SCHWAB ANNUITY PORTFOLIOS, 485BPOS, 2000-04-26

SCHWAB ANNUITY PORTFOLIOS
485BPOS, 2000-04-26

Previous: INHEIRITAGE ACCOUNT OF 1ST ALLMERICA FINANCIAL LIFE INS CO, 485BPOS, 2000-04-26

Next: UNITED OF OMAHA SEPARATE ACCOUNT B, 485BPOS, 2000-04-26

<PAGE> 1

As filed with the Securities and Exchange Commission on April 26, 2000
File Nos. 33-74534 and 811-8314

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 11 [X]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12 [X]

SCHWAB ANNUITY PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)

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

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

Jeremiah H. Chafkin

Schwab Annuity Portfolios
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, Esq. Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment Management, Inc.
1701 Market Street 1301 K Street, NW, Suite 800 East 101 Montgomery Street
Philadelphia, PA 19103 Washington, D.C. 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 April 30, 2000 pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(1)

/ / On __________ pursuant to paragraph (a)(1)

/ / 75 days after filing pursuant to paragraph (a)(2)

/ / On (date) pursuant to paragraph (a)(2) of Rule 485

if appropriate, check the following box:

/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment

<PAGE> 2

PROSPECTUS

APRIL 30, 2000

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

SCHWAB MARKETTRACK GROWTH PORTFOLIO II

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.
<PAGE> 3

ABOUT THE PORTFOLIO

<TABLE>
<C> <S>
3 Schwab MarketTrack Growth Portfolio II
4 Main Risks
5 Performance
6 Portfolio Fees and Expenses
7 Financial Highlights
8 Portfolio Management
8 Investing in the Portfolio
9 Transaction Policies
9 Distributions and Taxes
10 To Learn More
</TABLE>

2
<PAGE> 4

SCHWAB MARKETTRACK GROWTH PORTFOLIO II

TICKER SYMBOL: SWPHX

GOAL

THE PORTFOLIO SEEKS HIGH CAPITAL GROWTH WITH LESS VOLATILITY THAN AN ALL-STOCK
PORTFOLIO.

STRATEGY

TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. THE
PORTFOLIO'S TARGET ALLOCATION INCLUDES STOCK, BOND AND CASH INVESTMENTS.

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

LARGE-CAP STOCK Schwab S&P 500 Fund. Seeks to track the S&P 500
Index,(R) a widely recognized index maintained
by Standard & Poor's that includes 500 U.S.
large-cap stocks.

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

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

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

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

Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes. The portfolio's allocation focuses on stock
investments, while including some bonds and cash investments to reduce
volatility. The portfolio typically does not change its asset allocations for
purposes of investment strategy, and seeks to remain close to the target
allocations of 80% stocks, 15% bonds and 5% cash. The stock allocation is
further divided into three segments: 40% of assets for large-cap, 20% for
small-cap and 20% for international.

The portfolio is intended to offer the investor key features of two types of
investment strategies: asset allocation and indexing. The portfolio's
performance is a blend of the performance of different asset classes or
different segments within an asset class. Indexing, a strategy of tracking the
performance of a given market over time, involves looking to an index to
determine what securities to own. By investing in a combination of index mutual
funds, the portfolio can offer diversification in a single investment.

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

3
<PAGE> 5

MAIN RISKS

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

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

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

MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market.

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

OTHER RISK FACTORS

For the portion of the portfolio's assets that are invested in the bond market,
a major risk is that bond prices generally fall when interest rates rise.
Portfolio performance also could be affected if bonds held by its underlying
funds go into default. Another risk is that certain bonds may be paid off, or
"called," substantially earlier or later than expected. While the portfolio's
underlying funds seek to track the returns of various indices, in each case
their performance normally is below that of the index. This gap occurs mainly
because, unlike an index, the underlying funds incur expenses and must keep a
small portion of their assets in cash. To the extent that an underlying fund
lends securities or makes short-term or other investments to reduce its
performance gap, it may increase the risk that its performance will be reduced.

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

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

4
<PAGE> 6

PERFORMANCE

Below are a chart and a table showing the portfolio's performance, as well as
data on unmanaged market indices. These figures assume that all distributions
were reinvested. The figures do not reflect the expenses of any life insurance
company separate account that invests in the portfolio or of any annuity or life
insurance contract issued by such life insurance company. Such expenses, if
included, would lower the figures shown. Keep in mind that future performance
may differ from past performance, and that indices do not include any costs of
investments.
[Average Annual Total Returns Bar Chart]

<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
------------------------------------
<S> <C>
1997 24.54
1998 13.07
1999 19.63
Best quarter: 15.57% Q4 1998
Worst quarter: -10.84% Q3 1998
</TABLE>

<TABLE>
<CAPTION>
SINCE
INCEPTION OF
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999 1 YEAR PORTFOLIO(1)
- ------------------------------------------------- ------ ------------
<S> <C> <C>
Portfolio............................................... 19.63 19.44
S&P 500(R) Index........................................ 21.04 28.13
Lehman Brothers Aggregate Bond Index.................... (0.82) 5.70
</TABLE>

- -------------------------
(1) Inception: 11/01/1996.

The performance information above shows you how the portfolio's performance
compares to that of its index and how such performance changes from year to
year.

5
<PAGE> 7

PORTFOLIO FEES AND EXPENSES

The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance. These fees are approximately 0.27% of the portfolio's average net
assets based on current investments and may fluctuate.

FEE TABLE

SHAREHOLDER FEES

None

ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management fees*............................................ 0.54
Distribution (12b-1) fees................................... None
Other expenses.............................................. 0.59
----
Total annual operating expenses............................. 1.13
EXPENSE REDUCTION........................................... (0.53)
----
NET OPERATING EXPENSES**.................................... 0.60
----
</TABLE>

- -------------------------
* Reflects current fees

** Guaranteed by Schwab and the investment adviser through 04/30/2001 (excluding
interest, taxes and certain non-routine expenses.

EXPENSES ON A $10,000 INVESTMENT

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$61 $306 $571 $1,327
</TABLE>

6
<PAGE> 8

FINANCIAL HIGHLIGHTS

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

SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 12/31 1999 1998 1997 1996 1
- ------------------------------------------------------------ ------- ------- ------- ------
<S> <C> <C> <C> <C>
For a share outstanding throughout each period:
Net asset value at beginning of period...................... $ 14.24 $ 12.95 $ 10.42 $10.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.15 0.17 0.22(2) 0.04
Net realized and unrealized gains on investments.......... 2.63 1.52 2.33 0.38
------- ------- ------- ------
Total income from investment operations................... 2.78 1.69 2.55 0.42
LESS DISTRIBUTIONS:
Dividends from net investment income...................... (0.18) (0.15) (0.02) --
Distributions from realized gain on investments........... (1.00) (0.25) (0.00)(3) --
------- ------- ------- ------
Total distributions....................................... (1.18) (0.40) (0.02) --
------- ------- ------- ------
Net asset value at end of period............................ $ 15.84 $ 14.24 $ 12.95 $10.42
------- ------- ------- ------
TOTAL RETURN(%)............................................. 19.63 13.07 24.54 4.20*
RATIOS/SUPPLEMENTAL DATA(%)
Ratio of actual operating expenses to average net assets.... 0.56 0.57 0.75 0.67**
Reductions reflected in above expense ratio................. 0.53 0.71 1.24 4.04**
Ratio of net investment income to average net assets........ 1.32 1.64 1.98 2.35**
Portfolio turnover rate..................................... 14 67 81 7
Net assets, end of period (000s).......................... $18,956 $14,354 $10,333 $5,384
</TABLE>

- -------------------------
1 For the period from November 1, 1996 (commencement of operations) to
December 31, 1996.

2 Per share information presented is based upon the average number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.

3 Less than one cent per share.

* Not annualized.

** Annualized.

7
<PAGE> 9

PORTFOLIO MANAGEMENT

THE INVESTMENT ADVISER for the portfolio 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)
and has more than $107 billion under management. The firm manages assets for
more than 5 million shareholder accounts. (All figures on this page are as of
12/31/1999.)

As the investment adviser, the firm oversees the asset management and
administration of the portfolio. As compensation for these services, the firm
receives a management fee from the portfolio. For the 12 months ended
12/31/1999, this fee was 0.07% for the MarketTrack Growth Portfolio II. This
figure, which is expressed as a percentage of the portfolio's average daily net
assets, represent the actual amounts paid, including the effects of reductions.

GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of the equity portion of the MarketTrack Growth Portfolio
II. Prior to joining the firm in 1995, she worked for nearly 15 years in equity
index management.

KIMON DAIFOTIS, CFA, a vice president of the investment adviser, is responsible
for the day-to-day management of the bond and cash portions of the MarketTrack
Growth Portfolio II. Prior to joining the firm in October 1997, he worked for
more than 17 years in research and asset management.

INVESTING IN THE PORTFOLIO

Shares of the portfolio are sold on a continuous no load basis and are currently
available exclusively for variable annuity and variable life insurance separate
accounts, and in the future may be offered to tax-qualified retirement plans
(tax qualified plans). Variable life and variable annuity contract (variable
contract) investors also should review the separate account prospectus prepared
by their insurance company.

Although shares of the portfolio are not available for purchase directly by the
general public, you may nevertheless allocate account value under your variable
contract to and from the portfolio in accordance with the terms of your variable
contract. Please refer to the appropriate separate account prospectus for
further information on how to make an allocation and how to purchase or
surrender your variable contract.

Shares of the portfolio are expected to be offered to affiliated and
unaffiliated participating insurance companies and their separate accounts to
fund benefits under variable contracts and variable life insurance policies as
well as to tax qualified plans. The relationships of tax qualified plans and
plan participants to the portfolio would be subject, in part, to the provisions
of the individual tax qualified plans and applicable law. Accordingly, such
relationships could be different from those described in this prospectus for
separate accounts and variable contract owners in such areas, for example, as
tax matters and voting privileges.

The portfolio does not foresee any disadvantage to variable contract or variable
life insurance policy owners or plan participants arising out of these
arrangements. Nevertheless, differences in treatment under tax and other laws,
as well as other considerations, could cause the interests of various purchasers
of variable contracts and variable life insurance policies (and the interests of
any plan participants) to conflict. For example, violation of the federal tax
laws by one separate account investing in the portfolio could cause the variable
contracts funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. At the same time, if these
arrangements are implemented, the portfolio, the participating insurance
companies, and any tax qualified plans investing in the portfolio would be
subject to conditions imposed by the SEC that are designed to prevent or remedy
any such conflicts. These conditions would require the Board of Trustees to
monitor events in order to identify the existence of any material,
irreconcilable conflict that may possibly arise and to determine what action, if
any, should be taken in response to any such conflict. If a material,
irreconcilable conflict arises involving separate accounts or tax qualified
plans, a separate account or tax qualified plan may be required to withdraw its
participation in the portfolio.

8
<PAGE> 10

TRANSACTION POLICIES

THE PORTFOLIO IS OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE
(NYSE) IS OPEN.

THE PORTFOLIO CALCULATES ITS SHARE PRICE EACH BUSINESS DAY after the close of
the NYSE. The portfolio's share price is its net asset value per share, or NAV,
which is the portfolio's net assets divided by the number of its shares
outstanding. Purchase and redemption orders from separate accounts investing in
the portfolio that are received and accepted by a participating insurance
company, as the portfolio's designee, prior to the close of the portfolio
(generally 4:00 p.m. Eastern time) will be executed at the portfolio's NAV
determined that day. The portfolio may take up to seven days to pay sales
proceeds to a participating insurance company.

All orders to purchase shares of the portfolio are subject to acceptance by the
portfolio and are not binding until confirmed or accepted in writing.

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

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

The portfolio reserves certain rights, including the following:

- To refuse any purchase order, including those that appear to be
associated with short-term trading activities

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

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

DISTRIBUTIONS AND TAXES

The portfolio will distribute substantially all of its net investment income and
capital gains, if any, to the participating insurance company separate accounts
each year in December. Distributions are normally reinvested pursuant to
elections by the separate accounts.

The portfolio has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). The
Code relieves a regulated investment company from certain Federal income tax and
excise tax, if the company distributes substantially all of its net investment
income and net realized capital gains.

The portfolio must meet asset diversification requirements under Section 817(h)
of the Code and the related regulations issued by the Internal Revenue Service.
The portfolio intends to comply with these diversification requirements.

For more information regarding the federal income tax consequences of investing
in the portfolio, see "Federal Income Taxes" in the SAI. For information
concerning the tax consequences of variable contract ownership, variable
contract owners should consult the appropriate separate account prospectus.

9
<PAGE> 11

TO LEARN MORE

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

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

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

You can obtain copies of these documents by contacting SchwabFunds(R), a
participating insurance company or the SEC. All materials from SchwabFunds are
free; the SEC charges a duplicating fee. You can also review these materials in
person at the Securities and Exchange Commission's Public Reference Room or by
computer using the SEC's EDGAR database at www.sec.gov.

SCHWABFUNDS

P.O. Box 7575

San Francisco, CA 94120-7575

800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS

SCHWAB INSURANCE AND ANNUITY SERVICE CENTER

800-838-0650 (IN NEW YORK 800-838-0649)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)

202-942-8090

www.sec.gov

[email protected]

SEC FILE NUMBERS
Schwab Annuity Portfolios 811-8314

10
<PAGE> 12

PROSPECTUS

APRIL 30, 2000

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

SCHWAB MONEY MARKET PORTFOLIO

ABOUT THE PORTFOLIO

<TABLE>
<C> <S>
3 Schwab Money Market Portfolio
4 Main Risks
5 Performance
6 Portfolio Fees and Expenses
7 Financial Highlights
8 Portfolio Management
8 Investing in the Portfolio
9 Transaction Policies
9 Distributions and Taxes
10 To Learn More
</TABLE>

2
<PAGE> 14

SCHWAB MONEY MARKET PORTFOLIO

TICKER SYMBOL: SWPXX

GOAL

THE PORTFOLIO SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY.

STRATEGY

To pursue its goal, the portfolio invests in high-quality short-term money
market investments issued by U.S. and foreign issuers, such as:

- U.S. government securities and U.S. treasury securities

- commercial paper, including asset-backed commercial paper

- certificates of deposit

- variable-and floating-rate debt securities

- bank notes

- repurchase agreements

All of these investments must be denominated in U.S. dollars, including those
that are issued by foreign issuers.

In choosing securities, the portfolio's manager seeks to maximize current income
within the limits of the portfolio's credit, maturity and issuer policies. Some
of these policies may be stricter than the federal regulations that apply to all
money funds.

The investment adviser's credit research department analyzes and monitors the
securities that the portfolio owns or is considering buying. The manager may
adjust the portfolio's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the portfolio seeks to maintain a stable $1 share price.

MONEY FUND REGULATIONS

Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:

- Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).

- Diversification: requirements for diversification limit the portfolio's
exposure to any given issuer.

- Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months). As
with all mutual funds, the performance of this portfolio will fluctuate
over time, and future performance may differ from past performance.

3
<PAGE> 15

MAIN RISKS

INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the portfolio's yield will change over time.
During periods when interest rates are low, the portfolio's yield (and total
return) also will be low.

YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the portfolio is not
insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any
other government agency. Although the portfolio seeks to preserve the value of
your investment at $1 per share it is possible to lose money by investing in the
portfolio.

THE PORTFOLIO COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although
the risk of default generally is considered unlikely (even among foreign
investments, which carry additional risks), any default on the part of a
portfolio investment could cause the portfolio's share price or yield to fall.
The additional risks of foreign investments are due to reasons ranging from a
lack of reliable issuer information to the risk of political uncertainties.

The manager's maturity decisions also will affect the portfolio's yield, and in
unusual circumstances could potentially affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the portfolio's
yields at times could lag those of other money market funds. The portfolio's
emphasis on quality and stability also could cause it to underperform other
money funds, particularly those that take greater maturity and credit risks.

THE PORTFOLIO IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for
their emphasis on stability and liquidity, money market investments may offer
lower long-term performance than stock or bond investments. This portfolio is
appropriate for investors interested in high money market returns.

4
<PAGE> 16

PERFORMANCE

Below are a chart and table showing how the portfolio's performance has varied
from year to year and how it averages out over time. These figures assume that
all distributions were reinvested. The figures do not reflect the expenses of
any life insurance company separate account that invests in the portfolio or of
any annuity or life insurance contract issued by such life insurance company.
Such expenses, if included, would lower the figures shown. Keep in mind that
future performance may differ from past performance.

<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
------------------------------------
<S> <C>
1995 5.26
1996 4.98
1997 5.12
1998 5.07
1999 4.69
Best quarter: 1.34% Q2 1995
Worst quarter: 1.18% Q4 1998
</TABLE>

<TABLE>
<CAPTION>
SINCE
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999 1 YEAR 5 YEARS INCEPTION(1)
- ------------------------------------------------- ------ ------- ------------
<S> <C> <C> <C>
Money Market Portfolio.................................. 4.69 5.03 4.89
</TABLE>

- -------------------------
(1) Inception: 5/3/1994

The portfolio's current 7-day yield ending 12/31/1999 was 5.01%.

5
<PAGE> 17

PORTFOLIO FEES AND EXPENSES

FEE TABLE

SHAREHOLDER FEES

None

ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management fees*............................................ 0.38
Distribution (12b-1) fees................................... None
Other expenses.............................................. 0.15
----
Total annual operating expenses............................. 0.53
EXPENSE REDUCTION........................................... (0.03)
----
NET OPERATING EXPENSES**.................................... 0.50
----
</TABLE>

- -------------------------
* Reflects current fees.

** Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).

EXPENSES ON A $10,000 INVESTMENT:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$51 $167 $293 $662
</TABLE>

6
<PAGE> 18

FINANCIAL HIGHLIGHTS

SCHWAB MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 12/31 1999 1998 1997 1996 1995
- ---------------------------------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD:
Net asset value at beginning of
period................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
FROM INVESTMENT OPERATIONS
Net investment income................. 0.05 0.05 0.05 0.05 0.05
-------- ------- ------- ------- -------
Total from investments operations..... 0.05 0.05 0.05 0.05 0.05
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (0.05) (0.05) 1 (0.05) (0.05) (0.05)
-------- ------- ------- ------- -------
Total distributions................... (0.05) (0.05) (0.05) (0.05) (0.05)
-------- ------- ------- ------- -------
Net asset value at end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
Total return (%).............. 4.69 5.07 5.12 4.98 5.26
RATIOS/SUPPLEMENTAL DATA(%)
Ratio of net operating expenses to
average net assets.................... 0.50 0.50 0.50 0.50 0.50
Reductions reflected in above expense
ratio................................. 0.10 0.11 0.21 0.45 0.52
Ratio of net investment income to
average net assets.................... 4.62 4.91 5.01 4.87 5.17
Net assets, end of period (000s)........ $119,612 $78,266 $47,968 $27,431 $16,912
</TABLE>

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

1 The amounts shown include certain reclassifications related to book to tax
differences.

7
<PAGE> 19

PORTFOLIO MANAGEMENT

As the investment adviser, the firm oversees the asset management and
administration of the portfolio. As compensation for these services, the firm
receives a management fee from the portfolio. For the 12 months ended
12/31/1999, this fee was 0.30% for the portfolio. This figure, which is
expressed as a percentage of the portfolio's average daily net assets,
represents the actual amount paid, including the effects of reductions.

INVESTING IN THE PORTFOLIO

8
<PAGE> 20

TRANSACTION POLICIES

THE PORTFOLIO IS OPEN FOR BUSINESS EACH DAY THAT BOTH THE NEW YORK STOCK
EXCHANGE (NYSE) AND THE FEDERAL RESERVE BANK OF NEW YORK ARE OPEN.

THE PORTFOLIO CALCULATES ITS SHARE PRICE EACH BUSINESS DAY after the close of
the NYSE (generally 4:00 p.m. Eastern time). The portfolio's share price is its
net asset value per share, or NAV, which is the portfolio's net assets divided
by the number of its shares outstanding. The portfolio seeks to maintain a
stable NAV of $1. Purchase and redemption orders from separate accounts
investing in the portfolio that are received and accepted by a participating
insurance company, as the portfolio's designee, prior to the close of the
portfolio (generally 4:00 p.m. Eastern time) will be executed at the portfolio's
NAV determined that day. The portfolio may take up to seven days to pay sales
proceeds to a participating insurance company.

All orders to purchase shares of the portfolio are subject to acceptance by the
portfolio and are not binding until confirmed or accepted in writing.

The portfolio values its investment holdings on the basis of amortized cost
(cost plus discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.

The portfolio reserves certain rights, including the following:

- To refuse any purchase order, including those that appear to be
associated with short-term trading activities

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

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

DISTRIBUTIONS AND TAXES

9
<PAGE> 21

TO LEARN MORE

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

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

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

SCHWABFUNDS SECURITIES AND EXCHANGE COMMISSION
P.O. Box 7575 Washington, D.C. 20549-6009
San Francisco, CA 94120-7575 800-SEC-0330 (Public Reference Section)
800-435-4000 202-942-8090
www.schwab.com/schwabfunds www.sec.gov
SCHWAB INSURANCE AND ANNUITY SERVICE [email protected]
CENTER SEC FILE NUMBERS
800-838-0650 (IN NEW YORK 800-838-0649) Schwab Annuity Portfolios 811-8314
</TABLE>

10
<PAGE> 22

PROSPECTUS

APRIL 30, 2000

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

SCHWAB S&P 500 PORTFOLIO

ABOUT THE PORTFOLIO

<TABLE>
<C> <S>
3 Schwab S&P 500 Portfolio
4 Main Risks
5 Performance
6 Portfolio Fees and Expenses
7 Financial Highlights
8 Portfolio Management
8 Investing in the Portfolio
9 Transaction Policies
9 Distributions and Taxes
10 To Learn More
</TABLE>

2
<PAGE> 24

SCHWAB S&P 500 PORTFOLIO

TICKER SYMBOL: SWPSX

GOAL

THE PORTFOLIO'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

TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS IN STOCKS THAT ARE INCLUDED IN THE
INDEX. It is the portfolio'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 portfolio generally gives the same weight
to a given stock as the index does. This strategy distinguishes an index
portfolio from an "actively managed" portfolio. Instead of choosing investments
based on judgment, a portfolio manager looks to an index to determine which
securities the portfolio should own.

Like many index funds, the portfolio 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
portfolio incurs expenses and must keep a small portion of its assets in cash
for business operations. By using futures, the portfolio 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
portfolio's performance normally is below that of the index. Also, because the
composition of the index tends to be comparatively stable, index funds
historically have shown low portfolio turnover compared to actively managed
funds.

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 12/31/1999.)

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.

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

3
<PAGE> 25

MAIN RISKS

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

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 portfolio 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 portfolio may underperform portfolios 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 portfolio's performance
also will lag those investments.

OTHER RISK FACTORS

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

The portfolio 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 portfolio's performance could be
reduced.

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 portfolio.

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 portfolio. The portfolio 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 portfolio. More complete information may be
found in the Statement of Additional Information (see back cover).

4
<PAGE> 26

PERFORMANCE

Below are a chart and a table showing the portfolio's performance, as well as
data on an unmanaged market index. These figures assume that all distributions
were reinvested. The figures do not reflect the expenses of any life insurance
company separate account that invests in the portfolio or of any annuity or life
insurance contract issued by such life insurance company. Such expenses, if
included, would lower the figures shown. Keep in mind that future performance
may differ from past performance, and that the index does not include any costs
of investments.
[Annual Total Returns Bar Chart]

<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
------------------------------------
<S> <C>
1997 32.46
1998 28.06
1999 20.47
Best quarter: 21.20% Q4 1998
Worst quarter: -9.96% Q3 1998
</TABLE>

<TABLE>
<CAPTION>
SINCE
INCEPTION
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999 1 YEAR OF PORTFOLIO(1)
- ------------------------------------------------- ------ ----------------
<S> <C> <C>
Portfolio............................................. 20.47 27.37
S&P 500(R) Index...................................... 21.04 28.13
</TABLE>

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

(1) Inception: 11/01/1996.

The performance information above shows you how the portfolio's performance
compares to that of its index and how such performance changes from year to
year.

5
<PAGE> 27

PORTFOLIO FEES AND EXPENSES

FEE TABLE

SHAREHOLDER FEES

None

ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management fees*............................................ 0.20
Distribution (12b-1) fees................................... None
Other expenses.............................................. 0.14
----
Total annual operating expenses............................. 0.34
EXPENSE REDUCTION........................................... (0.06)
----
NET OPERATING EXPENSES**.................................... 0.28
----
</TABLE>

- -------------------------
* Reflects current fees

** Guaranteed by Schwab and the investment adviser through 04/30/2001 (excluding
interest, taxes and certain non-routine expenses).

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$29 $103 $185 $425
</TABLE>

6
<PAGE> 28

FINANCIAL HIGHLIGHTS

SCHWAB S&P 500 PORTFOLIO

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 12/31 1999 1998 1997 1996 1
- ---------------------------------------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
For a share outstanding throughout each period:
Net asset value at beginning of period.............. $ 17.78 $ 13.94 $ 10.53 $10.00
-------- ------- ------- ------
Income from investment operations:
Net investment income............................. 0.16 0.13 0.09 0.03
Net realized and unrealized gains on
investments.................................... 3.47 3.78 3.33 0.50
-------- ------- ------- ------
Total income from investment operations........... 3.63 3.91 3.42 0.53

Less distributions:
Dividends from net investment income.............. (0.14) (0.06) (0.01) --
Distributions from realized gain on investments... (0.01) (0.01) (0.00) 2 --
-------- ------- ------- ------
Total distributions............................... (0.15) (0.07) (0.01) --
-------- ------- ------- ------
Net asset value at end of period.................... $ 21.26 $ 17.78 $ 13.94 $10.53
-------- ------- ------- ------
TOTAL RETURN (%).................................... 20.47 28.06 32.46 5.30*

RATIOS/SUPPLEMENTAL DATA(%)
Ratio of actual operating expenses to average net
assets............................................ 0.28 0.28 0.29 0.33**
Reductions reflected in above expense ratio......... 0.06 0.27 0.64 2.78**
Ratio of net investment income to average net
assets............................................ 1.14 1.52 1.56 2.16**
Portfolio turnover rate............................. 7 7 4 0
Net assets, end of period (000s).................. $129,920 $83,869 $37,056 $5,923
</TABLE>

- -------------------------
1 For the period from November 1, 1996 (commencement of operations) to
December 31, 1996.

2 Less than one cent per share.

* Not annualized.

** Annualized.

7
<PAGE> 29

PORTFOLIO MANAGEMENT

As the investment adviser, the firm oversees the asset management and
administration of the portfolio. As compensation for these services, the firm
receives a management fee from the portfolio. For the 12 months ended
12/31/1999, this fee was 0.18% for the S&P 500 Portfolio. This figure, which is
expressed as a percentage of the portfolio's average daily net assets, represent
the actual amounts paid, including the effects of reductions.

GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of the S&P 500 Portfolio. Prior to joining the firm in
1995, she worked for nearly 15 years in equity index management.

INVESTING IN THE PORTFOLIO

8
<PAGE> 30

TRANSACTION POLICIES

THE PORTFOLIO IS OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE
(NYSE) IS OPEN.

All orders to purchase shares of the portfolio are subject to acceptance by the
portfolio and are not binding until confirmed or accepted in writing.

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

The portfolio reserves certain rights, including the following:

- To refuse any purchase order, including those that appear to be
associated with short-term trading activities

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

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

DISTRIBUTIONS AND TAXES

9
<PAGE> 31

TO LEARN MORE

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

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

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

SCHWAB INSURANCE AND ANNUITY SERVICE CENTER

800-838-0650 (IN NEW YORK 800-838-0649)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]

SEC FILE NUMBERS
Schwab Annuity Portfolios 811-8314

10
<PAGE> 32

STATEMENT OF ADDITIONAL INFORMATION

SCHWAB ANNUITY PORTFOLIOS
SCHWAB MONEY MARKET PORTFOLIO (MONEY MARKET PORTFOLIO)
SCHWAB MARKETTRACK GROWTH PORTFOLIO II (GROWTH PORTFOLIO)
SCHWAB S&P 500 PORTFOLIO (S&P 500 PORTFOLIO)

APRIL 30, 2000

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectuses dated April 30, 2000 (as
amended from time to time).

To obtain a copy of the prospectus, please contact the Schwab Insurance and
Annuity Service Center at Charles Schwab & Co., Inc. at 800-838-0650, in New
York call 800-838-0648.

The portfolios' most recent annual reports are separate documents supplied with
the SAI and include the portfolios' audited financial statements, which are
incorporated by reference into this SAI.

The portfolios are a series of Schwab Annuity Portfolios (the trust).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES,
RISKS AND LIMITATIONS ................................................ 2
MANAGEMENT OF THE PORTFOLIOS ......................................... 21
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES .................. 24
INVESTMENT ADVISORY AND OTHER SERVICES ............................... 24
BROKERAGE ALLOCATION AND OTHER PRACTICES ............................. 27
DESCRIPTION OF THE TRUST ............................................. 28
PURCHASE, REDEMPTION AND PRICING OF SHARES ........................... 30
TAXATION ............................................................. 31
CALCULATION OF PERFORMANCE DATA ...................................... 32
APPENDIX ............................................................. 35
</TABLE>

<PAGE> 33
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

The MONEY MARKET PORTFOLIO seeks the highest current income consistent with
stability of capital and liquidity.

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

The S&P 500 PORTFOLIO'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 S&P 500
Portfolio may purchase securities of companies with which it is affiliated to
the extent these companies are represented in its index.

The S&P 500 Portfolio 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 S&P 500 Portfolio or the general public regarding the advisability of
investing in securities generally or in the S&P 500 Portfolio particularly, or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the S&P 500 Portfolio 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 S&P 500 Portfolio. S&P has
no obligation to take the needs of the S&P 500 Portfolio 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 S&P 500 Portfolio shares or in the determination or
calculation of the equation by which the S&P 500 Portfolio'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 S&P 500 Portfolio's shares.

S&P does not guarantee the accuracy and /or the completeness of the S&P 500
Index or any data included therein, and S&P shall have no liability for any
errors, omissions or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Schwab S&P 500 Portfolio, 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

2
<PAGE> 34
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.

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

The following investment securities, strategies, risks and limitations
supplement those set forth in the prospectuses 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. Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with the portfolio's investment policies and limitations. Additionally,
for purposes of calculating any restriction for the Money Market Portfolio an
issuer shall be the entity deemed to be ultimately responsible for payments of
interest and principal on the security pursuant to Rule 2a-7, unless otherwise
noted. Not all investment securities or techniques discussed below are eligible
investments for each portfolio, and not all investments that may be made by
underlying funds of the Growth Portfolio are currently known. A portfolio or
underlying fund of the Growth Portfolio will invest in securities or engage in
techniques that are intended to help achieve its investment objective. There is
no guarantee the portfolios will achieve their objectives.

INVESTMENT SECURITIES, STRATEGIES AND RISKS

ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment depends 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 these securities is limited to the underlying
assets, but, in other cases additional credit support may also be provided by a
third party via a letter of credit or insurance guarantee. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default on the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-backed security.

Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a portfolio's concentration policy, the following
asset-backed securities industries have been selected: credit card receivables,
automobile receivables, trade receivables and diversified financial

3
<PAGE> 35
assets. The Money Market Portfolio will limit its investments in each such
industry to no more than 25% of its net assets.

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

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 SchwabFunds(R) bond fund that the Growth Portfolio may currently invest in
is the Schwab Total Bond Market Index Fund.

BORROWING may subject a portfolio to interest costs, which may exceed the income
received on the securities purchased with the borrowed portfolios. A portfolio
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,
the Money Market Portfolio will not purchase securities while borrowings are
outstanding, and the Growth Portfolio and S&P 500 Portfolio will not purchase
securities while borrowings represent more than 5% of its borrowings.

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

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. Based on the primary characteristics of non-U.S.
(foreign) banks, the portfolios have identified each foreign country as a
separate bank industry for purposes of the portfolio's concentration policy.
Each portfolio will limit its investments in securities issued by foreign banks
in each country to no more than 25% of its net assets. The Growth Portfolio will
not concentrate its investments in a particular industry or group of industries,
unless its underlying fund investments are so concentrated. The S&P 500
Portfolio will not concentrate its

4
<PAGE> 36
investments unless the S&P 500 Index is so concentrated.

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

CREDIT AND LIQUIDITY SUPPORTS OR ENHANCEMENTS 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, demand features, and lines of credit. 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 the portfolio.

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 securities react to interest rate changes more severely than
shorter-term securities (all things being equal) but generally offer a greater
rate of interest. 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.

The Growth Portfolio and its underlying funds may invest in investment grade
securities which are medium- and high- quality, although some still may have
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.

Should a security's rating change after purchase by a portfolio the investment
adviser would take such action, including no action, as determined to be in the
best interest of the portfolio by the board of trustees. For more information
about the ratings assigned by some NRSROs, refer to the appendix section of the
SAI.

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 assumes the rights and risks of ownership, including the risk of price
and yield fluctuations. Typically, no interest will accrue to a portfolio until
the security is delivered. A portfolio will segregate appropriate liquid assets
to cover its delayed-delivery purchase obligations. When a portfolio 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, a
portfolio could suffer losses.

5
<PAGE> 37
DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GDSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.

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. In addition, the Money Market Portfolio follows the regulations set forth
by the SEC that dictate the diversification requirements for money market mutual
funds. Generally, these requirements prohibit a money market fund from
purchasing a security if more than 5% of its total assets would be invested in
the securities of a single issuer, although a money market fund may invest up to
25% of its total assets in the first tier securities of a single issuer for up
to three business days. U.S. government and certain other securities are not
subject to this particular regulation.

Each portfolio also must comply with certain IRS regulations that impose asset
diversification requirements. See "Taxation" for more information.

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

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

6
<PAGE> 38
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.

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

Warrants are 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 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

7
<PAGE> 39
as fluctuating foreign currency exchange rates and withholding taxes, could have
more dramatic effects on the value of foreign securities. For example,
conditions within and around foreign countries, such as the possibility of
expropriation or confiscatory taxation, political or social instability,
diplomatic developments, change of government or war could affect the value of
foreign investments. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.

Foreign securities typically have less volume and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the portfolios and/or underlying 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 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 portfolio 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 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 Growth Portfolio or its 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 the 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 the portfolio or underlying funds.

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

8
<PAGE> 40

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 foreign investments and/or increase a
fund's 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.

For these reasons and others, foreign securities tend to be more volatile than
other types of investments. International funds, therefore, tend to be more
volatile than funds that invest primarily in securities of domestic issuers and
are normally recommended for long-term investors. The SchwabFunds(R)
international stock fund that the Growth Portfolio may currently invest in is
the Schwab International Index Fund(R).

Securities that are acquired by a portfolio outside the United States and that
are publicly traded in the United States are not considered illiquid, provided
that: (i) the portfolio acquires and holds the securities with the intention of
reselling the securities in the foreign trading market; (ii) the portfolio
reasonably believes it can readily dispose of the securities readily in the
foreign trading market or for cash in the United States; or (iii) 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 Growth Portfolio or its underlying funds may engage in currency
exchange contracts in order to secure exchange rates for portfolio securities
purchased or sold, but awaiting settlement. These transactions do not seek to
eliminate any fluctuations in the underlying prices of the securities involved.
Instead, the transactions simply establish a rate of exchange that can be
expected when the portfolio 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 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.

In order to reduce the effect that uninvested cash would have on its ability to
track the performance of its index as closely as possible, a portfolio may
purchase futures contracts representative of its index or the securities in its
index. 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 Growth Portfolio or its 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.

9
<PAGE> 41

When buying or selling futures contracts, a portfolio 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 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 upon
termination of the futures contracts assuming all contractual obligations are
satisfied. A 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, a portfolio will segregate assets in
an amount equal to the margin requirement that is deposited with the broker for
its outstanding futures contracts.

