SCHWAB CAPITAL TRUST (Form: 485BPOS, Received: 02/25/2011 14:57:46)

Schwab Target Funds

Investment objective

Each of the Schwab Target 2010, Schwab Target 2015, Schwab Target 2020, Schwab Target 2025, Schwab Target 2030, Schwab Target 2035, and Schwab Target 2040 Funds seeks to provide capital appreciation and income consistent with its current asset allocation.

Principal investment strategies of the funds

Each of the funds seeks to achieve its investment objective by investing primarily in a combination of other Schwab Funds and Laudus Funds. Each fund may also invest in unaffiliated third party mutual funds (referred to herein as unaffiliated funds and, together with Schwab Funds and Laudus Funds, the underlying funds). Each fund invests in the underlying funds in accordance with its target portfolio allocation. These underlying funds invest their assets directly in equity, fixed income, money market and other securities in accordance with their own investment objectives and policies. For each of the funds, the target asset allocation will be adjusted annually based on the adviser’s asset allocation strategy, in accordance with a predetermined “glide path” illustrated below under the “Description of the Funds’ Asset Allocation Strategies” section. However, the adviser reserves the right to modify a fund’s target asset allocations from time to time should circumstances warrant a change. In general, each fund’s allocation to equity securities will decrease and its allocation to fixed income securities will increase as the fund approaches its target retirement date. At the stated target date, each fund’s allocation will be approximately 40% equity securities, 53% fixed income securities, and 7% money market funds. Each fund will continue to reduce its allocation to equity securities for 20 years beyond the fund’s stated target date at which time each fund’s asset allocation will remain fixed at approximately 25% equity securities, 68% fixed income securities, and 7% money market funds.

In addition to the strategic annual adjustment of each fund’s target asset allocation, the adviser may adjust each fund’s underlying fund allocations within a particular asset class based on the following considerations: market trends, its outlook for a given market capitalization, and the underlying funds’ performance in various market conditions. Accordingly, a fund’s allocation to a particular underlying fund may increase or decrease throughout the year. Within the equity asset class, each fund will have exposure to one or more “style classes”. The style classes include domestic large-cap equity, domestic small-cap equity, and international equity. The adviser may adjust a fund’s allocation to a particular style class based on the following considerations: market trends, its outlook for a given style class, and the style classes’ performance in various market conditions. Accordingly, a fund’s allocation to a particular style class within the equity asset class may increase or decrease throughout the year.

Each fund intends to invest in a combination of underlying funds; however, each fund may invest directly in equity and fixed income securities, exchange traded funds (ETFs) and money market securities. The funds may also invest directly in derivatives, including futures contracts, primarily to seek returns on the funds’ otherwise uninvested cash assets.

For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, each fund may invest up to 100% of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When a fund engages in such activities, it may not achieve its investment objective.

Description of the funds’ asset allocation strategies

Each fund invests in a combination of underlying funds. Each fund’s target allocation is intended to allocate investments among various asset classes such as equity, fixed income, and money market funds. As set forth below, each fund has its own distinct target portfolio allocation and is designed to accommodate different investment goals and risk tolerances.

38 Fund details

The following chart shows each fund’s target asset allocation among the various asset classes for the calendar year beginning January 1, 2011.

Target Asset Allocation*


	Schwab		Schwab		Schwab		Schwab		Schwab		Schwab		Schwab
	Target		Target		Target		Target		Target		Target		Target
Asset Class	2010 Fund		2015 Fund		2020 Fund		2025 Fund		2030 Fund		2035 Fund		2040 Fund
Equity Securities		39%		52%		63%		72%		79%		85%		89%
Fixed-Income Securities		54%		43%		35%		26%		19%		13%		9%
Money Market Funds		7%		5%		2%		2%		2%		2%		2%


*	Market appreciation or depreciation may cause the funds’ actual asset allocation to vary temporarily from the funds’ target asset allocation.

As shown above, the portfolios of the funds with an earlier target retirement date are more heavily allocated to fixed income securities and money market funds; therefore these funds represent a more conservative approach. Funds with later target retirement dates take a more aggressive approach by allocating a greater amount of their assets to equity securities.

The target asset allocations of the funds have been developed with two general rules of investing in mind:


•	Higher investment returns are generally accompanied by a higher risk of losing money. Put another way, the greater an investment’s potential return, the greater its potential loss. For example, equity securities generally provide long-term returns that are superior to fixed income securities, although their returns have tended to be more volatile in the short-term.

•	Because their investments have more time to recover from losses, investors with longer time horizons generally have a higher risk tolerance.

For these reasons, the target asset allocations of the funds are expected to vary over time as your investment horizon changes.

Over time, the target allocation to asset classes will change according to a predetermined “glide path,” as illustrated in the following graph. As the glide path shows, each fund’s asset mix becomes more conservative as time elapses — both prior to and after the target retirement date. This reflects the need for reduced investment risk as retirement approaches and the need for greater certainty of income after retiring. The funds’ actual asset allocations may differ from the allocations shown in the illustration. Once a fund reaches its most conservative planned allocation, approximately 20 years after its target date, its allocation to equity securities will remain fixed at approximately 25% in equity securities, 68% in fixed income securities and 7% in money market funds. The adviser reserves the right to modify the glide path from time to time should circumstances warrant.

Fund details 39

Target Asset Allocation Over Time

Differences in the performance of underlying funds and the size and frequency of purchase and redemption orders may affect the fund’s actual allocations.

Principal risks of investing in the funds

The funds are intended for investors seeking an investment option whose asset mix becomes more conservative over time, and who are willing to accept the risks associated with the funds’ asset allocation strategies. In general, a fund with a later target date is expected to be more volatile than a fund with an earlier target date.

For more information on the principal risks of investing in the funds please see the Fund Summary sections and the section “Principal Risks of the Underlying Funds” in this prospectus.

40 Fund details

Risk spectrum

Each fund has a different level of risk and the amount of risk is relative to the time horizon included in its name. Funds with earlier target retirement dates will tend to be less risky and have lower expected returns than the funds with later target retirement dates. The following risk spectrum is designed to provide investors with a general overview of the relative risk characteristics of each fund.

A description of the funds’ policies and procedures with respect to the disclosure of each fund’s portfolio securities is available in the funds’ SAI.

Fund details 41

The funds’ investments in underlying funds

This section provides further details about each fund’s financial history for its period of operations. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in a fund would have earned or lost during a given period, assuming all distributions were reinvested. The funds’ independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the funds’ annual reports (see back cover).

Schwab Target 2010 Fund


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.46			8.76			12.65			11.42			10.24

Income (loss) from investment operations:
Net investment income (loss)		0.23			0.28			0.32			0.23			0.22
Net realized and unrealized gains (losses)		0.89			0.75			(3.73	)		1.24			1.13

Total from investment operations		1.12			1.03			(3.41	)		1.47			1.35
Less distributions:
Distributions from net investment income		(0.24	)		(0.33	)		(0.38	)		(0.21	)		(0.17	)
Distributions from net realized gains		—			—			(0.10	)		(0.03	)		—

Total distributions		(0.24	)		(0.33	)		(0.48	)		(0.24	)		(0.17	)

Net asset value at end of period		10.34			9.46			8.76			12.65			11.42

Total return (%)		11.99			12.24			(27.87	)		13.02			13.39
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.00	²		0.03	³		0.06			0.06			0.06
Gross operating expenses ¹		0.16			0.16			0.11			0.09			0.27
Net investment income (loss)		2.21			3.04			2.89			2.10			2.12
Portfolio turnover rate		24			47			50	⁴		1			0	⁵
Net assets, end of period ($ x 1,000,000)		73			75			80			138			62


¹		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


²		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


³		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁴		The portfolio turnover ratio increased due to additional rebalancing activity of the underlying funds during the period.


⁵		Less than 1%.

42 Financial highlights

Schwab Target 2015 Fund


	11/1/09–			11/1/08–			3/12/08 ¹ –
	10/31/10			10/31/09			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		9.09			8.15			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.16			0.19			0.06
Net realized and unrealized gains (losses)		1.06			0.91			(1.91	)

Total from investment operations		1.22			1.10			(1.85	)
Less distributions:
Distributions from net investment income		(0.15	)		(0.16	)		—
Distributions from net realized gains		—			(0.00	) ²		—

Total distributions		(0.15	)		(0.16	)		—

Net asset value at end of period		10.16			9.09			8.15

Total return (%)		13.55			13.82			(18.50	) ³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ⁴		0.00	⁵		0.02	⁶		0.05	⁷
Gross operating expenses ⁴		0.39			0.85			1.90	⁷
Net investment income (loss)		1.91			2.57			1.87	⁷
Portfolio turnover rate		13			39			35	³
Net assets, end of period ($ x 1,000,000)		37			17			6


¹		Commencement of operations.


²		Amount less than $0.01.


³		Not annualized.


⁴		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


⁵		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


⁶		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁷		Annualized.

Financial highlights 43

Schwab Target 2020 Fund


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.63			8.59			12.88			11.56			10.28

Income (loss) from investment operations:
Net investment income (loss)		0.20			0.24			0.30			0.21			0.21
Net realized and unrealized gains (losses)		1.18			1.08			(4.11	)		1.33			1.25

Total from investment operations		1.38			1.32			(3.81	)		1.54			1.46
Less distributions:
Distributions from net investment income		(0.21	)		(0.28	)		(0.38	)		(0.19	)		(0.18	)
Distributions from net realized gains		—			—			(0.10	)		(0.03	)		—

Total distributions		(0.21	)		(0.28	)		(0.48	)		(0.22	)		(0.18	)

Net asset value at end of period		10.80			9.63			8.59			12.88			11.56

Total return (%)		14.47			15.89			(30.59	)		13.47			14.36
Ratios/Supplemental Data (%)

Ratios to average net assets:Net operating expenses ¹		0.00	²		0.02	³		0.04			0.04			0.04
Gross operating expenses ¹		0.07			0.09			0.08			0.07			0.22
Net investment income (loss)		2.01			2.75			2.67			1.84			1.84
Portfolio turnover rate		15			48			34	⁴		—			—
Net assets, end of period ($ x 1,000,000)		240			198			163			225			84


¹		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


²		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


³		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁴		The portfolio turnover ratio increased due to additional rebalancing activity of the underlying funds during the period.

44 Financial highlights

Schwab Target 2025 Fund


	11/1/09–			11/1/08–			3/12/08 ¹ –
	10/31/10			10/31/09			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		9.21			7.99			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.16			0.17			0.05
Net realized and unrealized gains (losses)		1.24			1.21			(2.06	)

Total from investment operations		1.40			1.38			(2.01	)
Less distributions:
Distributions from net investment income		(0.15	)		(0.16	)		—

Net asset value at end of period		10.46			9.21			7.99

Total return (%)		15.34			17.61			(20.10	) ²
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ³		0.00	⁴		0.01	⁵		0.04	⁶
Gross operating expenses ³		0.24			0.57			1.27	⁶
Net investment income (loss)		1.62			2.15			1.60	⁶
Portfolio turnover rate		13			44			3	²
Net assets, end of period ($ x 1,000,000)		63			26			8


¹		Commencement of operations.


²		Not annualized.


³		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


⁴		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


⁵		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁶		Annualized.

Financial highlights 45

Schwab Target 2030 Fund


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.69			8.51			13.15			11.67			10.31

Income (loss) from investment operations:
Net investment income (loss)		0.17			0.20			0.28			0.18			0.19
Net realized and unrealized gains (losses)		1.36			1.23			(4.47	)		1.48			1.34

Total from investment operations		1.53			1.43			(4.19	)		1.66			1.53
Less distributions:
Distributions from net investment income		(0.17	)		(0.25	)		(0.35	)		(0.16	)		(0.17	)
Distributions from net realized gains		—			—			(0.10	)		(0.02	)		—

Total distributions		(0.17	)		(0.25	)		(0.45	)		(0.18	)		(0.17	)

Net asset value at end of period		11.05			9.69			8.51			13.15			11.67

Total return (%)		15.97			17.31			(32.83	)		14.45			14.99
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.00	²		0.01	³		0.03			0.03			0.03
Gross operating expenses ¹		0.08			0.11			0.10			0.09			0.32
Net investment income (loss)		1.64			2.37			2.35			1.50			1.54
Portfolio turnover rate		14			50			31	⁴		—			—
Net assets, end of period ($ x 1,000,000)		296			200			129			162			56


¹		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


²		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


³		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁴		The portfolio turnover ratio increased due to additional rebalancing activity of the underlying funds during the period.

46 Financial highlights

Schwab Target 2035 Fund


	11/1/09–			11/1/08–			3/12/08 ¹ –
	10/31/10			10/31/09			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		9.00			7.76			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.13			0.15			0.04
Net realized and unrealized gains (losses)		1.33			1.23			(2.28	)

Total from investment operations		1.46			1.38			(2.24	)
Less distributions:
Distributions from net investment income		(0.14	)		(0.14	)		—

Net asset value at end of period		10.32			9.00			7.76

Total return (%)		16.29			18.22			(22.40	) ²
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ³		0.00	⁴		0.01	⁵		0.02	⁶
Gross operating expenses ³		0.30			0.67			1.57	⁶
Net investment income (loss)		1.38			1.92			1.32	⁶
Portfolio turnover rate		14			49			7	²
Net assets, end of period ($ x 1,000,000)		49			22			6


¹		Commencement of operations.


²		Not annualized.


³		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


⁴		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


⁵		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁶		Annualized.

Financial highlights 47

Schwab Target 2040 Fund


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.71			8.48			13.45			11.83			10.36

Income (loss) from investment operations:
Net investment income (loss)		0.15			0.18			0.28			0.17			0.19
Net realized and unrealized gains (losses)		1.46			1.27			(4.80	)		1.62			1.45

Total from investment operations		1.61			1.45			(4.52	)		1.79			1.64
Less distributions:
Distributions from net investment income		(0.16	)		(0.22	)		(0.36	)		(0.15	)		(0.17	)
Distributions from net realized gains		—			—			(0.09	)		(0.02	)		—

Total distributions		(0.16	)		(0.22	)		(0.45	)		(0.17	)		(0.17	)

Net asset value at end of period		11.16			9.71			8.48			13.45			11.83

Total return (%)		16.71			17.66			(34.60	)		15.32			16.06
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.00	²		0.00	^2,3		0.01			0.01			0.01
Gross operating expenses ¹		0.10			0.15			0.15			0.13			0.48
Net investment income (loss)		1.44			2.15			2.22			1.19			1.26
Portfolio turnover rate		15			51			36	⁴		—			1
Net assets, end of period ($ x 1,000,000)		259			163			94			118			34


¹		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


²		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


³		Effective April 20, 2009 the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


⁴		The portfolio turnover ratio increased due to additional rebalancing activity of the underlying funds during the period.

48 Financial highlights

The following table shows which underlying funds may be used within each asset class and style class and each fund’s approximate asset allocation to each underlying fund as of February 1, 2011. Each fund’s allocation to a specified asset class, style class and underlying fund will change over time. Included in the current universe of underlying funds are five unaffiliated funds: one within the domestic large-cap equity style class, two within the international equity style class and two within the fixed income asset category. Similar to the Schwab Funds and Laudus Funds that serve as underlying funds, the investment objectives and principal investment strategies of these unaffiliated funds are described in the “Description of underlying funds” section of the prospectus under the sub-headings “Unaffiliated Large-Cap Value Fund,” “Unaffiliated International Growth Fund,” “Unaffiliated International Small-Cap Growth Fund,” “Unaffiliated Fixed Income Fund” and “Unaffiliated Fixed Income Fund II,” respectively.

The adviser may exclude one or more underlying funds from a fund’s asset allocation strategy at any given time. For additional details regarding how the adviser determines the funds’ underlying fund and style class allocations, please refer back to the “Principal Investment Strategies” section in the Fund Summary sections and the section “Fund details: Investment objectives, strategies and risks” in this prospectus. The adviser reserves the right to substitute other underlying funds and add additional underlying funds from time to time should circumstances warrant a change.


	Schwab		Schwab		Schwab		Schwab		Schwab		Schwab		Schwab
	Target		Target		Target		Target		Target		Target		Target
	2010		2015		2020		2025		2030		2035		2040
Asset Class, Style Class and Underlying Funds	Fund		Fund		Fund		Fund		Fund		Fund		Fund
Equity funds
Large-cap
Schwab Core Equity Fund		8.0%		10.3%		13.3%		15.3%		16.7%		19.1%		20.0%
Schwab S&P 500 Index Fund		7.2%		9.3%		11.2%		11.8%		12.4%		12.4%		12.7%
Schwab Dividend Equity Fund		1.9%		2.6%		3.1%		3.5%		3.8%		4.1%		4.4%
Laudus Growth Investors U.S. Large Cap Growth Fund		4.1%		5.1%		6.0%		6.9%		7.2%		8.2%		8.7%
Unaffiliated Large-Cap Value Fund		2.1%		2.6%		3.2%		3.3%		3.8%		4.1%		4.3%
Small-cap
Schwab Small-Cap Equity Fund		2.8%		4.4%		4.8%		6.0%		7.0%		7.4%		7.8%
Laudus Small-Cap MarketMasters Fund		1.4%		2.2%		2.5%		3.0%		3.7%		3.9%		4.2%
Global Real Estate
Schwab Global Real Estate Fund		1.9%		3.1%		3.6%		4.0%		4.3%		4.5%		5.0%
International
Laudus International MarketMasters Fund		3.8%		4.5%		5.5%		6.4%		6.8%		7.2%		7.4%
Laudus Mondrian International Equity Fund		1.8%		2.3%		2.8%		3.2%		3.5%		3.7%		3.9%
Laudus Mondrian Emerging Markets Fund		1.3%		1.8%		2.2%		2.5%		3.1%		3.2%		3.4%
Unaffiliated International Growth Fund		1.9%		2.2%		2.8%		3.2%		3.5%		3.7%		3.9%
Unaffiliated International Small-Cap Growth Fund		1.3%		1.8%		2.4%		2.6%		3.1%		3.2%		3.4%

TOTAL EQUITY		39.5%		52.2%		63.4%		71.7%		78.9%		84.7%		89.1%
Fixed-income funds
Intermediate-term bond
Schwab Total Bond Market Fund		20.0%		17.9%		18.2%		15.6%		12.5%		8.7%		5.4%
Schwab Premier Income Fund		5.6%		4.0%		2.9%		2.2%		1.6%		1.3%		1.0%
Unaffiliated Fixed Income Fund I		5.9%		4.4%		3.7%		2.8%		1.9%		1.0%		0.8%
Unaffiliated Fixed Income Fund II		4.2%		3.4%		1.9%		1.3%		0.0%		0.0%		0.0%
Short-term bond
Schwab Short-Term Bond Market Fund		12.3%		7.4%		2.9%		0.0%		0.0%		0.0%		0.0%
Inflation-protected bond
Schwab Inflation Protected Fund		3.0%		2.9%		2.5%		2.0%		1.4%		1.0%		0.8%
International bond
Laudus Mondrian International Fixed Income Fund		2.6%		2.5%		2.4%		2.0%		1.4%		1.0%		0.8%

TOTAL FIXED INCOME		53.6%		42.5%		34.5%		25.9%		18.8%		13.0%		8.8%
Money market funds
Schwab Value Advantage Money Fund		4.8%		1.8%		1.0%		0.8%		1.3%		0.9%		1.2%

Schwab Target Funds 49

Description of underlying funds

The funds invest primarily in the underlying funds. Therefore, each fund’s investment performance is directly related to the investment performance of these underlying funds. The following chart provides a brief description of the investment objective and principal investment strategies of the funds’ current underlying funds. Additional information about the underlying funds is provided in each underlying fund’s prospectus.


