of $362, $2,448 and $4,153, 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.

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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 shares of a portfolio means the affirmative vote,
at an annual or special meeting of shareholders, (a) where 67% or more of the
voting securities are present at the meeting or represented by proxy, of
shareholders owning more than 50% of the outstanding securities of a portfolio,
or (b) of more than 50% of the outstanding voting securities of a portfolio,
whichever is less. 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.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

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

The portfolios have made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a portfolio. If redemption proceeds are paid
in investment securities, such securities will be valued as set forth in
"Pricing of Shares". A redeeming shareholder would normally incur brokerage
expenses if he or she were to convert the securities to cash.

DELIVERY OF SHAREHOLDER DOCUMENTS

PRICING OF SHARES

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

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in good faith pursuant to guidelines adopted by the board of trustees.
Securities may be valued on the basis of prices provided by pricing services
when such prices are believed to reflect fair market value. The board of
trustees regularly reviews any fair values assigned to portfolio securities.

TAXATION

FEDERAL TAX INFORMATION FOR THE PORTFOLIOS

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

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

A portfolio's transactions in futures contracts and forward foreign currency
exchange transactions may be restricted by the Code and are subject to special
tax rules. In a given case, these rules may accelerate income to a portfolio,
defer its losses, cause adjustments in the holding periods of the portfolio's
assets, convert short-term capital losses into long-term capital losses or
otherwise affect the character of the portfolio's income. These rules could
therefore affect the 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

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extent they would qualify if the portfolios were regular corporations.
Distributions by a portfolio also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.

Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the 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. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.

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

The portfolios may invest in a non-U.S. corporation that could be treated as a
passive foreign investment company (PFIC) or become a PFIC under the Code. This
could result in adverse tax consequences upon the disposition of, or the receipt
of "excess distributions" with respect to, such equity investments. To the
extent the portfolios do invest in PFICs, they may elect to treat the PFIC as a
"qualified electing fund" or mark-to-market its investments in PFICs annually.
In either case, the portfolios may be required to distribute amounts in excess
of realized income and gains. To the extent that the portfolios do invest in
foreign securities that are determined to be PFIC securities and are required to
pay a tax on such investments, a credit for this tax would not be allowed to be
passed through to the portfolios' shareholders. Therefore, the payment of this
tax would reduce the portfolios' economic return from their PFIC shares, and
excess distributions

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received with respect to such shares are treated as ordinary income rather than
capital gains.

An underlying mutual fund may invest in non-U.S. corporations which would be
treated as PFICs or become a PFIC. This could result in adverse tax consequences
upon the disposition of, or the receipt of "excess distributions" with respect
to, such equity investments. To the extent an underlying mutual fund does invest
in PFICs, it may elect to treat the PFIC as a "qualified electing fund" or
mark-to-market its investments in PFICs annually. In either case, the underlying
mutual fund may be required to distribute amounts in excess of its realized
income and gains. To the extent that the underlying mutual fund itself is
required to pay a tax on income or gain from investment in PFICs, the payment of
this tax would reduce the portfolios' economic return.

CALCULATION OF PERFORMANCE DATA

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

<TABLE>
<CAPTION>
Portfolio One Year ended From Commencement of Operations
(Commencement of Operations) October 31, 1999 to October 31, 1999
- ------------------------------------------ -------------------------- -----------------------------------------
<S> <C> <C>
All Equity (5/19/98) 24.34% 10.36%
Growth (11/20/95) 19.24% 16.01%
Balanced (11/20/95) 14.18% 13.23%
Conservative (11/20/95) 9.13% 10.37%
</TABLE>

Portfolio (Commencement of Operations) Cumulative Total Return

All Equity (5/19/98) 15.39%
Growth (11/20/95) 79.82%
Balanced (11/20/95) 63.37%
Conservative (11/20/95) 47.66%

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.

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

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

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STATEMENT OF ADDITIONAL INFORMATION

SCHWAB ANALYTICS FUND(R)

FEBRUARY 29, 2000

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated February 29, 2000 (as
amended from time to time).

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

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

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

TABLE OF CONTENTS
Page
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS............................ 2
MANAGEMENT OF THE FUND.................................................. 9
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..................... 12
INVESTMENT ADVISORY AND OTHER SERVICES.................................. 12
BROKERAGE ALLOCATION AND OTHER PRACTICES................................ 14
DESCRIPTION OF THE TRUST................................................ 15
PURCHASE, REDEMPTION, DELIVERY OF SHAREHLODER REPORTS
AND PRICING OF SHARES................................................... 16
TAXATION................................................................ 17
CALCULATION OF PERFORMANCE DATA......................................... 19

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INVESTMENT STRATEGIES, RISKS AND LIMITATIONS

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

INVESTMENT OBJECTIVE

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

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

INVESTMENT STRATEGIES AND RISKS

BORROWING may subject the fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. The fund may
borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. BORROWING CAN INVOLVE LEVERAGING WHEN
SECURITIES ARE PURCHASED WITH THE BORROWED MONEY. TO AVOID THIS, EACH PORTFOLIO
WILL NOT PURCHASE SECURITIES WHILE BORROWINGS REPRESENT MORE THAN 5% OF ITS
TOTAL ASSETS.

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

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

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alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.

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

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

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

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

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

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

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In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union ("EMU"). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid and
more expensive. All of these factors could affect the value of the fund's
investments and/or increase its expenses. While the investment adviser has taken
steps to minimize the impact of the conversion on the fund, it is not possible
to know precisely what impact the conversion will have on the fund, if any, nor
is it possible to eliminate the risks completely.

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

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

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

5
<PAGE> 225

instead transacted in the underlying securities directly. There also is the risk
of losing any margin payments held by a broker in the event of its bankruptcy.
Additionally, the fund incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading.

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

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

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

6
<PAGE> 226

of trustees, will take into account the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent the fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in the fund's portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities.

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

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

INVESTMENT LIMITATIONS

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

THE FUND MAY NOT:

2) Purchase securities (other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except that the fund may purchase securities
under such circumstances only to the extent that the S&P 500(R) also is
so concentrated).

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

4) Lend money to any person, except that the fund may (1) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are

7
<PAGE> 227

distributed publicly or customarily purchased by institutional
investors, and (2) lend its portfolio securities.

5) Borrow money or issue senior securities, except that the fund may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that the fund will not purchase securities
while borrowings represent more than 5% of its total assets.

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

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

THE FUND MAY NOT:

2) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by the fund in units or attached to
other securities are deemed to be without value.

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

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

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

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

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

8) 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

8
<PAGE> 228

the securities of such issuer and together beneficially own more than
5% of the securities of such issuer.

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

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

MANAGEMENT OF THE FUND

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

- --------

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

9
<PAGE> 229

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

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

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer Charles Schwab Investment Management, Inc. From
1994 to 1996, Ms. Tung was
</TABLE>

- --------

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

10
<PAGE> 230

<TABLE>
<S> <C> <C>
Controller for Robertson Stephens Investment Management,
Inc. From 1993 to 1994, she was Vice President of Fund
Accounting, Capital Research and Management Co.

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

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

The fund is overseen by a board of trustees. The board of trustees meets
regularly to review the fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the fund's shareholders. The following table provides information as of
October 31, 1999, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 40 funds as of
October 31, 1999.

<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 0 N/A 0
William J. Klipp, 0 N/A 0
Donald F. Dorward $1,183 N/A $118,150
Robert G. Holmes $1,183 N/A $118,150
Donald R. Stephens $1,183 N/A $118,150
</TABLE>

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<PAGE> 231

DEFERRED COMPENSATION PLAN

CODE OF ETHICS

The fund, its investment adviser and Schwab has 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
director of compliance. Most securities transactions are subject to quarterly
reporting and review requirements.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 2000, 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, 2000, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of any of the fund: None

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

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

12
<PAGE> 232

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, 1999, 1998 and 1997, the fund paid
investment advisory fees of $987,000, $682,000 and $429,000, respectively (fees
were reduced by $414,000, $680,000 and $483,000, respectively).