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

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 expiration 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 seeks to close out a futures position. If a portfolio is unable
to close out its position and prices move adversely, the portfolio would have to
continue to make daily cash payments to maintain its margin requirements. If a
portfolio has 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 may be required to make or take delivery and incur
extra transaction costs buying or selling the underlying securities. A portfolio
will 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 has valued the instruments. The liquidity of the portfolio'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. The S&P 500 Portfolio normally will invest at least 80% of its
total assets in the securities of its index. The Growth Portfolio invests mainly
in other SchwabFunds(R), particularly index funds, which seek to track the total
returns of various market indices. Each of these index funds normally will
invest at

10
<PAGE> 42

least 65% of its total assets in the securities of its index. Moreover, each of
these index funds will invest so that its portfolio performs similarly to that
of its index. Each index fund tries to generally match its holdings in a
particular security to its weight in the index. Each index 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 index funds incur operating and
trading expenses unlike their indices. An index 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 the portfolio or index fund.

LENDING of portfolio securities is a common practice in the securities industry.
A portfolio will engage in security lending arrangements with the primary
objective of increasing its income. For example, a portfolio 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. 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, 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 portfolios, it is expected that
the portfolios 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.

MATURITY OF INVESTMENTS. The Money Market Portfolio follows the regulations set
forth by the SEC that dictate the maturity requirements for money market mutual
funds. Generally, these requirements prohibit a portfolio from purchasing a
security with a remaining maturity of more than 397 days or maintaining a
dollar-weighted average portfolio maturity that exceeds 90 days.

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, bankers' acceptances, notes and time deposits.

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.

11
<PAGE> 43
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." The
SchwabFunds(R) money market fund that the Growth Portfolio may currently invest
in is the Schwab Value Advantage Money Fund(R).

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 Growth Portfolio and its underlying funds 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 the
portfolio or its underlying fund. Principal and interest payments on certain
mortgage-related securities may be guaranteed by the government to the extent
described below. Such guarantees do not extend to the value or yield of the
mortgage-related securities themselves or of a portfolio's shares.

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. The Growth Portfolio will normally invest at least 50% in other
SchwabFunds, which are registered open-end investment companies.

OTHER SECURITIES. Under certain circumstances, an underlying fund of the Growth
Portfolio may make payment of a redemption by the 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 Growth Portfolio

12
<PAGE> 44
may hold the securities distributed until the investment adviser determined that
it was appropriate to sell them.

PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent obligations issued by banks in large denominations.

PUTS are sometimes called demand features or guarantees, and 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 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.

QUALITY OF INVESTMENTS. The Money Market Portfolio follows regulations set forth
by the SEC that dictate the quality requirements for money market mutual funds.
Generally these require the Money Market Portfolio to invest exclusively in
high-quality securities. Generally, high-quality securities are securities that
present minimal credit risks and are rated in one of the two highest rating
categories by two nationally recognized statistical rating organizations
(NRSROs), or by one if only one NRSRO has rated the securities, or, if unrated,
determined to be of comparable quality by the investment adviser pursuant to
guidelines adopted by the board of trustees. High-quality securities may be
"first tier" or "second tier" securities. First tier securities may be rated
within the highest category or determined to be of comparable quality by the
investment adviser. Money market fund shares and U.S. government securities are
first tier securities. Second tier securities generally are rated within the
second-highest category. The Money Market Portfolio's holdings of second tier
securities will not exceed 5% of its assets, and investments in the second tier
securities of any one issuer will be limited to the greater of 1% of the
portfolio's assets or $1 million.

Should a security's high-quality rating change after purchase by the portfolio,
the investment adviser would take such action, including no action, as
determined to be in the best interest of the portfolio by the board of trustees.
For more information about the ratings assigned by some NRSROs, refer to the
Appendix section of the SAI.

REPURCHASE AGREEMENTS. Repurchase agreements involve a portfolio 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. For example, commercial paper and other promissory notes may be
issued under Section 4(2) of the Securities Act of 1933. These securities may be
sold only to qualified institutional buyers such as the portfolios under Rule
144A of the Securities Act of 1933. Because of this requirement, these
securities are normally resold to other qualified buyers through or with the
assistance of the issuer or an investment dealer who makes a market in these
securities, thereby providing liquidity to the market. It is not possible to
predict with assurance exactly how the market for Section 4(2) paper sold and
offered under Rule 144A will continue to develop. Therefore, the investment
adviser, pursuant to guidelines approved by the board of trustees, will
carefully monitor a portfolio's

13
<PAGE> 45
investments in these securities, focusing on such important factors, among
others, as valuation, liquidity and availability of information. Restricted
securities may be considered to be liquid if an institutional or other market
exists for these securities. In making this determination, the portfolio, under
the direction and supervision of the board of trustees, will take into account
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of potential purchasers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and 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, the general level of illiquidity in the
portfolios 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 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 an
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
an 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 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 an underlying fund that invests in small-cap
stocks may change sharply during the short term and long term.

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

14
<PAGE> 46
stocks, bonds and cash, can help to lower the market risk of a fund. The
SchwabFunds(R) stock funds that the Growth Portfolio may currently invest in are
the Schwab S&P 500 Fund, Schwab Small-Cap Index Fund(R) and Schwab International
Index Fund(R) or funds comprising the Schwab Equity Index Funds. A stock fund's
other investments and use of investment techniques also will affect its
performance and portfolio value.

STOCK SUBSTITUTION STRATEGY is a strategy, whereby a portfolio (or underlying
fund) may, in extraordinary circumstances, substitute a similar stock for a
security in its index.

STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.

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

U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by the
Federal National Mortgage Association (FNMA or FANNIE MAE), the Federal Home
Loan Mortgage Corporation (FHLMC or FREDDIE MAC), the Student Loan Marketing
Association (SLMA or SALLIE MAE), and the Federal Home Loan Banks (FHLB), are
supported by a line of credit the issuing entity has with the U.S. Treasury.
Others are supported solely by the credit of the issuing agency or
instrumentality such as obligations issued by the Federal Farm Credit Banks
Funding Corporation (FFCB). There can be no assurance that the U.S. government
will provide financial support to U.S. government securities of its agencies and
instrumentalities if it is not obligated to do so under law. Of course U.S.
government securities, including U.S. Treasury securities, are among the safest
securities, however, not unlike other debt securities, they are still sensitive
to interest rate changes, which will cause their yields to fluctuate.

U.S. TREASURY SECURITIES are obligations of the U.S. Treasury and include bills,
notes and bonds. U.S. Treasury securities are backed by the full faith and
credit of the United States Government.

VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.

Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not

15
<PAGE> 47
always unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable rate demand security
purchased by a portfolio. In addition, the portfolio may exercise only its
demand rights at certain times. The portfolio could suffer losses in the event
that the issuer defaults on its obligation.

INVESTMENT LIMITATIONS

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

THE MONEY MARKET PORTFOLIO MAY NOT:

(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.

(2) 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 assets would be invested in securities of that
issuer.

(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.

(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the portfolio reserves the freedom of action to invest
up to 100% of its assets in certificates of deposit or bankers' acceptances
issued by domestic branches of U.S. banks and U.S. branches of foreign banks
(which the portfolio has determined to be subject to the same regulation as U.S.
banks), or obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities in accordance with its investment objective and policies.

(5) Invest more than 5% of its total net assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) that, with their predecessors, have a record of less than
three years of continuous operation.

(6) Enter into repurchase agreements if, as a result thereof, more than 10% of
its net assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven days and invested in
securities restricted as to disposition under the federal securities laws
(except commercial paper issued under Section 4(2) of the Securities Act of
1933, as amended, hereinafter the "1933 Act"). The portfolio will invest no more
than 10% of its net assets in illiquid securities.

(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the 1933 Act).

(8) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or its investment adviser individually own
beneficially more than 1/2 of 1% of the securities of that issuer and together
beneficially own more than 5% of the securities of such issuer.

(9) Invest in commodities or commodity contracts, including futures contracts,
real estate or

16
<PAGE> 48
real estate limited partnerships, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in real
estate.

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

(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.

(12) Make loans to others, except the portfolio may (i) purchase a portion of an
issue of short-term debt securities or similar obligations (including repurchase
agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio securities (up to one-third
of the portfolio's total assets) in accordance with its investment objectives
and policies.

(13) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. The portfolio will not borrow for leverage purposes or
purchase securities or make investments while reverse repurchase agreements or
borrowings are outstanding. If, for any reason, the current value of the
portfolio's total net assets falls below an amount equal to three times the
amount of its indebtedness from money borrowed, the Money Market Portfolio will,
within three business days, reduce its indebtedness to the extent necessary.

(14) Write, purchase or sell puts, calls or combinations thereof.

(15) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions.

(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the securities of
issuers which invest in or sponsor such programs.

(17) 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.

(18) Issue senior securities as defined in the 1940 Act.

EACH OF THE GROWTH PORTFOLIO AND S&P 500 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; except that the S&P 500 Portfolio may concentrate investments only
to the extent that the S&P 500 Index(R) is also so concentrated.

(3) Purchase or sell commodities, commodities contracts or real estate; lend or
borrow money;

17
<PAGE> 49
issue senior securities; underwrite securities; or pledge, mortgage or
hypothecate any of its assets, except as permitted by the 1940 Act or the rules
or regulations thereunder.

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

Diversification. Under the 1940 Act and 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 the portfolio.

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

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

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

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

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

OTHER INVESTMENT POLICIES

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS FOR EACH
OF THE GROWTH PORTFOLIO AND S&P 500 PORTFOLIO. ANY CHANGES IN EITHER THE GROWTH
PORTFOLIO'S OR THE S&P 500 PORTFOLIO'S NON-FUNDAMENTAL INVESTMENT POLICIES WILL
BE COMMUNICATED TO THE PORTFOLIO'S SHAREHOLDERS PRIOR TO THE EFFECTIVENESS OF
THE CHANGES.

EACH OF THE GROWTH PORTFOLIO AND S&P 500 PORTFOLIO MAY NOT:

18
<PAGE> 50
(1) Purchase or sell commodities, commodities contracts or real estate,
including interests in real estate limited partnerships, provided that each
Portfolio 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)
purchase securities of companies that deal in precious metals or interests
therein.

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

(3) 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.

(4) 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.

(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.

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

(7) 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.

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

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

(10) 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.

(11) 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.

(12) 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 total assets.

19
<PAGE> 51
(13) Make short sales, except for short sales against the box.

(14) 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.

(15) 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 each portfolio's concentration and borrowing limitations
and investments in illiquid securities, later changes in values do not require a
portfolio to sell the investment even if the portfolio could not then make the
same investment.

20
<PAGE> 52
MANAGEMENT OF THE PORTFOLIOS

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

<TABLE>
<CAPTION>
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATIONS & AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc., Vodaphone
AirTouch PLC (a 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
</TABLE>

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

21
<PAGE> 53

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

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.
</TABLE>

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

22
<PAGE> 54

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

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

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 Capital Trust and Schwab Investments. 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
December 31, 1999 concerning compensation of the trustees. Unless otherwise
stated, information is for the portfolio complex, which included 40 funds as of
December 31, 1999.

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

Money Growth S&P 500
Market Portfolio Portfolio
Portfolio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 N/A 0
Steven L. Scheid 0 0 0 N/A 0
William J. Klipp 0 0 0 N/A 0
Donald F. Dorward $2,451 $1,290 $2,709 N/A $121,600
Robert G. Holmes $2,451 $1,290 $2,709 N/A $121,600
Donald R. Stephens $2,451 $1,290 $2,709 N/A $121,600
Michael W. Wilsey $2,223 $1,170 $2,457 N/A $111,600
</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(R) selected by the trustee. Currently,
none of the independent trustees has elected to participate in this plan.

23
<PAGE> 55

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 funds or the investment adviser or the directors or
officers of Schwab to buy or sell securities for their own accounts. This
includes securities that may be purchased or held by the funds. Securities
transactions by some of these individuals may be subject to prior approval of
the investment adviser's Chief Compliance Officer or alternate. Most securities
transactions are subject to quarterly reporting and review requirements.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of, April 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 portfolios of the trust.

As of April 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:

Great-West Life and Annuity Insurance Company, a Colorado stock life insurance
company, and a subsidiary of GWLA Financial Inc. (an indirect, wholly-owned
subsidiary of Great-West Life Assurance Company) 8515 E. Orchard Road, Englewood
Colorado 80111 controls the Money Market Portfolio, Growth Portfolio and S&P 500
Portfolio through ownership of 91.07%, 96.49%, and 96.35%, respectively, of the
Money Market Portfolio's, the Growth Portfolio's and S&P 500 Portfolio's shares
of beneficial interest. Such control may dilute the effect of the votes of other
shareholders of the portfolios.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

CSIM, a wholly owned subsidiary of The Charles Schwab Corporation, 101
Montgomery Street, San Francisco CA 94104, serves as the portfolios' investment
adviser and administrator pursuant to 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.

MONEY MARKET PORTFOLIO. For its advisory and administrative services to the
portfolio, the investment adviser is entitled to receive a graduated annual fee
payable monthly based on the portfolio's average daily net assets as described
below:

Less than $1 billion - 0.38%

24
<PAGE> 56
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%

Prior to April 30, 1999, for its advisory and administrative services to the
Money Market Portfolio, the investment adviser was entitled to receive a
graduated annual fee, payable monthly, of 0.46% of the Portfolio's average daily
net assets not in excess of $1 billion; 0.45% of such net assets over $1 billion
but not in excess of $3 billion; 0.40% of such net assets over $3 billion but
not in excess of $10 billion, 0.37% of such net assets over $10 billion but not
in excess of $20 billion; and 0.34% of such net assets over $20 billion.

For the fiscal years ended December 31, 1997, 1998 and 1999, the portfolio paid
investment advisory and administration fees of $97,831 (fees were reduced by
$80,295), $244,224 (fees were reduced by $76,666), respectively and $435,107
(fees were reduced by $109,250).

The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Money Market Portfolio will not exceed 0.50 % of
the average daily net assets of the portfolio.

GROWTH PORTFOLIO. For its advisory and administrative services to the portfolio,
the investment adviser is entitled to receive a graduated annual fee payable
monthly based on the portfolio's average daily net assets as described below:

Less than $500 million - 0.54%
More than $500 million - 0.49%

Prior to April 30, 1999, for its advisory and administrative services to the
Growth Portfolio, the investment adviser was entitled to receive a graduated
annual fee, payable monthly, of 0.74% of the portfolio's average daily net
assets not in excess of $1 billion; 0.69% of the next $1 billion; and 0.64% of
such net assets over $2 billion.

For the fiscal years ended December 31, 1997, 1998, and 1999, the portfolio paid
investment advisory and administration fees of $211 (fees were reduced by
$55,088), $3,217 (fees were reduced by $89,361), and $11,474 (fees were reduced
by $82,036), respectively.

The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Growth Portfolio will not exceed 0.60% of the
average daily net assets of the portfolio.

S&P 500 PORTFOLIO. For its advisory and administrative services to the
portfolio, the investment adviser is entitled to receive a graduated annual fee
payable monthly based on the portfolio's average daily net assets as described
below:

Less than $500 million - 0.20%
More than $500 million - 0.17%

Prior to April 30, 1999, for its advisory and administrative services to the S&P
500 Portfolio, the investment adviser was entitled to receive a graduated annual
fee, payable monthly, of 0.36% of the portfolio'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.

25
<PAGE> 57
For the years ended December 31, 1997, 1998 and 1999, the portfolio paid
investment advisory and administration fees of $122 (fees were reduced by
$69,358), $53,790 (fees were reduced by $152,282) and $196,803 (fees were
reduced by $70,891), respectively.

The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the S&P 500 Portfolio will not exceed 0.28% of the
average daily net assets of the portfolio.

DISTRIBUTOR

Pursuant to a Distribution 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
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreement.

SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides portfolio information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
portfolios' prospectuses, financial reports and other informational literature
about the portfolios. Schwab maintains the office space, equipment and personnel
necessary to provide these services. Schwab also distributes and markets the
portfolios 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 and shareholder services agent
under its contract with each portfolio, Schwab does not receive an annual fee.

CUSTODIANS AND PORTFOLIO ACCOUNTANTS

PFPC Trust Company, 8800 Tinicum Boulevard, Third Floor, Suite 200,
Philadelphia, Pennsylvania 19153 serves as custodian for the Money Market
Portfolio and S&P 500 Portfolio. PFPC, Inc., 400 Bellevue Parkway, Wilmington,
DE 19809 serves as fund accountant to the Money Market Portfolio, and SEI
Investments Mutual Funds Services, One Freedom Valley Dr. Oaks, Pennsylvania
19456, serves as fund accountant to the S&P 500 Portfolio. Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts, 02109 serves as
custodian for the Growth Portfolio and SEI Investments Mutual Funds Services,
One Freedom Valley Dr. Oaks, Pennsylvania 19456, serves as fund accountant for
this portfolio.

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

INDEPENDENT ACCOUNTANTS

26
<PAGE> 58

The portfolios' 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 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 year ended December 31, 1999, are included in the portfolio's
annual report, which is a separate report supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

For reporting purposes, each of the Growth Portfolio and S&P 500 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.

Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the Money Market Portfolio's
portfolio turnover rate for reporting purposes is expected to be zero.

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 portfolios 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 portfolio turnover rates are in the financial highlight tables in the
prospectuses.

PORTFOLIO TRANSACTIONS

In effecting securities transactions for the portfolios, 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
portfolios on the basis of a number of factors, including, for example, price
paid for securities, clearance, commission paid for transactions, settlement,
reputation, financial strength and stability, efficiency of execution and error
resolution, block trading and block positioning capabilities, willingness to
execute related or unrelated difficult transactions in the future, and order of
call.

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

27
<PAGE> 59
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 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.

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.

BROKERAGE COMMISSIONS

For the fiscal years ended December 31, 1999, 1998 and 1997, the Growth
Portfolio paid brokerage commissions of $673, $1,731, and $3,042, respectively
to its affiliated broker-dealer.

For the fiscal years ended December 31, 1999, 1998 and 1997, the S&P 500
Portfolio paid brokerage commissions of $16,615, $19,845, and $15,241,
respectively to its affiliated broker-dealer.