Asset Class, Style Class (if Applicable) & Underlying Fund		Investment Objective and Principal Investment Strategy
Equity Funds — Domestic Large-Cap

Schwab Core Equity Fund		Seeks long-term capital growth. The fund invests, under normal circumstances, at least 80% of its net assets in equity securities of U.S. companies. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P 500 ^® Index.

Schwab S&P 500 Index Fund		Seeks to track the total return of the S&P 500 ^® Index. Under normal circumstances, the fund will invest at least 80% of its net assets in stocks that are included in the S&P 500 ^® Index.

Schwab Dividend Equity Fund		Seeks current income and capital appreciation. The fund invests, under normal circumstances, at least 80% of its net assets in dividend paying common and preferred stock. The fund invests in securities of U.S. companies that tend to be either large- or mid-cap companies.

Laudus Growth Investors U.S. Large Cap Growth Fund		Seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of its net assets (plus borrowings for investment purposes, if any) in equity securities of U.S. large capitalization companies. The fund defines large capitalization companies as those with a market capitalization of at least $3 billion at the time of investment. In addition, up to 20% of the fund’s net assets may be invested in foreign equity securities. Investments in equity securities include common stock and preferred stock. The fund may, but is not required to, use derivative instruments for risk management purposes or as part of the fund’s investment strategies. When selecting securities for the fund, the subadviser considers earnings revision trends, expected earnings growth rates, sales acceleration, price earnings multiples and positive stock price momentum. The fund exhibits a “growth” style of investing.

Unaffiliated Large-Cap Value Fund		Seeks capital appreciation, with a secondary goal of current income. To purse this goal, the fund invests primarily in equity securities of large capitalization companies. The fund will invest (except when maintaining a temporary defensive position) at least 80% of the value of its net assets in equity securities of companies with a market capitalization of greater than $1 billion at the time of purchase. The fund will invest mostly in companies the portfolio managers believe are “value” companies. The portfolio management team seeks companies that they believe are neglected or out of favor and whose stock prices are low in relation to current earnings, cash flow, book value and sales and those companies that it believes have reasonable prospects for growth even though the expectations for these companies are low and their valuations are temporarily depressed.

50 Schwab Target Funds


Asset Class, Style Class (if Applicable) & Underlying Fund		Investment Objective and Principal Investment Strategy
Equity Funds — Domestic Small-Cap

Schwab Small-Cap Equity Fund		Seeks long-term capital growth. Under normal circumstances, the fund invests at least 80% of its net assets in small-cap equity securities. Small-cap equity securities generally are securities with market capitalizations of up to $2.5 billion or securities included in the S&P SmallCap 600 Index, each measured at time of purchase by the fund. In addition, small-cap equity securities may include those with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $2.5 billion. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P SmallCap 600 Index.

Laudus Small-Cap MarketMasters Fund		Seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of its net assets in equity securities of companies with small market capitalizations or investments with similar economic characteristics, such as futures. Companies with small market capitalizations generally are those with market capitalizations of $2.5 billion or less but may include companies with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $3 billion.
Equity Funds — Global Real Estate


Schwab Global Real Estate Fund		Seeks capital growth and income consistent with prudent investment management. The fund invests, under normal circumstances, at least 80% of its net assets in securities of real estate companies and companies related to the real estate industry. The fund may invest a significant portion of its total assets in real estate investment trusts (REITs) and other similar REIT-like structures. The fund does not invest directly in real estate. The fund is non-diversified.
Equity Funds — International


Laudus International MarketMasters Fund		Seeks long-term capital appreciation. The fund normally invests a substantial amount of its assets in equity securities of companies outside the United States and typically focuses on developed markets, but may invest in companies from emerging markets as well. The fund invests in companies across all market capitalization ranges.

Laudus Mondrian International Equity Fund		Seeks long-term capital appreciation. Under normal circumstances, the fund will invest at least 80% of its net assets (including, for this purpose, any borrowings for investment purposes) in equity securities. The fund pursues its investment objective primarily by investing in equity securities of non-U.S. large capitalization issuers, including the securities of emerging market companies. For purposes of investments to be made by the fund, large capitalization companies are currently defined to mean issuers that have a market capitalization of more than $6.5 billion at the time of purchase.

Schwab Target Funds 51


Asset Class, Style Class (if Applicable) & Underlying Fund		Investment Objective and Principal Investment Strategy
Equity Funds — International (continued)

Laudus Mondrian Emerging Markets Fund		Seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of its net assets in the securities of emerging markets issuers. The fund generally invests in large capitalization equity securities of emerging market companies that, in the subadviser’s opinion, are undervalued at the time of purchase based on fundamental value analysis employed by the subadviser. The fund considers an “emerging country” to be any country except the United States, Canada, and those in the Morgan Stanley Capital International EAFE Index. Although this is not an exclusive list, the subadviser considers an emerging country security to be one that is issued by a company that exhibits one or more of the following characteristics: (1) its principal securities trading market is in an emerging country, as defined above; (2) while traded in any market, alone or on a consolidated basis, the company derives 50% or more of its annual revenues or annual profits from either goods produced, sales made or services performed in emerging countries; (3) the company has 50% of more of its assets located in an emerging country; or (4) it is organized under the laws of, and has a principal office in, an emerging country. Companies with large market capitalizations generally are those with market capitalizations of $3.5 billion or more at the time of purchase. The fund is non-diversified and, typically, will invest in securities of approximately 30-40 companies.

Unaffiliated International Growth Fund		Seeks capital growth. Under normal market conditions, the fund invests primarily in equity securities of companies located in at least three developed countries outside the U.S. The fund may invest a portion of its assets in securities of companies located in emerging markets. The fund exhibits a “growth” style of investing.

Unaffiliated International Small-Cap Growth Fund		Seeks long-term capital appreciation. Under normal market conditions, the fund invests at least 80% of its net assets in stocks of small companies. For purposes of the fund, the investment adviser considers a company to be a small cap company if it has a market capitalization no larger than the largest capitalized company included in the MSCI All Country World Ex-U.S. Small Cap Index (Net). The fund primarily invests in a diversified portfolio of common stocks of small cap companies located in countries included in the MSCI All Country World Ex-U.S. Small Cap Index (Net). Normally, the fund’s investments will be divided among Continental Europe, the United Kingdom, Canada, Japan and the markets of the Pacific Basin. The fund may also invest in emerging markets. The fund’s investment adviser generally seeks common stocks of companies that historically have had and are expected to maintain superior growth, profitability and quality relative to local markets and relative to companies within the same industry worldwide.
Fixed Income Funds — Intermediate-term bond


Schwab Total Bond Market Fund		Seeks high current income by tracking the performance of the Barclays Capital U.S. Aggregate Bond Index (“Barclays Capital Index”). The fund primarily invests in a diversified portfolio of investment grade debt instruments with varying maturities and is designed to track the performance of the Barclays Capital Index. The Barclays Capital Index includes investment-grade government, corporate, mortgage-, commercial mortgage-and asset-backed bonds that are denominated in U.S. dollars and have maturities longer than one year.

52 Schwab Target Funds


Asset Class, Style Class (if Applicable) & Underlying Fund		Investment Objective and Principal Investment Strategy
Fixed Income Funds — Intermediate-term bond (continued)

Schwab Premier Income Fund		Seeks high current income and may also seek capital appreciation. The fund invests primarily in fixed income instruments issued by U.S., non-U.S., and emerging market governments, governmental agencies, companies and entities and supranational entities of varying sectors, credit quality and maturities (bonds). The fund may invest in investment-grade and below investment-grade bonds (junk bonds) and may invest all of its assets in either ratings category. The fund may invest in bonds of any maturity and may invest all of its assets in a single maturity category. The fund is non-diversified.

Unaffiliated Fixed Income Fund I		Seeks maximum total return, consistent with preservation of capital and prudent investment management. Under normal market circumstances, the fund invests at least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities, which may be represented by derivatives. The fund invests primarily in investment grade debt securities, but may invest up to 10% of its total assets in high yield securities (“junk bonds”) rated B or higher by Moody’s or equivalently rated by S&P or Fitch. The fund may invest all of its assets in derivative instruments, and may invest a portion of its assets in foreign securities, including those of companies located in emerging markets.

Unaffiliated Fixed Income Fund II		Seeks high total investment return through a combination of current income and capital appreciation. The fund invests, under normal circumstances, at least 80% of its net assets in investment-grade fixed-income securities. The fund may invest up to 10% of its assets in below investment-grade fixed-income securities and may invest in fixed-income securities of any maturity. The fund may invest up to 20% of its assets in securities of foreign issuers, including emerging markets securities, and may invest without limit in obligations of supranational entities ( e.g. , World Bank) and Canadian issuers. The fund may also engage in foreign currency hedging transactions, repurchase agreements and swap transactions (including credit default swaps) and other derivatives transactions for hedging or investment purposes.
Fixed Income Funds — Short-term bond


Schwab Short-Term Bond Market Fund		Seeks high current income by tracking the performance of the Barclays Capital Mutual Fund Short (1-5 Year) U.S. Government/Credit Index (“Barclays Capital Short Index”). The fund primarily invests in a diversified portfolio of investment grade debt instruments of varying maturities and is designed to track the performance of the Barclays Capital Short Index. The Barclays Capital Short Index includes investment-grade government and corporate bonds that are denominated in U.S. dollars and have maturities of one to five years. Under normal circumstances, the dollar-weighted average maturity of the fund’s portfolio is not expected to exceed three years.

Schwab Target Funds 53


Asset Class, Style Class (if Applicable) & Underlying Fund		Investment Objective and Principal Investment Strategy
Fixed Income Funds — Inflation-protected bond


Schwab Inflation Protected Fund		Seeks to provide total return and inflation protection. The fund normally invests at least 80% of its net assets in inflation-protected fixed income securities, which are securities that are structured to provide protection against inflation. The fund may invest in inflation-protected fixed income securities of any type, including those issued by the U.S. Government and its agencies and instrumentalities, foreign governments and their agencies and instrumentalities and U.S. and foreign corporations. The fund invests primarily in investment grade securities, but may invest up to 5% of its net assets in below investment grade bonds (junk bonds).
Fixed Income Funds — International bond


Laudus Mondrian International Fixed Income Fund		Seeks long-term value total return consistent with its value-oriented investment approach. Under normal circumstances, the fund will invest at least 80% of its net assets in fixed income securities. The fund primarily invests in issuers that are organized, have a majority of their assets or derive most of their operating income outside of the United States. The fund will attempt to achieve its objective by investing in a broad range of fixed income securities, including debt obligations of governments, their agencies, instrumentalities or political subdivisions and companies, that will generally be rated investment grade at the time of investment. In selecting fixed income instruments for the fund, the subadviser identifies those countries’ fixed income markets that it believes will provide the United States domiciled investor the highest yield over a market cycle while also offering the opportunity for capital gain and currency appreciation. The fund is non-diversified.
Money Market Funds


Schwab Value Advantage Money Fund		Seeks highest current income consistent with stability of capital and liquidity. Invests in high-quality, U.S. dollar-denominated money market securities. The fund seeks to maintain a stable $1 share price.

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Principal risks of the underlying funds

The value of your investment in the funds is based primarily on the prices of the underlying funds that the funds purchase. In turn, the price of each underlying fund is based on the value of its securities. The prices of these securities change daily and each underlying fund’s performance reflects the risks of investing in a particular asset class or classes. As indicated in the following table, certain of the underlying funds reflect the risks of equity investing, while others reflect the risks of investing in fixed income securities, foreign securities or a combination of these types of securities. The degree to which the risks described below apply to a particular fund varies according to its allocation among underlying funds.

Laudus

Growth

Investors

Schwab

Laudus

Schwab

U.S. Large

Small-

Global

Small-Cap

International

Mondrian

Core

S&P 500

Dividend

Cap

Unaffiliated

Cap

Real

Market

International

Equity

Index

Equity

Growth

Large-Cap

Equity

Estate

Masters

Equity

Fund

Value Fund

Fund

Investment risk

Market risk

Market segment risk

Management risk

Equity risk

Large- and mid-cap risk

Small-cap risk

Exchange-traded funds risk

Convertible securities risk

“Growth” investing risk

“Value” investing risk

Interest rate risk

Credit risk

Prepayment and extension risk

U.S. Government securities risk

Inflation-protected securities risk

Mortgage dollar-rolls risk

Money market fund risk

Foreign securities risk

Emerging markets risk

Currency risk

Real estate investment risk

Real estate investment trusts (REITs) risk

Short sales risk

Derivatives risk

Leverage risk

Non-diversification risk

Securities lending risk

Tracking error risk

Index funds market risk

Portfolio turnover risk

Multi-manager risk

Liquidity risk

Schwab Target Funds 55

Laudus

Unaffiliated

Schwab

Mondrian

Schwab

Mondrian

Unaffiliated

International

Total

Short-Term

Schwab

International

Unaffiliated

Value

Emerging

International

Small-Cap

Bond

Inflation

Premier

Fixed

Advantage

Markets

Growth

Market

Protected

Income

Money

Fund

Fund II

Fund

Investment risk

Market risk

Market segment risk

Management risk

Equity risk

Large- and mid-cap risk

Small-cap risk

Exchange-traded funds risk

Convertible securities risk

“Growth” investing risk

“Value” investing risk

Interest rate risk

Credit risk

Prepayment and extension risk

U.S. Government securities risk

Inflation-protected securities risk

Mortgage dollar-rolls risk

Money market fund risk

Foreign securities risk

Emerging markets risk

Currency risk

Real estate investment risk

Real estate investment trusts (REITs) risk

Short sales risk

Derivatives risk

Leverage risk

Non-diversification risk

Securities lending risk

Tracking error risk

Index funds market risk

Portfolio turnover risk

Multi-manager risk

Liquidity risk

56 Schwab Target Funds


•	Investment risk. An investment in the underlying funds is not a bank deposit. The funds’ investments in the underlying funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

•	Market risk. Stock and bond markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of the funds’ investments in the underlying funds will fluctuate, which means that the funds could lose money on their investment.

•	Market segment risk. The underlying funds invest their assets in accordance with their own distinct investment objectives. As a result, the performance of an underlying fund will correlate directly with the performance of the particular segment of the stock or bond market that the fund invests in (e.g., large-cap securities, small-cap securities, foreign securities, fixed income securities or dividend-paying common stocks). This may cause the underlying fund to underperform funds that do not similarly restrict their investments to a particular market segment.

•	Management risk. Generally, the underlying funds are actively managed mutual funds. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser) will make poor security selections. An underlying fund’s adviser applies its own investment techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee that they will produce the desired results. In addition, with respect to certain of the underlying funds, the investment adviser makes investment decisions for the fund using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the desired results in the future. In addition, if market dynamics change, the effectiveness of this strategy may be limited. Either of these risks may cause these underlying funds to underperform other funds with a similar investment objective.

•	Equity risk. The prices of equity securities in which the underlying funds invest rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time. Due to their fixed income features, preferred stocks provide higher income potential than issuers’ common stocks, but typically are more sensitive to interest rate changes than the underlying common stock. The rights of common stockholders are generally subordinate to the rights associated with an issuer’s preferred stocks and the rights of preferred stockholders are generally subordinate to the rights associated with an issuer’s debt securities on the distribution of an issuer’s assets in the event of a liquidation.

•	Large- and mid-cap risk. An underlying fund’s investments in large- and mid-cap companies will reflect the risks associated with the large-cap and mid-cap segments of the stock market. Both large-cap and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap stocks fall behind other types of investments — small-cap stocks, for instance — the performance of an underlying fund that focuses its investments in large- and mid-cap securities will lag these investments.

•	Small-cap risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Accordingly, underlying funds that invest in small-cap securities may be more volatile than underlying funds that invest in large- and mid-cap securities. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. In addition, smaller companies may have limited financial resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies. Further, smaller companies may have less publicly available information and, when available, it may be inaccurate or incomplete. During a period when small-cap stocks fall behind other types of investments — large-cap stocks, for instance — the performance of an underlying fund that focuses its investments in small-cap securities will lag these investments.

•

Exchange-Traded funds (ETFs) risk. When an underlying fund invests in an ETF, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.


•	Convertible securities risk. Certain of the underlying funds may invest in convertible securities, which are bonds, debentures, notes, preferred stock or other securities that may be converted into or exercised for a prescribed amount of

Schwab Target Funds 57

common stock at a specified time and price. Convertible securities provide an opportunity for equity participation, with the potential for a higher dividend or interest yield and lower price volatility compared to common stock. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline, and the credit standing of the issuer. The price of a convertible security will also normally vary in some proportion to changes in the price of the underlying common stock because of the conversion or exercise feature.


•	“Growth” investing risk. Certain of the underlying funds pursue a “growth style” of investing. Growth investing focuses on a company’s prospects for growth of revenue and earnings. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks also can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Since growth companies usually invest a high portion of earnings in their business, they may lack the dividends of value stocks that can cushion stock prices in a falling market. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks.

•	“Value” investing risk. Certain of the underlying funds may pursue a “value style” of investing. Value investing focuses on companies whose stocks appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If an underlying fund’s investment adviser’s (or sub-adviser’s) assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is wrong, the underlying fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time.

•	Interest rate risk. An underlying fund’s investments in fixed income securities are subject to the risk that interest rates rise and fall over time. As with any investment whose yield reflects current interest rates, an underlying fund’s yield will change over time. During periods when interest rates are low, an underlying fund’s yield (and total return) also may be low. Changes in interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the fund’s share price to fall. This risk is greater when the underlying fund holds bonds with longer maturities. To the extent that the investment adviser (or sub-adviser) of an underlying fund anticipates interest rate trends imprecisely, the underlying fund could miss yield opportunities or its share price could fall. Inflation-protected securities may react differently to interest rate changes than other types of debt securities and, as discussed below, tend to react to changes in “real” interest rates.

•	Credit risk. Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the fund’s share price to fall. The underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Below investment-grade bonds (junk bonds) involve greater risks of default or downgrade and are more volatile than investment-grade bonds. Below investment-grade bonds also involve greater risk of price declines than investment-grade securities due to actual or perceived changes in an issuer’s creditworthiness. In addition, issuers of below investment-grade bonds may be more susceptible than other issuers to economic downturns. Such bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the bonds.

•	Prepayment and extension risk. An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. In addition, rising interest rates tend to extend the duration of certain fixed income securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, an underlying fund that holds these securities may exhibit additional volatility. This is known as extension risk. When interest rates decline, borrowers may pay off their fixed income securities sooner than expected. This can reduce the returns of an underlying fund because the fund will have to reinvest that money at the lower prevailing interest rates. This is known as prepayment risk.