The investment adviser and Schwab have guaranteed that, through at least
February 28, 2001, the total fund operating expenses for the fund will not
exceed 0.75% of its average daily net assets.

SUB-ADVISER

The investment adviser has entered into an investment sub-advisory agreement
(the "Sub-Advisory Agreement") with Symphony Asset Management, Inc. (the
"sub-adviser" or "Symphony") pursuant to which Symphony Asset Management, Inc.
will act as the fund's sub-adviser. The sub-adviser makes investment decisions
for the fund's non-cash investments and uses quantitative techniques and
proprietary real-time databases and software models to continually identify and
rank stocks that exhibit a favorable combination of attributes that historically
have been associated with aggregate total returns greater than that of the S&P
500(R). Once rankings are determined, statistical methodologies will be used to
construct a portfolio of the most attractive stocks in terms of potential
long-term capital growth.

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

DISTRIBUTOR

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

SHAREHOLDER SERVICES AND TRANSFER AGENT

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

13
<PAGE> 233

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 Investements, 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, PricewaterhouseCoopers LLP, 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 333 Market Street, San Francisco, CA
94105. The fund's audited financial statements for the fiscal year ended October
31, 1999, are included in the fund's annual report, which is a separate report
supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

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

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

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

The fund's portfolio turnover rates for the fiscal years ended October 31, 1999
and 1998, were 99% and 115%, 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.

14
<PAGE> 234

PORTFOLIO TRANSACTIONS

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

In 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, 1999, 1998 and 1997, the fund paid
brokerage commissions of $278,377, $234,861, and $155,109, 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

15
<PAGE> 235

minimums may be waived for certain investors, including trustees, officers and
employees of Schwab, or changed without prior notice.

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

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 shares of the fund means the affirmative vote, at
an annual or special meeting of shareholders, (a) where 67% or more of the
voting securities present at the meeting or represented by proxy of shareholders
owning more than 50% of the outstanding securities of a portfolio are present or
(b) of more than 50% of the outstanding voting securities of a fund, whichever
is less. 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.

PURCHASE, REDEMPTION AND PRICING OF SHARES

16
<PAGE> 236

PURCHASING AND REDEEMING SHARES OF THE FUND

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

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

The fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption proceeds are paid in
investment securities, such securities will be valued as set forth in "Pricing
of Shares." A redeeming shareholder would normally incur brokerage expenses if
he or she were to convert the securities to cash.

DELIVERY OF SHAREHOLDER DOCUMENTS

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.

TAXATION

17
<PAGE> 237

FEDERAL TAX INFORMATION FOR THE FUND

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

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

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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

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

18
<PAGE> 238

certified statement that he or she is not subject to "backup withholding."
Backup withholding is not an additional tax and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.

Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the fund generally are not subject to U.S.
taxation, unless the recipient is an individual who 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. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.

CALCULATION OF PERFORMANCE DATA

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

<TABLE>
<CAPTION>
Fund (Commencement of Operations) One Year ended From Commencement of
October 31, 1999 Operations to October
31, 1999
- ---------------------------------- ------------------------- --------------------------
<S> <C> <C>
Analytics Fund(R) (7/1/96) 35.20% 27.25%
</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, 1999.

Fund (Commencement of Operations) Cumulative Total Return

19
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Analytics Fund(R) (7/1/96) 123.47%

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

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STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SELECT(TM) FUNDS

INSTITUTIONAL SELECT S&P 500 FUND
INSTITUTIONAL SELECT LARGE-CAP VALUE INDEX FUND
INSTITUTIONAL SELECT SMALL-CAP VALUE INDEX FUND

FEBRUARY 29, 2000

This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated February 29, 2000 (as
amended from time to time).

To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, day or night, or write to the funds at P.O. Box 7575, San
Francisco, CA 94120-7575. For TDD service call 800-345-2550, day or night.

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.

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

<TABLE>
<CAPTION>
TABLE OF CONTENTS

<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS................. 2
MANAGEMENT OF THE FUNDS.............................................................. 11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................................. 14
INVESTMENT ADVISORY AND OTHER SERVICES............................................... 14
BROKERAGE ALLOCATION AND OTHER PRACTICES............................................. 16
DESCRIPTION OF THE TRUST............................................................. 17
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER DOCUMENTS AND PRICING OF SHARES........ 18
TAXATION............................................................................. 19
CALCULATION OF PERFORMANCE DATA...................................................... 21
</TABLE>

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INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

Each Fund seeks high total return. There is no guarantee any Fund will achieve
its objective. Each fund's investment objective may be changed only by vote of a
majority of its shareholders.

The following investment strategies, securities, 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 a 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.

INVESTMENT STRATEGIES

THE INSTITUTIONAL SELECTTM S&P 500 FUND intends to achieve its objective by
tracking the performance of the S&P 500(R) Index.

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
within 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 INSTITUTIONAL SELECT LARGE-CAP VALUE INDEX FUND intends to achieve its
objective by tracking the performance of the S&P 500/BARRA Value Index.

THE S&P 500/BARRA VALUE INDEX is a widely recognized index comprised of 393
large-cap value common stocks selected by BARRA, Inc. and Standard & Poor's, as
of December 31, 1999. The total value of the index (as measured by the combined
market capitalization of the companies included in the index) is approximately
one-half of the total value of the S&P 500 Index. The securities of the
companies with the highest book-to-price ratios may be included in the index.
BARRA, Inc. and Standard & Poor's rebalance the index at least semi-annually.
The fund may purchase securities of companies with which it is affiliated to the
extent these companies are represented in its index.

THE INSTITUTIONAL SELECT SMALL-CAP VALUE INDEX FUND intends to achieve its
objective by tracking the performance of the S&P SmallCap 600/BARRA Value Index.

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THE S&P SMALLCAP 600/BARRA VALUE INDEX is a widely recognized index comprised of
401 small-cap value common stocks selected by BARRA, Inc. and Standard & Poor's,
as of December 31, 1999. The total value of the index (as measured by the
combined market capitalization of the companies included in the index) is
approximately one-half of the total value of the S&P SmallCap 600 Index. The
securities of companies with the highest book-to-price ratios may be included in
the Index. BARRA, Inc. and Standard & Poor's rebalance the index at least
semi-annually. The fund may purchase securities of companies with which it is
affiliated to the extent these companies are represented in its index.

The funds are not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the shareholders of the funds
or any member of the public regarding the advisability of investing in
securities generally or in the funds particularly or the ability of the S&P 500
Index, the S&P 500/BARRA Value Index or the S&P SmallCap 600/BARRA Value Index
to track general stock market performance. S&P's only relationship to the funds
is the licensing of certain trademarks and trade names of S&P and of the S&P
Indexes, which are determined, composed and calculated by S&P without regard to
the Institutional Select Funds. S&P has no obligation to take the needs of the
Institutional Select Funds or their shareholders into consideration in
determining, composing or calculating the S&P Indexes. S&P is not responsible
for and has not participated in the determination of the prices and amounts of
the funds' shares or in the determination or calculation of the equation by
which the funds' shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
funds' shares.

S&P does not guarantee the accuracy and /or the completeness of the S&P 500
Index, the S&P 500/BARRA Value Index or the S&P SmallCap 600/BARRA Value Index
or any data included therein, and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the funds, their shareholders or any other
person or entity from the use of the S&P Indexes or any data therein. S&P makes
no express or implied warranties and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to the
S&P Indexes 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.

INVESTMENT SECURITIES AND RISKS

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. Each fund may borrow money
from banks and make other investments or engage in other transactions
permissible under the Investment Company Act of 1940 (the "1940 Act") which may
be considered a borrowing (such as mortgage dollar rolls and reverse repurchase
agreements). However, each fund may not purchase securities when bank borrowings
exceed 5% of a fund's 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

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<PAGE> 243

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.

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 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, a fund 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 fund could suffer
losses.

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

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

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<PAGE> 244

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.

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

FUTURES CONTRACTS are instruments 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 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.