DESCRIPTION OF THE TRUST

Each portfolio is a series of Schwab Annuity Portfolios, an open-end investment
management company organized as a Massachusetts business trust on January 21,
1994. 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.

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

Life insurance companies and their separate accounts are the record owners of
portfolio shares. The portfolios understand that the life insurance companies
will vote their shares in accordance with timely instructions received from
contract owners who have allocated contract values to the portfolios, to the
extent required by applicable laws.

The bylaws of the trust provide that a majority of shares entitled to vote shall
be a quorum for the

28
<PAGE> 60
transaction of business at a shareholders' meeting, except that where any
provision of law, or of the Declaration of Trust or of the bylaws permits or
requires that (1) holders of any series shall vote as a series, then a majority
of the aggregate number of shares of that series entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that series,
or (2) holders of any class shall vote as a class, then a majority of the
aggregate number of shares of that class entitled to vote shall be necessary to
constitute a quorum for the transaction of business by that class.

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

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

As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses 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 pursuant to elections made by
the participating insurance companies. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.

29
<PAGE> 61
PURCHASE, REDEMPTION AND PRICING OF SHARES

Purchase and Redemption of Shares

You cannot purchase shares of the portfolios directly, but you may allocate
account value under your variable contract to and from the portfolios in
accordance with the terms of your variable contract. Please refer to the
appropriate separate account prospectus for information on how to purchase units
of a variable contract and how to select specific portfolios as investment
options.

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. Please note that
this ability to make in-kind redemptions may be effected by agreements made with
participating insurance companies.

PRICING OF SHARES

The Money Market Portfolio values its portfolio instruments at amortized cost,
which means they are valued at their acquisition cost, as adjusted for
amortization of premium or discount, rather than at current market value.
Calculations are made to compare the value of the Money Market Portfolio's
investments valued at amortized cost with market values. Market valuations are
obtained by using actual quotations provided by market makers, estimates of
market value or values obtained from yield data relating to classes of money
market instruments published by reputable sources at the mean between the bid
and asked prices for the instruments. The amortized cost method of valuation
seeks to maintain a stable $1.00 per share net asset value even when there are
fluctuations in interest rates that affect the value of portfolio instruments.
Accordingly, this method of valuation can, in certain circumstances, lead to a
dilution of a shareholder's interest. If a deviation of 1/2 of 1% or more were
to occur between the net asset value per share calculated by reference to market
values and the Money Market Portfolio's $1.00 per share net asset value, or if
there were any other deviation that the board of trustees of the Trust believed
would result in a material dilution to shareholders or purchasers, the board of
trustees would promptly consider what action, if any, should be initiated. If
the Money Market Portfolio's net asset value per share (computed using market
values) declined, or were expected to decline, below $1.00 (computed using
amortized cost), the board of trustees might temporarily reduce or suspend
dividend payments in an effort to maintain the net asset value at $1.00 per
share. As a result of this reduction or suspension of dividends or other action
by the board of trustees, an investor would receive less income during a given
period than if the reduction or suspension had not taken place. Such action
could result in investors not receiving a dividend for the period during which
they hold their shares and receiving, upon redemption, a price per share lower
than that which they paid. On the other hand, if the Money Market Portfolio's
net asset value per share (computed using market values) were to increase, or
were anticipated to increase above $1.00 (computed using amortized cost), the
board of

30
<PAGE> 62
trustees might supplement dividends in an effort to maintain the net asset value
at $1.00 per share.

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 of underlying mutual funds are valued at their respective net
asset values as determined by those funds. 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
portfolio 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 INCOME TAXES

For a discussion of the tax status of a particular Contract and the tax
consequences of ownership of such a contract, refer to the appropriate Separate
Account Prospectus. Shares of the portfolios are available only through separate
accounts of participating insurance companies and plans.

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.

Internal Revenue Service regulations applicable to separate accounts generally
require that portfolios that serve as the funding vehicles for separate accounts
invest no more than 55% of the value of their total assets in one investment,
70% in two investments, 80% in three investments and 90% in four investments.

Alternatively, a portfolio will be treated as meeting these requirements for any
quarter of its taxable year if, as of the close of such quarter, the portfolio
meets the diversification requirements applicable to regulated investment
companies and no more than 55% of the value of its total assets consists of cash
and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies.

The portfolios intend to meet these requirements. Internal Revenue Service
regulations also limit the types of investors that may invest in such a
portfolio. The portfolios intend to meet this limitation by offering shares only
to participating insurance companies and their separate accounts in connection
with the purchase of contracts and variable life insurance policies and to

31
<PAGE> 63
plans.

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.

The Growth Portfolio 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 portfolio 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 portfolio may be required to distribute amounts in excess of
realized income and gains. To the extent that the portfolio does 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 portfolio's shareholders. Therefore, the payment of this
tax would reduce the portfolio's economic return from its shares, and excess
distributions received with respect to such shares are treated as ordinary
income rather than capital gains.

An underlying fund of the Growth Portfolio 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

The following performance data does not take into account fees and charges that
apply under variable contracts for which the portfolios serve as investment
vehicles.

The Money Market Portfolio's current 7-day yield based on the seven days ended
December 31, 1999 is stated below and was calculated by determining the net
change, exclusive of capital changes and incomes other than investment income,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder account, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and the multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.

7-DAY CURRENT YIELD

32
<PAGE> 64

MONEY MARKET PORTFOLIO 5.01%

The Money Market Portfolio's effective yield based on the seven days ended
December 31, 1999 is stated below and was calculated by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
account, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, with the resulting
figure, carried to at least the nearest one hundredth of one percent.

7-DAY EFFECTIVE YIELD

MONEY MARKET PORTFOLIO 5.14%

A fund also may advertise its average annual total return and cumulative total
return.

Average annual total return for a period is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in a portfolio made at
the beginning of the period, then calculating the average annual compounded rate
of return that would produce the same investment return on the $1,000 over the
same period. In computing average annual total return, a portfolio assumes the
reinvestment of all distributions at net asset value on applicable reinvestment
dates. Average annual total returns for one year ended December 31, 1999 and
since each of Growth Portfolio's and S&P 500 Portfolio's commencement of
operations are stated below.

<TABLE>
<CAPTION>
Portfolio and One Year Life of the Portfolio
Commencement Date
- -----------------------------------------------------------------------------
<S> <C> <C>
Growth Portfolio 19.63% 19.44%
(11/01/1996)
S&P 500 20.47% 27.37%
Portfolio
(11/01/1996)
</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 December 31, 1999 for each of Growth Portfolio
and S&P 500 Portfolio.

<TABLE>
<CAPTION>
Name of Portfolio and Date Portfolio Cumulative Total Return From
Commenced Operations Commencement of Operations
- -------------------- --------------------------
<S> <C>
Growth Portfolio (11/01/1996) 75.53%
S&P 500 Portfolio (11/01/1996) 115.17%
</TABLE>

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

33
<PAGE> 65
provided by proprietary and non-proprietary research services and other
investments for which reliable data is available.

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

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

34
<PAGE> 66
APPENDIX - RATINGS OF INVESTMENT SECURITIES

From time to time, each Fund may report the percentage of its assets which fall
into the rating categories set forth below.

BONDS

MOODY'S INVESTORS SERVICE

Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.

A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

35
<PAGE> 67
STANDARD & POOR'S CORPORATION

INVESTMENT GRADE

AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.

A Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

SPECULATIVE GRADE

Debt rated 'BB' and 'B' is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.

BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.

B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions would likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or
'BB-rating.

DUFF & PHELPS CREDIT RATING CO.

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.

36
<PAGE> 68

A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.

BB Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or fortunes. Overall quality may move up or down
frequently within this category.

B Below investment grade and possessing risk that obligations will not be
met when due. conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into a higher or
lower rating grade.

FITCH IBCA, INC.

INVESTMENT GRADE BOND

AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.

AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in
the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated 'F-1+'.

A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.

SPECULATIVE GRADE BOND

BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.

B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.

37
<PAGE> 69
DESCRIPTION OF IBCA'S LONG-TERM RATINGS

AAA Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions
are unlikely to increase investment risk substantially

AA Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.

A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may
lead to increased investment risk.

BBB Obligations for which there is currently a low expectation of investment
risk. Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are
more likely to lead to increased investment risk than for obligations in
other categories.

BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.

B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.

DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS

INVESTMENT GRADE

AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.

AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.

A The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.

38
<PAGE> 70
BBB The lowest investment-grade category; indicates an acceptable capacity to
repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.

NON-INVESTMENT GRADE

BB While not investment grade, the "BB" rating suggests that the likelihood
of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to
adequately service debt obligations.

B Issues rated "B" show a higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse developments could
well negatively affect the payment of interest and principal on a timely
basis.

39
<PAGE> 71
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

Short-term notes/variable rate demand obligations bearing the designations
MIG-1/VMIG-1 are considered to be of the best quality, enjoying strong
protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.

STANDARD & POOR'S CORPORATION

An S&P SP-1 rating indicates that the subject securities' issuer has a
strong capacity to pay principal and interest. Issues determined to possess very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.

FITCH IBCA, INC.

Obligations supported by the highest capacity for timely repayment are
rated F1+. An F1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated F2 are supported by a
good capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.

COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers (or related supporting institutions) of commercial paper with this
rating are considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.

STANDARD & POOR'S CORPORATION

A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates a strong degree of safety regarding timely payment of principal and
interest. Issues determined to possess overwhelming safety characteristics are
denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.

40
<PAGE> 72
DUFF & PHELPS CREDIT RATING CO.

D-1 is the highest commercial paper rating assigned by Duff. Three
gradations exist within this rating category: A D-1+ rating indicates the
highest certainty of timely payment (issuer short-term liquidity is found to be
outstanding and safety is deemed to be just below that of risk-free short-term
U.S. Treasury obligations), a D-1 rating signifies a very high certainty of
timely payment (issuer liquidity is determined to be excellent and risk factors
are considered minor) and a D-1- rating denotes high certainty of timely payment
(issuer liquidity factors are strong and risk is very small). A D-2 rating
indicates a good certainty of timely payment. Liquidity factors and company
fundamentals are sound and risk factors are small.

FITCH IBCA, INC.

F1+ is the highest category, and indicates the strongest degree of
assurance for timely payment. Issues rated F1 reflect an assurance of timely
payment only slightly less than issues rated F1+. Issues assigned an F2 rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues in the first two rating categories.

COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS

THOMSON BANKWATCH (TBW)

TBW-1 is the highest category and indicates the degree of safety regarding
timely repayment of principal and interest is very high. TBW-2 is the second
highest category and while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated "TBW-1."

41
<PAGE> 73

PART C
OTHER INFORMATION
SCHWAB ANNUITY PORTFOLIOS

Item 23 Exhibits:

Articles of Incorporation (a) Agreement and Declaration of Trust is
incorporated by reference to Exhibit 1,
File No. 811-8314 to Post Effective
Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27,
1998.

By-laws (b) Amended and Restated Bylaws are
incorporated by reference to Exhibit 2,
File No. 811-8314 to Post-Effective
Amendment No. 3 to Registrant's
Registration Statement on Form N-1A,
electronically filed on April 29, 1996.

Instruments Defining (c) (i) Article III, Sections 4 and 5; Article
Rights of Securities IV, Section 1; Article V; Article VIII,
Holders Section 4; and Article IX, Sections 1,
4, and 7 of the Agreement and
Declaration of Trust is incorporated by
reference to Exhibit 1, File No.
811-8314 to Post Effective Amendment No.
7 to Registrant's Registration Statement
on Form N-1A, electronically filed on
February 27, 1998.

(ii) Article 9 and Article 11 of the Amended
and Restated Bylaws are incorporated by
reference to Exhibit 2, File No.
811-8314 to Post-Effective Amendment No.
3 to Registrant's Registration Statement
on Form N-1A, electronically filed on
April 29, 1996.

Investment Advisory (d) (i) Investment Advisory and Administration
Contracts Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") dated June 15,
1994 is incorporated by reference to
Exhibit 5(a), File No. 811-8314 to Post
Effective Amendment No. 6,
electronically filed on April 30, 1997.

(ii) Amended Schedule A to Investment
Advisory and Administration Agreement
between Registrant and Charles Schwab
Investment Management, Inc. (the
"Investment Manager") dated June 15,
1994 is incorporated by reference to
Exhibit 5(b), File No. 811-8314 to Post
Effective Amendment No. 5 to
Registrant's Registration Statement on
form N-1A, electronically filed on
September 9, 1996.

(iii) Amended Schedule B to Investment
Advisory and Administration Agreement
between Registrant and Charles Schwab
Investment Management, Inc. (the
"Investment Manager") is incorporated by
reference to Exhibit 5(c), File No.
811-8314 to Post Effective Amendment No.
7 to Registrants Registration Statement
on form N-1A, electronically filed on
February 27, 1998.

(iv) Schedule A and B, to the Amended and
Restated Investment Sub-Advisory and
Administration Agreement between the
Investment Manager and Symphony is
incorporated by reference to Exhibit
5(d), File No. 811-8314 to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on
form N-1A, electronically filed on
September 9, 1996.

C-1
<PAGE> 74

Underwriting Contracts (e) (i) Distribution Agreement between
Registrant and Charles Schwab & Co.,
Inc. ("Schwab") dated March 29, 1994 is
incorporated by reference to Exhibit
6(a), File No. 811-8314 to Post
Effective Amendment No. 7 to
Registrant's Registration Statement on
form N-1A, electronically filed on
February 27, 1998.

(ii) Amended Schedule A to Distribution
Agreement between Registrant and Schwab
dated March 29, 1994 is incorporated by
reference to Exhibit 6(b), File No.
811-8314 to Post-Effective Amendment No.
5 to Registrant's Registration Statement
on form N-1A, electronically filed on
September 9, 1996.

Bonus or Profit Sharing (f) Inapplicable.
Plans

Custodian Agreements (g) (i) Custodian Services Agreement between
Registrant and PNC Bank, National
Association, dated March 29, 1994, is
incorporated by reference to Exhibit
8(a), File No. 811-8314 to Post
Effective Amendment No. 7 to
Registrant's Registration Statement on
form N-1A, electronically filed on
February 27, 1998.

(ii) Amendment No. 1 to the Custodian
Services Agreement between Registrant
and PNC Bank, National Association,
dated March 29, 1994 incorporated by
reference to Exhibit 8(b), File No.
811-8314 to Post-Effective Amendment No.
3 to Registrant's Registration Statement
on Form N-1A, electronically filed on
April 29, 1996.

(iii) Schedule A to the Custodian Services
Agreement between Registrant and PNC
Bank, National Association on behalf of
Schwab Money Market Portfolio and Schwab
S&P 500 Portfolio, is incorporated by
reference to Exhibit 8(c), File No.
811-8314 to Post-Effective Amendment No.
5 to Registrant's Registration Statement
on form N-1A, electronically filed on
September 9, 1996.

(iv) Custodian Agreement dated April 4, 1997,
and Amendment to the Custodian Agreement
and Schedule 1, dated April 4, 1997,
between Registrant, on behalf of Schwab
MarketTrack Growth Portfolio II and
Morgan Stanley Trust Company is
incorporated herein by reference
electronically filed as Exhibit 8(d),
File No. 811-8314 on April 30, 1998.

(v) Appendix 1, 2 and 3 to the Custodian
Agreement on behalf of Schwab
MarketTrack Growth Portfolio II,
formerly Schwab Asset Director - High
Growth Portfolio, is incorporated by
reference to Exhibit 8(d), File No.
811-8314 to Post Effective Amendment No.
6 to registrant's Registration Statement
on Form N-1A, electronically filed on
April 30, 1997.

(vi) Transfer Agency Agreement between
Registrant and Schwab dated March 29,
1994 is incorporated by reference to
Exhibit 8(f), File No. 811-8314 to Post
Effective Amendment No. 7 to
Registrant's Registration Statement on
form N-1A, electronically filed on
February 27, 1998.

C-2
<PAGE> 75

(viii) Schedule B and D to the Transfer Agency
Agreement between Registrant and Schwab
dated March 29, 1994 is incorporated by
reference to Exhibit 8(g), File No.
811-8314 to Post Effective Amendment No.
7 to Registrant's Registration Statement
on form N-1A, electronically filed on
February 27, 1998.

(ix) Amended Schedules A and C to the
Transfer Agency Agreement between
Registrant and Schwab dated March 29,
1994 are incorporated by reference to
Exhibit 8(f), File No. 811-8314 to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on
form N-1A, electronically filed on April
30, 1997.

(x) Shareholder Service Agreement between
Registrant and Schwab dated March 29,
1994 is incorporated by reference to
Exhibit 8(i), File No. 811-8314 to Post
Effective Amendment No. 7 to
Registrant's Registration Statement on
form N-1A, electronically filed on
February 27, 1998.

(xi) Amended Schedules A and C to the
Shareholder Service Agreement between
Registrant and Schwab dated March 29,
1994 is incorporated by reference to
Exhibit 8(h), File No. 811-8314 to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on
form N-1A, electronically filed on April
30, 1997.

(xii) Schedule B to the Shareholder Service
Agreement between Registrant and Schwab
dated March 29, 1994 is incorporated by
reference to Exhibit 8(k), File No.
811-8314 to Post Effective Amendment No.
7 to Registrant's Registration Statement
on form N-1A, electronically filed on
February 27, 1998.

(xiii) Accounting Services Agreement and
Schedules A, B and C between Registrant
and SEI Fund Resources, on behalf of the
Schwab MarketTrack Growth Portfolio II
is incorporated herein by reference to
Exhibit 8(l), File No. 811-8314 to Post
Effective Amendment No. 8 to
Registrant's Registration Statement on
Form N-1A, electronically filed on April
30, 1998.

(xiv) Accounting Services Agreement dated
March 24, 1994 between Registrant and
PNC Bank, National Association is
incorporated by reference to Exhibit
8(m), File No. 811-8314 to Post
Effective Amendment No. 7 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
February 27, 1998.

(xv) Amendment No. 1 to the Accounting
Services Agreement, dated February 5,
1996, by and between Registrant and PFPC
Inc., is filed herewith as Exhibit
(g)(xv), File No. 811-8314.