•	U.S. Government securities risk. Some of the U.S. government securities that the underlying funds invest in are not backed by the full faith and credit of the United States government, which means they are neither issued nor guaranteed by the U.S. Treasury. Securities such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are supported by limited lines of credit maintained by their issuers with the U.S. Treasury. Others, such as obligations issued by the Federal Farm Credit Banks Funding Corporation, are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the underlying funds own do not extend to shares of the underlying funds themselves. On September 7, 2008, the U.S. Treasury

58 Schwab Target Funds

announced a federal takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality. Under this agreement, the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This is intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. No assurance can be given that the U.S. Treasury initiatives will be successful.


•	Inflation-protected securities risk. Certain of the underlying funds may invest in inflation-protected securities. The value of inflation-protected securities generally will fluctuate in response to changes in “real” interest rates. Real interest rates represent nominal (or stated) interest rates reduced by the expected impact of inflation. The value of an inflation-protected security generally decreases when real interest rates rise and generally increase when real interest rates fall. In addition, the principal value of an inflation-protected security is periodically adjusted up or down along with the rate of inflation. If the measure of inflation falls, the principal value of the inflation-protected security will be adjusted downwards, and consequently, the interest payable on the security will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the United States Treasury in the case of TIPS. For securities that do not provide a similar guarantee, the adjusted principal value of the security to be repaid at maturity is subject to credit risk.

•	Mortgage dollar rolls risk. Mortgage dollar rolls are transactions in which an underlying fund sells mortgage-backed securities to a dealer and simultaneously agrees to repurchase similar securities in the future at a predetermined price. An underlying fund’s mortgage dollar rolls could lose money if the price of the mortgage-backed securities sold falls below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement.

•	Money market fund risk. In addition to the risks discussed under “Investment Risk” above, an investment by the funds in an underlying money market fund has additional risks. For example, although the underlying money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in a money market fund. In addition, a money market fund 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.

•	Foreign securities risk. An underlying fund’s investments in securities of foreign issuers involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions, or changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges). In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. An underlying fund with foreign investments may also experience more rapid or extreme changes in value than a fund that invests solely in securities of U.S. companies because the securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. There also is the risk that the cost of buying, selling, and holding foreign securities, including brokerage, tax, and custody costs, may be higher than those involved in domestic transactions. During any period when foreign securities underperform other types of investments — U.S. securities, for instance — the performance of an underlying fund that focuses its investments in foreign securities will lag these investments. To the extent that an underlying fund invests a significant portion of its assets in any one country, the underlying fund will be subject to a greater risk of loss or volatility than if the underlying fund always maintained wide geographic diversity among the countries in which it invests. Investing in any one country makes an underlying fund more vulnerable to the risks of adverse securities markets, exchange rates and social, political, regulatory and economic events in that one country.

•	Emerging markets risk. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and unreliable securities valuation. It is sometimes difficult to obtain and enforce court judgments in such countries and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

•	Currency risk. As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the

Schwab Target Funds 59

currency hedged. In either event, the dollar value of an investment in the underlying fund would be adversely affected. Currencies in non-U.S. countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention by U.S. or foreign governments, central banks or supranational agencies, such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United State or abroad.


•	Real estate investment risk. Certain of the underlying funds have a policy of concentrating their investments in real estate companies and companies related to the real estate industry. Such an underlying fund is subject to risks associated with the direct ownership of real estate securities and a fund’s investment in such an underlying fund will be closely linked to the performance of the real estate markets. An investment by a fund in an underlying fund that invests, but does not concentrate, in real estate companies and companies related to the real estate industry will subject the fund to the risks associated with the direct ownership of real estate securities to a lesser extent. These risks include, among others, declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; defaults by borrowers or tenants, particularly during an economic downturn; increasing competition; increases in property taxes and operating expenses; changes in zoning laws; losses due to costs resulting from the clean-up of environmental problems; liability to third parties for damages resulting from environmental problems; casualty or condemnation losses; limitations on rents; changes in market and sub-market values and the appeal of properties to tenants; and changes in interest rates.

•	Real estate investment trusts (REITs) risk. Certain of the underlying funds invest in REITs. In addition to the risks associated with investing in securities of real estate companies and real estate related companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to an underlying fund that invests in that REIT. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and an underlying fund that invests in REITs will bear a proportionate share of those expenses.

•	Short sales risk. Certain underlying funds may engage in short sales, which are transactions in which the underlying fund sells a security it does not own. To complete a short sale, the underlying fund must borrow the security to deliver to the buyer. The underlying fund is then obligated to replace the borrowed security by purchasing the security at the market price at the time of replacement. This price may be more or less than the price at which the security was sold by the underlying fund and the underlying fund will incur a loss if the price of the security sold short increases between the time of the short sale and the time the underlying fund replaces the borrowed security.

•	Derivatives risk. An underlying fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index, instrument or certain securities and a predetermined amount. A credit default swap is an agreement in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments.


		An underlying fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as credit risk, leverage risk, liquidity risk, market risk and management risk, are discussed elsewhere in this section. An underlying fund’s use of derivatives is also subject to lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

60 Schwab Target Funds


•	Leverage risk. Certain underlying fund transactions, such as derivatives, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose the underlying fund to greater risk. In a reverse repurchase agreement, the underlying fund would sell a security and enter into an agreement to repurchase the security at a specified future date and price. Leverage tends to magnify the effect of any decrease or increase in the value of the underlying fund’s portfolio securities. The use of leverage may cause the underlying fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.

•	Non-diversification risk. Certain of the underlying funds are non-diversified and, as such, may invest a greater percentage of their assets in the securities in a single issuer than an underlying fund that is diversified. A non-diversified underlying fund is more susceptible to risks associated with a single economic, political or regulatory occurrence than a diversified underlying fund.

•	Securities lending risk. Certain of the underlying funds may lend their portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the underlying fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. An underlying fund may pay lending fees to a party arranging the loan.

•	Tracking error risk. Certain underlying funds seek to track the performance of their benchmark indices, although they may not be successful in doing so. The divergence between the performance of an underlying fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

•	Index funds market risk. Certain of the underlying funds invest in equity securities included in, or representative of, an underlying index. These underlying funds follow these stocks during upturns as well as downturns. Because of an indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market, even though these stocks may go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds, for instance — the underlying fund’s performance also will lag those investments.

•	Portfolio turnover risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gain distributions.

•	Multi-manager risk. Certain of the underlying funds utilize a multi-manager approach to investing. Although the investment adviser monitors and seeks to coordinate the overall management of these underlying funds, each investment manager makes investment decisions independently, and it is possible that the investment styles of the investment managers may not complement one another. As a result, the exposure of these underlying funds to a given stock, industry or investment style could unintentionally be smaller than if the underlying funds had a single manager.

•	Liquidity risk. Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the condition of a particular issuer or under adverse market or economic conditions independent of the issuer. An underlying fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.

Schwab Target Funds 61

The investment adviser for the funds is Charles Schwab Investment Management, Inc. (“CSIM” or the “investment adviser”), 211 Main Street, San Francisco, CA 94105. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 84 mutual funds and approximately 187 billion in assets.

As the investment adviser, the firm oversees the asset management and administration of the funds. The firm does not receive a fee for the services it performs for the funds. However, the firm is entitled to receive an annual management fee from each of the Schwab funds and Laudus funds that serve as underlying funds.

A discussion regarding the basis for the Board of Trustees’ approval of each fund’s investment advisory agreement is available in each fund’s 2010 annual report, which covers the period from 11/1/09 through 10/31/10.

Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the funds. He has been the portfolio manager of the funds since 2008. From 2003, until his appointment, he held vice president level positions in product development, investment operations and audit at the firm. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry, with more than 6 of those years spent in portfolio management

Additional information about the portfolio manager’s compensation, other accounts managed by the portfolio manager and the portfolio manager’s ownership of securities in each fund is available in the SAI.

In this section, you will find information on buying, selling and exchanging shares. You may invest in a fund through an intermediary by placing orders through your brokerage account at Schwab or an account with another broker/dealer, investment adviser, 401(k) plan, employee benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of the fund (intermediary orders). Eligible Investors (as defined herein) may invest directly in a fund by placing orders through the fund’s transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with a fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the funds on purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the funds. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The funds are not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of a fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with a fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent, Boston Financial Data Services (transfer agent). The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the funds” section of this prospectus. If you do not exercise one of these options within ninety days, the funds reserve the right to redeem your shares.

62 Investing in the funds

Buying, selling and exchanging shares through an intermediary

To purchase, redeem or exchange shares held in your Schwab account or in your account at another intermediary, you must place your orders with the intermediary that holds your shares. You may not purchase, redeem or exchange shares held in your intermediary account directly with a fund.

When selling or exchanging shares, you should be aware of the following fund policies:


•	The funds may take up to seven days to pay sale proceeds.

•	The funds reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Only Eligible Investors (as defined below) may purchase shares directly from a fund’s transfer agent, Boston Financial Data Services. Eligible Investors include, but are not limited to, qualified and non-qualified employee benefit plans (including but not limited to defined benefit plans, defined contribution plans, 401(k) plans), foundations and endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of Schwab Funds as a result of a reorganization of a fund. The funds reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for a fund’s shares. Eligible Investors must open an account with a fund through the fund’s transfer agent prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Subject to acceptance by a fund, you may make your initial purchase and any additional purchases of shares by wiring federal funds to the transfer agent. If you have not yet opened an account with a fund, you must fax a signed, hard copy of the completed account application and all supporting documents to the transfer agent at 1-816-218-0490. You must call the transfer agent at 1-800-407-0256 prior to the close of a fund (generally 4:00 p.m. Eastern time or the close of the New York Stock Exchange (NYSE), whichever is earlier) to place your order and to receive wire instructions. Orders received by the transfer agent in good order on or prior to the close of a fund will be processed at the net asset value per share of the fund for that day. Your wired funds must be received and accepted by the transfer agent prior to 6:00 p.m. Eastern time or the deadline for the Fedwire Funds Service for initiating third party transfers, whichever is earlier, on the day your purchase order is placed. Please call the transfer agent at 1-800-407-0256 if you have any questions or need additional information.

Initial and additional direct purchases by mail

Subject to acceptance by a fund, you may open an account and make your initial purchase and any additional purchases of the fund’s shares by mail. To open an account by mail, complete and sign the account application and mail the account application, all supporting documents and a check for the desired purchase amount to the transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Additional investments may be made at any time by mailing a check (payable to Schwab Funds) to the transfer agent at the address above. Be sure to include your account number on your check.

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order of fund shares to be in good order on a particular day, a check must be received on or before the close of a fund (generally 4:00 p.m. Eastern time or the close of the NYSE, whichever is earlier) on that day. If the payment is received by a fund after the deadline, the purchase price of fund shares will be based upon the next determination of net asset value of fund shares. No currency, third party checks, foreign checks, starter checks, credit card checks, traveler’s checks or money orders will be accepted by the funds.

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The funds may take up to seven days to pay sale proceeds.

•	The funds reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of a fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The funds and their service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

You may redeem your fund shares by mail by sending a request letter to the funds’ transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Your redemption request will be processed by a fund at the net asset value per share of the fund next determined after the request is received in good order. To be in good order, the redemption request must include the name of the fund and the number of shares or the dollar amount to be redeemed, all required signatures and authorizations and any required signature guarantees.

Additional direct redemption information

To protect you, the funds and their service providers from fraud, signature guarantees may be required to enable the transfer agent to verify the identity of the person who has authorized a redemption from an account. Signature guarantees are required for (1) redemptions where the proceeds are to be sent to someone other than the registered shareholder(s) at the registered address, (2) redemptions if your account address has changed within the last 10 business days, (3) share transfer requests, and (4) redemptions where the proceeds are wired in connection with bank instructions not already on file with the transfer agent. Signature guarantees may be obtained from certain eligible financial institutions, including, but not limited to, the following: U.S. banks, trust companies, credit unions, securities brokers and dealers, savings and loan associations and participants in the Securities and Transfer Association Medallion Program (“STAMP”), the Stock Exchange Medallion Program (“SEMP”) or the New York Stock Exchange Medallion Signature Program (“MSP”). Signature guarantees from non-U.S. banks that do not include a stamp may require a U.S. consulate stamp. You may contact the transfer agent at 1-800-407-0256 for further details.

Direct exchange privileges

64 Investing in the funds

Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by a fund containing the information indicated below.

The funds reserve the right to suspend or terminate the privilege of exchanging shares of the funds by mail or by telephone at any time.

Direct exchanges by telephone

If you authorized the telephone redemption option in the account application, you may exchange fund shares by telephone by calling the funds’ transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account registration; (b) the class of shares to be exchanged (if applicable); (c) the name of the fund from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct redemptions by telephone” for more information regarding transacting with the funds’ transfer agent via telephone.

Direct exchanges by mail

To exchange fund shares by mail, simply send a letter of instruction to the funds’ transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. The letter of instruction must include: (a) your account number; (b) the class of shares to be exchanged (if applicable); (c) the fund from and the fund into which the exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

The funds are open for business each day that the New York Stock Exchange (NYSE) is open. Each fund calculates its share price each business day as of the close of the NYSE (generally 4 p.m. Eastern time). A fund’s share price is its net asset value per share, or NAV, which is the fund’s net assets divided by the number of its shares outstanding. Orders to buy, sell or exchange shares that are received by a fund in good order on or prior to the close of the fund (generally 4 p.m. Eastern time) will be executed at the next share price calculated that day.

If you place an order through your Schwab account or an account at another intermediary, please consult with your intermediary to determine when your order will be executed. Generally, you will receive the share price next calculated after a fund receives your order from your intermediary. However, some intermediaries, such as Schwab, may arrange with a fund for you to receive the share price next calculated after your intermediary has received your order. Some intermediaries may require that they receive orders prior to a specified cut-off time.

In valuing underlying fund investments, the funds use the NAVs reported by their underlying funds. In valuing other portfolio securities, the funds use market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, a fund may value securities based on fair values developed using methods approved by the funds’ Board of Trustees.

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


Minimum initial investment

$100

The minimum may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. These minimums may also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.

Choose an option for fund distributions If you are an Eligible Investor placing direct orders with a fund, you will have one of the three options described below for fund distributions. If you don’t indicate a choice, you will receive the first option. If you are placing orders through an intermediary, you will select from the options for fund distributions provided

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by your intermediary, which may be different than those provided by the funds to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature

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

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

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

Each fund reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive the fund’s investment minimums.

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

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

Payments by the investment adviser or its affiliates

The investment adviser or its affiliates may make cash payments out of their own resources, or provide products and services at a discount, to certain brokerage firms, banks, retirement plan service providers and other financial intermediaries that perform shareholder, recordkeeping, sub-accounting and other administrative services in connection with investments in fund shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the funds may pay to those intermediaries The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing, promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, distribution-related services provided by such intermediaries are paid by the investment adviser or its affiliates, not by the funds or their shareholders.

Shareholder servicing plan

The Board of Trustees has adopted a Shareholder Servicing Plan (the “Plan”) on behalf of the funds. The Plan enables the funds to bear expenses relating to the provision by service providers, including Schwab, of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds. The funds are not subject to any fee under the Plan.

Policy regarding short-term or excessive trading

The funds are intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the funds’ performance by disrupting the efficient management of the fund, increasing fund transaction costs and taxes, causing the funds to maintain higher cash balances, and diluting the value of the funds’ shares.

In order to discourage market timing, each fund’s Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by fund shareholders. Each fund seeks to deter market timing through several methods. These methods may include: fair value pricing, imposition of redemption fees and trade activity monitoring. Fair value pricing and redemption fees are discussed more thoroughly in the subsequent pages of this prospectus and are considered to be key elements of the funds’ policy regarding short term or excessive trading. Trade activity monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to a fund.

Although these methods are designed to discourage market timing, there can be no guarantee that the funds will be able to identify and restrict investors that engage in such activities. In addition, some of these methods are inherently subjective and involve judgment in their application. Each fund and its service providers seek to make these judgments and applications uniformly and in a manner that they believe is consistent with interests of the fund’s long-term shareholders. The funds may amend these policies and procedures in response to changing regulatory requirements or to enhance the effectiveness of the program.

66 Investing in the funds

to the fund and in a pattern of activity that potentially could be detrimental to the fund. If a fund, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into the fund by that shareholder. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to comply with applicable laws.

If trades are effected through a financial intermediary, each funds or its service providers will work with the intermediary to monitor possible market timing activity. The funds reserve the right to contact the intermediary to provide certain shareholder transaction information and may require the intermediary to restrict the shareholder from future purchases or exchanges in the funds. Transactions by fund shareholders investing through intermediaries may also be subject to the restrictions of the intermediary’s own frequent trading policies, which may differ from those of the funds.

The funds may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the funds through such intermediary. The funds will defer to an intermediary’s policies only after the funds determine that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the funds and in a pattern of activity that potentially could be detrimental to the funds. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The funds reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

The Board of Trustees has adopted procedures to fair value the funds’ securities when market prices are not “readily available” or are unreliable. For example, a fund may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; when a security’s primary trading market is closed during regular market hours; or when a security’s value is materially affected by events occurring after the close of the security’s primary trading market.

By fair valuing securities whose prices may have been affected by events occurring after the close of trading, the funds seek to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the net asset value of the fund’s shares, and seeks to help ensure that the prices at which the fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders.

Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a fund could obtain the fair value assigned to the security upon the sale of such security. The respective prospectuses for the underlying funds in which the funds invest explain the circumstances in which those funds will use fair value pricing and the effect of fair value pricing.

Redemption fee

Shares redeemed or exchanged within 30 days of purchase, which shall be calculated to include the 30th day, will be subject to a fee of 2%, which is intended to limit short-term trading in the funds, or to the extent that short-term trading persists, to impose the costs of that type of activity on the shareholders who engage in it. Each fund treats shares that have been held the longest as being redeemed first. Each fund retains the redemption fees for the benefit of the remaining shareholders. Fund shares purchased with reinvested dividends are not subject to redemption fees. Each fund reserves the right, in its sole discretion, to waive such fee when, in its judgment, such waiver would be in the best interests of the fund and its long-term shareholders. A fund may waive the redemption fee for retirement plans, wrap or fee-based programs, charitable giving funds, unregistered separate accounts, redemptions pursuant to rebalancing programs or systematic withdrawal plans established by the fund or financial intermediaries, and registered investment companies and redemptions initiated by the fund. In addition, certain financial intermediaries may use criteria and methods for tracking, applying and calculating the fees that are different from a fund’s but which the fund, in its discretion, may determine are in the best interests of the fund and its long-term shareholders. While the funds discourage mutual fund market timing and maintain procedures designed to provide reasonable assurances that such activity will be identified and terminated, including the imposition of the redemption fee described above, no policy or procedure can guarantee that all such activity will in fact be identified or that such activity can be completely eliminated. The funds reserve the right to modify or eliminate the redemption fees or waivers at any time.

Investing in the funds 67

Customer identification and verification and anti-money laundering program

Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will allow the funds or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.

The funds or your financial intermediary are required by law to reject your new account application if the required identifying information is not provided. A fund or your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they are unable to obtain this information. In certain instances, a fund or your financial intermediary is required to collect documents, which will be used solely to establish and verify your identity.