A fund must maintain a small portion of its assets in cash to process
shareholder transactions 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 a fund's cash balance to produce a return similar to that of
the underlying security or index on which the futures contract is based. A fund
may enter into futures contracts for these or other reasons.

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<PAGE> 245

market." The margin amount will be returned to the fund upon termination of the
futures contracts assuming all contractual obligations are satisfied. A 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 a separate account in an
amount equal to the margin requirement that is deposited with the broker for its
outstanding futures contracts.

While a 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 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 a fund had instead
transacted in the underlying securities directly. There also is the risk of
losing any margin payments held by a broker in the event of its bankruptcy.
Additionally, a fund incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading.

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, a 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 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 securities represented in, 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 may 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 mutual funds.

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Lending portfolio securities involves risks that the borrower may fail to return
the securities or provide additional collateral.

A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents maintained on a daily marked-to-market basis in an amount at
least equal to the current market value of the securities loaned; (2) a fund may
at any time call the loan and obtain the return of the securities loaned; (3) a
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 a 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 a fund, it is expected that a fund
will do so only where the items being voted upon are, in the judgment of 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.

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, the investment adviser must follow the procedures adopted by 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 a 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 a fund,
including those issued by foreign investment companies. Mutual funds are
registered investment companies, which may issue and redeem their shares on a
continuous basis (open-end mutual funds) or may offer a fixed number of shares
usually listed on an exchange (closed-end mutual funds). Mutual funds generally
offer investors the advantages of diversification and professional investment
management, by combining shareholders' money and investing it in various types
of securities, such as stocks, bonds and money market securities. Mutual funds
also make various investments and use certain techniques in order to enhance
their performance. These may include entering into delayed-delivery and
when-issued securities transactions or swap agreements; buying and selling
futures contracts, illiquid and restricted securities and repurchase agreements
and borrowing or lending money and/or portfolio securities. The risks of
investing in mutual funds

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generally reflect the risks of the securities in which the mutual funds invest
and the investment techniques they may employ. Also, mutual funds charge fees
and incur operating expenses.

Each fund may purchase shares of mutual funds in compliance with the
requirements of federal law or any applicable exemptive relief received from the
SEC. Mutual fund investments for a fund are currently restricted under federal
regulations, and therefore, the extent to which a fund may invest in another
mutual fund may be limited. In addition, each fund intends 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.

Funds in which a fund also 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 fund. For example, hedge funds
typically require investors to keep their investment in a hedge fund for some
period of time, such as one month. This means investors would not be able to
sell their shares of a hedge fund until such time had past.

SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that are typically small in comparison to those in the
S&P 500. 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
the Small-Cap Value Index 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 the Small-Cap Value 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 Small-Cap Value 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.

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government or its agencies or instrumentalities. U.S. Treasury securities
include bills, notes and bonds and are backed by the full faith and credit of
the United States. Not all U.S. government securities are backed by the full
faith and credit of the United States. Securities issued by government agencies
or instrumentalities include obligations of the following: The Farm Credit
System, Small Business Administration, and the Government National Mortgage
Association (GNMA or Ginnie Mae), including GNMA certificates and
mortgage-backed securities, whose securities are supported by the full faith and
credit of the United States; the Federal Home Loan Banks and the Tennessee
Valley Authority, whose securities are supported by the right to borrow from the
U.S. Treasury; Freddie Mac (formerly known as the Federal Home Loan Mortgage
Association or FHLMC) and Fannie Mae (formerly known as the Federal National
Mortgage Association or FNMA), or the Student Loan Marketing Association (Sallie
Mae or SLMA), whose securities are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the agency or
instrumentality.

There can be no assurance that the U.S. government will provide full financial
support to U.S. government-sponsored agencies or instrumentalities if the U.S.
government is not obligated to do so under law. While U.S. government
securities, including U.S. Treasury securities, are among the safest securities,
like other fixed-income securities, they are sensitive to interest rate changes,
which will cause their yield and value of such securities to fluctuate.

INVESTMENT LIMITATIONS

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

EACH FUND MAY NOT:

1) purchase securities of any issuer, except as 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, except as permitted under the 1940 Act, or the rules or
regulations thereunder; and

3) (i) purchase or sell commodities, commodities contracts, futures
contracts 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 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 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 a fund.

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Concentration. The SEC staff 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 presently allows a fund to borrow from any bank
(including pledging, mortgaging or hypothecating assets) in an amount up to
33 1/3% of its total assets. The 1940 Act presently excludes temporary
borrowings not in excess of 5% of a fund's total assets from this limitation on
borrowings.

Lending. Under the 1940 Act, a fund may only make loans if expressly permitted
by its investment policies.

NON-FUNDAMENTAL INVESTMENT POLICIES.

The following investment policies and restrictions are non-fundamental and may
be changed by the Trust's Board of Trustees.

EACH 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;

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;

6) borrow money for temporary or emergency purposes except that a 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;

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 securities represented in 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).

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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 a fund's
investment policies and limitations.

MANAGEMENT OF THE FUNDS

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

- --------

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

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<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
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) and 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).

JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.

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

- --------

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

12
<PAGE> 252

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

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 a fund's shareholders. The following table provides information as of October
31, 1999, concerning compensation of the trustees. Unless otherwise stated,
information is for the fund complex, which included 40 funds as of October 31,
1999.

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
From the as Part of Fund Fund Complex
Expenses
S&P 500 Large-Cap Small Cap
Fund Value Value
Index Fund Index Fund
- -------------------- ----------- ----------- ------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 N/A 0
Steven L. Scheid 0 0 0 NA 0
William J. Klipp, 0 0 0 N/A 0
Donald F. Dorward $735 $662 $645 N/A $118,150
Robert G. Holmes $735 $662 $645 N/A $118,150
Donald R. Stephens $735 $662 $645 N/A $118,150
Michael W. Wilsey $735 $662 $645 N/A $109,450
</TABLE>

13
<PAGE> 253

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(R) selected by the trustee. Currently,
none of the independent trustees have elected to participate in this plan.

CODE OF ETHICS

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 director of compliance. Most securities transactions
are subject to quarterly reporting and review requirements.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of January 31, 2000, the officers and trustees of the funds, as a group owned
of record or beneficially less than 1% of the outstanding voting securities of
each fund.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISOR

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 funds' investment advisor and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) 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 Institutional Select(TM) S&P
500 Fund, Large-Cap Value Index Fund and Small-Cap Value Index Fund, the
investment advisor is entitled to receive an annual fee, accrued daily and paid
monthly, of 0.18%, 0.20% and 0.25% respectively of each fund's average daily net
assets not in excess of $1 billion, and 0.15%, 0.18% and 0.23% respectively of
such net assets over $1 billion.

For the fiscal year ended October 31, 1999, the S&P 500 Fund, Large-Cap Value
Index Fund and Small-Cap Value Index Fund paid no investment advisory fees (fees
were reduced by $227,000, $71,000 and $44,000, respectively).

14
<PAGE> 254

The investment adviser and Schwab have voluntarily guaranteed that, through at
least December 31, 2005, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Institutional Select S&P 500 Fund, Large
Cap-Value Index Fund and Small-Cap Value Index Fund will not exceed 0.15%, 0.25%
and 0.32%, respectively, of each fund's average daily net assets.

DISTRIBUTOR

Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the funds and is the trust's agent for the purpose of the continuous
offering of the funds' shares. The funds pay the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the 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(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 the contract with the funds,
Schwab is entitled to receive an annual fee, payable monthly from the funds, 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 the funds,
Schwab is entitled to receive an annual fee, payable monthly from the funds, in
the amount of 0.05% of the average daily net assets.

CUSTODIAN AND FUND ACCOUNTANT

PFPC Trust Company, 8800 Tinicum Blvd., 3rd Floor Suite 200, Philadelphia
Pennsylvania 19153, serves as custodian for the funds and SEI Investments,
Mutual Fund Services, One Freedom Valley Drive, Oaks Pennsylvania 19456, serves
as fund accountant.

The custodian is 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 the funds' transactions.