(xvi) Amended Custodian Services Agreement
dated November 1, 1998, by and between
the Registrant and PNC Bank, National
Association is filed herewith as Exhibit
(g)(xvi), File No. 811-8314.

C-3
<PAGE> 76

(xvii) Amended Accounting Services Agreement
by and between the Registrant and SEI
Fund Resources, dated as of April 1,
1998, is incorporated by reference to
Exhibit g)(xvii), File No. 811-8314 to
Post Effective Amendment No. 10 to
Registrant's Registration Statement on
Form N1-A, electronically filed on
April 22, 1999.

(xviii) Custodian Services Agreement dated
October 28, 1999, by and between the
Registrant and Brown Brothers Harriman
& Co., on the behalf of Schwab
MarketTrack Growth Portfolio II is
filed herewith as Exhibit (g)(xviii),
File No. 811-8314.

Other Material Contracts (h) License Agreement between Registrant
and Standard & Poor's Corporation is
incorporated by reference to Exhibit
9, File No. 811-8314 to Post-Effective
Amendment No. 5 to Registrant's
Registration Statement on form N-1A,
electronically filed on September 9,
1996.

Legal Opinion (i) Opinion of Morgan, Lewis & Bockius LLP
as to legality of the securities being
registered is filed herewith as
Exhibit (i), File No. 811-8314.

Other Opinions (j) Consent of independent accountants,
PricewaterhouseCoopers LLP is filed
herewith as Exhibit (j), File No.
811-8314.

Omitted Financial (k) Inapplicable.
Statements

Initial Capital Agreements (l) (i) Purchase Agreement between Registrant
and Schwab relating to Schwab Money
Market Portfolio is incorporated by
reference to Exhibit 13(a), File No.
811-8314 to Post Effective Amendment
No. 7 to Registrant's Registration
Statement on form N-1A, electronically
filed on February 27, 1998.

(ii) Purchase Agreement between Registrant
and Schwab relating to Schwab Asset
Director(R)-High Growth Portfolio and
Schwab S&P 500 Portfolio is
incorporated herein by reference to
Exhibit 13(b), File No. 811-8314 to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on
form N-1A, electronically filed on
September 9, 1996.

Rule 12b-1 Plan (m) Inapplicable.

Financial Data Schedule (n) Inapplicable.

Rule 18f-3 Plan (o) Inapplicable.

C-4
<PAGE> 77
Power of Attorney (p) (i) Powers of Attorney for each Trustee,
the Chief Executive Officer and the
Chief Financial Officer is
incorporated herein by reference to
Exhibit (p), File No. 811-8314 to
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
April 30, 1999.

(ii) Power of Attorney executed by Jeremiah
H. Chafkin, December 6, 1999, is
electronically filed herewith as
Exhibit (p)(ii), File No. 811-8314.

Code of Ethics (q) Code of Ethics adopted by Registrant,
Charles Schwab Investment Management
Inc. and Charles Schwab & Co., Inc. is
electronically filed herewith as
Exhibit (q), File No. 811-8314.

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

The Charles Schwab Family of Funds ("Schwab Fund Family"), Schwab
Investments and Schwab Capital Trust 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 its principal
underwriter, transfer agent, and shareholder services agent. As a result, the
Schwab Fund Family, Schwab Investments and Schwab Capital Trust 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 herein 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 the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate

C-5
<PAGE> 78
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 Capital Trust, 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 Capital Trust and any other investment companies that
Schwab may sponsor in the future as well as provider of advisory services to the
Schwab Fund for Charitable Giving and to Charles Schwab Asset Management
(Ireland) Limited.

The business, profession, vocation or employment of a substantial
nature in which each director and/or senior or executive officer of the
investment adviser (CSIM) is or has been engaged during the past two fiscal
years is listed below. The name of any company for which any director 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 Charles Schwab & Co. Inc. is listed below.

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
</TABLE>

C-6
<PAGE> 79

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

David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer, Director

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
</TABLE>

C-7
<PAGE> 80

Name and Position
with Registrant Name of Company Capacity
- -------------------------------- ------------------------------------------------- ----------------------------------
<S> <C> <C>
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

Jeremiah H. Chafkin, Charles Schwab & Co., Inc. Executive Vice President -
Executive Vice President SchwabFunds. Prior to November
and Chief 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

</TABLE>

C-8
<PAGE> 81

Name and Position
with Registrant Name of Company Capacity
- -------------------------------- ------------------------------------------------- ----------------------------------
<S> <C> <C>
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

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

Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services

John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Asset
Management Products and Services

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
</TABLE>

C-9
<PAGE> 82

Name and Position
with Registrant Name of Company Capacity
- -------------------------------- ------------------------------------------------- ----------------------------------
<S> <C> <C>
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>

Item 27. Principal Underwriter.

(a) Schwab acts as principal underwriter and distributor of Registrant's
shares. Schwab currently also acts as a principal underwriter for The
Charles Schwab Family of Funds, Schwab Investments, and Schwab Capital
Trust, and intends to act as such for any other investment company
which Schwab may sponsor in the future.

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

Item 28. Location of Accounts and Records.

All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's former custodian and fund accountants, Morgan Stanley Trust
Company, 1 Pierrepont Plaza, Brooklyn, New York 11201, Federated Services
Company, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222; Registrant's
principal underwriter, Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, California 94104; Registrant's custodian and fund accountant are as
follows: PFPC Trust Company, 8800 Tinicum Boulevard, Third Floor, Suite 200,
Philadelphia, Pennsylvania 19153 serves as custodian for the Schwab Money Market
Portfolio and Schwab S&P 500 Portfolio; PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809 serves as fund accountant to the Schwab Money Market
Portfolio, and SEI Investments Mutual Funds Services, One Freedom Valley Dr.
Oaks, Pennsylvania 19456, serves as fund accountant to the Schwab S&P 500
Portfolio; Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts, 02109 serves as custodian for the Schwab MarketTrack Growth
Portfolio II and SEI Investments Mutual Funds Services, One Freedom Valley Dr.
Oaks, Pennsylvania 19456, serves as fund accountant for the Schwab MarketTrack
Growth Portfolio II; or Ropes & gray, 1301 K Street, N.W., Suite 800 East,
Washington, District of Columbia 20005.

C-10
<PAGE> 83
Item 29 Management Services.

Not applicable.

Item 30. Undertakings.
Not Applicable

C-11
<PAGE> 84
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
Post Effective Amendment No. 11 to Registrant's Registration Statement on Form
N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this Post
Effective Amendment No. 11 to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on this 26th day of April, 2000.

SCHWAB ANNUITY PORTFOLIOS
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. 11 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 26th day
of April, 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., Attorney-in-Fact
---------------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney
<PAGE> 85
EXHIBIT INDEX

EXH. NO. DOCUMENT

(g)(v) Amendment No. 1 to the Accounting Services
Services Agreement

(g)(xvi) Amended Custodian Services Agreement

(g)(xviii) Custodian Services Agreement

(i) Opinion of Counsel

(j) Auditor's Consent

(p)(ii) Power of Attorney

(q) Code of Ethics

<PAGE> 1
EXHIBIT (g)(v)

AMENDMENT NO. 1 TO ACCOUNTING SERVICES AGREEMENT

This Amendment, dated February 5, 1996, is entered into between SCHWAB
ANNUITY PORTFOLIOS, a Massachusetts business trust (the "Fund"), and PFPC INC.
(formerly Provident Financial Processing Corporation), a Delaware corporation
which is an indirect wholly-owned subsidiary of PNC Bank Corp. (formerly, PNC
Financial Corp.) ("PFPC").

WHEREAS, the Fund and PFPC have entered into an Accounting Services
Agreement dated as of March 29, 1994 (the "Agreement") pursuant to which the
Fund appointed PFPC to provide accounting services to its investment portfolios
listed on schedule A to the Agreement; and

WHEREAS, the Fund and PFPC desire to amend the Agreement;

NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

1. Paragraph 15 is hereby deleted and replaced with the following:
Duration and Termination. This Agreement shall continue in full force and effect
with respect to each Portfolio, unless terminated as hereinafter provided or
amended by mutual, written agreement of the parties hereto. This Agreement may
be terminated by either party by an instrument in writing delivered, faxed or
mailed, postage prepaid, to the other party, such termination to take effect on
the date stated therein, which date shall not be sooner than sixty (60) days
after the date of such delivery or mailing.

2. Any defined terms not defined herein shall have the same meaning as
given in the Agreement.
<PAGE> 2
3. Miscellaneous. Except to the extent amended and supplemented hereby,
the Agreement shall remain unchanged and in full force and effect and is hereby
ratified and confirmed in all respects as amended and supplemented hereby.

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.

SCHWAB ANNUITY PORTFOLIOS

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

Title: Senior Vice President and Chief
---------------------------------
Operating Officer
---------------------------------
PFPC INC.

By: /s/ Robert J. Perlsweig
----------------------------------
Robert J. Perlsweig

Title: Executive Vice President
----------------------------------

<PAGE> 1
EXHIBIT (g)(xvi)

November 1, 1998

SCHWAB ANNUITY PORTFOLIOS

RE: Custodian Services Fees

Ladies and Gentlemen:

This letter constitutes our agreement with respect to compensation to be paid to
PNC Bank, National Association ("PNC") under the terms of a Custodian Services
Agreement (the "Agreement") dated March 29, 1994 between Schwab Annuity
Portfolios ("you" or the "Trust"), on behalf of the Fund listed on the attached
Schedule 1, as amended from time to time (the "Funds"), and PNC. Pursuant to the
terms of the Agreement, the Trust, on behalf of the Fund, will pay PNC, for the
services that PNC will provide to the Fund as follows:

1. The Fund shall pay an asset based fee of .009% on the first $200
million of average daily gross assets; .008% on the next $200 million
of average daily gross assets; .007% on the next $200 million of
average daily gross assets; .003% on the next $200 million of average
daily gross assets; .0025% on the next $200 million of average daily
gross assets and .002% on average daily gross assets in excess of $1
billion; exclusive of out-of-pocket expenses and transaction charges.
The fee shall be calculated daily and paid monthly. The fee for the
period from the date hereof until the end of that year shall be
pro-rated according to the proportion which such period bears to the
full annual period.

2. The Fund shall pay transaction charges of $16.50 for each physical
delivery; $8.25 for each fed book entry transaction; $6.50 for each
depository eligible transaction; $10.00 for each GNMA depository
transaction, $7.50 for each repo with PNC (per round-trip piece of
collateral); $30.00 for each options contract
and $50.00 for each futures contract.

A transaction includes Buys, Sells, Maturities, Free Deliveries, Free Receipts,
Exercised or Expired Options.

Out-of-pocket expenses include but are not limited to, postage, overnight
express charges, report transmission charges, microfiche/microfilm, Federal
Reserve wire fees, wire fees for receipt and disbursement, record
retention/storage, custody transfer/registration fees ($10.00 per item); and
cost of independent pricing services.
<PAGE> 2
PNC accepts the payment to it hereunder as full payment with respect to
services provided to the Funds under the terms of the Agreement. This Agreement
supersedes all previous Agreements concerning compensation for services to be
provided to the Trust on behalf of the Fund with respect to the Agreement.

Very truly yours,

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Joseph T. Gramlich
-----------------------------------
Name: Joseph T. Gramlich
-----------------------------------
Title: Vice President
-----------------------------------

Accepted:

SCHWAB ANNUITY PORTFOLIOS
on behalf of the Fund listed on the attached Schedule I, as amended from time to
time.

By: /s/ Tai-Chin Tung
-----------------------------------------
Name: Tai-Chin Tung
-----------------------------------------
Title: Treasurer and Principal Financial Officer
-----------------------------------------
<PAGE> 3
SCHEDULE I

Custodian Services Fees

Fund

Schwab S & P 500 Portfolio

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Joseph T. Gramlich
--------------------------------
Name: Joseph T. Gramlich
--------------------------------
Title: Vice President
--------------------------------

SCHWAB ANNUITY PORTFOLIOS

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

November 1, 1998
<PAGE> 4
SCHEDULE A

Custodian and Accounting Services Fees

Portfolio

Schwab Money Market Portfolio

SCHWAB ANNUITY PORTFOLIO On
behalf of each of the Funds
listed above.

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

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Joseph T. Gramlich
---------------------------------
Name: Joseph T. Gramlich
---------------------------------
Title: Vice President
---------------------------------
PFPC INC.

By: /s/ Joseph T. Gramlich
---------------------------------
Name: Joseph T. Gramlich
---------------------------------
Title: Senior Vice President
---------------------------------

November 1, 1998
<PAGE> 5
SCHEDULE A

Accounting Services Agreement

Date
----
Schwab Money Market Portfolio March 29, 1994

SCHWAB ANNUITY PORTFOLIO On behalf of each of the Funds listed above.

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

PFPC INC.

By: /s/ Joseph T. Gramlich
---------------------------------
Name: Joseph T. Gramlich
---------------------------------
Title: Senior Vice President
---------------------------------

November 1, 1998

<PAGE> 1
EXHIBIT (g)(xviii)

CUSTODIAN AGREEMENT

THIS AGREEMENT, dated as of October 28, 1999 , between SCHWAB ANNUITY
PORTFOLIOS, an open-end management investment company organized under the laws
of the Commonwealth of Massachusetts and registered with the Commission under
the 1940 Act on behalf of the Portfolios listed on Schedule A (each a FUND) and
BROWN BROTHERS HARRIMAN & CO., a limited partnership formed under the laws of
the State of New York (BBH&CO. or the CUSTODIAN).

W I T N E S S E T H:

WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the
Fund and to provide related services, all as provided herein, and BBH&Co. is
willing to accept such employment, subject to the terms and conditions herein
set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:

1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the
Fund's custodian, and BBH&Co. hereby accepts such appointment. All
Investments of the Fund delivered to the Custodian or its agents or
Subcustodians (as defined in Section 13.20) shall be dealt with as
provided in this Agreement. The duties of the Custodian with respect to
the Fund's Investments shall be only as set forth expressly in this
Agreement which duties are generally comprised of safekeeping and
various administrative duties that will be performed in accordance with
Instructions and as reasonably required to effect Instructions.

2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants

1
<PAGE> 2
and covenants each of the following:

2.1 This Agreement has been, and at the time of delivery of
each Instruction such Instruction will have been, duly authorized,
executed and delivered by the Fund. This Agreement does not violate any
Applicable Law or conflict with or constitute a default under the
Fund's prospectus or other organic document, agreement, judgment, order
or decree to which the Fund is a party or by which it or its
Investments is bound.

2.2 By providing an Instruction with respect to the first
acquisition of an Investment in a jurisdiction other than the United
States of America, the Fund shall be deemed to have confirmed to the
Custodian that the Fund, or its delegate or agent, has assessed and
accepted all material Country or Sovereign Risks and accepted
responsibility for their occurrence and will, where appropriate, ensure
that such risks are disclosed to the Fund's shareholders.

2.3 The Fund shall safeguard and shall solely be responsible
for the safekeeping of any testkeys, identification codes, passwords,
other security devices or statements of account with which the
Custodian provides it, except that the Fund shall not be responsible
where the Custodian has been negligent in the safekeeping of such
devices or statements of account. In furtherance and not limitation of
the foregoing, in the event the Fund utilizes any on-line service
offered by the Custodian, the Fund and the Custodian shall be fully
responsible for the security of each party's connecting terminal,
access thereto and the proper and authorized use thereof, and the
initiation and application of continuing effective safeguards in
respect thereof.

3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and
warrants that this Agreement has been duly authorized, executed and delivered by
BBH&Co. and does not and will not violate any Applicable Law or conflict with,
or constitute a default under, BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound. BBH&Co. hereby represents and warrants that it is a bank
having the qualification prescribed in paragraph (a) of Section 26(a) of the
1940 Act and that it will continue to have such qualification during the term of
this Agreement.

4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the
Custodian shall perform its duties pursuant to Instructions. As used herein, the
term INSTRUCTION shall mean a directive initiated by the Fund,

2
<PAGE> 3
acting directly or through its board of directors, officers or other Authorized
Persons, which directive shall conform to the requirements of this Section 4.

4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON shall
be a person or entity authorized to give Instructions for or on behalf of the
Fund by written notices to the Custodian or otherwise in accordance with
procedures delivered to and acknowledged by the Custodian, including without
limitation the Fund's Investment Adviser or Foreign Custody Manager. The
Custodian may treat any Authorized Person as having full authority of the Fund
to issue Instructions hereunder unless the notice of authorization contains
explicit limitations as to said authority (including any limitations arising
from the Custodian's appointment of depositories pursuant to Section 5.6 of this
Agreement. The Custodian shall be entitled to rely upon the authority of
Authorized Persons until it receives appropriate written notice from the Fund to
the contrary.

4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall make
available to the Fund from time to time unless the Fund shall elect to transmit
such Instruction in accordance with Subsections 4.2.1 through 4.2.3 of this
Section.

4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD.
Instructions may be transmitted through a secured or tested
electro-mechanical means identified by the Fund or by an Authorized
Person entitled to give Instruction and acknowledged and accepted by
the Custodian; it being understood that such acknowledgment shall
authorize the Custodian to receive and process such means of delivery
but shall not represent a judgment by the Custodian as to the
reasonableness or security of the method determined by the Authorized
Person.

4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in
a writing that bears the manual signature of Authorized Persons.

4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized
Persons and acknowledged and accepted by the Custodian (subject to the
same limits as to acknowledgements as is contained in Subsection 4.2.1,
above) including Instructions given orally or by SWIFT, telex or
telefax (whether tested or

3
<PAGE> 4
untested).

When an Instruction is given by means established under Subsections 4.2.1
through 4.2.3, it shall be the responsibility of the Custodian to use reasonable
care to adhere to any security or other procedures established in writing
between the Custodian and the Authorized Person with respect to such means of
Instruction, but such Authorized Person shall be solely responsible for
determining that the particular means chosen is reasonable under the
circumstances. With respect to telefax Instructions, the parties agree and
acknowledge that receipt of legible Instructions cannot be assured, that the
Custodian cannot verify that authorized signatures on telefax Instructions are
original or properly affixed, and that the Custodian shall not be liable for
losses or expenses incurred through actions taken in reliance on inaccurately
stated, illegible or unauthorized telefax Instructions. It shall be the
responsibility of the Custodian to promptly notify the Fund if Instructions are
illegible. The provisions of Section 4A of the Uniform Commercial Code shall
apply to Funds Transfers performed in accordance with Instructions. In the event
that a Funds Transfer Services Agreement is executed between the Fund and
Authorized Person and the Custodian, such an agreement shall comprise a
designation of form of a means of delivering Instructions for purposes of this
Section 4.2.