The funds will accept investments and your order will be processed at the NAV next determined after receipt of your application in proper form (or upon receipt of all identifying information required on the application). The funds, however, reserve the right to close and/or liquidate your account at the then-current day’s price if the funds or your financial intermediary are unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.

Customer identification and verification is part of a fund’s overall obligation to deter money laundering under Federal law. Each fund has adopted an Anti-Money Laundering Compliance Program designed to prevent the fund from being used for money laundering or the financing of terrorist activities. In this regard, the funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of a fund or in cases when the fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if a fund is required to withhold such proceeds.

Schwab Large-Cap Growth Fund

Any investment in a fund typically involves several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is different, you should consult your tax advisor about the tax implications of your investment in a fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.

As a shareholder, you are entitled to your share of the dividends and gains a fund earns. Every year, each fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record. During the fourth quarter of the year, typically in early November, an estimate of each fund’s capital gain distribution, if any, may be made available on the funds’ website: www.schwab.com/schwabfunds.

Generally, any sale or exchange of your shares is a taxable event. For tax purposes, an exchange of your shares for shares of another Schwab Fund or Laudus MarketMasters Fund is treated the same as a sale. A sale may result in a capital gain or loss for you. The gain or loss generally will be treated as short term if you held the shares for 12 months or less, long term if you held the shares longer. Absent further legislation, the reduced maximum rates on long-term capital gains will cease to apply to taxable years beginning after December 31, 2012. Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed received) by you with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if you purchase other substantially identical shares within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.

68 Investing in the funds

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

Schwab customers who sell fund shares typically will receive a report that calculates their gain or loss using the “average cost” single-category method. This information is not reported to the IRS, and you still have the option of calculating gains or losses using any other methods permitted by the IRS.

The funds may be required to withhold U.S. federal income tax on all taxable distributions payable to shareholders if they fail to provide the funds with their correct taxpayer identification number or to make required certifications, or if they have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against U.S. federal income tax liability.

Foreign shareholders may be subject to different U.S. federal income tax treatment, including withholding tax at the rate of 30% on amounts treated as ordinary dividends from the funds, as discussed in more detail in the SAI.

Investing in the funds 69

To learn more

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

Annual and semi-annual reports, which are mailed to current fund investors, contain more information about the funds’ holdings and detailed financial information about the funds. Annual reports also contain information from the funds’ managers about strategies, recent market conditions and trends and their impact on fund performance.

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.

For a free copy of any of these documents or to request other information or ask questions about the funds, call Schwab Funds ^® at 1-800-435-4000. In addition, you may visit Schwab Funds’ web site at www.schwabfunds.com/prospectus for a free copy of a prospectus, SAI or an annual or semi-annual report.

The SAI, the funds’ annual and semi-annual reports and other related materials are available from the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the funds, including the SAI, at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.

SEC File Number



Schwab Target 2010 Fund		811-7704

Schwab Target 2015 Fund		811-7704

Schwab Target 2020 Fund		811-7704

Schwab Target 2025 Fund		811-7704

Schwab Target 2030 Fund		811-7704

Schwab Target 2035 Fund		811-7704

Schwab Target 2040 Fund		811-7704

REG32636FLT-10

Schwab Target Funds

Prospectus
February 28, 2011

Schwab Active Equity Funds

Prospectus

February 28, 2011

• Schwab Large-Cap Growth Fund ^tm SWLSX

• Schwab Premier Equity Fund ^{^®} SWPSX

• Schwab Core Equity Fund ^tm SWANX

• Schwab ^{^®} International Core Equity Fund SICNX

• Schwab Dividend Equity Fund ^tm SWDSX

• Schwab Small-Cap Equity Fund ^tm SWSCX

• Schwab Hedged Equity Fund ^tm SWHEX

• Schwab Financial Services Fund ^tm SWFFX

• Schwab Health Care Fund ^tm SWHFX

Schwab Active Equity Funds



Fund summaries

Schwab Large-Cap Growth Fund ^tm		1

Schwab Premier Equity Fund ^®		5

Schwab Core Equity Fund ^tm		9

Schwab ^® International Core Equity Fund		13

Schwab Dividend Equity Fund ^tm		18

Schwab Small-Cap Equity Fund ^tm		22

Schwab Hedged Equity Fund ^tm		26

Schwab Financial Services Fund ^tm		30

Schwab Health Care Fund ^tm		34

Fund details

Investment objectives, strategies, risks

Schwab Large-Cap Growth Fund ^tm		38

Schwab Premier Equity Fund ^®		40

Schwab Core Equity Fund ^tm		42

Schwab ^® International Core Equity Fund		44

Schwab Dividend Equity Fund ^tm		47

Schwab Small-Cap Equity Fund ^tm		50

Schwab Hedged Equity Fund ^tm		52

Schwab Financial Services Fund ^tm		54

Schwab Health Care Fund ^tm		57

More about Schwab’s research		60

Portfolio holdings		60

Financial highlights		61

Fund management		70

Investing in the funds

Investing through a financial intermediary		71

Investing directly with the funds		71

Share price		74

Additional policies affecting your investment		74

Distributions and taxes		77

Schwab Large-Cap Growth Fund ^tm

Ticker Symbol: SWLSX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.72
Distribution (12b-1) fees		None
Other expenses ¹		0.32

Total annual fund operating expenses		1.04
Less expense reduction		(0.05)

Total annual fund operating expenses after expense reduction ²		0.99


¹	Restated to reflect current fees and expenses.


²	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.99% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$101	$315	$547	$1,213

Portfolio Turnover

Principal investment strategies

To pursue its investment objective, the fund invests primarily in U.S. common stocks. Under normal circumstances, the fund invests at least 80% of its net assets in large-cap stocks of U.S. companies. Large-cap stocks generally are those with market capitalizations equal to at least $5 billion at the time of purchase. The fund invests its assets in companies it believes to have above-average growth potential. Growth may be measured by factors such as earnings or revenue. Companies with high growth potential tend to have higher than average price/earnings (P/E) or price/book (P/B) ratios.

Schwab Large-Cap Growth Fund ^tm 1

Companies with strong growth potential often have new products, technologies, or other opportunities, or have a strong industry or market position. The stocks of these companies are often called “growth” stocks.

The fund uses a portfolio optimization process to assist in constructing the portfolio. The portfolio managers seek to use the portfolio optimization process to build a portfolio they believe will provide the optimal balance between risk and expected return, subject to parameters such as the number of stocks desired in the portfolio, the level of portfolio turnover, industry and sector diversification, and volatility considerations.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A”, “B” or “C” at the time of purchase. If a stock held by the fund is downgraded to a rating below “C,” the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio relative to the fund’s comparative index or provide potential for long-term capital growth.

The fund may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. By using these instruments, the fund potentially can offset the impact on its performance of keeping some assets in cash. The fund may invest in exchange traded funds and stocks of real estate investment trusts (REITs). The fund also may lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

The fund may buy and sell portfolio securities actively. If it does, its portfolio turnover rate and transaction costs will rise, which may lower fund performance and may increase the likelihood of capital gain distributions.

For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100% of its assets in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Market Risk. Equity markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large-Cap Risk. The fund will principally invest in large-cap segments of the U.S. stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap U.S. stocks fall behind other types of investments — mid- or small-cap stocks, for instance — the fund’s large-cap holdings could reduce performance.

Growth Investing Risk. Growth stocks can be volatile. Growth companies usually invest a high portion of earnings in their businesses and may lack the dividends of value stocks that can cushion stock prices in a falling market. The prices of growth stocks are based largely on projections of the issuer’s future earnings and revenues. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks.

2 Schwab Large-Cap Growth Fund ^tm

Derivatives Risk. The fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund.

Exchange Traded Fund (ETF) Risk. When the fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. In addition, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio of securities.

Securities Lending Risk. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate, including fluctuations in the value of underlying properties, defaults by borrowers or tenants, changes in interest rates and risks related to general or local economic conditions. REITs are also subject to certain additional risks, for example, REITs, are dependent upon specialized management skills and cash flows, and may have their investments in relatively few properties, a small geographic area or a single property type. Failure of a company to qualify as a REIT under federal tax law may have adverse consequences on the fund. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 7, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 13.76% Q2 2009
Worst quarter: (19.53%) Q4 2008

Average annual total returns (%) as of 12/31/10


					Since inception
	1 year		5 years		(10/3/05)


Before taxes		13.17%		2.26%		2.50%
After taxes on distributions		13.08%		2.18%		2.43%
After taxes on distributions and sale of shares		8.68%		1.92%		2.14%
Comparative Index (reflects no deduction for expenses or taxes)
Russell 1000 Growth Index		16.71%		3.75%		4.14%

Schwab Large-Cap Growth Fund ^tm 3

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2005.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2005.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

4 Schwab Large-Cap Growth Fund ^tm

Schwab Premier Equity Fund ^®

Ticker Symbol: SWPSX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.73
Distribution (12b-1) fees		None
Other expenses ¹		0.30

Total annual fund operating expenses		1.03
Less expense reduction		(0.01)

Total annual fund operating expenses after expense reduction ²		1.02


¹	Restated to reflect current fees and expenses.


²	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 1.02% for so long as the investment adviser serves as adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$104	$325	$563	$1,248

Portfolio Turnover

Principal investment strategies

To pursue its investment objective, the fund invests primarily in U.S. common stocks. Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in common stocks of U.S. companies. The fund generally seeks to invest in the stocks of approximately 100 companies, but the fund may hold fewer or more stocks at a particular time. The fund may invest in companies of all sizes.

Schwab Premier Equity Fund ^® 5

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. The fund will invest in a stock only if the stock is rated “A” or “B” at the time of purchase. If a stock held by the fund is downgraded to a rating below “B”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio relative to the fund’s comparative index.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large- and Mid-Cap Risk. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more vulnerable to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — large-cap and mid-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

6 Schwab Premier Equity Fund ^®

than the principal amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 15.69% Q2 2009
Worst quarter: (24.22%) Q4 2008

Average annual total returns (%) as of 12/31/10


						Since Inception
	1 year		5 years			(3/21/05)
Before taxes		17.03%		0.23%			2.51%
After taxes on distributions		16.95%		(0.04%	)		2.26%
After taxes on distributions and sale of shares		11.19%		0.22%			2.17%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%			3.08%

Schwab Premier Equity Fund ^® 7

after-tax returns are not relevant if you hold your fund shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2005.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2005.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

8 Schwab Premier Equity Fund ^®

Schwab Core Equity Fund ^tm

Ticker Symbol: SWANX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.47
Distribution (12b-1) fees		None
Other expenses ¹		0.27

Total annual fund operating expenses ²		0.74


¹	Restated to reflect current fees and expenses.


²	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.75% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$76	$237	$411	$918

Portfolio Turnover

Principal investment strategies

To pursue its investment objective, the fund invests primarily in U.S. stocks. Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in equity securities of U.S. companies. The fund expects to hold the common stocks of U.S. companies that have market capitalizations of approximately $500 million or more. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P 500 ^® Index.

Schwab Core Equity Fund ^tm 9

expected return, subject to parameters such as the number of stocks desired in the portfolio, the level of portfolio turnover, industry and sector diversification, and volatility considerations.

The fund approaches risk management from the perspective of its benchmark, the S&P 500 Index. The S&P 500 Index includes the common stocks of 500 leading U.S. publicly traded companies from a broad range of industries. The portfolio managers seek to keep the fund’s volatility similar to that of the S&P 500 Index.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks for purposes of sector diversification. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

10 Schwab Core Equity Fund ^tm

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Annual total returns (%) as of 12/31

Best quarter: 14.52% Q3 2009
Worst quarter: (19.06%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		12.43%		1.94%		1.50%
After taxes on distributions		12.26%		1.72%		1.27%
After taxes on distributions and sale of shares		8.30%		1.64%		1.21%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		1.41%

Investment adviser

Charles Schwab Investment Management, Inc.

Schwab Core Equity Fund ^tm 11

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2004.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2002.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

12 Schwab Core Equity Fund ^tm

Schwab ^® International Core Equity Fund

Ticker Symbol: SICNX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.58
Distribution (12b-1) fees		None
Other expenses ¹		0.68

Acquired fund fees and expenses (AFFE) ²		0.01

Total annual fund operating expenses ²		1.27
Less expense reduction		(0.40)

Total annual fund operating expenses (including AFFE) after expense reduction ^2,3		0.87


¹	Restated to reflect current fees and expenses.


²	The total annual fund operating expenses in the fee table may differ from the expense ratio in the fund’s “Financial Highlights” because the financial highlights include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE) incurred indirectly by the fund through its investments in other investment companies during its prior fiscal year.

The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.86% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. This agreement is limited to the fund’s direct operating expenses and does not apply to AFFE.

Example

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$89	$278	$482	$1,073

Portfolio Turnover

Schwab ^® International Core Equity Fund 13

Principal investment strategies

To pursue its investment objective, the fund invests primarily in the stocks of publicly traded companies located in developed countries excluding the United States. The fund considers developed countries to include Australia, Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Though the fund invests primarily in securities issued by companies located in developed countries, it may also invest in securities issued by companies located in emerging markets. The fund considers any country that is not a developed country to be an emerging market country.

Under normal circumstances, the fund invests at least 80% of its net assets in equity securities. The fund typically invests a majority of its assets in the stocks of large-cap and mid-cap companies but may invest a portion of its assets in small-cap companies. In addition, the portfolio managers seek to allocate the fund’s investments across different countries and geographic regions in an effort to manage the economic and socio-political risks associated with investing in a single country or limited number of countries. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the MSCI EAFE Index. The MSCI EAFE Index includes over 1,000 securities listed on the stock exchanges of certain developed market countries in Europe, Australia, Asia, and the Far East.

The fund uses a portfolio optimization process to assist in constructing the portfolio. The portfolio managers seek to use the portfolio optimization process to build a portfolio they believe will provide the optimal balance between risk and expected return, subject to parameters such as the number of stocks desired in the portfolio, the level of portfolio turnover, country and sector diversification, and volatility considerations. The fund generally does not intend to hedge its exposure to foreign currencies.

To aid its stock selection, the fund uses Charles Schwab and Co., Inc.’s (“Schwab’s”) proprietary international stock research. This research ranks stocks of publicly traded companies located in the countries in the MSCI EAFE Index plus publicly traded stocks of companies located in certain additional countries not included in the Index. The stocks are ranked based on factors that Schwab believes to be indicative of stocks’ performance potential. The fund may also use additional research as a component of its overall stock selection process. This research may incorporate the analysis of factors including, but not limited to, valuation, balance sheet strength, future earnings power and trading activity to identify companies expected to outperform the broader equity market.

The fund may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. By using these instruments, the fund can potentially offset the impact on its performance of keeping some assets in cash. The fund may invest in exchange traded funds and stocks of real estate investment trusts (REITs). The fund may also lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

14 Schwab ^® International Core Equity Fund

than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Emerging Markets Risk. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and unreliable securities valuation. It is sometimes difficult to obtain and enforce court judgments in such countries and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

Geographic Risk. To the extent the fund’s investments in a single country or a limited number of countries represent a higher percentage of the fund’s assets, the fund assumes the risk that economic, political and social conditions in those countries will have a significant impact on its investment performance and it may be subject to increased price volatility.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows the fund’s investment results for the prior year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund by comparing the fund’s performance with a broad measure of market performance. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 7, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that

Schwab ^® International Core Equity Fund 15

of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 23.15% Q2 2009
Worst quarter: (14.35%) Q1 2009

Average annual total returns (%) as of 12/31/10


			Since
			inception
	1 year		(5/30/08)


Before taxes		10.51%		(6.39%	)
After taxes on distributions		10.34%		(6.59%	)
After taxes on distributions and sale of shares		7.57%		(5.28%	)
Comparative Index (reflects no deduction for expenses or taxes)
MSCI EAFE Index		8.21%		(6.37%	)

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2008.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2008.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

16 Schwab ^® International Core Equity Fund

Tax information

Payments to financial intermediaries

Schwab ^® International Core Equity Fund 17

Schwab Dividend Equity Fund ^tm

Ticker Symbol: SWDSX

Investment objective

The fund seeks current income and capital appreciation.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.62
Distribution (12b-1) fees		None
Other expenses		0.27

Total annual fund operating expenses ¹		0.89


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.89% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$91	$284	$493	$1,096

Portfolio Turnover

Principal investment strategies

Under normal circumstances, the fund invests at least 80% of its net assets in dividend paying common and preferred stocks. The fund seeks to provide current income from dividends that are eligible for the reduced tax rate on qualified dividend income. The fund also seeks to provide capital appreciation.

18 Schwab Dividend Equity Fund ^tm

headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months.

The fund’s initial selection universe typically consists of the 1,500 largest U.S. publicly traded companies in terms of market capitalization. These companies tend to be large- to mid-cap companies. From this list, the fund’s portfolio manager seeks to select stocks that pay dividends and that have been rated “A” or “B” by Schwab Equity Ratings. The fund may purchase “C”-rated stocks for purposes of sector diversification. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for capital appreciation. The manager then constructs a diversified portfolio that seeks to provide a dividend yield that exceeds that of the S&P 500 Index while seeking to maintain a lower volatility than that of the Index.

The fund may also invest in other equity investments, including convertible securities. The fund may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. By using these instruments, the fund potentially can offset the impact of its performance of keeping some assets in cash. The fund may invest in exchange traded funds and stocks of real estate investment trusts (REITs). The fund also may lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund primarily invests in dividend paying stocks. As a result, fund performance will correlate directly with the performance of the dividend paying stock segment of the stock market, and the fund may underperform funds that do not limit their investments to dividend paying stocks. If stocks held by the fund reduce or stop paying dividends, the fund’s ability to generate income may be affected.

Convertible Securities Risk. Convertible securities generally are debt obligations that pay income, but which may convert into common or preferred stock under certain circumstances. These investments, which are often issued by smaller or less established companies, are subject to the equity risks described above, but they also are subject to fixed income risks. For example, an issuer may fail to pay interest or dividends, and prices of convertible securities generally will fall when interest rates rise.

Schwab Dividend Equity Fund ^tm 19

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Annual total returns (%) as of 12/31

Best quarter: 14.06% Q3 2009
Worst quarter: (17.42%) Q4 2008

Average annual total returns (%) as of 12/31/10


					Since
					inception
	1 year		5 years		(9/23/03)
Before taxes		11.46%		2.52%		6.52%
After taxes on distributions		11.17%		2.13%		5.92%
After taxes on distributions and sale of shares		7.79%		2.14%		5.51%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		5.14%

20 Schwab Dividend Equity Fund ^tm

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2004.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2003.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Dividend Equity Fund ^tm 21

Schwab Small-Cap Equity Fund ^tm

Ticker Symbol: SWSCX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.81
Distribution (12b-1) fees		None
Other expenses ¹		0.32

Total annual fund operating expenses		1.13
Less expense reduction		(0.01)

Total annual fund operating expenses after expense reduction ²		1.12


¹	Restated to reflect current fees and expenses.