INDEPENDENT ACCOUNTANTS

The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and each 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 333 Market Street, San
Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended October 31, 1999, are included in the fund's annual report, which is
a separate report supplied with the SAI.

15
<PAGE> 255

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 each
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. A fund may experience a high portfolio
turnover rate in its first year of operation. 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 effecting securities transactions for the funds, 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 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 a fund, 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 a fund to trade directly with other institutional
holders on a net basis. At times, this may allow a fund to trade larger blocks
than would be possible trading through a single market maker.

16
<PAGE> 256

BROKERAGE COMMISSIONS

For the fiscal year ended October 31, 1999, the Institutional Select S&P 500
Fund, Large-Cap Value Index Fund and Small-Cap Value Index Fund paid brokerage
commissions of $99,862, $42,758 and $66,416, respectively.

DESCRIPTION OF THE TRUST

Each fund is a series of Schwab Capital Trust, an open-end management investment
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 fund.
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 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 vote of outstanding securities of a fund means the vote, at an annual
or a special meeting of shareholders, of the lesser of (a) 67% of the voting
securities present at the meeting, if the shareholders of more than 50% of the
outstanding securities of a fund are present or represented by proxy, or (b)
more than 50% of the outstanding voting securities 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. 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

17
<PAGE> 257

the trust itself is unable to meet its obligations. There is a remote
possibility that a fund could become liable for a misstatement in the prospectus
or SAI about another fund.

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

PURCHASING AND REDEEMING SHARES OF THE FUNDS

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

Each fund reserves the right to waive the early redemption fee for certain
tax-advantaged retirement plans.

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
including any order that appears in its sole discretion 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

18
<PAGE> 258

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.

DELIVERY OF SHAREHOLDER DOCUMENTS

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. 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 FUNDS

A fund's transactions in futures contracts, forward contracts, options and
certain other investment and hedging activities may be restricted by the Code
and are subject to special tax rules. In a

19
<PAGE> 259

given case, these rules may accelerate income to a fund, defer its losses, cause
adjustments in the holding periods of the fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of the fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. The funds will endeavor to make any
available elections pertaining to these transactions in a manner believed to be
in the best interest of the funds and their shareholders.

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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 its
treatment under applicable tax laws may differ from the federal income tax
treatment.

Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the funds generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the US for
183 days or more. 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.

20
<PAGE> 260

CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) From Commencement of Operations to October 31, 1999
- --------------------------------------------------------- --------------------------------------------------
<S> <C>
Institutional Select(TM) S&P 500 Fund (2/1/99) 7.40%

Large-Cap Value Index Fund (2/1/99) 6.80%

Small-Cap Value Index Fund (2/1/99) (1.10%)
</TABLE>

<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------------------------- -----------------------------------------------
<S> <C>
Institutional Select S&P 500 Fund (2/1/99) 7.40%

Large-Cap Value Index Fund (2/1/99) 6.80%

Small-Cap Value Index Fund (2/1/99) (1.10%)
</TABLE>

<PAGE> 261

PART C
OTHER INFORMATION
SCHWAB CAPITAL TRUST

Item 23. Exhibits.

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

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

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

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

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

(ii) Amended Schedules A and B to Investment
Advisory and Administration Agreement
referenced in Exhibit (d)(i) above is
incorporated herein by reference to Exhibit
(d)(ii) 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 Manager, referenced in
Exhibit (d)(i) above are incorporated
herein by reference to Exhibit
(d)(iii) of Post Effective Amendment
No. 33 to Registrant's Registration
Statement on Form N-1A electronically
filed on April 15, 1999.

<PAGE> 262

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

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

(ii) Amended Schedule A to the Distribution
Agreement, referenced at Exhibit (e)(i)
above, is incorporated herein by
reference to Exhibit (e)(ii) 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) of Post Effective
Amendment No. 33 to Registrant's
Registration Statement on Form N-1A
electronically filed on April 15, 1999.

(f) Bonus or Profit Inapplicable
Sharing Contracts

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

(ii) Amended Appendix 2 to Custodian
Agreement between the Registrant and
Morgan Stanley Trust Company referred to
at Exhibit (g)(i) above, is incorporated
herein by reference to Exhibit (g)(ii)
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) of Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.

<PAGE> 263

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

(v) Amended Schedule A to the Accounting
Services Agreement referenced at
Exhibit (g)(iv) above, is incorporated
herein by reference to Exhibit (g)(v)
of Post-Effective Amendment No. 32 to
Registrant's Registration Statement on
Form N1-A, 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)
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) 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) of
Post-Effective Amendment No. 32 to
Registrant's Registration Statement on
Form N1-A, electronically filed on
February 26, 1999.

(ix) Schedule I to the Custodian Services
Agreement referenced at Exhibit
(g)(vii) above, is electronically
filed herewith.

(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) of
Post-Effective Amendment No. 7 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
February 27, 1996.

(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) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on
Form N-1A, electronically filed on May
17, 1996.

Part C
<PAGE> 264

(xii) Transfer Agency Agreement between
Registrant and Schwab, dated July 21,
1993, is incorporated herein by
reference to Exhibit 8(j) of
Post-Effective Amendment No. 21 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 17, 1997.

(xiii) Amended Schedules A and C to the
Transfer Agency Agreement referenced
at Exhibit (g)(xii) above is
incorporated herein by reference to
Exhibit (xiii) of Post-Effective
Amendment No. 32 to Registrant's
Registration Statement on Form N1-A,
electronically filed on February 26,
1999.

(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) 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) 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) of Post-Effective Amendment
No. 32 to Registrant's Registration
Statement on Form N1-A, 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) of Post Effective
Amendment No. 33 to Registrant's
Registration Statement on Form N-1A
electronically filed on April 15,
1999.

(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) of Post-Effective
Amendment No. 30 to Registrant's
Registration Statement on Form N-1A,
electronically filed on December 29,
1998.

(h) Other Material License Agreement between Schwab Capital
Contracts Trust and Standard & Poor's is
incorporated herein by reference to
Exhibit (h) of Post-Effective Amendment
No. 32 to Registrant's Registration
Statement on Form N1-A, electronically
filed on February 26, 1999.

(i) Legal Opinion Opinion of Counsel electronically filed
herewith as Exhibit (i).

<PAGE> 265

(j) Other Opinions Auditors' Consent electronically filed
herewith as Exhibit (j).

(k) Omitted Financial Inapplicable.
Statements

(l) Initial Capital (i) Purchase Agreement for the Schwab
Agreement International Index Fund(R), dated June
17, 1993, is 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) 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) 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) 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)
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) of Post-Effective
Amendment No. 13 to Registrant's
Registration Statement on Form N-1A,
electronically filed on October 10,
1996.

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

<PAGE> 266

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

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

(x) 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) of
Post-Effective Amendment No. 32 to
Registrant's Registration Statement on
Form N1-A, 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) of Post Effective
Amendment No. 33 to Registrant's
Registration Statement on Form N-1A
electronically filed on April 15,
1999.

(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 to Registrant's Registration
Statement on Form N1-A, electronically
filed on April 14, 1997.

(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) of Post
Effective Amendment No. 33 to
Registrant's Registration Statement on
Form N-1A electronically filed on
April 15, 1999.

(p) Power of Attorney Power of Attorney executed by Jeremiah
H. Chafkin, December 6, 1999, is
electronically filed herewith as Exhibit
(p).

(q) Code of Ethics Code of Ethics adopted by Registrant,
Charles Schwab Investment Management
Inc. and Charles Schwab & Co., Inc. is
electronically filed herewith as
Exhibit (q).

<PAGE> 267

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

The Charles Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios each are Massachusetts business trusts registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), are advised by the
Investment Manager, and employ Schwab as their principal underwriter, transfer
agent and shareholder services agent. As a result, The Charles Schwab Family of
Funds, Schwab Investments and Schwab Annuity Portfolios may be deemed to be
under common control with Registrant.

Item 25. Indemnification.

Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit
(1) hereto, which is incorporated by reference) provides in effect that
Registrant will indemnify its officers and trustees against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees reasonably
incurred by any such officer or trustee in connection with the defense or
disposition of any action, suit, or other proceeding. However, in accordance
with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement
and Declaration of Trust does not protect any person against any liability to
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. In any event,
Registrant will comply with 1940 Act Releases No. 7221 and 11330 respecting the
permissible boundaries of indemnification by an investment company of its
officers and trustees.

Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Adviser

Registrant's investment 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.

<PAGE> 268

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 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 Management, Inc. Chairman, Director

The Charles Schwab Trust Company Director

Mayer & Schweitzer, Inc. Chairman and Director until
January 1999

Schwab Retirement Plan Services, Inc. Chairman, Director until January
1999

Charles Schwab Limited (U.K.) Chairman and Chief Executive
Officer

Schwab Holdings, Inc. Chief Executive Officer

Schwab International Holdings, Inc. Chairman and Chief Executive
Officer

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

Performance Technologies, Inc. Chairman, Director until January
1999

TrustMark, Inc. Chairman and Director until
January 1999

The Gap, Inc. Director

Audiobase, Inc. Director

Vodaphone AirTouch PLC Director

Siebel Systems Director
</TABLE>

<PAGE> 269

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

Schwab Retirement Plan Services, Inc. Director until January 1999

Charles Schwab Limited (U.K.) Director until January 1999

Charles Schwab Investment Management, Inc. Director

Mayer & Schweitzer, Inc. Director until January 1999

Performance Technologies, Inc. Director until January 1999

TrustMark, Inc. Director until January 1999

Steven L. Scheid Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President and Trustee President - Financial Products
and Services, Director

The Charles Schwab Corporation Vice Chairman and Executive
Vice President

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

The Charles Schwab Trust Company Director until July 1998

Charles Schwab Limited (U.K.) Finance Officer

Schwab Retirement Plan Services, Inc. Director until January 1999

Performance Technologies, Inc. Director until January 1999

Mayer & Schweitzer, Inc. Director until January 1999

Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary

Charles Schwab & Co., Inc. Vice President and Assistant
Corporate Secretary

Charles Schwab Investment Management, Inc. Assistant Corporate Secretary

The Charles Schwab Trust Company Assistant Corporate Secretary
</TABLE>

<PAGE> 270

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -------------------------------- ------------------------------------------------- ----------------------------------
<S> <C> <C>
Jeremiah H. Chafkin, Executive Charles Schwab & Co., Inc. Executive Vice President -
Vice President and Chief SchwabFunds. Prior to November
Operating Officer 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust
Company.

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

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

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

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

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

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

Dawn G. Lepore Charles Schwab & Co., Inc. Vice Chairman, Executive Vice
President and Chief Information
Officer
</TABLE>

<PAGE> 271

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

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

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

The following information, which is believed to be accurate, is based upon
information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two fiscal years for his or her
own account in the capacity of director, officer, employee, partner or trustee
is as follows:

<TABLE>
<CAPTION>
Name Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew T. Rudd Symphony Asset Management, Inc. Director and Chairman

BARRA, Inc. Director, Chief Executive Officer and
Chairman

Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer and
President

BARRA, Inc. President, BARRA Ventures Div. until 1994
</TABLE>

<PAGE> 272

<TABLE>
<CAPTION>
Name Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer

Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994

Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments

BARRA, Inc. Director of Active Strategies until 1994

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

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

Item 27. Principal Underwriters.

(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab also acts as principal underwriter for the The
Charles Schwab Family of Funds, Schwab Investments, 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 each director and/or
senior or executive officer of Schwab. The principal business address of Schwab
is 101 Montgomery Street, San Francisco, California 94104.

Item 28. Location of Accounts and Records.

All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of Registrant; Registrant's investment manager and
administrator, Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, California 94104; Registrant's former sub-investment
adviser, Dimensional Fund Advisors Inc., 1299 Ocean Avenue, Suite 1100, Santa
Monica, California 90401; Registrant's sub-investment adviser for the Schwab
Analytics Fund(R) is Symphony Asset Management, Inc., 555 California Street,
Suite 2975, San Francisco, California 94104; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's custodian and fund accountants, PNC Bank, National
Association/PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, 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.

<PAGE> 273

Item 29. Management Services.

Not applicable.

Item 30. Undertakings.

Not applicable.

<PAGE> 274

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
certifies that it meets all of the requirements for the effectiveness of this
Registration Statement pursuant to Rule 485(b) under the 1933 Act and has duly
caused this Post Effective Amendment No. 36 to be signed on its behalf by the
undersigned, duly authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on this 25th day of February, 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. 36 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 25th day of February, 2000.

<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman, Chief Executive Officer, and Trustee
- ------------------------------
Charles R. Schwab

Steve Scheid* President and Trustee
- ------------------------------
Steve Scheid

Jeremiah H. Chafkin* Executive Vice President, Chief Operating Officer
- ------------------------------
Jeremiah H. Chafkin

William J. Klipp* Trustee
- ------------------------------
William J. Klipp

Donald F. Dorward* Trustee
- ------------------------------
Donald F. Dorward

Robert G. Holmes* Trustee
- ------------------------------
Robert G. Holmes

Donald R. Stephens* Trustee
- ------------------------------
Donald R. Stephens

Michael W. Wilsey* Trustee
- ------------------------------
Michael W. Wilsey

Tai-Chin Tung* Treasurer and Principal Financial Officer
- ------------------------------
Tai-Chin Tung
</TABLE>

*By /s/ John H. Grady, Jr.
--------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney

<PAGE> 275

EXHIBIT INDEX

EXH. NO. DOCUMENT

(g)(ix) Schedule I to the Custodian Services Agreement

(i) Opinion of Counsel

(j) Auditors' Consent

(p) Power of Attorney

(q) Code of Ethics

<PAGE> 1
EXHIBIT (g)(ix)

SCHEDULE I
CUSTODIAN SERVICES AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND PFPC TRUST COMPANY

LIST OF FUNDS

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

PFPC TRUST COMPANY

By: /s/ Joseph Gramlich
-----------------------------
Joseph Gramlich

Title: Vice President

SCHWAB CAPITAL TRUST

By: /s/ Tai-Chin Tung
-----------------------------
Tai-Chin Tung

Title: Treasurer and Principal Financial Officer

<PAGE> 1
EXHIBIT (i)

[letterhead of Morgan, Lewis & Bockius LLP]

February 15, 2000

Schwab Capital Trust
101 Montgomery Street
San Francisco, CA 94104

Re: Opinion of Counsel regarding Post-Effective Amendment No. 36 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-62470).

Ladies and Gentlemen:

We have acted as counsel to Schwab Capital Trust, a Massachusetts
business trust (the "Trust"), in connection with the above-referenced
Registration Statement on Form N-1A (as amended, the "Registration Statement")
which relates to the Trust's shares of beneficial interest, par value $.00001
per share (collectively, the "Shares"). This opinion is being delivered to you
in connection with the Trust's filing of Post-Effective Amendment No. 36 to the
Registration Statement (the "Amendment") to be filed with the Securities and
Exchange Commission pursuant to Rule 485(b) of the Securities Act of 1933 (the
"1933 Act"). With your permission, all assumptions and statements of reliance
herein have been made without any independent investigation or verification on
our part except to the extent otherwise expressly stated, and we express no
opinion with respect to the subject matter or accuracy of such assumptions or
items relied upon.

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

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

(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration of
Trust");

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

<PAGE> 2
Schwab Investments
February 15, 2000
Page 2

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

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

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

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

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

Very truly yours,

/s/ Morgan, Lewis & Bockius LLP

<PAGE> 1
EXHIBIT (j)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our reports dated December 9, 1999, relating to the
financial statements and financial highlights which appear in the October 31,
1999 Annual Reports to Shareholders of Schwab S&P 500 Fund, Schwab Total Stock
Index Fund, Schwab Small-Cap Index Fund, Schwab International Index Fund, Schwab
MarketTrack All Equity Portfolio, Schwab MarketTrack Growth Portfolio, Schwab
MarketTrack Balanced Portfolio, Schwab MarketTrack Conservative Portfolio,
Schwab MarketManager Growth Portfolio, Schwab MarketManager Balanced Portfolio,
Schwab MarketManager Small Cap Portfolio, Schwab MarketManager International
Portfolio, Institutional Select S&P 500 Fund, Institutional Select Large-Cap
Fund, Institutional Select Small-Cap Fund and Schwab Analytics Fund
(constituting Schwab Capital Trust) which are also incorporated by reference
into the Registration Statement. We also consent to the references to us under
the headings "Financial Highlights" and "Independent Accountants" in such
Registration Statement.

PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2000

<PAGE> 1
EXHIBIT (p)

THE CHARLES SCHWAB FAMILY OF FUNDS
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS

POWER OF ATTORNEY

I, the undersigned trustee and/or officer of The Charles Schwab Family
of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios
(each a "Trust" and collectively the "Trusts"), and each a Massachusetts
business trust, do hereby constitute and appoint Frances Cole, Matthew O'Toole,
Richard W. Grant and John H. Grady, Jr., and each of them singly, my true and
lawful attorneys, with full power to them and each of them, to sign for me and
in my name and the capacity listed below, any and all amendments to the
Registration Statement on Form N1-A of each Trust, and to file the same with all
exhibits thereto, and other documents in connection thereunder, with the
Securities and Exchange Commission, granting unto my said attorneys, and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully as to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully do
or cause to be done by virtue thereof.

WITNESS my hand on the date set forth below.

/s/ Jeremiah H. Chafkin Date: 12/6/1999
- -----------------------------------
Jeremiah H. Chafkin
Executive Vice President and Chief Operating Officer

<PAGE> 1
EXHIBIT (q)

THE CHARLES SCHWAB FAMILY OF FUNDS
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
CHARLES SCHWAB & CO., INC.
CODE OF ETHICS ADOPTED PURSUANT TO SECTION 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940

Rule 17j-1 of the Investment Company Act of 1940 (the "1940 Act") requires that
every registered investment company, and each investment adviser to and
principal underwriter for such investment company, adopt a written code of
ethics containing provisions reasonably necessary to prevent its "Access
Persons" from engaging in any act, practice or course of business prohibited by
section 17(j) of the 1940 Act and Rule 17j-1 adopted thereunder. That Rule
further requires that each investment company and its adviser(s) and
underwriter(s) use reasonable diligence, and institute procedures reasonably
necessary, to prevent violations of such code. The Insider Trading and
Securities Fraud Enforcement Act of 1988 ("ITSFEA"), requires every investment
adviser and registered broker-dealer to develop, implement and enforce policies
and procedures to prevent the misuse of material nonpublic information.

The following policies constitute the Code of Ethics for The Charles Schwab
Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity
Portfolios (each a "Trust", and collectively known as the "Trusts"), Charles
Schwab Investment Management, Inc. ("CSIM"), a registered investment adviser and
the investment adviser to the Trusts, and Charles Schwab & Co., Inc. ("Schwab"),
a registered broker-dealer and the principal underwriter of the Trusts. The
policies and procedures established by this Code of Ethics are applicable to all
directors, trustees, officers and employees of the Trusts and CSIM, and to any
director or officer of Schwab who, makes, participates in or obtains information
regarding the purchase or sale of "Covered Securities" by the Trusts. Other
entities that serve as sub-advisers to separate series of the Trusts shall
comply with their own codes of ethics approved by the Board of Trustees, and
report to the Boards of Trustees in accordance with Section VI hereunder.

I. POLICY STATEMENT

Rule 17j-1 under the 1940 Act makes it unlawful for any Affiliated Person of, or
principal underwriter for, the Trusts or Affiliated Person of the Trusts'
investment adviser(s) and principal underwriter, in connection with the direct
or indirect purchase or sale by such person of any Covered Security that is
"held or to be acquired" by any investment portfolio of a Trust (each a "Fund"):

- - To employ any device, scheme or artifice to defraud the Trust or any
Fund;

<PAGE> 2

- - To make to the Trust or any Fund any untrue statement of a material
fact or omit to state to the Trust or any Fund a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading;

- - To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon the Trust or any Fund; and

- - To engage in any manipulative practice with respect to the Trust or any
Fund.

It is the policy of the Trusts, CSIM and Schwab that no Access Person of a
Trust, CSIM or Schwab will make, participate in, or engage in any act, practice
or course of conduct that would violate the provisions set forth above or which
would, in any way, conflict with the interests of the Trusts or their
shareholders. This obligation encompasses:

- - the duty at all times to place the interests of shareholders first;

- - the duty to ensure that all personal securities transactions be
conducted consistent with the Code of Ethics and in such a manner as to
avoid any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility; and

- - the fundamental standard that Access Persons not take inappropriate
advantage of their positions.

II. DEFINITIONS

The definitions used in this Code of Ethics include the following.

ACCESS PERSON. An "Access Person" of the Trusts or CSIM is any director, Trustee
or officer of the Trusts or CSIM, and any employee of CSIM who, in the ordinary
course of business, makes, participates in or obtains information regarding the
purchase or sale of securities for the Trusts or a Fund. An "Access Person" of
Schwab is any director or officer of Schwab who, in the ordinary course of
business, makes, participates in or obtains information regarding the purchase
or sale of securities for a Trust or a Fund or whose functions or duties as part
of his or her business relate to the making of any recommendation to a Trust or
a Fund regarding the purchase or sale of securities. An "Access Person" is also
any natural person who "controls" a Trust or a Fund or CSIM, but only if such
person obtains information concerning recommendations made to the Trust or a
Fund with regard to the purchase or sale of Covered Securities by the Trust or a
Fund.

AFFILIATED PERSON. An "Affiliated Person" of the Trusts, CSIM or Schwab is
defined in Section 2(a)(3) of the 1940 Act.

BENEFICIAL OWNERSHIP. A person should consider himself or herself "beneficial
owner" of any security in which he or she has a direct or indirect pecuniary
interest. In addition, he or she has "beneficial ownership" of securities held
by his or her spouse, minor children, a relative who shares his or her home, or
other persons if by reason of any contract,

<PAGE> 3

understanding, relationship, agreement or other arrangement, he or she obtains
from such securities benefits substantially equivalent to those of ownership. He
or she should also consider himself or herself the beneficial owner of
securities if he or she can vest or revest title in himself or herself now or in
the future.

CONTROL. "Control" has the same meaning as in Section (2)(a)(9) of the 1940 Act.

COVERED SECURITY. A "Covered Security" is any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation in
any profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option or privilege on any security. A Covered Security is also any
group or index of securities, or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign currency, or,
in general, any interest or instrument commonly known as a security, or any
certificate of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to or purchase,
any of the foregoing.

Notwithstanding the above definition, Covered Securities include only those
securities which a Trust would be permitted to acquire under its investment
objectives and policies set forth in its then current prospectuses filed under
the Securities Act of 1933 (the "1933 Act"), and does not include securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit,
commercial paper, repurchase agreements, other money market instruments and
shares of registered open-end investment companies.

HELD OR TO BE ACQUIRED. A security is "held or to be acquired" if within the
most recent 15 days it is or has been held by a Trust, or is being or has been
considered by a Trust or CSIM for purchase by a Trust. A purchase or sale
includes the writing of an option to purchase or sell.

INITIAL PUBLIC OFFERING. "Initial Public Offering" is an offering of securities
registered under the 1933 Act the issuer of which, immediately before the
registration, was not subject to the reporting requirements of Sections 13 or
15(d) of the Securities Exchange Act of 1934.

INVESTMENT PERSONNEL. "Investment Personnel" are Access Persons who, in
connection with their regular functions or duties, make or participate in making
recommendations regarding the purchase or sale of securities by a Trust or a
Fund. The term also includes all persons who control a Trust or CSIM or Schwab
and obtain information concerning recommendations made to a Trust regarding the
purchase or sale of securities by a Trust or a Fund.