4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person
shall be responsible for assuring the adequacy and accuracy of Instructions.
Particularly, upon any acquisition, disposition or other dealing in the Fund's
Investments, and upon any delivery and transfer of any Investment or moneys, the
person initiating such Instruction shall give the Custodian an Instruction with
the following information:

4.3.1 The transaction date and the date and location of
settlement;

4.3.2 The specification of the type of transaction;

4.3.4 A description of the Investments or moneys in question,
including, as appropriate,

4
<PAGE> 5
quantity, price per unit, amount of money to be received or delivered,
currency information and where applicable, interest rates, maturity
dates and such other information as may be established in operating
procedures between the Fund and the Custodian. Where an Instruction is
communicated by electronic means, or otherwise where an Instruction
contains an identifying number such as a CUSIP, SEDOL or ISIN number,
the Custodian shall be entitled to rely on such number as controlling
notwithstanding any inconsistency contained in such Instruction,
particularly with respect to Investment description;

4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.

If the Custodian shall determine that an Instruction is either unclear or
incomplete (including those transmitted by telefax), the Custodian shall give
prompt notice of such determination to the Fund, and the Fund shall thereupon
amend or otherwise reform such Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially
delivered until the redelivery of an amended or reformed Instruction.

4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund
shall take into consideration delays which may occur due to the involvement of a
Subcustodian or agent, differences in time zones, and other factors particular
to a given market, exchange or issuer. The Custodian shall attempt in good faith
to execute any Instruction (including any modification or revocation of a
previous Instruction) received by the Custodian after either (i) specific timing
requirements or deadlines established by the Custodian with respect to
particular classes of Instruction, or (ii) such a time that the Custodian could
not reasonably be expected to have acted on such Instruction due to time zone
differences or other factors beyond its reasonable control, but shall not be
held responsible for losses resulting from its inability to do so.

5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments
delivered to it or Subcustodians for the Fund in accordance with the provisions
of this Section. The Custodian shall not be

5
<PAGE> 6
responsible for (a) the safekeeping of Investments not delivered or that are not
caused to be issued to it or its Subcustodians; (b) pre-existing faults or
defects in Investments that are delivered to the Custodian, or its
Subcustodians; or (c) for assets to hold pursuant to Section 5.6 hereof. The
Custodian is hereby authorized to hold with itself or a Subcustodian, and to
record in one or more accounts, all Investments delivered to and accepted by the
Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or in consequence of any corporate action. The Custodian shall hold
Investments for the account of the Fund and shall segregate Investments from
assets belonging to the Custodian and shall cause its Subcustodians to segregate
Investments from assets belonging to the Subcustodian in an account held for the
Fund or in an account maintained by the Subcustodian generally for
non-proprietary assets of the Custodian.

5.1 USE OF SECURITIES DEPOSITORIES. Except for Investments held
pursuant to Section 5.6 hereunder, the Custodian may deposit and maintain
Investments in any Securities Depository, either directly or through one or more
Subcustodians appointed by the Custodian. Investments held in a Securities
Depository shall be held (a) subject to the agreement, rules, statement of terms
and conditions or other document or conditions effective between the Securities
Depository and the Custodian or the Subcustodian, as the case may be, and (b) in
an account for the Fund or in bulk segregation in an account maintained for the
non-proprietary assets of the entity holding such Investments in the Depository.
If market practice or the rules and regulations of the Securities Depository
prevent the Custodian, the Subcustodian (or any agent of either) from holding
its client assets in such a separate account, the Custodian, the Subcustodian or
other agent shall, as appropriate, segregate such Investments for benefit of the
Fund or for benefit of clients of the Custodian generally on its own books.

For purposes of this Section, a "Securities Depository" is (i) a system
for the handling of securities

6
<PAGE> 7
where all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
book keeping entry without physical delivery of the securities, or (ii) any
system that qualifies under Rule 17f-4(a) or Rule 17f-5(a)(I)(ii) or (iii) under
the 1940 Act.

The Custodian may deposit Investments in a clearing agency registered
with the Securities and Exchange Commission under section 17A of the Securities
Exchange Act of 1934, as amended ("Clearing Agency"), which acts as a securities
depository or the book-entry system, or both, as provided in Subpart O of
Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the
book-entry regulations of federal agencies substantially in the form of Subpart
O, provided that:

(i) the Custodian ensures that, upon ceasing to act for the Fund, and
subject to its own rules and contributions to a participant's fund, the
clearing agency shall deliver all Investments held for the Fund to a
successor clearing agency or custodian to be named by the Fund. Where
the Fund has not named a successor, the Custodian shall ensure that the
clearing agency shall deliver the Fund's Investments to a bank having
the qualifications prescribed in Section 26(a)(1) of the 1940 Act for
trustees of unit investment trusts, to be held by the bank as custodian
for the Fund under terms customary to a custodian agreement between
banks and investment companies;

(ii) the Custodian or its agent will deposit the Fund's Investments in an
account that includes only assets held by it for customers;

(iii) the Custodian will send the Fund a confirmation of any transfers to or
from the Fund's account. Where Investments are transferred to the
Fund's account, the Custodian shall, by book-entry or otherwise,
identify Investments as belonging to the Fund by registering the
Investments in the

7
<PAGE> 8
name of the Custodian (or its nominee) or by reflecting the Investments
on the Custodian's account on the books of the clearing agency, the
book-entry system or the Custodian's agent. For this purpose, the term
"confirmation" means advice of notice of a transaction; and

(iv) the Custodian or its agent will promptly send to the Fund reports it
receives from the appropriate Federal Reserve Bank or clearing agency
or its respective system of internal accounting controls. The Custodian
and its agents shall send the Fund such reports on their own systems of
internal accounting controls as the Fund may reasonably request from
time to time.

5.2 CERTIFICATED ASSETS. Investments which are certificated may be held
in registered or bearer form: (a) in the Custodian's vault; (b) in the vault of
a Subcustodian or agent of the Custodian or a Subcustodian; or (c) in an account
maintained by the Custodian, Subcustodian or agent at a Securities Depository;
all in accordance with customary market practice in the jurisdiction in which
any Investments are held.

5.3 REGISTERED ASSETS. Investments which are registered may be
registered in the name of the Custodian, a Subcustodian, or in the name of the
Fund or a nominee for any of the foregoing, and may be held in any manner set
forth in paragraph 5.2 above with or without any identification of fiduciary
capacity in such registration.

5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf of the
Custodian, a Subcustodian or another agent of the Custodian, or a Securities
Depository; including depositories so appointed pursuant to Section 5.6 hereof.

5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the

8
<PAGE> 9
Custodian is responsible under the terms of this Agreement, the Custodian shall
replace such Investment, or in the event that such replacement cannot be
effected, the Custodian shall pay to the Fund the fair market value of such
Investment based on the last available price as of the close of business in the
relevant market on the date that the claim is paid to the Fund with respect to
such loss, or, if less, such other amount as shall be agreed by the parties as
the date for settlement.

5.6 This Section 5.6 sets forth provisions addressing those Funds
(listed on Schedule C hereof) that invest primarily in other mutual funds (each
hereinafter referred to as a "Fund of Funds"). The Fund and the Custodian hereby
agree to authorize the Custodian to take certain additional actions on behalf of
the Fund with respect to each Fund of Funds, as set forth in this Section 5.6.

A. Definitions. Terms defined in this Section 5.6 are as follows:

Schwab is Charles Schwab & Co., Inc.

Schwab Mutual Fund Shares are shares of mutual funds issued by fund
companies that have executed an Operating and/or Service Agreement(s)
with Schwab to participate in Schwab's Mutual Fund One Source or
Marketplace programs.

Mutual Fund Shares are shares of mutual funds issued by fund companies
that have not executed an Operating and/or Service Agreement(s) with
Schwab to participate in Schwab's Mutual Fund One Source or Marketplace
programs.

Fund Agent refers to the transfer agent for any investment company that
issues Mutual Fund Shares.

B. Safekeeping of Mutual Fund Shares. For purposes of this Section 5.6,
Mutual Fund Shares shall be deposited and/or maintained with a Fund
Agent acting as transfer agent for such fund. Each such Fund Agent
shall be deemed to be a "depository" for purposes of Rule 17f-4 under
the 1940 Act. The Fund hereby directs the Custodian to deposit and/or
maintain such securities with a Fund Agent, subject to the following
provisions:

(i) The Custodian shall keep Mutual Fund Shares with a Fund Agent,
provided that such securities are represented in an account
with the Fund Agent, in the name of the Custodian as custodian
of the Fund, in which the Custodian shall not deposit any
assets of the Custodian other than assets held on behalf of
the Fund;

(ii) The records of the Custodian with respect to Mutual Fund
Shares that are maintained with a Fund Agent shall identify by
book-entry those securities which the Fund or its investment
advisor identifies to the Custodian as belonging to the Fund;

(iii) The Custodian shall pay for Mutual Fund Shares purchased for
the account of the Fund upon (x) receipt of Authorized
Instructions that such securities have been purchased and

9
<PAGE> 10
will be transferred to the Custodian's account with the Fund
Agent, and (y) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account
of the Fund. The Custodian shall transfer Mutual Fund Shares
sold for the account of the Fund upon (a) receipt of
Authorized Instructions that such securities have been sold
and that payment for such securities will be transferred to
the Custodian, and (b) the making of an entry on the records
of the Custodian to reflect such transfer and payment for the
account of the Fund. The Custodian will receive confirmation
of the sale of such securities and payment therefore only
after such securities are transferred. Upon request, the
Custodian shall furnish the Fund copies of daily transaction
sheets reflecting each day's transactions with each Fund Agent
for the account of the Fund; and

(iv) The Custodian shall not be liable to the Fund for any loss or
damage to the Fund resulting from the maintenance of Mutual
Fund Shares with a Fund Agent except for losses resulting
directly from the negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees.

C. Safekeeping of Schwab Mutual Fund Shares. Schwab Mutual Fund Shares
shall be deposited and/or maintained in an account maintained with
Schwab as sub-agent for the funds. Schwab shall be deemed to be a
'depository' for purposes of Rule 17f-4 under the 1940 Act. The Fund
hereby directs the Custodian to deposit and/or maintain such securities
with Schwab, subject to the following provisions:

(i) The Custodian shall keep Schwab Mutual Fund Shares with
Schwab, provided that such securities are represented in an
account with Schwab, in the name of the Custodian as custodian
for the Fund, in which the Custodian will not deposit any
assets of the Custodian other than assets held on behalf of
the Fund and which Schwab represents to the Custodian will not
include any assets of Schwab other than assets held as a
fiduciary, custodian or otherwise for customers;

(ii) The records of the Custodian with respect to Schwab Mutual
Fund Shares that are maintained with Schwab shall identify by
book-entry those securities which the Fund or its investment
advisor has identified to the Custodian as belonging to the
Fund;

(iii) The Custodian shall pay for Schwab Mutual Fund Shares
purchased for the account of the Fund upon (i) receipt of
Authorized Instructions that such securities have been
purchased and will be transferred to the Custodian's account
with Schwab, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer Schwab
Mutual Fund Shares sold for the account of the Fund upon (i)
receipt of Authorized Instructions that such securities have
been sold and that payment for such securities will be
transferred to the Custodian, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. The Custodian will
receive confirmation of the sale of such securities and
payment therefor only after such securities are transferred.
Upon request, the Custodian shall furnish the Fund copies of
daily transaction sheets reflecting each day's transactions
with Schwab for the account of the Fund; and

(iv) The Custodian shall not be liable to the Fund for any loss or
damage to the Fund resulting from maintenance of Schwab Mutual
Fund Shares with Schwab except for losses resulting directly
from the negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees. The Fund acknowledges that the maintenance of
Schwab Mutual Fund Shares with Schwab as contemplated by this
Section 5.6 may be deemed to be "self custody" for purposes of
the Investment Company Act of 1940 and the regulations
thereunder.

10
<PAGE> 11
6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.

6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against delivery
thereof to the Custodian or a Subcustodian, as the case may be, either directly
or through a Clearing Corporation or a Securities Depository (in accordance with
the rules of such Securities Depository or such Clearing Corporation), or (b)
otherwise in accordance with an Instruction, Applicable Law, generally accepted
trade practices, or the terms of the instrument representing such Investment.

6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in cash,
by check or by bank wire transfer, (b) by credit to the account of the Custodian
or the applicable Subcustodian, as the case may be, with a Clearing Corporation
or a Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the terms of
the instrument representing such Investment.

6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER
COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian may
deliver Investments or cash of the Fund in connection with borrowings and other
collateral and margin requirements.

6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a) receive
and retain, to the extent the same are provided to the Custodian, confirmations
or other documents evidencing the purchase or sale by the Fund of
exchange-traded futures contracts and commodity options, (b) when required by
such Tri-Party Agreement, deposit and maintain in an account opened pursuant to
such Agreement (MARGIN ACCOUNT), segregated either physically or by book-entry
in a Securities Depository for the benefit of any futures commission merchant,
such Investments as the Fund shall have designated as initial, maintenance or
variation "margin" deposits or other collateral intended to secure the Fund's
performance of its obligations under the terms of any exchange-traded futures
contracts and commodity options; and (c) thereafter pay, release or transfer
Investments into or out of the

11
<PAGE> 12
margin account in accordance with the provisions of the such Agreement.
Alternatively, the Custodian may deliver Investments, in accordance with an
Instruction, to a futures commission merchant for purposes of margin
requirements in accordance with Rule 17f-6. The Custodian shall in no event be
responsible for the acts and omissions of any futures commission merchant to
whom Investments are delivered pursuant to this Section; for the sufficiency of
Investments held in any Margin Account; or, for the performance of any terms of
any exchange-traded futures contracts and commodity options.

6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to time,
the Fund's Investments may include Investments that are not ownership interests
as may be represented by certificate (whether registered or bearer), by entry in
a Securities Depository or by book entry agent, registrar or similar agent for
recording ownership interests in the relevant Investment. If the Fund shall at
any time acquire such Investments, including without limitation deposit
obligations, loan participations, repurchase agreements and derivative
arrangements, the Custodian shall (a) receive and retain, to the extent the same
are provided to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the terms
of the applicable arrangement, but only to the extent directed to do so by
Instruction. The Custodian shall have no responsibility for agreements running
to the Fund as to which it is not a party other than to retain, to the extent
the same are provided to the Custodian, documents or copies of documents
evidencing the arrangement and, in accordance with Instruction, to include such
arrangements in reports made to the Fund.

6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian shall: (a) exchange securities held for the account of the Fund
for other securities in connection with any reorganization, recapitalization,
conversion, split-up, change of par value of shares or similar event, and (b)
deposit any such securities in accordance with the terms of any reorganization
or protective plan.

6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for definitive
securities; (b) for transfer into the name of an entity allowable under Section
5.3; and (c) for a different number of certificates or instruments representing
the same number of shares or the same principal amount of indebtedness.

6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian shall
(a) deliver warrants, puts, calls, rights or similar securities to the issuer or
trustee thereof, or to any agent of such issuer or trustee, for

12
<PAGE> 13
purposes of exercising such rights or selling such securities, and (b) deposit
securities in response to any invitation for the tender thereof.

6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions or similar rights of
securities ownership affecting securities held on the Fund's account and
promptly notify the Fund of such action, and (b) collect all stock dividends,
rights and other items of like nature with respect to such securities.

6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect to
Investments and promptly credit the amount collected to a Principal or Agency
Account; provided, however, that the Custodian shall not be responsible for: (a)
the collection of amounts due and payable with respect to Investments that are
in default, or (b) the collection of cash or share entitlements with respect to
Investments that are not registered in the name of the Custodian or its
Subcustodians. The Custodian is hereby authorized to endorse and deliver any
instrument required to be so endorsed and delivered to effect collection of any
amount due and payable to the Fund with respect to Investments.

6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law or
established market practice in connection with the receipt of income, capital
gains or other payments by the Fund with respect to Investments, or in
connection with the sale, purchase or ownership of Investments.

6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered, to the Fund proxy forms, notices of meeting, and any other notices or
announcements materially affecting or relating to Investments received by the
Custodian or any nominee.

6.13. TAXES. The Custodian shall, where applicable, assist the Fund in
the reclamation of taxes withheld on dividends and interest payments received by
the Fund. In the performance of its duties with respect to tax withholding and
reclamation, the Custodian shall be entitled to rely on the reasonable advice of
counsel and upon information and advice regarding the Fund's tax status that is
received from or on behalf of the Fund without duty of separate inquiry.

13
<PAGE> 14
6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of moneys
or the free delivery of securities, provided that such Instruction shall
indicate the purpose of such payment or delivery and that the Custodian shall
record the party to whom such payment or delivery is made.

The Custodian shall attend to all nondiscretionary details in
connection with the sale or purchase or other administration of Investments,
except as otherwise directed by an Instruction, and may make payments to itself
or others for minor expenses of administering Investments under this Agreement;
provided that the Fund shall have the right to request an accounting with
respect to such expenses.

In fulfilling the duties set forth in Sections 6.6 through 6.10 above,
the Custodian shall provide to the Fund all material information pertaining to a
corporate action which the Custodian actually receives; provided that the
Custodian shall not be responsible for the completeness or accuracy of such
information. Any advance credit of cash or shares expected to be received as a
result of any corporate action shall be subject to actual collection and may,
when the Custodian deems collection unlikely, be reversed by the Custodian.

The Custodian may at any time or times in its discretion appoint (and
may at any time remove) agents (other than Subcustodians) to carry out some or
all of the administrative provisions of this Agreement (AGENTS), provided,
however, that the appointment of such agent (other than agents appointed under
Section 5.6 of this Agreement) shall not relieve the Custodian of its
administrative obligations under this Agreement.