²	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 1.12% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$114	$356	$617	$1,363

Portfolio Turnover

Principal investment strategies

Under normal circumstances, the fund invests at least 80% of its net assets in small-cap equity securities. Small-cap equity securities generally are securities with market capitalizations of up to $2.5 billion or securities included in the Russell 2000 ^® Index, each measured at the time of purchase by the fund. In addition, small-cap equity securities may include those with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause

22 Schwab Small-Cap Equity Fund ^tm

the average weighted market capitalization of the fund to exceed $2.5 billion. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the Russell 2000 ^® Index.

The fund approaches risk management from the perspective of its benchmark index, the Russell 2000 ^® Index. The Russell 2000 ^® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 ^® Index measures the performance of the 2,000 smallest companies (based on total market capitalization) in the Russell 3000 ^® Index, which represents approximately 10% of the total market capitalization of the Russell 3000 ^® Index.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks for purposes of sector diversification. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Schwab Small-Cap Equity Fund ^tm 23

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 20.56% Q2 2009
Worst quarter: (25.80%) Q4 2008

24 Schwab Small-Cap Equity Fund ^tm

Average annual total returns (%) as of 12/31/10


					Since
					inception
	1 year		5 years		(7/1/03)
Before taxes		24.66%		0.70%		9.10%
After taxes on distributions		24.66%		0.49%		8.37%
After taxes on distributions and sale of shares		16.03%		0.60%		7.70%
Comparative Index (reflect no deduction for expenses or taxes)
Russell 2000 ^® Index		26.85%		4.47%		9.11%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2004.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2003.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Small-Cap Equity Fund ^tm 25

Schwab Hedged Equity Fund ^tm

Ticker Symbol: SWHEX

Investment objective

The fund seeks long-term capital appreciation over market cycles with lower volatility than the broad equity market.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		1.05
Distribution (12b-1) fees		None
Other expenses
Dividend expense on securities sold short		0.59
Remainder of other expenses		0.35

Total other expenses		0.94

Total annual fund operating expenses ¹		1.99

The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes, certain non-routine expenses and expenses for dividends and interest paid on securities sold short) of the fund to 1.33% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$202	$624	$1,073	$2,317

Portfolio Turnover

Principal investment strategies

To pursue its investment objective, the fund will establish long and short positions in equity securities issued by U.S. companies. Under normal circumstances it will invest at least 80% of its net assets in equity securities issued by U.S. companies; typically, the actual percentage will be higher. The fund typically purchases or sells short stocks of companies that have market capitalizations of $1 billion or more at the time the stock is purchased or sold short.

26 Schwab Hedged Equity Fund ^tm

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. In general, the fund selects its long positions from stocks that are rated “A” or “B” at the time of purchase and selects its short positions from stocks that are rated “D” or “F” at the time of purchase. The fund may purchase or sell short a “C”-rated stock for purposes of sector diversification. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital appreciation.

When the fund takes a long position, it purchases a stock outright. When the fund takes a short position, it sells a stock that it has borrowed. To complete, or close out, the short sale transaction, the fund buys the same stock in the market and returns it to the lender. Short positions may be used to hedge against the volatility of the long portion of the overall portfolio and/or to garner returns from declines in securities prices. The portfolio managers also may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. The fund may invest in exchange traded funds and stocks of real estate investment trusts (“REITs”).

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time. The fund’s use of short selling may reduce the risk of general equity market volatility but cannot completely eliminate the risk.

Schwab Hedged Equity Fund ^tm 27

purchasing the security at the market price at the time of replacement. This price may be more or less than the price at which the security was sold by the fund and the fund will incur a loss if the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 11.38% Q3 2009
Worst quarter: (10.49%) Q4 2008

28 Schwab Hedged Equity Fund ^tm

Average annual total returns (%) as of 12/31/10


					Since
					inception
	1 year		5 years		(9/3/02)
Before taxes		6.57%		1.22%		6.26%
After taxes on distributions		6.57%		1.17%		6.10%
After taxes on distributions and sale of shares		4.27%		1.04%		5.46%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		5.96%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2005.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2005.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Hedged Equity Fund ^tm 29

Schwab Financial Services Fund ^tm

Ticker Symbol: SWFFX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.54
Distribution (12b-1) fees		None
Other expenses ¹		0.50

Total annual fund operating expenses		1.04
Less expense reduction		(0.10)

Total annual fund operating expenses after expense reduction ²		0.94


¹	Restated to reflect current fees and expenses.


²	The investment adviser and its affiliates have agreed to limit the fund’s total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) to 0.94% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$96	$300	$520	$1,155

Portfolio Turnover

Principal investment strategies

To pursue its goal, the fund primarily invests in equity securities issued by companies in the financial services sector. The financial services sector may include, for example, asset management firms, brokerage companies, commercial banks, financial services firms, insurance companies, real estate investment trusts (REITs), and savings and loan associations. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these securities; typically,

30 Schwab Financial Services Fund ^tm

the actual percentage will be higher. The fund will concentrate its investments in securities of companies in the financial services sector. The fund generally invests in U.S. companies and may invest in companies of all sizes.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks to broaden exposure among industries represented in the portfolio. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of maintaining this exposure. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Concentration Risk. Because the fund’s investments are concentrated in issuers doing business in the same sector, the companies in which the fund invests will be affected by many of the same factors, such as legislative or regulatory changes, intense competition for market share and other competitive challenges. In addition, stocks of financial services companies may underperform other segments of the equity market or stock market as a whole and are likely to have above-average volatility.

Schwab Financial Services Fund ^tm 31

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Annual total returns (%) as of 12/31

Best quarter: 23.32% Q3 2009
Worst quarter: (30.13%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years			10 years
Before taxes		16.35%		(4.69%	)		1.24%
After taxes on distributions		16.29%		(4.88%	)		0.78%
After taxes on distributions and sale of shares		10.71%		(3.91%	)		0.98%
Comparative Indices (reflects no deduction for expenses or taxes)
S&P 1500 SuperComposite Financial Sector Index		13.29%		(9.53%	)		(2.78%	)
S&P 500 ^® Index		15.06%		2.29%			1.41%

32 Schwab Financial Services Fund ^tm

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2004.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2000.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Financial Services Fund ^tm 33

Schwab Health Care Fund ^tm

Ticker Symbol: SWHFX

Investment objective

The fund seeks long-term capital growth.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.54
Distribution (12b-1) fees		None
Other expenses		0.32

Total annual fund operating expenses		0.86
Less expense reduction		(0.04)

Total annual fund operating expenses after expense reduction ¹		0.82


¹	The investment adviser and its affiliates have agreed to limit the fund’s total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) to 0.82% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$84	$262	$455	$1,014

Portfolio Turnover

Principal investment strategies

To pursue its goal, the fund primarily invests in equity securities issued by companies in the health care sector. The health care sector may include, for example, drug and biotechnology companies, health care facilities operations, medical product manufacturers and suppliers, medical providers and financial services firms. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these securities; typically, the actual percentage will be higher. The fund will concentrate its investments in securities of companies in the health care sector. The fund primarily invests in U.S. companies, but may invest up to 25% of its net assets in the stocks of publicly traded companies located in countries other than the United States. The fund’s international investments will primarily be in stocks issued by companies located in developed

34 Schwab Health Care Fund ^tm

countries, however it may also invest in stocks issued by companies located in emerging markets. The fund considers developed countries to include Australia, Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The fund considers any country that is not a developed country to be an emerging market country. The fund generally does not intend to hedge its exposure to foreign currencies. The fund may invest in companies of all sizes.

To aid its U.S. stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks to broaden exposure among industries represented in the portfolio. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of maintaining this exposure. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

To aid its international stock selection, the fund uses Schwab’s proprietary international stock research. This research ranks stocks of publicly traded companies located in the countries in the MSCI EAFE Index plus stocks of publicly traded companies located in additional countries not included in the MSCI EAFE Index.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Concentration Risk. Because the fund’s investments are concentrated in issuers doing business in the same sector, the companies in which the fund invests will be affected by many of the same factors, such as legislative or regulatory changes, intense competition for market share and other competitive challenges. In addition, stocks of health care companies may underperform other segments of the equity market or stock market as a whole and are likely to have above-average volatility.

Schwab Health Care Fund ^tm 35

limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Annual total returns (%) as of 12/31

Best quarter: 16.67% Q4 2003
Worst quarter: (18.45%) Q1 2001

36 Schwab Health Care Fund ^tm

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		9.75%		2.26%		4.52%
After taxes on distributions		9.56%		2.12%		4.43%
After taxes on distributions and sale of shares		6.59%		1.92%		3.93%
Comparative Indices (reflect no deduction for expenses or taxes)
Dow Jones Global Health Care Index		4.81%		3.10%		1.61%
S&P 500 ^{^®} Index		15.06%		2.29%		1.41%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. She has managed the fund since 2004.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2000.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since 2006.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Health Care Fund ^tm 37

Fund details

Investment objectives, strategies and risks

Investment objective

The fund seeks long-term capital growth.

Investment strategy

To pursue its investment objective, the fund invests primarily in U.S. common stocks. Under normal circumstances, the fund invests at least 80% of its net assets in large-cap stocks of U.S. companies. The fund will notify its shareholders at least 60 days before changing this policy. Large-cap stocks generally are those with market capitalizations equal to at least $5 billion at the time of purchase. The fund invests its assets in companies it believes to have above-average growth potential. Growth may be measured by factors such as earnings or revenue. Companies with high growth potential tend to have higher than average price/earnings (P/E) or price/book (P/B) ratios. Companies with strong growth potential often have new products, technologies, or other opportunities, or have a strong industry or market position. The stocks of these companies are often called “growth” stocks.

Schwab Equity Ratings are based on a disciplined methodology that evaluates each stock on the basis of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. From time to time, Schwab may update the Schwab Equity Ratings methodology, including the factors underlying each broad category. For a further description of Schwab Equity Ratings, see “More About Schwab’s Research” following later in this prospectus.

The fund may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. A futures contract is a contract to buy or sell a specific financial instrument at a specified price at a specific future time. By using these instruments, the fund potentially can offset the impact on its performance of keeping some assets in cash. The fund may invest in exchange traded funds and stocks of real estate investment trusts (REITs). The fund also may lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

38 Fund details

Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money.

Management Risk. The fund’s investment adviser makes investment decisions for the fund using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the desired results in the future and, if market dynamics change, the effectiveness of the strategy may be limited. In addition, the portfolio optimization process used by the fund to assist in constructing the fund’s portfolio does not assure successful investment. Securities selected with the assistance of the process may be negatively impacted by factors or events not foreseen in developing the process. As a result, the fund may have a lower return than if it were managed using another process or strategy. These risks may cause the fund to underperform its comparative index or other funds with a similar investment objective. The fund may invest in stocks that have not received Schwab Equity Ratings, and these stocks may underperform the fund’s stocks that receive Schwab Equity Ratings.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large-Cap Risk. Many of the risks of this fund are associated with its investment in the large-cap segments of the U.S. stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap U.S. stocks fall behind other types of investments — mid- or small-cap stocks, for instance — the fund’s large-cap holdings could reduce performance also will lag these investments.

Growth Investing Risk. Growth stocks can be volatile for several reasons. Since growth companies usually invest a high portion of earnings in their businesses, they may lack the dividends of value stocks that can cushion stock prices in a falling market. The prices of growth stocks are based largely on projections of the issuer’s future earnings and revenues. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks.

Derivatives Risk. The principal types of derivatives used by the fund are futures contracts. A futures contract is an agreement to buy or sell a financial instrument at a specific price on a specific day.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk, market risk and management risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Exchange Traded Fund (ETF) Risk. When the fund invests in an ETF, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund may pay lending fees to a party arranging the loan.

Fund details 39

economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer. The fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.

Schwab Premier Equity Fund ^®

Investment objective

The fund seeks long-term capital growth.

Investment strategy

To pursue its investment objective, the fund invests primarily in U.S. common stocks. Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in common stocks of U.S. companies. The fund will notify its shareholders at least 60 days before changing this policy. The fund generally seeks to invest in the stocks of approximately 100 companies, but the fund may hold fewer or more stocks at a particular time. The fund may invest in companies of all sizes.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average will strongly underperform the equities market over the next 12 months. The fund will invest in a stock only if the stock is rated “A” or “B” at the time of purchase. If a stock held by the fund is downgraded to a rating below “B”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio relative to the fund’s comparative index.

40 Fund details

fund also may lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large- and Mid-Cap Risk. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — large-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

Fund details 41

to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate. Risks commonly associated with the direct ownership of real estate include fluctuations in the value of underlying properties, defaults by borrowers or tenants, access to capital, changes in interest rates and risks related to general or local economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Schwab Core Equity Fund ^tm

Investment objective

The fund seeks long-term capital growth.

Investment strategy

To pursue its investment objective, the fund invests primarily in U.S. stocks. Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in equity securities of U.S. companies. The fund will notify its shareholders at least 60 days before changing this policy. The fund expects to hold the common stocks of U.S. companies that have market values of approximately $500 million or more. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P 500 ^® Index.

The fund approaches risk management from the perspective of its comparative index, the S&P 500 Index. The S&P 500 Index includes the common stocks of 500 leading U.S. publicly traded companies from a broad range of industries. The portfolio managers seek to keep the fund’s volatility similar to that of the S&P 500 Index.

42 Fund details

market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks for purposes of sector diversification. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large- and Mid-Cap Risk. Many of the risks of this fund are associated with its investment in the large- and mid-cap segments of the U.S. stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Fund details 43

and management risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate. Risks commonly associated with the direct ownership of real estate include fluctuations in the value of underlying properties, defaults by borrowers or tenants, access to capital changes in interest rates and risks related to general or local economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Schwab ^® International Core Equity Fund

Investment objective

The fund seeks long-term capital growth. The investment objective may be changed without shareholder approval.

Investment strategy

To pursue its investment objective, the fund invests primarily in the stocks of publicly traded companies located in developed countries excluding the United States. Though the fund invests primarily in securities issued by companies located in developed countries, it may also invest in securities issued by companies located in emerging markets. The fund considers developed countries to include Australia, Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The fund considers any country that is not a developed country to be an emerging market country.

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Under normal circumstances, the fund invests at least 80% of its net assets in equity securities. The fund will notify its shareholders at least 60 days before changing this policy. The fund typically invests a majority of its assets in the stocks of large-cap and mid-cap companies but may invest a portion of its assets in small-cap companies. In addition, the portfolio managers seek to allocate the fund’s investments across different countries and geographic regions in an effort to manage the economic and socio-political risks associated with investing in a single country or limited number of countries. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the MSCI EAFE Index. The MSCI EAFE Index includes over 1,000 securities listed on the stock exchanges of certain developed market countries in Europe, Australia, Asia, and the Far East.

The fund uses a portfolio optimization process to assist in constructing the portfolio. The portfolio managers seek to use the portfolio optimization process to build a portfolio they believe will provide the optimal balance between risk and expected return, subject to parameters such as the number of stocks desired in the portfolio, the level of portfolio turnover, country and sector diversification, and volatility considerations. The fund generally does not intend to hedge its exposure to foreign currencies.

To aid its stock selection, the fund uses Schwab’s proprietary international stock research. This research ranks stocks, including stocks of certain real estate investment trusts (REITs), of publicly traded companies located in the countries in the MSCI EAFE Index plus publicly traded stocks of companies located in additional countries not included in the MSCI EAFE Index. The stocks are ranked based on factors that Schwab believes to be indicative of stocks’ performance potential based on investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. From time to time, Schwab may update the research methodology as well as the factors underlying each broad category. In addition, the fund may purchase certain stocks that have not been ranked by Schwab’s research.

For a further description of Schwab’s proprietary international stock research, see “More About Schwab’s Research” following later in this prospectus.

The fund may also use additional research as a component of its overall stock selection process. This research may incorporate the analysis of factors including, but not limited to, valuation, balance sheet strength, future earnings power and trading activity to identify companies expected to outperform the broader equity market.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Management Risk. The fund’s investment adviser makes investment decisions for the fund using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the desired results in the future and, if market dynamics change, the effectiveness of the strategy may be limited. In addition, the portfolio optimization process used by the fund to assist in constructing the fund’s portfolio does not assure successful investment. Securities selected with the assistance of the process may be negatively impacted by factors or events not foreseen in developing the process. As a result, the fund may have a lower return than if it were managed using another process or strategy. These risks may cause the fund to underperform its comparative index or other funds with a similar investment objective. The fund may invest in stocks that have not received a rating from Schwab’s proprietary international stock research, and these stocks may underperform the fund’s stocks that receive a rating from Schwab’s proprietary international stock research.

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Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large- and Mid-Cap Risk. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Foreign Investment Risk. The fund’s investments in securities of foreign issuers involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions, or changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges). In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value as compared to a fund that invests solely in securities of U.S. companies because the securities’ markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries.

Currency Risk. As a result of the fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the fund would be adversely affected. Currency exchange rates may fluctuate in response to factors extrinsic to that country’s economy, which makes the forecasting of currency market movements extremely difficult. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the U.S. or abroad. These can result in losses to the fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transactions costs.

Emerging Market Risk. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements, unreliable securities valuation and greater risk associated with the custody of securities. It is sometimes difficult to obtain and enforce court judgments in such countries, and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

46 Fund details

suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate. Risks commonly associated with the direct ownership of real estate include fluctuations in the value of underlying properties, defaults by borrowers or tenants, changes in interest rates and risks related to general or local economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Schwab Dividend Equity Fund ^tm

Investment objective

The fund seeks current income and capital appreciation.

Investment strategy

Under normal circumstances, the fund invests at least 80% of its net assets in dividend paying common and preferred stocks. The fund will notify its shareholders at least 60 days before changing this policy. The fund seeks to provide current income from dividends that are eligible for the reduced tax rate on qualified dividend income. The fund also seeks to provide capital appreciation.

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Schwab Equity Ratings are based on a disciplined methodology that evaluates each stock on the basis of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. From time to time, Schwab may update the Schwab Equity Ratings methodology, including the factors underlying each broad category. For a description of Schwab Equity Ratings, see “More About Schwab’s Research” following this section.

The fund may also invest in other equity investments, including convertible securities, and futures. Convertible securities can be converted into or exchanged for common stocks, preferred stocks or other securities. Convertible securities and preferred stocks provide an opportunity for equity participation, with the potential for a higher dividend or interest yield and lower price volatility compared to common stock.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

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companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. In accordance with its income objective, the fund primarily invests in dividend paying stocks. As a result, fund performance will correlate directly with the performance of the dividend paying stock segment of the stock market. This may cause the fund to underperform funds that do not limit their investments to dividend paying stocks. In addition, if stocks held by the fund reduce or stop paying dividends, the fund’s ability to generate income may be affected.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate. Risks commonly associated with the direct ownership of real estate include fluctuations in the value of underlying properties, defaults by borrowers or tenants, access to capital changes in interest rates and risks related to general or local economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a

Fund details 49

borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

Schwab Small-Cap Equity Fund ^tm

Investment objective

The fund seeks long-term capital growth.