NON-INTERESTED TRUSTEE. A "Non-Interested Trustee" is any Trustee of the Trusts
who is not an interested person as defined in section 2(a)(19) of the 1940 Act.

<PAGE> 4

PRIVATE PLACEMENT. A "Private Placement" is an offering that is exempt form
registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) or
pursuant to Rule 504, Rule 505 or Rule 506 adopted thereunder.

III. COMMUNICATIONS

Access Persons may not tip or otherwise disclose to others (except to others who
have a need to know such information in the ordinary course of their business)
any information regarding the investment activities of the Trusts, including any
transaction or recommendation made by or to CSIM or a Trust or a Fund. All such
communications must be reported immediately to the CSIM Compliance Department.

IV. LIMITS ON ACCEPTING OR RECEIVING GIFTS

Access Persons may not accept or receive any gift of more than de minimis value
(as defined in the Schwab Compliance Manual) from any person or entity in
connection with the Trusts or a Fund's entry into a contract, development of an
economic relationship, or other course of dealing by or on behalf of the Trusts
or a Fund.

V. TRADING RESTRICTIONS

The policies and procedures regarding trading restrictions are as follows:

OFFICERS, DIRECTORS, TRUSTEES AND EMPLOYEES TRADING RESTRICTIONS. Any officer,
director, Trustee or employee of the Trusts, CSIM or Schwab with material
nonpublic information about a Covered Security is prohibited from all personal
trading in any security about which he or she has such information.

PRIOR APPROVAL OF TRADES. At all times, each personal transaction in a Covered
Security by Investment Personnel involving more than 5,000 shares of any
issuer's equity securities, rights, warrants or units or $100,000.00 face value
of bonds or debentures of any one issuer must receive prior approval by CSIM's
Chief Compliance Officer or his or her designee. Prior approval of a personal
transaction may only be relied upon for 5 business days from the date approval
is received. Because of the specific policies in place to monitor and control
employee trading of stock of The Charles Schwab Corporation ("SCH"), prior
approval of personal transactions do not apply to SCH stock and SCH options. All
other trading restrictions applicable to Covered Securities still apply to SCH
stock and SCH options.

All Access Persons other than Investment Personnel may trade in Covered
Securities without prior approval, provided that such persons have no actual
knowledge of the Trusts' activities with respect to the subject security, and
have no material, nonpublic information about the issuer of the subject
security.

These trading restrictions apply to all transactions in Covered Securities in
accounts over which Access Persons of CSIM, exercise control, accounts for their
family members or accounts in which they have a beneficial interest, but do not
apply to dividend reinvestment

<PAGE> 5

programs, odd-lot transactions or investment decisions made by an unrelated
third party who does not have access to the information in possession of such
Access Person. All trading activity by Access Persons is subject to reporting
and surveillance as set forth in the surveillance and reporting sections of
these procedures.

PRIOR APPROVAL OF INITIAL PUBLIC OFFERINGS ("IPOS") AND PRIVATE PLACEMENTS. Each
transaction involving an IPO or a private placement by Investment Personnel must
receive prior approval by CSIM's Chief Compliance Officer or his or her
designee.

NON-INTERESTED TRUSTEES. A Non-Interested Trustee of the Trusts may trade in
securities in which a Trust has invested or is considering for investment,
provided that the Trustee has no actual knowledge of the Trust's contemporaneous
activities with respect to the subject security, and has no material, nonpublic
information about the issuer of the subject security.

VI. REPORTING

The policies and procedures regarding reporting requirements that are applicable
to the Access Persons of the Trusts, CSIM and Schwab include the following.

REPORTS TO THE BOARD OF TRUSTEES. The President of CSIM and Executive Vice
President of Schwab (or their designees) must (i) furnish annually to the Board
of Trustees a written report of any issues arising under the Code of Ethics,
including any material violations and any sanctions imposed in response to these
violations and (ii) certify annually to the Board of Trustees that each has
adopted procedures reasonably necessary to prevent its Access Persons from
violating the provisions of its Code of Ethics. The President of the Trusts (or
his or her designee) will report to the Board of Trustees on an annual basis in
accordance with subparts (i) and (ii), above.

The President of any adviser or sub-adviser other than CSIM shall submit a copy
of its code of ethics for the Board's approval, together with the reports
required by subparts (i) and (ii), above. Such adviser or sub-adviser shall
submit any amendments to its code within 30 days of adoption.

ACCESS PERSON REPORTING. Each Trust, CSIM and Schwab are responsible for
promptly identifying and reporting to the CSIM Compliance Department all persons
considered to be Access Persons. Each Trust, CSIM and Schwab will compile a
written list of such persons, and promptly notify the CSIM Compliance Department
of all changes in the persons designated as Access Persons. The CSIM Compliance
Department will notify Access Persons of their obligation to report trading
activity, and provide them with a copy of this Code. The CSIM Compliance
Department will also prepare the quarterly transaction report for each Access
Person and present such reports to Access Persons for review and execution.
Access Persons shall return the executed quarterly transaction report to the
appropriate review officer(s) ("Review Officer") appointed by the Presidents of
the Trusts and CSIM and Executive Vice President of Schwab, or their respective
designees. Access Persons of any adviser or sub-adviser other than CSIM shall
only file reports under their own code.

<PAGE> 6

Each Access Person (with the exception of Non-Interested Trustees) must make an
initial holdings report, no later than ten days after he or she becomes an
Access Person and annual holdings reports which shall disclose (a) the title,
number of shares and principal amount of each Covered Security, with the
exception of SCH stock and SCH options, in which such Access Person had any
direct or indirect beneficial ownership; and (b) the name of any broker, dealer
or bank with whom the Access Person maintained an account in which securities
were held for the direct or indirect beneficial interest of the Access Person.
The annual disclosure of holdings shall be made and calculated as of each
calendar year end.

Access Persons (other than Non-Interested Trustees) shall report on a quarterly
calendar basis all transactions in which they acquire any direct or indirect
beneficial ownership in Covered Securities, except for indirect or direct
beneficial ownership in SCH stock or SCH options. These transaction reports must
be made no later than ten days after the end of each calendar quarter and
include trading activity at Schwab and any other broker-dealer.

NON-INTERESTED TRUSTEE REPORTING. The CSIM Compliance Department shall notify
each Non-Interested Trustee that such person is subject to this Code of Ethics'
reporting requirements and shall deliver a copy of this Code of Ethics to each
such person.

Each Non-Interested Trustee shall submit quarterly transaction reports to the
appropriate Review Officer showing all transactions in Covered Securities in
which the person has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership, but only where the Non-Interested Trustee knew at
the time of the transaction or, in the ordinary course of fulfilling his or her
official duties as a Trustee, should have known that during the 15-day period
immediately preceding or after the date of the transaction, such security is or
was purchased or sold, or considered for purchase or sale, by a Trust.

VII. SURVEILLANCE

The policies and procedures regarding surveillance that are applicable to
officers, directors, Trustees and employees of the Trusts, CSIM and Schwab
include the following.

EMPLOYEE SURVEILLANCE AND REVIEW. The Presidents of the Trusts and CSIM and
Executive Vice President of Schwab, or their respective designees, will appoint
Review Officer(s) to conduct employee surveillance and review. The Review
Officer will, on a quarterly basis, compare all reported personal transactions
in Covered Securities with the Trusts or a Fund's completed portfolio
transactions and a list of Covered Securities being considered for purchase or
sale by CSIM to determine whether a violation may have occurred. The Review
Officer will employ procedures similar to those attached as Exhibit A hereto.
Before determining that a person has violated the Code of Ethics, the Review
Officer must give the person an opportunity to supply explanatory material.

If the Review Officer determines that a violation has or may have occurred, the
Review Officer must submit the determination, together with the confidential
quarterly report and any explanatory material provided by the person to the
President of CSIM (or his or her designee), who will determine whether the
person violated the Code of Ethics.

<PAGE> 7

No person is required to participate in a determination of whether he or she has
committed a violation or discuss the imposition of any sanction against himself
or herself.