7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and
conditions set forth

14
<PAGE> 15
in this Section 7, the Fund hereby authorizes the Custodian to open and
maintain, with itself or with Subcustodians, cash accounts in United States
Dollars, in such other currencies as are the currencies of the countries in
which the Fund maintains Investments or in such other currencies as the Fund
shall from time to time request by Instruction.

7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund. Such
accounts collectively shall be a deposit obligation of the Custodian and shall
be subject to the terms of this Section 7 and the general liability provisions
contained in Section 9. Cash accounts opened on the books of a Subcustodian may
be opened in the name of the Fund or the Custodian or in the name of the
Custodian for its customers generally (AGENCY ACCOUNTS). Such deposits shall be
obligations of the Subcustodian and shall be treated as an Investment of the
Fund. The appointment or use of such accounts shall not relieve the Custodian of
its obligations under this Agreement, and specifically the Custodian shall be
responsible for using reasonable care in the administration of such accounts,
including without limitation in the selection and monitoring of such
Subcustodians. Provided that the Custodian has complied with these obligations,
the Custodian shall not be liable for the repayment of balances in Agency
Accounts in the event such Subcustodian fails to make repayment by reason of
bankruptcy, insolvency or similar cause.

7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The
Custodian shall make payments from or deposits to any of said accounts in the
course of carrying out its administrative duties, including but not limited to
income collection with respect to the Fund's Investments, and otherwise in
accordance with Instructions. The Custodian and its Subcustodians shall be
required to credit amounts to the cash accounts only when moneys are actually
received in cleared funds in accordance with banking

15
<PAGE> 16
practice in the country and currency of deposit. Any credit made to any
Principal or Agency Account before actual receipt of cleared funds shall be
provisional and may be reversed by the Custodian in the event such payment is
not actually collected. Unless otherwise specifically agreed in writing by the
Custodian or any Subcustodian, all deposits shall be payable only at the branch
of the Custodian or Subcustodian where the deposit is made or carried.

7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss or
damage arising from the applicability of any law or regulation now or hereafter
in effect, or from the occurrence of any event, which may delay or affect the
transferability, convertibility or availability of any currency in the country
(a) in which such Principal or Agency Accounts are maintained or (b) in which
such currency is issued, and in no event shall the Custodian be obligated to
make payment of a deposit denominated in a currency during the period during
which its transferability, convertibility or availability has been affected by
any such law, regulation or event. Without limiting the generality of the
foregoing, neither the Custodian nor any Subcustodian shall be required to repay
any deposit made at a foreign branch of either the Custodian or Subcustodian if
such branch cannot repay the deposit due to a cause for which the Custodian
would not be responsible in accordance with the terms of Section 9 of this
Agreement unless the Custodian or such Subcustodian expressly agrees in writing
to repay the deposit under such circumstances. All currency transactions in any
account opened pursuant to this Agreement are subject to exchange control
regulations of the United States and of the country where such currency is the
lawful currency or where the account is maintained. Any taxes, costs, charges or
fees imposed on the convertibility of a currency held by the Fund shall be for
the account of the Fund.

16
<PAGE> 17
7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions. The
Custodian may act as principal in any foreign exchange transaction with the Fund
in accordance with Section 7.4.2 of this Agreement. The obligations of the
Custodian in respect of all foreign exchange transactions (whether or not the
Custodian shall act as principal in such transaction) shall be contingent on the
free, unencumbered transferability of the currency transacted on the actual
settlement date of the transaction.

7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The
Custodian shall process foreign exchange transactions
(including without limitation contracts, futures, options, and
options on futures), where any third party acts as principal
counterparty to the Fund on the same basis it performs duties
as agent for the Fund with respect to any other of the Fund's
Investments. Accordingly the Custodian shall only be
responsible for delivering or receiving currency on behalf of
the Fund in respect of such contracts pursuant to
Instructions. The Custodian shall not be responsible for the
failure of any counterparty (including any Subcustodian) in
such agency transaction to perform its obligations thereunder.
The Custodian (a) shall transmit cash and Instructions to and
from the currency broker or banking institution with which a
foreign exchange contract or option has been executed pursuant
hereto, (b) may make free outgoing payments of cash in the
form of Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or
confirmation that the countervalue currency completing the
foreign exchange contract has been delivered or received or
that the option has been delivered or received, and (c) shall
hold all confirmations, certificates and other documents and
agreements received by the Custodian and evidencing or
relating to such foreign exchange transactions in safekeeping.
The Fund accepts full responsibility for its use of
third-party foreign exchange dealers and for execution of said
foreign exchange contracts and options and understands that
the Fund shall be responsible for any and all costs and
interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties
to deliver foreign exchange.

7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS
PRINCIPAL. The Custodian may undertake foreign exchange
transactions with the Fund as principal as the Custodian and
the Fund may agree from time to time. In such event, the
foreign exchange transaction will be performed in accordance
with the particular agreement of the parties, or in the event
a principal foreign exchange transaction is initiated by
Instruction in the absence of specific agreement, such
transaction will be performed in accordance with the usual
commercial terms of the Custodian.

7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event

17
<PAGE> 18
that a delay shall have been caused by the negligence or willful misconduct of
the Custodian in carrying out an Instruction to credit or transfer cash, the
Custodian shall be liable to the Fund: (a) with respect to Principal Accounts,
for interest to be calculated at the rate customarily paid on such deposit and
currency by the Custodian on overnight deposits at the time the delay occurs for
the period from the day when the transfer should have been effected until the
day it is in fact effected; and, (b) with respect to Agency Accounts, for
interest to be calculated at the rate customarily paid on such deposit and
currency by the Subcustodian on overnight deposits at the time the delay occurs
for the period from the day when the transfer should have been effected until
the day it is in fact effected. The Custodian shall not be liable for delays in
carrying out such Instructions to transfer cash which are not due to the
Custodian's own negligence or willful misconduct.

7.6 ADVANCES. If, for any reason in the conduct of its safekeeping
duties pursuant to Section 5 hereof or its administration of the Fund's assets
pursuant to Section 6 hereof, the Custodian or any Subcustodian advances monies
to facilitate settlement or otherwise for benefit of the Fund (whether or not
any Principal or Agency Account shall be overdrawn either during, or at the end
of, any Business Day), the Fund hereby does:

7.6.1 acknowledge that the Fund shall have no right or title to any
Investments purchased with such Advance save a right to receive such
Investments upon: (a) the debit of the Principal or Agency Account; or,
(b) if such debit would produce an overdraft in such account, other
reimbursement of the associated Advance;

7.6.2 grant to the Custodian a security interest in all Investments;
and,

7.6.3 agree that the Custodian may secure the resulting Advance by
perfecting a security interest in all Investments under Applicable Law.

Neither the Custodian nor any Subcustodian shall be obligated to advance monies
to the Fund, and in the

18
<PAGE> 19
event that such Advance occurs, any transaction giving rise to an Advance shall
be for the account and risk of the Fund and shall not be deemed to be a
transaction undertaken by the Custodian for its own account and risk. If such
Advance shall have been made by a Subcustodian or any other person, the
Custodian may assign the security interest and any other rights granted to the
Custodian hereunder to such Subcustodian or other person. If the Fund shall fail
to repay when due the principal balance of an Advance and accrued and unpaid
interest thereon, the Custodian or its assignee, as the case may be, shall be
entitled to utilize the available cash balance in any Agency or Principal
Account and to dispose of any Investments to the extent necessary to recover
payment of all principal of, and interest on, such Advance in full. The
Custodian may assign any rights it has hereunder to a Subcustodian or third
party. Any security interest in Investments taken hereunder shall be treated as
financial assets credited to securities accounts under Articles 8 and 9 of the
Uniform Commercial Code (1997). Accordingly, the Custodian shall have the rights
and benefits of a secured creditor that is a securities intermediary under such
Articles 8 and 9.

7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits maintained in all
Principal Accounts (whether or not denominated in Dollars) shall collectively
constitute a single and indivisible current account with respect to the Fund's
obligations to the Custodian, or its assignee, and balances in such Principal
Accounts shall be available for satisfaction of the Fund's obligations under
this Section 7. The Custodian shall further have a right of offset against the
balances in any Agency Account maintained hereunder to the extent that the
aggregate of all Principal Accounts is overdrawn.

8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions
hereinafter set forth in this Section 8, the Fund hereby authorizes the
Custodian to utilize Securities Depositories to act on behalf

19
<PAGE> 20
of the Fund and to appoint from time to time and to utilize Subcustodians. With
respect to securities and funds held by a Subcustodian, either directly or
indirectly (including by a Securities Depository or Clearing Corporation),
notwithstanding any provisions of this Agreement to the contrary, payment for
securities purchased and delivery of securities sold may be made prior to
receipt of securities or payment, respectively, and securities or payment may be
received in a form, in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally accepted trade
practice in the applicable local market, (d) the terms and characteristics of
the particular Investment, or (e) the terms of Instructions.

8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities Depository
in the United States, including The Depository Trust Company, provided such
Depository meets applicable requirements of the Federal Reserve Bank or of the
Securities and Exchange Commission. The Custodian may, at any time and from time
to time, appoint any bank as defined in Section 2(a)(5) of the 1940 Act meeting
the requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian
for purposes of holding Investments of the Fund in the United States.
Notwithstanding the foregoing, nothing in this Section shall relieve the
Custodian of its administrative obligations under this Agreement in connection
with the appointment of Subcustodians and Securities Depositories. In addition,
the Custodian may appoint as a depository an entity described in Section 5.6 of
this Agreement.

8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain non-U.S. Investments of the Fund in any Securities
Depository located outside the United States

20
<PAGE> 21
provided such Securities Depository meets the requirements of an "eligible
foreign custodian" under Rule 17f-5 promulgated under the 1940 Act, or any
successor rule or regulation ("Rule 17f-5") or which by order of the Securities
and Exchange Commission is exempted therefrom. Additionally, the Custodian may,
at any time and from time to time, appoint (a) any bank, trust company or other
entity meeting the requirements of an ELIGIBLE FOREIGN CUSTODIAN under Rule
17f-5 or which by order of the Securities and Exchange Commission is exempted
therefrom, or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting
the requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian
for purposes of holding Investments of the Fund outside the United States. Such
appointment of foreign Subcustodians shall be subject to approval of the Fund in
accordance with Subsections 8.2.1 and 8.2.2.

8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and
except to the extent that review of certain matters concerning the
appointment of Subcustodians shall have been delegated to the Custodian
pursuant to Subsection 8.2.2, the Custodian shall, prior to the
appointment of any Subcustodian for purposes of holding Investments of
the Fund outside the United States, obtain written confirmation of the
approval of the Board of Trustees or Directors of the Fund with respect
to (a) the identity of a Subcustodian, (b) the country or countries in
which, and the Securities Depositories, if any, through which, any
proposed Subcustodian is authorized to hold Investments of the Fund,
and (c) the Subcustodian agreement which shall govern such appointment.
Each such duly approved country, Subcustodian and Securities Depository
shall be listed on Appendix A attached hereto as the same may from time
to time be amended.

8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time
to time, the Custodian may offer to perform, and the Fund may accept to
perform, that the Custodian perform certain reviews of Subcustodians
and of Subcustodian Contracts as delegate of the Fund's Board. In such
event, the Custodian's duties and obligations with respect to this
delegated review will be performed in accordance with the terms of the
separate delegation agreement between the Fund and the Custodian.

8.3 RESPONSIBILITY FOR FOREIGN SUBCUSTODIANS. With respect to
securities and funds held by a Foreign Subcustodian, either directly or
indirectly (including by a Securities System or foreign clearing agency),
including demand deposit and interest bearing deposits, currencies or other
deposits and foreign

21
<PAGE> 22
exchange contracts as referred to herein, the Custodian shall be liable to
the Fund for any loss or damage to the Fund caused by or resulting from the acts
or omissions of any Foreign Subcustodian to the extent that (i) under the terms
set forth in the Subcustodian Agreement between the Custodian and the Foreign
Subcustodian, the Foreign Subcustodian failed to perform in accordance with the
terms of such contract or the standard of conduct imposed under such
Subcustodian Agreement or (ii) such acts or omissions would be deemed to be
negligence, gross negligence or willful misconduct under the laws, circumstances
and practices prevailing in the jurisdiction where the act or omission occurred.

8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be held
in a country in which no Foreign Subcustodian is authorized to act in order that
the Custodian shall, if it deems appropriate to do so, have sufficient time to
establish a subcustodial arrangement in accordance herewith. In the event,
however, the Custodian is unable to establish such arrangements prior to the
time such investment is to be acquired, the Custodian is authorized to designate
at its discretion a local safekeeping agent, and the use of such local
safekeeping agent shall be at the sole risk of the Fund, and accordingly the
Custodian shall be responsible to the Fund for the actions of such agent if and
only to the extent the Custodian shall have recovered from such agent for any
damages caused the Fund by such agent. The foregoing sentence does not apply
where the Custodian is acting as the Fund's Foreign Custody Manager pursuant to
a separate Foreign Custody Manager Delegation Agreement between the Custodian
and the Fund.

9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and
obligations hereunder, the Custodian shall use reasonable care under the facts
and circumstances prevailing in the market where

22
<PAGE> 23
performance is effected. Subject to the specific provisions of this Section, the
Custodian shall be liable for any damage incurred by the Fund in consequence of
the Custodian's negligence, bad faith or willful misconduct, including that
caused by a Subcustodian as set forth is Section 8 hereof. In no event shall the
Custodian be liable hereunder for any special, indirect, punitive or
consequential damages arising out of, pursuant to or in connection with this
Agreement even if the Custodian has been advised of the possibility of such
damages. It is agreed that the Custodian shall have no duty to assess the risks
inherent in the Fund's Investments or to provide investment advice with respect
to such Investments and that the Fund as principal shall bear any risks
attendant to particular Investments such as failure of counterparty or issuer.

9.1 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not liable
hereunder for any loss or damage in association with such failure to perform,
for or in consequence of the following causes:

9.1.1 FORCE MAJEURE. FORCE MAJEURE shall mean any circumstance
or event which is beyond the reasonable control of the Custodian, a
Subcustodian or any agent of the Custodian or a Subcustodian and which
adversely affects the performance by the Custodian of its obligations
hereunder, by the Subcustodian of its obligations under its Subcustody
Agreement or by any other agent of the Custodian or the Subcustodian,
including any event caused by, arising out of or involving (a) an act
of God, (b) accident, fire, water damage or explosion, (c) any
computer, system or other equipment failure or malfunction caused by
any computer virus or the malfunction or failure of any communications
medium (provided that the Custodian has performed in accordance with
Section 12.10), (d) any interruption of the power supply or other
utility service, (e) any strike or other work stoppage, whether partial
or total other than a strike or work stoppage involving the Custodian,
any Subcustodian or any affiliate of the Custodian, (f) any delay or
disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the
securities, commodities or foreign exchange markets, whether or not
resulting from or reflecting the occurrence of any Sovereign Risk, (h)
any encumbrance on the transferability of a currency or a currency
position on the actual settlement date of a foreign exchange
transaction, whether or not resulting from or reflecting the occurrence
of any Sovereign Risk, or (i) any other cause similarly beyond the
reasonable control of the Custodian. The Custodian shall use reasonable
care within its control to minimize the loss or damage to the Fund
resulting from a Force Majeure event including without limitation, the
maintenance of a suitable disaster recovery plan to ensure that the
effects of any Force Majeure event or circumstance are mitigated
insofar as possible and to ensure continuity of service to the Fund.

9.1.2 COUNTRY RISK. COUNTRY RISK shall mean, with respect to
the acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of,
systemic and markets factors affecting the acquisition, payment for or
ownership

23
<PAGE> 24
of Investments including (a) the prevalence of crime and corruption,
(b) the inaccuracy or unreliability of business and financial
information, (c) the instability or volatility of banking and financial
systems, or the absence or inadequacy of an infrastructure to support
such systems, (d) custody and settlement infrastructure of the market
in which such Investments are transacted and held, (e) the acts,
omissions and operation of any Securities Depository, (f) the risk of
the bankruptcy or insolvency of banking agents, counterparties to cash
and securities transactions, registrars or transfer agents, and (g) the
existence of market conditions which prevent the orderly execution or
settlement of transactions or which affect the value of assets.

9.1.3 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of
any jurisdiction, including the United States of America, where
Investments is acquired or held hereunder or under a Subcustody
Agreement, (a) any act of war, terrorism, riot, insurrection or civil
commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by
any Governmental Authority, whether de facto or de jure, (iv) any
devaluation or revaluation of the currency, (d) the imposition of
taxes, levies or other charges affecting Investments, (vi) any change
in the Applicable Law, or (e) any other economic or political risk
incurred or experienced.

9.2. LIMITATIONS ON LIABILITY. Except as otherwise specifically
provided in this Agreement or in any separate Delegation Agreement between the
parties, the Custodian shall not be liable for any loss, claim, damage or other
liability arising from the following causes:

9.2.1 FAILURE OF THIRD PARTIES. The failure of any third party
(excluding Subcustodians) including: (a) any issuer of Investments or
book-entry or other agent of and issuer; (b) any counterparty with
respect to any Investment, including any issuer of exchange-traded or
other futures, option, derivative or commodities contract; (c) failure
of an Investment Advisor, Foreign Custody Manager or other agent of the
Fund; or (d) failure of other third parties similarly beyond the
control or choice of the Custodian.

9.2.2 INFORMATION SOURCES. The Custodian may rely upon
information received from issuers of Investments or agents of such
issuers, information received from Subcustodians and from other
commercially reasonable sources such as commercial data bases and the
like, but shall not be responsible for specific inaccuracies in such
information, provided that the Custodian has relied upon such
information in good faith, or for the failure of any commercially
reasonable information provider.

9.2.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's
declaration of trust, certificate of incorporation or by-laws,
Applicable Law, or actions by the trustees, directors or shareholders
of the Fund.

9.2.4 RESTRICTED SECURITIES. The limitations inherent in the
rights, transferability or similar investment characteristics of a
given Investment of the Fund.