Investment strategy

Under normal circumstances, the fund invests at least 80% of its net assets in small-cap equity securities. The fund will notify its shareholders at least 60 days before changing this policy. Small-cap equity securities generally are securities with market capitalizations of up to $2.5 billion or securities included in the Russell 2000 ^® Index, each measured at the time of purchase by the fund. In addition, small-cap equity securities may include those with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $2.5 billion. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the Russell 2000 ^® Index.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks for purposes of sector diversification. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of sector diversification. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

50 Fund details

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

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generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.

Schwab Hedged Equity Fund ^tm

Investment objective

The fund’s principal investment objective is long-term capital appreciation over market cycles with lower volatility than the broad equity market.

Investment strategy

To pursue its investment objective, the fund will establish long and short positions in equity securities issued by U.S. companies. Under normal circumstances it will invest at least 80% of its net assets in equity securities issued by U.S. companies. The fund will notify its shareholders at least 60 days before changing this policy.

The fund typically purchases or sells short stocks of companies that have market capitalizations of $1 billion or more at the time the stock is purchased or sold short. When the fund takes a long position, it purchases a stock outright. When the fund takes a short position, it sells a stock that it has borrowed. To complete, or close out, the short sale transaction, the fund buys the same stock in the market and returns it to the lender. The fund makes money if the market price of the stock goes down after the short sale. Conversely, if the price of the stock goes up after the short sale, the fund will lose money because it will have to pay more to replace the borrowed stock than it received when it sold the stock short.

To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. In general, the fund selects its long positions from stocks that are rated “A” or “B” at the time of purchase and selects its short positions from stocks that are rated “D” or “F” at the time of purchase. The fund may purchase or sell short a “C”-rated stock for purposes of sector diversification. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital appreciation.

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Short positions may be used to hedge against the volatility of the long portion of the overall portfolio and/or to garner returns from declines in securities prices. The portfolio managers also may invest in derivatives, principally futures contracts, primarily to seek returns on the fund’s otherwise uninvested cash assets. A futures contract is a contract to buy or sell a specific financial instrument at a specified price at a specific future time. The fund may invest in exchange traded funds and stocks of real estate investment trusts (REITs).

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Investment Style Risk. The fund’s long positions could decline in value at the same time that the value of the stocks sold short increase, thereby increasing the fund’s overall potential for loss. The fund’s short sales may result in a loss if the price of the borrowed securities rise and it costs more to replace the borrowed securities. In contrast to the fund’s long positions, for which the risk of loss is typically limited to the amount invested, the potential loss on the fund’s short positions is unlimited. In addition, any gain on a short sale is decreased, and any loss is increased, by the amount of any payment, dividend or interest that the fund may be required to pay with respect to the borrowed securities. Market factors may prevent the fund from closing out a short position at the most desirable time or at a favorable price. The lender of the borrowed securities may require the fund to return the securities on short notice, which may require the fund to purchase the borrowed securities at an unfavorable price, resulting in a loss.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time. The fund’s use of short selling may reduce the risk of general equity market volatility but cannot completely eliminate that risk.

Short Sales Risk. Short sales are transactions in which the fund sells a security it does not own. To complete a short sale, the fund must borrow the security to deliver to the buyer. The fund is then obligated to replace the borrowed security by purchasing the security at the market price at the time of replacement. This price may be more or less than the price at

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which the security was sold by the fund and the fund will incur a loss if the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security.

Schwab Financial Services Fund ^tm

Investment objective

The fund’s goal is to seek long-term capital growth.

Investment strategy

To pursue its goal, the fund primarily invests in equity securities issued by companies in the financial services sector. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these securities; typically, the actual percentage will be higher. The fund will notify its shareholders at least 60 days before changing this policy. The fund will concentrate its investments in securities of companies in the financial services sector. The financial services sector may include, for example, these types of companies: asset management firms; brokerage companies; commercial banks; financial services firms; insurance companies; real estate investment trusts (REITs); and savings and loan associations. The fund generally invests in U.S. companies and may invest in companies of all sizes.

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To aid its stock selection, the fund uses Schwab Equity Ratings ^® . Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks to broaden exposure among industries represented in the portfolio. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of maintaining this exposure. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

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factors, such as legislative or regulatory changes, intense competition for market share and other competitive challenges posed by joint ventures and mergers between U.S. and foreign firms. In addition, the fund is subject to the risks that stocks of financial services companies may underperform other segments of the equity market or the stock market as a whole and are likely to have above-average volatility.

REITs Risk. The fund’s investments in REITs will be subject to the risks associated with the direct ownership of real estate. Risks commonly associated with the direct ownership of real estate include fluctuations in the value of underlying properties, defaults by borrowers or tenants, access to capital changes in interest rates and risks related to general or local economic conditions. In addition to the risks associated with investing in securities of real estate companies, REITs are subject to certain additional risks. Equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills and may have their investments in relatively few properties, or in a small geographic area or a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code, or to maintain their exemptions from registration under the Investment Company Act of 1940. The failure of a company to qualify as a REIT under federal tax law may have adverse consequences to the fund. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, REITs have their own expenses, and the fund will bear a proportionate share of those expenses.

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Schwab Health Care Fund ^tm

Investment objective

The fund’s goal is to seek long-term capital growth.

Investment strategy

To pursue its goal, the fund primarily invests in equity securities issued by companies in the health care sector. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these securities; typically, the actual percentage will be higher. The fund will notify its shareholders at least 60 days before changing this policy. The fund will concentrate its investments in securities of companies in the health care sector. The health care sector may include, for example, these types of companies: drug and biotechnology companies; health care facilities operators; medical product manufacturers and suppliers; medical providers; and medical services firms.

The fund primarily invests in U.S. companies, but may invest up to 25% of its net assets in the stocks of publicly traded companies located in countries other than the United States. The fund’s international investments will primarily be in stocks issued by companies located in developed countries, however it may also invest in stocks issued by companies located in emerging markets. The fund considers developed countries to include Australia, Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The fund considers any country that is not a developed country to be an emerging market country. The fund generally does not intend to hedge its exposure to foreign currencies. The fund may invest in companies of all sizes.

To aid its U.S. stock selection, the fund uses Schwab Equity Ratings. Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months. Generally, the fund seeks to invest in stocks that are rated “A” or “B” at the time of purchase, but the fund may purchase “C”-rated stocks to broaden exposure among industries represented in the portfolio. If a stock held by the fund is downgraded to a rating below “C”, the fund will sell the stock unless the portfolio managers believe it is necessary to continue holding the stock for purposes of maintaining this exposure. The portfolio managers will consider the current market environment and any potential negative impact on the fund in determining when to sell a downgraded stock. In addition, the fund may purchase certain stocks that have not received Schwab Equity Ratings to the extent the portfolio managers believe the purchases will help to manage the volatility of the fund’s portfolio or provide potential for long-term capital growth.

To aid its international stock selection, the fund uses Schwab’s proprietary international stock research. This research ranks stocks, including stocks of certain real estate investment trusts (REITs), of publicly traded companies located in the countries in the MSCI EAFE Index plus publicly traded stocks of companies located in additional countries not included in the MSCI EAFE Index. The stocks are ranked based on factors that Schwab believes to be indicative of stocks’ performance potential based on investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. From time to time, Schwab may update the research methodology as well as the factors underlying each broad category. In addition, the fund may purchase certain stocks that have not been ranked by Schwab’s research.

For a further description of Schwab Equity Ratings and Schwab’s proprietary international stock research, see “More About Schwab’s Research” following later in this prospectus.

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fund also may lend portfolio securities to earn additional income. Any income realized through securities lending may help fund performance.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Management Risk. The fund’s investment adviser makes investment decisions for the fund using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the desired results in the future and, if market dynamics change, the effectiveness of the strategy may be limited. In addition, the portfolio optimization process used by the fund to assist in constructing the fund’s portfolio does not assure successful investment. Securities selected with the assistance of the process may be negatively impacted by factors or events not foreseen in developing the process. As a result, the fund may have a lower return than if it were managed using another process or strategy. These risks may cause the fund to underperform its comparative index or other funds with a similar investment objective. The fund may invest in stocks that have not been rated by Schwab Equity Ratings or Schwab’s proprietary international stock research, and these stocks may underperform the fund’s stocks that receive Schwab Equity Ratings or a rating from Schwab’s proprietary international stock research.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Concentration Risk. Because the fund’s investments are concentrated in issuers doing business in the same sector, your investment is exposed to that sector’s risks. The companies in which the fund invests are affected by many of the same factors, such as legislative or regulatory changes, intense competition for market share and other competitive challenges posed by joint ventures and mergers between U.S. and foreign firms. In addition, the fund is subject to the risks that stocks of health care companies may underperform other segments of the equity market or the stock market as a whole and are likely to have above-average volatility.

58 Fund details

Emerging Market Risk. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and unreliable securities valuation. It is sometimes difficult to obtain and enforce court judgments in such countries and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

Fund details 59

More about Schwab’s research

With the exception of the Schwab International Core Equity Fund, the funds use Schwab Equity Ratings ^® to aid in stock selection. Schwab Equity Ratings represent Schwab’s point-of-view on the 12-month performance outlook for approximately 3,000 of the largest (by market capitalization) stocks, including stocks of certain real estate investment trusts (REITs), of issuers headquartered or incorporated in the U.S. and in certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Stocks are rated using a scale of “A,” “B,” “C,” “D” and “F.” Schwab’s outlook is that “A” rated stocks, on average, will strongly outperform and “F” rated stocks, on average, will strongly underperform the equities market over the next 12 months.

Schwab Equity Ratings are based on a disciplined methodology that evaluates each stock on the basis of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk.

The Fundamentals grade underlying the Schwab Equity Rating is based on a number of operating performance measures derived from recent financial statement data. Stocks with attributes such as high cash return on investment, low capital intensity, and improving profitability tend to have better Fundamentals grades. Highly rated stocks with such grades may have the potential for price appreciation, as investors perceive that these companies have the financial strength to potentially grow earnings faster than the average stock.

The Valuation grade underlying the Schwab Equity Rating is based upon several value-oriented investment criteria. From a valuation ratio perspective, stocks with attributes such as high levels of sales, operating income, net assets, and cash liquidity per dollar of current stock price tend to have better Valuation grades. From an investor sentiment perspective, stocks with relatively few total shares sold short tend to have better Valuation grades. Highly rated stocks with such grades may have the potential for price appreciation, as investors perceive that the current stock prices of these companies are too low relative to measures of investment value.

The Momentum grade underlying the Schwab Equity Rating is based upon several measures of short-term investor expectation change. Stocks with attributes such as recently improving analyst forecasts, strong recent price performance, and a history of earnings that exceed consensus forecasts tend to have better Momentum grades. Highly rated stocks with such grades may have the potential for price appreciation, as investors become more aware of these companies’ improving short-term performance prospects.

The Risk grade underlying the Schwab Equity Rating is based upon diverse measures of investment risk. Stocks with strengthening balance sheets and geographically diversified business activities tend to have better Risk grades. Highly rated stocks with such grades may have the potential for price appreciation, as investors perceive that these companies offer an attractive risk-versus-return trade-off.

The Schwab International Core Equity Fund and the Schwab Health Care Fund also use Schwab’s proprietary international stock research to aid in the selection of foreign stocks. Schwab’s proprietary international stock research evaluates each stock on the basis of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk.

The Fundamentals category evaluates stocks based upon measures derived from recent financial statement data. Stocks with attributes such as high earnings quality and profitability tend to have a better Fundamentals rank.

The Valuation category examines several value-oriented investment criteria. Stocks of firms with attractive relative valuation multiples tend to have a better Valuation rank.

The Momentum category is based upon several measures of investor sentiment change. Stocks with attributes such as increasing analyst earnings forecasts and strong relative price performance tend to have a better Momentum rank.

The Risk category is based upon measures of company-specific investment risk. Larger stocks of high institutional investor interest tend to have a better Risk rank.

From time to time, Schwab may update the research methodology as well as the factors underlying each broad category for both Schwab Equity Ratings and Schwab’s proprietary international stock research.

A description of each fund’s policies and procedures with respect to the disclosure of its portfolio securities is available in the fund’s SAI.

60 Fund details

This section provides further details about each fund’s financial history for the past five years or, if shorter, for its period of operations. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in a fund would have earned or lost during a given period, assuming all distributions were reinvested. Each fund’s independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund’s annual report (see back cover).

Schwab Large-Cap Growth Fund ^tm

On October 7, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The financial history of the fund is that of the fund’s former Select Shares. Accordingly, the financial highlights of the fund’s former Select Shares are shown below.


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.10			8.22			12.77			11.09			9.73

Income (loss) from investment operations:
Net investment income (loss)		0.05			0.05			0.06			0.04			0.02
Net realized and unrealized gains (losses)		1.39			0.87			(4.56	)		1.67			1.35

Total from investment operations		1.44			0.92			(4.50	)		1.71			1.37
Less distributions:
Distributions from net investment income		(0.06	)		(0.04	)		(0.05	)		(0.03	)		(0.01	)

Net asset value at end of period		10.48			9.10			8.22			12.77			11.09

Total return (%)		15.83			11.36			(35.36	)		15.47			14.04
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.00	²		0.99			0.99			0.99			0.99
Gross operating expenses		1.04			1.03			1.01			1.03			1.12
Net investment income (loss)		0.39			0.65			0.53			0.33			0.26
Portfolio turnover rate		57			63			49			30			53
Net assets, end of period ($ x 1,000,000)		219			360			332			492			107


¹		Effective October 7, 2009, the Investor Shares class and the Select Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		The ratio of net operating expenses would have been 0.99%, if certain non-routine expenses had not been incurred.

Financial highlights 61

Schwab Premier Equity Fund ^®

On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The financial history of the fund is that of the fund’s former Select Shares. Accordingly, the financial highlights of the fund’s former Select Shares are shown below.


	11/1/09–			11/1/08 ¹ –			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		8.46			8.05			14.01			12.51			10.71

Income (loss) from investment operations:
Net investment income (loss)		0.04			0.04			0.06			0.04			0.02
Net realized and unrealized gains (losses)		1.22			0.43			(5.11	)		1.48			1.83

Total from investment operations		1.26			0.47			(5.05	)		1.52			1.85
Less distributions:
Distributions from net investment income		(0.05	)		(0.06	)		(0.05	)		(0.02	)		(0.05	)
Distributions from net realized gains		—			—			(0.86	)		—			—

Total distributions		(0.05	)		(0.06	)		(0.91	)		(0.02	)		(0.05	)

Net asset value at end of period		9.67			8.46			8.05			14.01			12.51

Total return (%)		14.96			6.01			(38.32	)		12.20			17.28
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.02			1.04	²		1.02			1.01			1.02
Gross operating expenses		1.04			1.04			1.02			1.01			1.03
Net investment income (loss)		0.34			0.54			0.50			0.32			0.17
Portfolio turnover rate		80			98			92			72			73
Net assets, end of period ($ x 1,000,000)		292			365			441			983			857


¹		Effective September 28, 2009, the Investor Shares class and the Select Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for period ended October 31, 2009 is a blended rate.

62 Financial highlights

Schwab Core Equity Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		14.26			13.43			20.49			18.40			15.81

Income (loss) from investment operations:
Net investment income (loss)		0.17			0.17			0.23			0.16			0.10
Net realized and unrealized gains (losses)		1.50			0.88			(7.06	)		2.35			2.58

Total from investment operations		1.67			1.05			(6.83	)		2.51			2.68
Less distributions:
Distributions from net investment income		(0.15	)		(0.22	)		(0.18	)		(0.10	)		(0.09	)
Distributions from net realized gains		—			—			(0.05	)		(0.32	)		—

Total distributions		(0.15	)		(0.22	)		(0.23	)		(0.42	)		(0.09	)

Net asset value at end of period		15.78			14.26			13.43			20.49			18.40

Total return (%)		11.77			8.11			(33.71	)		13.88			17.02
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.73			0.75			0.75			0.75			0.75
Gross operating expenses		0.74			0.78			0.78			0.78			0.81
Net investment income (loss)		1.05			1.39			1.28			0.91			0.63
Portfolio turnover rate		49			41	¹		35			18			42
Net assets, end of period ($ x 1,000,000)		1,792			1,770			1,449			2,133			1,125


¹		Portfolio turnover excludes the impact of investment activity resulting from a merger with another fund.

Financial highlights 63

Schwab ^® International Core Equity Fund

On October 7, 2009, the Investor Share class, Select Share class and Institutional Share classes were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the financial highlights of the fund’s former Institutional Shares are shown below.


	11/1/09–			11/1/08–			5/30/08 ² –
	10/31/10			10/31/09 ¹			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		7.25			5.85			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.16			0.03			0.06
Net realized and unrealized gains (losses)		0.57			1.46			(4.21	)

Total from investment operations		0.73			1.49			(4.15	)
Less distributions:
Distributions from net investment income		(0.18	)		(0.09	)		—

Net asset value at end of period		7.80			7.25			5.85

Total return (%)		10.09			25.98			(41.50	) ³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.87	⁴		0.86			0.86	⁵
Gross operating expenses		1.27			1.60			1.39	⁵
Net investment income (loss)		1.85			1.19			1.67	⁵
Portfolio turnover rate		91	⁶		94			56	³
Net assets, end of period ($ x 1,000,000)		53			37			3


¹		Effective October 7, 2009, the Investor Shares class, the Select Shares class and the Institutional Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Not annualized.


⁴		The ratio of net operating expenses would have been 0.86% if certain non-routine expenses had not been incurred.


⁵		Annualized.


⁶		Portfolio turnover excludes the impact of investment activity resulting from a merger with another fund.

64 Financial highlights

Schwab Dividend Equity Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		10.94			10.63			15.66			14.60			12.80

Income (loss) from investment operations:
Net investment income (loss)		0.21			0.25			0.32			0.28			0.26
Net realized and unrealized gains (losses)		1.14			0.31			(4.97	)		1.37			1.98

Total from investment operations		1.35			0.56			(4.65	)		1.65			2.24
Less distributions:
Distributions from net investment income		(0.21	)		(0.25	)		(0.33	)		(0.28	)		(0.28	)
Distributions from net realized gains		—			—			(0.05	)		(0.31	)		(0.16	)

Total distributions		(0.21	)		(0.25	)		(0.38	)		(0.59	)		(0.44	)

Net asset value at end of period		12.08			10.94			10.63			15.66			14.60

Total return (%)		12.42			5.62			(30.23	)		11.55			17.86
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.89			0.90	²		0.89			0.89			0.90
Gross operating expenses		0.89			0.91			0.89			0.89			0.90
Net investment income (loss)		1.74			2.40			2.33			1.83			1.92
Portfolio turnover rate		37			39			22			18			36
Net assets, end of period ($ x 1,000,000)		1,322			1,297			824			1,340			729


¹		Effective October 7, 2009, the Investor Shares class and the Select Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for period ended October 31, 2009 is a blended rate.