If the President of CSIM (or his or her designee) finds that the person violated
the Code of Ethics, he or she will impose upon the person sanctions that he or
she deems appropriate and will report the violation and the sanction imposed to
the Trusts' Board of Trustees at the next regularly scheduled board meeting,
unless, in the sole discretion of the President or his or her designee,
circumstances warrant an earlier report.

The Review Officer will report his or her own transactions to an Alternate
Review Officer on a quarterly basis. The Alternative Review Officer on a
quarterly basis shall fulfill the duties of the Review Officer with respect to
the latter's transactions in Covered Securities.

Employees of CSIM and Schwab are also subject to the requirements of Schwab's
Employee Compliance Guide and Code of Conduct.

VIII. RECORDS

All records associated with this Code of Ethics, including but not limited to;
(i) lists of persons who are, or within past five years have been designated as
Access Persons; (ii) quarterly transaction and annual holdings reports by such
persons; (iii) surveillance documentation, including any Code violation and any
sanctions resulting from the violation; and (iv) communications and all versions
of the Code of Ethics, shall be maintained by the CSIM Compliance Department in
an easily accessible place for at least five years. In addition, any record of
any decision, and the reasons supporting the decision, to approve the
acquisition by Investment Personnel of securities acquired in an IPO or a
private placement, shall be maintained by the CSIM Compliance Department for at
least five years after the end of the fiscal year in which the approval is
granted.

The Code of Ethics, a copy of each quarterly transaction and annual holding
report by each Access Person of the Trusts, any written report made to the Board
of Trustees concerning the Code of Ethics and lists of all persons required to
make reports shall be preserved with the Trusts' records for the period required
by Rule 17j-1.

IX. DISCLOSURE

The Trusts will disclose in their Statement of Additional Information that (i)
the Trusts, CSIM and Schwab have adopted a Code of Ethics; (ii) the personnel of
the Trusts, CSIM and Schwab are permitted to invest in securities for their own
account, subject to the limitations of Rule 17j-1 and this Code; and (iii) the
Code of Ethics can be obtained from the Securities and Exchange Commission. The
Code of Ethics will be filed as an exhibit to the Trusts' registration
statements.

<PAGE> 8

EXHIBIT A

REVIEW AND SURVEILLANCE PROCEDURES
FOR COMPLIANCE WITH RULE 17j-1
UNDER THE 1940 ACT

I. NOTIFICATION OF QUARTERLY REPORTING REQUIREMENTS

A. At the end of each calendar quarter, the Review Officer will
send a Quarterly Personal Securities Transaction Report (the
form of which is attached as Exhibit B), to each person who is
an Access Person of (i) the Trusts, (ii) CSIM and (iii)
Schwab.

B. The Review Officer will promptly record the return of each
Quarterly Personal Securities Transaction Report.

C. Seven days after the end of the calendar quarter, the Review
Officer will send a reminder notice to any Access Person who
has not returned his or her Quarterly Personal Securities
Transaction Report.

D. Eleven days after the end of the calendar quarter, the Review
Officer will send a "Notice of Failure" to any Access Person
who has not returned his or her Quarterly Personal Securities
Transaction Report. The Notice of Failure will notify the
Access Person that he or she is in violation of Rule 17j-1
under the 1940 Act and the Code of Ethics and may be subject
to sanctions under the Code of Ethics.

E. The Review Officer shall report the name of any Access Person
who has failed to provide a Quarterly Personal Securities
Transaction Report to the President of CSIM for further
evaluation and imposition of sanctions, if applicable.

II. REVIEW OF QUARTERLY REPORTS

A. Investment Personnel

1. The Review Officer shall verify, against the list of pre-approved
transactions, that Investment Personnel have reported all transactions
that were pre-approved, and that all reported transactions were
pre-cleared.

2. For any transaction in a Covered Security involving
more than 1,000 shares of any issuer's equity
securities, rights, warrants or units or $100,000.00
face value of bonds or debentures of any one issuer
that was reported on the Quarterly Personal
Securities

<PAGE> 9

Transaction Report, but for which the person had not
obtained prior approval, the Review Officer shall
prepare a report on the transaction and transmit the
report to the President of CSIM for further action.

B. Access Persons.

1. The Review Officer shall review each Quarterly
Personal Securities Transaction Report received
against the master list of Covered Securities
purchased or sold, or considered for purchase or
sale, by the Funds for the same period as the
transactions reported by the Access Person.

2. For any transaction by an Access Person in the same security as that
purchased or sold by a Fund, the Review Officer will first determine
whether the transaction was within 15 days (before or after) the
transaction conducted by the Fund. If it falls within the 15 day
period, the Review Officer will review the transaction in light of the
following considerations:

- the size of the transaction;
- whether the transaction was in the same
"direction" as the Fund's;
- the timing of the transaction; and
- the purchase or sale price of the Covered
Security.

3. For any trade that is identified by the Review
Officer as having occurred on the same day as a Fund
at a more favorable price to the Access Person, the
Review Officer shall send an inquiry letter to the
Access Person and will conduct further investigation
of the transaction.

4. If the Review Officer after further review determines
that a transaction appears to involve a conflict of
interest and/or a violation of the Code, he or she
will report this to the President of the Access
Person's employer for further action.

III. PERIODIC REVIEW

A. On an annual basis, the Review Officer shall review all annual
holdings and quarterly reports submitted by Investment
Personnel for patterns of trading activity that evidence a
possible violation of the Code of Ethics. The following
patterns, if ascertained, will require further inquiry:

- Trading only or primarily in securities that one or
more Funds actively trade in;

<PAGE> 10

- Transactions that match up closely in time with Fund
transactions and diverge from the person's
otherwise-normal trading profile in terms of the size
of transaction or type of security; and

- Transactions involving the purchase or sale of
Covered Securities that yielded significant profits
(or losses avoided), which match up closely in time
with the Funds' transactions.

B. The Review Officer shall conduct periodic reviews of reports
submitted by Access Persons that disclose more than 5 trades
in Covered Securities per calendar quarter. The Review Officer
may review specific transactions or a group of transactions
for any pattern of activity referenced in A., above.

IV. VERIFICATION OF BROKERAGE STATEMENTS

A. The Review Officer may request that an Access Person provide a
duplicate statement of any account with a broker, dealer or
bank where an Access Person holds securities, in order to
verify the accuracy of reports made by the Access Person.

B. Any request for statement of securities accounts shall be
complied with no later than 10 days after the request has been
made. If the request has not been complied with, it will be
considered a violation of the Code of Ethics.

V. ANNUAL CERTIFICATION

On an annual basis, each Access Person must certify that he or she (i)
is aware that he or she is subject to the requirements of Rule 17j-1
and the Code of Ethics and understands his or her obligations under the
Rule and Code of Ethics; and (ii) he or she has fully complied with the
requirements of the Code of Ethics.

<PAGE> 11

EXHIBIT B
QUARTERLY PERSONAL SECURITIES TRANSACTIONS REPORT

Name of Reporting Person:
Calendar Quarter Ended:

<TABLE>
<CAPTION>
- ------------ --------------- ------------ -------------------- -------------- -------- -----------------------------
Name of Date of Title of No. of Shares/ Type of Name of Broker, Dealer or
Issuer* Transaction Security Principal Amount Transaction Price Bank Effecting Transaction
- ------------ --------------- ------------ -------------------- -------------- -------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>

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

- ------------ --------------- ------------ -------------------- -------------- -------- -----------------------------
</TABLE>

* You are not required to report your personal transactions in stock of The
Charles Schwab Corporation ("SCH") or SCH options.

If you had no reportable transactions during the quarter, please check here.

If you established an account within the last quarter, please provide the
following information:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Name of Broker, Dealer Date Account was Interest Rate Maturity Date Date Report Submitted
or Bank Established (if applicable) (if applicable) by Access Person
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

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

- --------------------------------------------------------------------------------------------------------------------
</TABLE>

If you did not establish a securities account within the last quarter, please
check here.

If you to disclaim beneficial ownership of one or more Securities reported
above, please describe below and indicate which Securities are at issue.

Signature Date