10. INDEMNIFICATION. The Fund hereby agrees to indemnify the Custodian and
its respective agents,

24
<PAGE> 25
nominees, partners, employees, officers and directors, and agrees to hold each
of them harmless from and against all claims and liabilities, including
reasonable counsel fees and taxes, incurred or assessed against any of them in
connection with the performance of this Agreement and any Instruction, except to
the extent that any such claims, liabilities and losses, including counsel fees
and taxes incurred or assessed, result from the negligence, bad faith or willful
misconduct of the Custodian or of a Subcustodian as set forth in Section 8
hereof. If any person indemnified under the preceding sentence gives written
notice of claim to the Custodian, the Custodian shall promptly give written
notice to the Fund. Not more than thirty days following the date of such notice,
unless the Custodian shall be liable under Section 8 hereof in respect of such
claim, the Fund will pay the amount of such claim or reimburse the Custodian for
any payment made by the Custodian in respect thereof.

The Custodian agrees to indemnify the Fund and its agents, nominees,
partners, employees, officers and trustees, and agrees to hold each of them
harmless from and against all claims and liabilities, including counsel fees and
taxes incurred or assessed against any of them in connection with the
performance of this Agreement or any Instruction to the extent that any such
claims, liabilities and losses, including counsel fees and taxes incurred or
assessed, result from the negligence, bad faith or willful misconduct of the
Custodian or a Subcustodian as set forth in Section 8 hereof. If any person
indemnified under the preceding sentence gives written notice of claim to the
Fund, the Fund shall promptly give written notice to the Custodian. Not more
than thirty days following the date of such notice, unless the Custodian shall
not be liable in respect of such claim, the Custodian will pay the amount of
such claim or reimburse the Fund for any payment made by the Fund in respect
thereof.

25
<PAGE> 26
11. REPORTS AND RECORDS. The Custodian shall:

11.1 create and maintain records relating to the performance
of its obligations under this Agreement;

11.2 make available to the Fund, its auditors, agents and
employees, during regular business hours of the Custodian, upon
reasonable request and during normal business hours of the Custodian,
all records maintained by the Custodian pursuant to paragraph (a)
above, subject, however, to all reasonable security requirements of the
Custodian then applicable to the records of its custody customers
generally; and

11.3 make available to the Fund all Electronic Reports; it
being understood that the Custodian shall not be liable hereunder for
the inaccuracy or incompleteness thereof or for errors in any
information included therein.

The Fund shall examine all records, howsoever produced or transmitted,
promptly upon receipt thereof and notify the Custodian promptly of any
discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within a reasonable time after its receipt thereof,
such records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value of
assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it is
acknowledged and agreed that the Custodian does not verify nor represent nor
warrant as to the accuracy or completeness of such information and accordingly
shall be without liability in selecting and using such sources and furnishing
such information.

12. MISCELLANEOUS.

12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon
request, such proxies, powers of attorney or other instruments as may be
necessary or desirable for the Custodian to provide, or to cause any
Subcustodian to provide, custody services.

26
<PAGE> 27
12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this
Agreement constitutes the entire agreement between the Fund and the Custodian
with respect to the subject matter hereof. Accordingly, this Agreement
supersedes any custody agreement or other oral or written agreements heretofore
in effect between the Fund and the Custodian with respect to the custody of the
Fund's Investments.

12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or modified, except by an instrument in
writing executed by the party against which enforcement of such waiver,
amendment or modification is sought; provided, however, that an Instruction
shall, whether or not such Instruction shall constitute a waiver, amendment or
modification for purposes hereof, shall be deemed to have been accepted by the
Custodian when it commences actions pursuant thereto or in accordance therewith.

12.4 GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW
YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE. THE PARTIES
HERETO IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK, THE FEDERAL COURTS LOCATED IN NEW YORK CITY IN THE BOROUGH OF
MANHATTAN, OR OF THE COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL COURTS
LOCATED IN THE CITY OR COUNTY OF SAN FRANCISCO.

(b) The names "Schwab Capital Trust" and "Trustees of Schwab Capital
Trust" refer respectively to

27
<PAGE> 28
the Trust created by the Trustees, as trustees but not individually or
personally, acting from time to time under the Declaration of Trust, to which
reference is hereby made and a copy of which is on file at the Office of the
Secretary of the Commonwealth of Massachusetts and elsewhere as required by law,
and to any and all amendments thereto so filed or hereafter filed. The
obligations of "Schwab Capital Trust" entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, interest holders or representatives personally, but bind only the
assets of the Trust, and all persons dealing with any series of units of
interest of the Trust must look solely to the assets of the trust belonging to
such series for the enforcement of any claims against the Trust.

12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by first
class registered or certified mail, postage prepaid, return receipt requested,
(c) by a nationally recognized overnight courier or (d) by facsimile
transmission, provided that any notice or other writing sent by facsimile
transmission shall also be mailed, postage prepaid, to the party to whom such
notice is addressed. All such notices shall be addressed, as follows:

IF TO THE FUND:

Charles Schwab Investment Management, Inc.
101 Montgomery Street
San Francisco, CA 94104
Attn: Treasurer

Telephone: 415-667-3901
Facsimile: 415-667-3800

(to receive notice pursuant to Section 5.6
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
Attn: Mutual Fund Operations

Telephone: 415-636-4170
Facsimile: 415-395-6150

28
<PAGE> 29
IF TO THE CUSTODIAN:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn: Manager, Securities Department
Telephone: (617) 772-1818
Facsimile: (617) 772-2263

or such other address as the Fund or the Custodian may have designated
in writing to the other.

12.6 HEADINGS. Paragraph headings included herein are for convenience
of reference only and shall not modify, define, expand or limit any of the terms
or provisions hereof.

12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
the Fund and the Custodian.

12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all information
provided by each party to the other regarding its business and operations. All
confidential information provided by a party hereto shall be used by any other
party hereto solely for the purpose of rendering or obtaining services pursuant
to this Agreement and, except as may be required in carrying out this Agreement,
shall not be disclosed to any third party without the prior consent of such
providing party. The foregoing shall not be applicable to any information that
is publicly available when provided or thereafter becomes publicly available
other than through a breach of this Agreement, or that is required to be
disclosed by or to any bank examiner of the Custodian or any Subcustodian, any
Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.

12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall
be entitled to

29
<PAGE> 30
receive and act upon the reasonable advice of (i) counsel for the Fund or (ii)
such counsel as the Fund and the Custodian may agree upon, with respect to all
matters, and the Custodian shall be without liability for any action reasonably
taken or omitted pursuant to such reasonable advice.

12.10 YEAR 2000. Without limiting any other express or implied
warranties made in this Agreement, the Custodian hereby represents and warrants
that its internal core processing systems for the provision of services under
this agreement operate with the ability to store and process date and
date-related data without error or malfunction due to any inability to process
dates in the twentieth or twenty-first century. The Custodian further represents
that it is proceeding with further testing in accordance with industry
conventions and standards with respect to Year 2000 processing. The Custodian
will report and certify to the Fund the results of the same in accordance with
the prevailing schedule established by the relevant financial service industry
sectors and any regulatory schedule or guidelines. The Custodian shall correct
any deficiencies revealed by further testing at no cost to the Fund. In addition
to the foregoing, the Custodian hereby represents and warrants that: (a) it will
use reasonable care and diligence in accordance with the terms of this Agreement
to assure that these services are not compromised by loss of systems or software
functionality related to the succession of the year 2000; (b) it will use
reasonable care and diligence to cause that its agents and Subcustodians perform
likewise; and, (c) it will use reasonable care and diligence to provide for
alternate means of providing services in the event that a computer system or
software might be negatively affected by the succession of the year 2000.

13. DEFINITIONS. The following defined terms will have the respective
meanings set forth below.

13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid to
third parties for account of the Fund or in discharge of

30
<PAGE> 31
any expense, tax or other item payable by the Fund.

13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books
of a Subcustodian or other banking institution in accordance with Section 7.1.

13.3 AGENT shall have the meaning set forth in the last sentence of
Section 6.

13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all
(a) laws, statutes, treaties, regulations, guidelines (or their equivalents);
(b) orders, interpretations licenses and permits; and (c) judgments, decrees,
injunctions writs, orders and similar actions by a court of competent
jurisdiction; compliance with which is required or customarily observed in such
jurisdiction.

13.5 AUTHORIZED PERSON shall mean any person or entity authorized to
give Instructions on behalf of the Fund in accordance with Section 4.1.

13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar entitlement
to Investments, including without limitation a transfer agent or registrar.

13.7 CLEARING CORPORATION shall mean any entity or system established
for purposes of providing securities settlement and movement and associated
functions for a given market.

13.8 COMPULSORY SECURITIES DEPOSITORY shall mean a Securities
Depository the use of which is mandatory (i) under applicable law or regulation;
(ii) because securities cannot be withdrawn from the depository; or (iii)
because maintaining securities outside the Securities Depository is not
consistent with prevailing custodial practices.

13.9 DELEGATION AGREEMENT shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative with
respect to certain responsibilities concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5.

13.10 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5 under the 1940 Act.

13.11 FOREIGN SUBCUSTODIAN shall mean each foreign bank appointed
pursuant to Rule 17f-5 under the 1940 Act, but shall not include Compulsory
Securities Depositories.

13.12 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.

13.13 INSTRUCTION(S) shall have the meaning assigned in Section 4.

13.14 INVESTMENT ADVISOR shall mean any person or entity who is an
Authorized Person to give Instructions with respect to the investment and
reinvestment of the Fund's Investments.

13.15 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as well as
receivables, derivatives, contractual rights or entitlements and other
intangible assets.

13.16 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4
hereof.

13.17 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund carried
on the books of

31
<PAGE> 32
BBH&Co. as principal in accordance with Section 7.

13.18 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from the
assets of the Custodian or any Subcustodian.

13.19 SECURITIES DEPOSITORY shall mean a central or book entry system
or agency established under Applicable Law for purposes of recording the
ownership and/or entitlement to investment securities for a given market.

13.20 SUBCUSTODIAN shall mean each bank appointed by the Custodian
pursuant to Section 8, but shall not include Compulsory Securities Depositories.

13.21 TRI-PARTY AGREEMENT shall have the meaning set forth in Section
6.4 hereof.

13.22 1940 ACT shall mean the Investment Company Act of 1940, as
amended.

14. COMPENSATION. The Fund agrees to pay to the Custodian (a) a fee in an
amount set forth in the fee letter between the Fund and the Custodian in effect
on the date hereof or as amended from time to time, and (b) all reasonable
out-of-pocket expenses incurred by the Custodian, including the reasonable fees
and expenses of all Subcustodians (not including Subcustodian fees that are
covered in Section 14(a)), all as to which the Custodian and Fund may from time
to time agree, and payable from time to time. Amounts payable by the Fund under
and pursuant to this Section 14 shall be payable by wire transfer to the
Custodian at BBH&Co. in New York, New York.

15. TERMINATION. This Agreement may be terminated by either party in
accordance with the provisions of this Section. The provisions of this Agreement
and any other rights or obligations incurred or accrued by any party hereto
prior to termination of this Agreement shall survive any termination of this
Agreement.

15.1 NOTICE AND EFFECT. This Agreement may be terminated by
either party by written notice effective no sooner than seventy-five
days following the date that notice to such effect shall be delivered
to other party at its address set forth in paragraph 12.5 hereof.

32
<PAGE> 33
15.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held
by the Custodian or any Subcustodian shall be delivered to the
successor custodian in accordance with reasonable Instructions. The
Custodian agrees to cooperate with the Fund in the execution of
documents and performance of other actions necessary or desirable in
order to facilitate the succession of the new custodian. If no
successor custodian shall be appointed, the Custodian shall in like
manner transfer the Fund's Investments in accordance with Instructions.

15.3 DELAYED SUCCESSION. If no Instruction has been given as
of the effective date of termination, Custodian may at any time on or
after such termination date and upon ten days written notice to the
Fund either (a) deliver the Investments of the Fund held hereunder to
the Fund at the address designated for receipt of notices hereunder; or
(b) deliver any investments held hereunder to a bank or trust company
having a capitalization of $2M USD equivalent and operating under the
Applicable law of the jurisdiction where such Investments are located,
such delivery to be at the risk of the Fund. In the event that
Investments or moneys of the Fund remain in the custody of the
Custodian or its Subcustodians after the date of termination owing to
the failure of the Fund to issue Instructions with respect to their
disposition or owing to the fact that such disposition could not be
accomplished in accordance with such Instructions despite diligent
efforts of the Custodian, the Custodian shall be entitled to
compensation for its services with respect to such Investments and
moneys during such period as the Custodian or its Subcustodians retain
possession of such items and the provisions of this Agreement shall
remain in full force and effect until disposition in accordance with
this Section is accomplished.

15.4 ASSIGNMENT. This Agreement may not be assigned by either
party without the prior written consent of the other party. For this
purpose, assignment includes the change of control of a party or
assignment to any entity controlling, controlled by or under common
control with, the party, including successors.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.

SCHWAB ANNUITY PORTFOLIOS
By: /s/ Tai-Chin Tung
-------------------------------
By: BROWN BROTHERS HARRIMAN & CO.

By: /s/ Kristen F. Giarrusso
-------------------------------
Partner

33
<PAGE> 34
EXHIBIT (g)(xviii)

SCHEDULE "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
SCHWAB ANNUITY PORTFOLIOS
and
BROWN BROTHERS HARRIMAN & CO.

Dated as of October 29, 1999

The following is a list of Portfolio(s) for which the Custodian shall serve
under a Custodian Agreement dated as of October 28, 1999 (the "Agreement"):

SCHWAB MARKETTRACK GROWTH PORTFOLIO II

IN WITNESS WHEREOF, each of the parties hereto has caused this Schedule to be
executed in its name and on behalf of each such Portfolio.

SCHWAB ANNUITY PORTFOLIOS BROWN BROTHERS HARRIMAN & CO.

By: /s/ Tai-Chin Tung By: /s/ Kristen F. Giarrusso
----------------------------- ----------------------------
Name: Tai-Chin Tung Name: Kristen F. Giarrusso
Title: Controller Title: Partner

<PAGE> 35
EXHIBIT (g)(xviii)

SCHEDULE "C
TO
SECTION 5.6. OF THE CUSTODIAN AGREEMENT
BETWEEN
SCHWAB ANNUITY PORTFOLIOS
and
BROWN BROTHERS HARRIMAN & CO.

Dated as of October 28, 1999

The following is a list of Portfolio(s) for which the Custodian shall serve
under a Custodian Agreement dated as of October 28, 1999 (the "Agreement"):

SCHWAB MARKETTRACK GROWTH PORTFOLIO II

IN WITNESS WHEREOF, each of the parties hereto has caused this Schedule to be
executed in its name and on behalf of each such Portfolio.

SCHWAB ANNUITY PORTFOLIOS BROWN BROTHERS HARRIMAN & CO.

By: /s/ Tai-Chin Tung By: /s/ Kristen F. Giarrusso
---------------------- -----------------------------------
Name: Tai-Chin Tung Name: Kristen F. Giarrusso
Title: Controller Title: Partner

<PAGE> 1
EXHIBIT (i)

1701 Market Street MORGAN, LEWIS
Philadelphia, PA 19103 & BOCKIUS LLP
(215)963-5000 COUNSELORS AT LAW
Fax: (215)963-5299

April 26, 2000

Schwab Annuity Portfolios
101 Montgomery Street
San Francisco, CA 94104

Re: Opinion of Counsel regarding Post-Effective Amendment No. 11 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-74534).

Ladies and Gentlemen:

We have acted as counsel to Schwab Annuity Portfolios, a Massachusetts trust
(the "Trust"), in connection with the above-referenced Registration Statement
(as amended, the "Registration Statement") which relates to the Trust's units of
beneficial interest, par value $.00001 per share (collectively, the "Shares").
This opinion is being delivered to you in connection with the Trust's filing of
Post-Effective Amendment No. 11 to the Registration Statement (the "Amendment")
to be filed with the Securities and Exchange Commission pursuant to Rule 485(b)
of the Securities Act of 1933 (the "1933 Act"). With your permission, all
assumptions and statements of reliance herein have been made without any
independent investigation or verification on our part except to the extent
otherwise expressly stated, and we express no opinion with respect to the
subject matter or accuracy of such assumptions or items relied upon.

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

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

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

(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated 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.
<PAGE> 2
In our capacity as counsel to the Trust, we have examined the originals, or
certified, conformed or reproduced copies, of all records, agreements,
instruments and documents as we have deemed relevant or necessary as the basis
for the opinion hereinafter expressed. In all such examinations, we have assumed
the legal capacity of all natural persons executing documents, the genuineness
of all signatures, the authenticity of all original or certified copies, and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduced copies. As to various questions of fact relevant to such
opinion, we have relied upon, and assume the accuracy of, certificates and oral
or written statements of public officials and officers or representatives of the
Fund. We have assumed that the Amendment, as filed with the Securities and
Exchange Commission, will be in substantially the form of the printer's proof
referred to in paragraph (d) above.

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

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

Very truly yours,

/s/Morgan, Lewis and Bockius LLP
- --------------------------------
Morgan, Lewis and 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 February 4, 2000, relating to the
financial statements and financial highlights which appear in the December 31,
1999 Annual Reports to Shareholders of Schwab Money Market Portfolio, Schwab
MarketTrack Growth Portfolio II, and Schwab S&P 500 Portfolio (constituting
Schwab Annuity Portfolios) 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.

/s/ Pricewaterhouse Coopers LLP
- -------------------------------
San Francisco, California
April 30, 2000

<PAGE> 1
EXHIBIT (p)(ii)

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

page 2
<PAGE> 3
relative who shares his or her home, or other persons if by reason of any
contract, 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 3
<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

page 4
<PAGE> 5
accounts in which they have a beneficial interest, but do not apply to dividend
reinvestment 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 5
<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 held in their Schwab accounts, 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

page 6
<PAGE> 7
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.

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 7
<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.
<PAGE> 9
2. For any transaction in a Covered Security 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
that was reported on the Quarterly Personal
Securities 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
<PAGE> 10
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;

- 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, Date Account was Interest Rate Maturity Date Date Report Submitted
Dealer 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