Financial highlights 65

Schwab Small-Cap Equity Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		11.14			10.55			18.22			17.80			15.78

Income (loss) from investment operations:
Net investment income (loss)		(0.04	)		(0.02	)		(0.01	)		(0.10	)		(0.02	)
Net realized and unrealized gains (losses)		2.86			0.61			(6.59	)		0.60			2.49

Total from investment operations		2.82			0.59			(6.60	)		0.50			2.47
Less distributions:
Distributions from net investment income		—			(0.00	) ²		—			—			(0.02	)
Distributions from net realized gains		—			—			(1.07	)		(0.08	)		(0.43	)

Total distributions		—			(0.00	) ²		(1.07	)		(0.08	)		(0.45	)

Net asset value at end of period		13.96			11.14			10.55			18.22			17.80

Total return (%)		25.31			5.65			(38.16	)		2.80			15.89
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.12			1.12			1.11			1.09			1.12
Gross operating expenses		1.14			1.17			1.12			1.09			1.14
Net investment income (loss)		(0.26	)		(0.16	)		(0.09	)		(0.28	)		(0.21	)
Portfolio turnover rate		64			85			50			106			82
Net assets, end of period ($ x 1,000,000)		219			202			79			228			276


¹		Effective September 28, 2009, the Investor Shares class and the Select Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Amount is less than $0.01.

66 Financial highlights

Schwab Hedged Equity Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		13.45			12.55			16.39			15.98			14.46

Income (loss) from investment operations:
Net investment income (loss)		(0.08	)		(0.05	)		(0.05	)		0.14			0.07
Net realized and unrealized gains (losses)		1.42			0.96			(3.63	)		0.36			1.76

Total from investment operations		1.34			0.91			(3.68	)		0.50			1.83
Less distributions:
Distributions from net investment income		—			(0.01	)		(0.16	)		(0.09	)		(0.05	)
Distributions from net realized gains		—			—			—			—			(0.26	)

Total distributions		—			(0.01	)		(0.16	)		(0.09	)		(0.31	)

Net asset value at end of period		14.79			13.45			12.55			16.39			15.98

Total return (%)		9.96			7.28			(22.66	)		3.11			12.82
Ratios/Supplemental Data (%)

Ratios to average net assets:Net operating expenses (including dividend expense on short sales)		1.97			2.07	²		2.17	³		2.03	³		1.90
Net operating expenses (excluding dividend expense on short sales)		1.38	⁴		1.62	^2,5		1.77			1.77			1.77	⁶
Gross operating expenses		1.99			2.29			2.19			2.04			1.97
Net investment income (loss)		(0.54	)		(0.41	)		(0.17	)		0.79			0.77
Portfolio turnover rate		115			169			138			72			100
Net assets, end of period ($ x 1,000,000)		329			306			343			948			931


¹		Effective September 28, 2009, the Investor Shares class and the Select Shares class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for period ended October 31, 2009 is a blended rate.


³		The ratio of net operating expense would have been 2.02% and 2.16% for the periods ended October 31, 2007 and October 31, 2008, respectively, if interest expense had not been incurred.


⁴		The ratio of net operating expenses would have been 1.31%, if stock loan fees on short sales had not been incurred.


⁵		The ratio of net operating expenses would have been 1.47%, if stock loan fees on short sales had not been incurred.


⁶		The ratio of net operating expenses would have been 1.76%, if interest expense had not been incurred.

Financial highlights 67

Schwab Financial Services Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		8.77			9.05			15.88			15.75			14.42

Income (loss) from investment operations:
Net investment income (loss)		0.04			0.08			0.18			0.18			0.10
Net realized and unrealized gains (losses)		0.99			(0.21	)		(6.78	)		0.25			1.98

Total from investment operations		1.03			(0.13	)		(6.60	)		0.43			2.08
Less distributions:
Distributions from net investment income		(0.06	)		(0.15	)		(0.21	)		(0.11	)		(0.11	)
Distributions from net realized gains		—			—			(0.02	)		(0.19	)		(0.64	)

Total distributions		(0.06	)		(0.15	)		(0.23	)		(0.30	)		(0.75	)

Net asset value at end of period		9.74			8.77			9.05			15.88			15.75

Total return (%)		11.79			(1.10	)		(42.08	)		2.75			14.85
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.95	¹		0.96	²		0.94			0.90			0.98
Gross operating expenses		1.04			0.99			0.94			0.90			0.98
Net investment income (loss)		0.37			0.91			1.56			1.06			0.87
Portfolio turnover rate		54			47			59			54			57
Net assets, end of period ($ x 1,000,000)		52			64			84			94			95


¹		The ratio of net operating expenses would have been 0.94%, if certain non-routine expenses had not been incurred.


²		Effective July 1, 2009, the net operating expense limitation was lowered. The ratio presented for period ended October 31, 2009 is a blended rate.

68 Financial highlights

Schwab Health Care Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		13.41			12.55			17.08			15.05			14.03

Income (loss) from investment operations:
Net investment income (loss)		0.19			0.13			0.08			0.05			(0.01	)
Net realized and unrealized gains (losses)		2.01			0.82			(4.46	)		2.11			1.03

Total from investment operations		2.20			0.95			(4.38	)		2.16			1.02
Less distributions:
Distributions from net investment income		(0.13	)		(0.09	)		(0.05	)		—			—
Distributions from net realized gains		—			—			(0.10	)		(0.13	)		—

Total distributions		(0.13	)		(0.09	)		(0.15	)		(0.13	)		—

Net asset value at end of period		15.48			13.41			12.55			17.08			15.05

Total return (%)		16.49			7.65			(25.87	)		14.49			7.27
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.82			0.83	¹		0.82			0.82			0.84
Gross operating expenses		0.86			0.85			0.82			0.82			0.84
Net investment income (loss)		1.14			0.88			0.48			0.32			(0.07	)
Portfolio turnover rate		37			36			50			34			76
Net assets, end of period ($ x 1,000,000)		410			430			545			834			611


¹		Effective July 1, 2009, the net operating expense limitation was lowered. The ratio presented for period ended October 31, 2009 is a blended rate.

Financial highlights 69

The investment adviser for the funds is Charles Schwab Investment Management, Inc., 211 Main Street, San Francisco, CA 94105. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 84 mutual funds and approximately $187 billion in assets.

As the investment adviser, the firm oversees the asset management and administration of the funds. As compensation for these services, the firm receives a management fee from each fund. For the 12 months ended 10/31/10, these fees were 0.68% for the Schwab Large-Cap Growth Fund ^tm , 0.72% for the Schwab Premier Equity Fund ^® , 0.47% for the Schwab Core Equity Fund ^tm , 0.62% for the Schwab Dividend Equity Fund ^tm , 0.81% for the Schwab Small-Cap Equity Fund ^tm , 1.05% for the Schwab Hedged Equity Fund ^tm , 0.51% for the Schwab Financial Services Fund ^tm , 0.52% for the Schwab Health Care Fund ^tm and 0.23% for the Schwab ^® International Core Equity Fund. These figures, which are expressed as a percentage of each fund’s average daily net assets, represent the actual amounts paid, including the effects of reductions.

A discussion regarding the basis for the Board of Trustees’ approval of the funds’ investment advisory agreement is available in each fund’s 2010 annual report, which covers the period from 11/1/09 through 10/31/10.

Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds. Prior to joining the firm in August 2004, she worked for more than eleven years in asset management and quantitative analysis at other investment firms.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds except for the Schwab International Core Equity Fund. Prior to joining the firm in November 1998, he worked for 20 years in equity management.

Paul Alan Davis, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds. Prior to joining the firm in 2003, he worked for more than 12 years in portfolio management.

Additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in each fund is available in the Statement of Additional Information.

70 Fund management

In this section, you will find information on buying, selling and exchanging shares. You may invest in a fund through an intermediary by placing orders through your brokerage account at Charles Schwab & Co., Inc. (Schwab) or an account with another broker/dealer, investment adviser, 401(k) plan, employee benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of the fund (intermediary orders). Eligible Investors (as defined herein) may invest directly in a fund by placing orders through the fund’s transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with a fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the fund on purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the fund. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The fund is not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of a fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with the fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent. The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the funds” section of the prospectus. If you do not exercise one of these options within ninety days, the fund reserves the right to redeem your shares.

Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.


•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.


•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Only Eligible Investors (as defined below) may purchase shares directly from a fund’s transfer agent. Eligible Investors include, but are not limited to, qualified and non-qualified employee benefit plans (including but not limited to defined

Investing in the funds 71

benefit plans, defined contribution plans, 401(k) plans), foundations and endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of a Schwab Fund as a result of a reorganization. The funds reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for a fund’s shares. Eligible Investors must open an account with the fund through the fund’s transfer agent, Boston Financial Data Services (transfer agent), prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Subject to acceptance by the fund, you may make your initial purchase and any additional purchases of shares by wiring federal funds to the transfer agent. If you have not yet opened an account with the fund, you must fax a signed, hard copy of the completed account application and all supporting documents to the transfer agent at 1-816-218-0490. You must call the transfer agent at 1-800-407-0256 prior to the close of the fund (generally 4:00 p.m. Eastern time or the close of the New York Stock Exchange (NYSE), whichever is earlier) to place your order and to receive wire instructions. Orders received by the transfer agent in good order on or prior to the close of the fund will be processed at the net asset value per share of the fund for that day. Your wired funds must be received and accepted by the transfer agent prior to 6:00 p.m. Eastern time or the deadline for the Fedwire Funds Service for initiating third party transfers, whichever is earlier, on the day your purchase order is placed. Please call the transfer agent at 1-800-407-0256 if you have any questions or need additional information.

Initial and additional direct purchases by mail

Subject to acceptance by the fund, payment for the purchase of shares received by mail will be credited to a shareholder’s account at the net asset value per share of the fund next determined after receipt, even though the check may not yet have been converted into federal funds. For purposes of calculating the purchase price of fund shares, a purchase order is received by the fund on the day that it is in good order unless it is rejected by the fund’s transfer agent. For a cash purchase order of fund shares to be in good order on a particular day, a check must be received on or before the close of the fund (generally 4:00 p.m. Eastern time or the close of the NYSE, whichever is earlier) on that day. If the payment is received by the fund after the deadline, the purchase price of fund shares will be based upon the next determination of net asset value of fund shares. No currency, third party checks, foreign checks, starter checks, credit card checks, traveler’s checks or money orders will be accepted by the fund.

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

72 Investing in the funds

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of the fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The fund and its service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

You may redeem your fund shares by mail by sending a request letter to the fund’s transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Your redemption request will be processed by the fund at the net asset value per share of the fund next determined after the request is received in good order. To be in good order, the redemption request must include the name of the fund and the number of shares or the dollar amount to be redeemed, all required signatures and authorizations and any required signature guarantees.

Additional direct redemption information

To protect you, the fund and its service providers from fraud, signature guarantees may be required to enable the transfer agent to verify the identity of the person who has authorized a redemption from an account. Signature guarantees are required for (1) redemptions where the proceeds are to be sent to someone other than the registered shareholder(s) at the registered address, (2) redemptions if your account address has changed within the last 10 business days, (3) share transfer requests, and (4) redemptions where the proceeds are wired in connection with bank instructions not already on file with the transfer agent. Signature guarantees may be obtained from certain eligible financial institutions, including, but not limited to, the following: U.S. banks, trust companies, credit unions, securities brokers and dealers, savings and loan associations and participants in the Securities and Transfer Association Medallion Program (“STAMP”), the Stock Exchange Medallion Program (“SEMP”) or the New York Stock Exchange Medallion Signature Program (“MSP”). Signature guarantees from non-U.S. banks that do not include a stamp may require a U.S. consulate stamp. You may contact the transfer agent at 1-800-407-0256 for further details.

Direct exchange privileges

Upon request, and subject to certain limitations, shares of the funds may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. To exchange your shares to another fund or class of shares, you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by the fund containing the information indicated below.

The funds reserve the right to suspend or terminate the privilege of exchanging shares of the funds by mail or by telephone at any time.

Direct exchanges by telephone

If you authorized the telephone redemption option in the account application, you may exchange fund shares by telephone by calling the fund’s transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account registration; (b) the class of shares to be exchanged; (c) the name of the fund from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct redemptions by telephone” for more information regarding transacting with the funds’ transfer agent via telephone.

Direct exchanges by mail

To exchange fund shares by mail, simply send a letter of instruction to the funds’ transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. The letter of instruction must include: (a) your account number; (b) the class of shares to be exchanged; (c) the fund from and the fund into which the exchange is to be

Investing in the funds 73

made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

The funds are open for business each day that the New York Stock Exchange (NYSE) is open. Each fund calculates its share price each business day as of the close of the NYSE (generally 4 p.m. Eastern time). The fund’s share price is its net asset value per share, or NAV, which is the fund’s net assets divided by the number of its shares outstanding. Orders to buy, sell or exchange shares that are received by the fund in good order on or prior to the close of the fund (generally 4 p.m. Eastern time) will be executed at the next share price calculated that day.

When you place an order through your Schwab account or an account at another intermediary, please consult with your intermediary to determine when your order will be executed. Generally, you will receive the share price next calculated after the fund receives your order from your intermediary. However, some intermediaries, such as Schwab, may arrange with the fund for you to receive the share price next calculated after your intermediary has received your order. Some intermediaries may require that they receive orders prior to a specified cut-off time.

In valuing its securities, a fund uses market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, the fund may value securities based on fair values developed using methods approved by the fund’s Board of Trustees.

Shareholders of funds that invest in foreign securities as part of their investment strategy, such as the Schwab International Core Equity Fund and Schwab Health Care Fund , should be aware that because foreign markets are often open on weekends and other days when the funds are closed, the value of a fund’s portfolio may change on days when it is not possible to buy or sell shares of the fund


Minimum initial investment

$100

Choose an option for fund distributions. If you are an Eligible Investor placing direct orders with the fund, you will have one of the three options described below for fund distributions. If you don’t indicate a choice, you will receive the first option. If you are placing orders through an intermediary, you will select from the options for fund distributions provided by your intermediary, which may be different than those provided by the funds to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature

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

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

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

Each fund reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive a fund’s investment minimums.

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

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

Payments by the investment adviser or its affiliates

74 Investing in the funds

intermediaries that perform shareholder, recordkeeping, sub-accounting and other administrative services in connection with investments in fund shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the funds may pay to those intermediaries The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing, promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, distribution-related services provided by such intermediaries are paid by the investment adviser or its affiliates, not by the fund or its shareholders.

Shareholder servicing plan

The Board of Trustees has adopted a Shareholder Servicing Plan (the “Plan”) on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by service providers, including Schwab, of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds. Schwab serves as the funds’ paying agent under the Plan for making payments of the shareholder service fee due to the service providers (other than Schwab) under the Plan. All shareholder service fees paid by the funds to Schwab in its capacity as the funds’ paying agent will be passed through to the service providers, and Schwab will not retain any portion of such fees.

Pursuant to the Plan, each fund’s shares are subject to an annual shareholder servicing fee of up to 0.25%. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab (or, in the case of payments made to Schwab, pursuant to Schwab’s written agreement with the funds), and a fund will pay no more than 0.25% of the average annual daily net asset value of the fund shares owned by shareholders holding shares through such service provider. Payments under the Plan are made as described above regardless of Schwab’s or the service provider’s actual cost of providing the services. If the cost of providing the services under the Plan is less than the payments received, the unexpended portion of the fees may be retained as profit by Schwab or the service provider.

Policy regarding short-term or excessive trading

The funds are intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the funds’ performance by disrupting the efficient management of the funds, increasing fund transaction costs and taxes, causing the funds to maintain higher cash balances, and diluting the value of the funds’ shares.

To discourage market timing, the funds’ Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by fund shareholders. Each fund seeks to deter market timing through several methods. These methods may include: fair value pricing, imposition of redemption fees and trade activity monitoring. Fair value pricing and redemption fees are discussed more thoroughly in the subsequent pages of this prospectus and are considered to be key elements of the fund’s policy regarding short term or excessive trading. Trade activity monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to the fund.

Each fund or its service providers maintain risk-based surveillance procedures designed to detect market timing in fund shares in amounts that might be detrimental to the fund. Under these procedures, the funds have requested that service providers to the funds monitor transactional activity in amounts and frequency determined by each fund to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. If a fund, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into the fund by that shareholder. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to comply with applicable laws.

Investing in the funds 75

frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The funds reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

Redemption fee

Shares redeemed or exchanged within 30 days of purchase, which shall be calculated to include the 30th day, will be subject to a fee of 2%, which is intended to limit short-term trading in the funds, or to the extent that short-term trading persists, to impose the costs of that type of activity on the shareholders who engage in it. Such fee will be paid to the funds. Each fund treats shares that have been held the longest as being redeemed first. Fund shares purchased with reinvested dividends are not subject to redemption fees. Each fund reserves the right, in its sole discretion, to waive such fee when, in its judgment, such waiver would be in the best interests of the fund. A fund may waive the redemption fee for retirement plans, wrap or fee-based programs, charitable giving funds, unregistered separate accounts, redemptions pursuant to rebalancing programs or systematic withdrawal plans established by the fund or financial intermediaries, and registered investment companies and redemptions initiated by the fund. In addition, certain financial intermediaries may use criteria and methods for tracking, applying and calculating the fees that are different from the fund’s but which the fund, in its discretion, may determine are in the best interests of the fund. While the funds discourage mutual fund market timing and maintain procedures designed to provide reasonable assurances that such activity will be identified and terminated, including the imposition of the redemption fee described above, no policy or procedure can guarantee that all such activity will in fact be identified or that such activity can be completely eliminated. The funds reserve the right to modify or eliminate the redemption fees or waivers at any time.

Customer identification and verification and anti-money laundering program

Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will allow the fund or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.

Each fund or your financial intermediary is required by law to reject your new account application if the required identifying information is not provided. The fund or your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they are unable to obtain this information. In certain instances, the fund or your financial intermediary is required to collect documents, which will be used solely to establish and verify your identity.

76 Investing in the funds

Customer identification and verification is part of the fund’s overall obligation to deter money laundering under Federal law. Each fund has adopted an Anti-Money Laundering Compliance Program designed to prevent the fund from being used for money laundering or the financing of terrorist activities. In this regard, the funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of the fund or in cases when the fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the fund is required to withhold such proceeds.

Schwab ^® S&P 500 Index Fund

Any investment in a fund typically involves several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is different, you should consult your tax advisor about the tax implications of your investment in the fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.

As a shareholder, you are entitled to your share of the dividends and gains a fund earns. Every year, each fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record, except the Schwab Dividend Equity Fund, which typically makes income distributions at the end of the calendar quarter. During the fourth quarter of the year, typically in early November, an estimate of each fund’s capital gain distribution, if any, may be made available on the funds’ website: www.schwab.com/schwabfunds.

Unless you are investing through an IRA, 401(k) or other tax-advantaged retirement account, your fund distributions generally have tax consequences. Each fund’s net investment income and short-term capital gains are distributed as dividends and will be taxable as ordinary income or qualified dividend income. Dividends that are designated by the fund as qualified dividend income are eligible for a reduced maximum tax rate. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations. The Schwab Dividend Equity Fund expects that the majority, or possibly all, of the fund’s ordinary income distributions will be eligible to be treated as qualified dividend income subject to the reduced tax rates. Each of the other funds expect that a portion of each fund’s ordinary income distribution will be eligible to be treated as qualified dividend income subject to the reduced tax rates. Other capital gain distributions are taxable as long-term capital gains, regardless of how long you have held your shares in a fund. Absent further legislation, the reduced maximum rates on qualified dividend income and long-term capital gains will cease to apply to taxable years beginning after December 31, 2012. Distributions generally are taxable in the tax year in which they are declared, whether you reinvest them or take them in cash.

Generally, any sale or exchange of your shares is a taxable event. For tax purposes, an exchange of your shares for shares of another Schwab Fund or Laudus MarketMasters Fund is treated the same as a sale. A sale may result in a capital gain or loss for you. The gain or loss generally will be treated as short term if you held the shares for one-year or less, long term if you held the shares longer. Absent further legislation, the reduced maximum rates on long-term capital gains will cease to apply to taxable years beginning after December 31, 2012. Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed received) by you with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if you purchase other substantially identical shares within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.

If a fund invests a portion of its assets in foreign securities, shareholders of the fund may have additional tax considerations as a result of foreign tax payments made by the fund. Typically, these payments will reduce the fund’s dividends but will still be included in your taxable income. You may be able to claim a tax credit or deduction for your portion of foreign taxed paid by the fund, however.

Investing in the funds 77

78 Investing in the funds

Notes

To learn more

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

For a free copy of any of these documents or to request other information or ask questions about the funds, call Schwab Funds ^® at 1-800-435-4000. In addition, you may visit Schwab Funds’ web site at
www.schwabfunds.com/prospectus for a free copy of a prospectus, SAI or an annual or semi-annual report.

The SAI, the funds’ annual and semi-annual reports and other related materials are available from the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the funds, including the funds’ SAI, at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.

SEC File Number



Schwab Large-Cap Growth Fund		811-7704

Schwab Premier Equity Fund ^®		811-7704

Schwab Core Equity Fund ^tm		811-7704

Schwab ^® International Core Equity Fund		811-7704

Schwab Dividend Equity Fund ^tm		811-7704

Schwab Small-Cap Equity Fund ^tm		811-7704

Schwab Hedged Equity Fund ^tm		811-7704

Schwab Financial Services Fund ^tm		811-7704

Schwab Health Care Fund ^tm		811-7704

EG26571FLT-14

Schwab Active Equity Funds

Prospectus
February 28, 2011

Schwab Equity Index Funds ^®

Prospectus

February 28, 2011

• Schwab S&P ^® 500 Index Fund SWPPX

• Schwab 1000 Index ^® Fund SNXFX

• Schwab Small-Cap Index Fund ^® SWSSX

• Schwab Total Stock Market Index Fund ^® SWTSX

• Schwab International Index Fund ^® SWISX

Schwab Equity Index Funds ^®



Fund summaries

Schwab ^® S&P 500 Index Fund		1

Schwab 1000 Index ^® Fund		5

Schwab Small-Cap Index Fund ^®		9

Schwab Total Stock Market Fund ^®		13

Schwab International Index Fund ^®		18

Fund details

Investment objectives, strategies, risks		22

Schwab ^® S&P 500 Index Fund		22

Schwab 1000 Index ^® Fund		24

Schwab Small-Cap Index Fund ^®		25

Schwab Total Stock Market Fund ^®		27

Schwab International Index Fund ^®		30

Portfolio holdings		32

Financial highlights		33

Fund management		38

Investing in the funds		39

Investing through a financial intermediary		39

Investing directly with the funds		39

Share price		42

Additional policies affecting your investment		42

Distributions and taxes		45

Schwab ^® S&P 500 Index Fund

Ticker Symbol: SWPPX

Investment objective

The fund’s goal is to track the total return of the S&P 500 ^® Index.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.06
Distribution (12b-1) fees		None
Other expenses		0.04

Total annual fund operating expenses		0.10
Less expense reduction		(0.01)

Total annual fund operating expenses after expense reduction ¹		0.09


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.09% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$9	$29	$51	$115

Portfolio turnover

Schwab ^® S&P 500 Index Fund 1

Principal investment strategies

To pursue its goal, the fund generally invests in stocks that are included in the S&P 500 ^® Index ¹ . It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher.

The S&P 500 Index includes the stocks of 500 leading U.S. publicly traded 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 the index in proportion to its total market value.

The fund may invest in derivatives, principally futures contracts, and lend its securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. By using futures, the fund potentially can offset a portion of the gap attributable to its cash holdings. In addition, any income realized through securities lending may help reduce the portion of the gap attributable to expenses.

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund primarily follows the large-cap portion of the U.S. stock market, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

A significant percentage of the index may be composed of securities in a single industry or sector of the economy. If the fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

Large-Cap Risk. Although the S&P 500 ^® Index encompasses stocks from many different sectors of the economy, its performance primarily reflects that of large-cap stocks, which tend to go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — the fund’s large-cap holdings could reduce performance.

Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse

¹ Index ownership — “Standard & Poor’s ^® ”, “S&P ^® ”, “S&P 500 ^® ”, “Standard & Poor’s 500” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Schwab S&P 500 Index Fund. The Schwab S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in the fund.

2 Schwab ^® S&P 500 Index Fund

economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 9, 2009, the Investor Share class, Select Share class, and e.Shares class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 15.81% Q2 2009
Worst quarter: (21.80%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		14.97%		2.31%		1.35%
After taxes on distributions		14.63%		2.01%		0.96%
After taxes on distributions and sale of shares		10.12%		1.95%		0.99%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		1.41%

Schwab ^® S&P 500 Index Fund 3

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2005.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2008.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

4 Schwab ^® S&P 500 Index Fund

Schwab 1000 Index ^® Fund

Ticker Symbol: SNXFX

Investment objective

The fund’s goal is to match the total return of the Schwab 1000 Index ^® .

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.23
Distribution (12b-1) fees		None
Other expenses		0.12

Total annual fund operating expenses		0.35
Less expense reduction		(0.06)

Total annual fund operating expenses after expense reduction ¹		0.29


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.29% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$30	$93	$163	$368

Portfolio turnover

Principal investment strategies

To pursue its goal, the fund generally invests in stocks that are included in the Schwab 1000 Index ^® . It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher.

Schwab 1000 Index ^® Fund 5

number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell securities that are represented in the index in anticipation of their removal from the index, or buy securities that are not yet represented in the index in anticipation of their addition to the index.

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

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

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund primarily follows the large- and mid-cap portion of the U.S. stock market, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

Large- and Mid-Cap Risk. Many of the risks of this fund are associated with its investment in the large- and mid-cap segments of the U.S. stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — bonds, for instance — the fund’s large- and mid-cap holdings could reduce performance.

6 Schwab 1000 Index ^® Fund

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of two indices. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Investor Shares. Accordingly, the past performance information of the fund’s former Investor Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 16.09% Q2 2009
Worst quarter: (22.34%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		15.96%		2.50%		1.70%
After taxes on distributions		15.46%		2.20%		1.36%
After taxes on distributions and sale of shares		10.98%		2.11%		1.33%
Comparative Indices (reflects no deduction for expenses or taxes)
Schwab 1000 Index		16.51%		2.78%		2.01%
S&P 500 ^® Index		15.06%		2.29%		1.41%

Schwab 1000 Index ^® Fund 7

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2005.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2008.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

8 Schwab 1000 Index ^® Fund

Schwab Small-Cap Index Fund ^®

Ticker Symbol: SWSSX

Investment objective

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

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.15
Distribution (12b-1) fees		None
Other expenses		0.05

Total annual fund operating expenses		0.20
Less expense reduction		(0.01)

Total annual fund operating expenses after expense reduction ¹		0.19


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.19% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$19	$61	$107	$243

Portfolio turnover

Principal investment strategies

To pursue its goal, the fund generally invests in stocks that are included in the Schwab Small-Cap Index. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher.

Schwab Small Cap Index Fund ^® 9

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

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund primarily follows the small-cap portion of the U.S. stock market, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

10 Schwab Small Cap Index Fund ^®

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of two indices. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On August 21, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 25.57% Q2 2009
Worst quarter: (26.86%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		27.35%		5.68%		5.95%
After taxes on distributions		27.07%		4.34%		5.06%
After taxes on distributions and sale of shares		18.03%		4.51%		4.89%
Comparative Indices (reflects no deduction for expenses or taxes)
Schwab Small-Cap Index		27.61%		5.84%		6.02%
Russell 2000 Index		26.85%		4.47%		6.33%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2005.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2008.

Schwab Small Cap Index Fund ^® 11

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

12 Schwab Small Cap Index Fund ^®

Schwab Total Stock Market Index Fund ^®

Ticker Symbol: SWTSX

Investment objective

The fund’s goal is to track the total return of the entire U.S. stock market, as measured by The Dow Jones U.S. Total Stock Market Index ^SM .

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.06
Distribution (12b-1) fees		None
Other expenses		0.05

Total annual fund operating expenses		0.11
Less expense reduction		(0.02)

Total annual fund operating expenses after expense reduction ¹		0.09


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.09% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$9	$29	$51	$115

Portfolio turnover

Schwab Total Stock Market Index Fund ^® 13

Principal investment strategies

To pursue its goal, the fund generally invests in stocks that are included in The Dow Jones U.S. Total Stock Market Index ^SM1 . It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher.

The Dow Jones U.S. Total Stock Market Index ^SM includes all publicly traded stocks of companies headquartered in the United States for which pricing information is readily available — currently more than 3,894 stocks. The index is a float-adjusted market capitalization weighted index that reflects the shares of securities actually available to investors in the marketplace.

Because it may not be possible or practical to purchase all of the stocks included in the index, the investment adviser seeks to track the total return of the index by using statistical sampling techniques. These techniques involve investing in a limited number of index securities which, when taken together, are expected to perform similarly to the index as a whole. These techniques are based on a variety of factors, including capitalization, tax considerations, performance attributes, dividend yield, price/earnings ratio, risk factors, industry factors and other characteristics. The fund generally expects that its portfolio will include the largest 2,000 to 2,800 U.S. stocks (measured by the float-adjusted market capitalization), and that its industry weightings, dividend yield and price/earnings ratio will be similar to those of the index.

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

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund follows the U.S. stock market, as measured by the index. It follows this market during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

¹ Index ownership — The Dow Jones U.S. Total Stock Market Index ^sm measures the performance of all U.S. headquartered equity securities with readily available data. “Dow Jones” and “The Dow Jones U.S. Total Stock Market Index ^sm ” are service marks of Dow Jones Trademark Holdings, LLC, (“Dow Jones”), have been licensed to CME Group Index Services LLC (“CME”), and sublicensed for use for certain purposes by Charles Schwab Investment Management, Inc. The Schwab Total Stock Market Index Fund ^® , based on The Dow Jones U.S. Total Stock Market Index ^sm , is not sponsored, endorsed, sold or promoted by Dow Jones or CME and neither makes any representation regarding the advisability of investing in such product.

14 Schwab Total Stock Market Index Fund ^®

Sampling Index Tracking Risk. The fund does not fully replicate its benchmark index and may hold securities not included in the index. As a result, the fund is subject to the risk that the investment adviser’s investment strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. Because the fund utilizes a sampling approach, it may not track the return of the index as well as it would if the fund purchased all of the securities in the benchmark index.

Large- and Mid-Cap Risk. Many of the risks of this fund are associated with its investment in the large- and mid-cap segments of the U.S. stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — bonds, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The

Schwab Total Stock Market Index Fund ^® 15

performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 16.24% Q2 2009
Worst quarter: (22.54%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		17.23%		3.04%		2.55%
After taxes on distributions		16.89%		2.77%		2.19%
After taxes on distributions and sale of shares		11.56%		2.57%		2.03%
Comparative Index (reflects no deduction for expenses or taxes)
Dow Jones U.S. Total Stock Market Index ^sm		17.49%		3.00%		2.55%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the fund. He has managed the fund since June 1999.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

16 Schwab Total Stock Market Index Fund ^®

Payments to financial intermediaries

Schwab Total Stock Market Index Fund ^® 17

Schwab International Index Fund ^®

Ticker Symbol: SWISX

Investment objective

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

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.15
Distribution (12b-1) fees		None
Other expenses ¹		0.06

Total annual fund operating expenses		0.21
Less expense reduction		(0.02)

Total annual fund operating expenses after expense reduction ²		0.19


¹	Restated to reflect current expenses.


²	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.19% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$19	$61	$107	$243

Portfolio turnover

Principal investment strategies

To pursue its goal, the fund generally invests in stocks that are included in the Schwab International Index. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher.

18 Schwab International Index Fund ^®

The fund generally gives the same weight to a given stock as the index does. However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell securities that are represented in the index in anticipation of their removal from the index, or buy securities that are not yet represented in the index in anticipation of their addition to the index. The fund does not hedge its exposure to foreign currencies. However, the fund may use forward contracts to lock in exchange rates for the portfolio securities purchased or sold, but awaiting settlement. These transactions establish a rate of exchange that can be expected to be received upon settlement of the securities.

Schwab International Index includes stocks of 350 of the largest publicly traded companies from selected countries outside the United States. The selected countries, within the following regions, all have developed securities markets and include Europe, Australasia and the Far East. Within these countries, Schwab identifies 350 of the largest companies according to their free float-adjusted market capitalizations in U.S. dollars. The index does not maintain any particular country weightings, although any given country cannot represent more than 35% of the index.

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. Your investment follows the performance of a mix of international large-cap stocks, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

Large-Cap Risk. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when these stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — the fund’s large-cap holdings could reduce performance.

Schwab International Index Fund ^® 19

performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of two indices. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On August 21, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 24.57% Q2 2009
Worst quarter: (21.13%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		6.61%		2.55%		3.04%
After taxes on distributions		6.13%		2.16%		2.53%
After taxes on distributions and sale of shares		4.83%		2.24%		2.46%
Comparative Indices (reflects no deduction for expenses or taxes)
Schwab International Index		6.41%		2.74%		3.38%
MSCI-EAFE (Net) Index*		7.75%		2.46%		3.50%


*	Morgan Stanley Capital International Europe, Australia, Far East Index. Reflects dividends reinvested monthly, net of the withholding taxes and net of tax credit for foreigners not benefitting from any double taxation treaty.

20 Schwab International Index Fund ^®

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the fund. He has managed the fund since February 2001.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has managed the fund since February 2011.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab International Index Fund ^® 21

Fund details

Investment objectives, strategies and risks

Investment objective

The fund’s goal is to track the total return of the S&P 500 ^® Index ¹ .

Index

The S&P 500 Index includes the stocks of 500 leading U.S. publicly traded 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 the index in proportion to its total market value.

Investment strategy

To pursue its goal, the fund generally invests in stocks that are included in the index. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher. The fund will notify its shareholders at least 60 days before changing this policy.

Like many index funds, the fund also may invest in derivatives, principally futures contracts, and lend its securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. By using futures, the fund potentially can offset a portion of the gap attributable to its cash holdings. In addition, any income realized through securities lending may help reduce the portion of the gap attributable to expenses.

Although the 500 companies in the index constitute only about 12% of all the publicly traded companies in the United States, they represent approximately 77% of the total value of the U.S. stock market. (All figures are as of 12/31/10.)

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 fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

22 Fund details

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in certain securities in its benchmark index, match the securities’ weighting to the benchmark, or the fund may invest in securities not in the index, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. The fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

Derivatives Risk. The fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are futures and options on futures. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Fund details 23

Schwab 1000 Index ^® Fund

Investment objective

The fund’s goal is to match the total return of the Schwab 1000 Index ^® .

Index

Investment strategy

To pursue its goal, the fund generally invests in stocks that are included in the index. It is the fund’s policy that under normal circumstances it will invest at least 80% of its net assets in these stocks; typically, the actual percentage is considerably higher. The fund will notify its shareholders at least 60 days before changing this policy.

Although there are currently more than 6,000 total stocks in the United States, the companies represented by the Schwab 1000 Index make up some 91% of the total value of all U.S. stocks. (Figures are as of 12/31/10.)

These large- and mid-cap stocks cover many industries and represent many sizes. Because large- and mid-cap stocks can perform differently from each other at times, a fund that invests in both categories of stocks may have somewhat different performance than a fund that invests only in large-cap stocks.

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

24 Fund details

Large- and Mid-Cap Risk. Many of the risks of this fund are associated with its investment in the large- and mid-cap segments of the U.S. stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — bonds, for instance — the fund’s large- and mid-cap holdings could reduce performance.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Schwab Small Cap Index Fund ^®

Investment objective

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

Fund details 25

Index

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

Investment strategy

In measuring the performance of the second-largest 1,000 companies in the U.S. stock market, the index may be said to focus on the “biggest of the small” among America’s publicly traded stocks.

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

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. The prices of securities issued by such companies may suffer a decline in response. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

26 Fund details

operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Schwab Total Stock Market Index Fund ^®

Investment objective

The fund’s goal is to track the total return of the entire U.S. stock market, as measured by The Dow Jones U.S. Total Stock Market Index ^sm

1 .

Fund details 27

Index

The fund’s benchmark index includes all publicly traded stocks of companies headquartered in the United States for which pricing information is readily available — currently more than 6,000 stocks. The index is a float-adjusted market capitalization weighted index that reflects the shares of securities actually available to investors in the marketplace.

Investment strategy

The U.S. stock market is commonly divided into three segments, based on market capitalization. Mid- and small-cap stocks are the most numerous, but make up only about one-third of the total value of the market. In contrast, large-cap stocks are relatively few in number but make up approximately two-thirds of the market’s total value. In fact, the largest 1,000 of the market’s listed stocks represent about 91% of its total value. (All figures on this page are as of 12/31/10).

In terms of performance, these segments can behave somewhat differently from each other, over the short-term as well as the long-term. For that reason, the performance of the overall stock market can be seen as a blend of the performance of all three segments.

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund follows the U.S. stock market, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or

28 Fund details

to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in all of the securities in its benchmark index or may invest in securities not in the index, because the manager may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. The fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

Large- and Mid-Cap Risk. Many of the risks of this fund are associated with its investment in the large- and mid-cap segments of the U.S. stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — bonds or small-cap stocks, for instance— the fund’s large- and mid-cap holdings could reduce performance.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Fund details 29

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Schwab International Index Fund ^®

Investment objective

Index

The fund seeks to achieve its investment objective by tracking the total return of the Schwab International Index. The index includes stocks of 350 of the largest publicly traded companies from selected countries outside the United States. The selected countries all have developed securities markets and include most Western European countries, as well as Australia, Singapore, Canada, Hong Kong and Japan — as of December 31, 2010, 22 countries in all. Within these countries, Schwab identifies 350 of the largest companies according to their free float-adjusted market capitalizations (total market value of all shares available for purchase by international investors) in U.S. dollars. The index does not maintain any particular country weightings, although any given country cannot represent more than 35% of the index.

Investment strategy

However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell securities that are represented in the index in anticipation of their removal from the index, or buy securities that are not yet represented in the index in anticipation of their addition to the index. The fund does not hedge its exposure to foreign currencies. However, the fund may use forward contracts to lock in exchange rates for the portfolio securities purchased or sold, but awaiting settlement. These transactions establish a rate of exchange that can be expected to be received upon settlement of the securities.

Over the past decades, foreign stock markets have grown rapidly. The market value of the fund captures 20% of the world’s total market capitalization. (All figures are as of 12/31/10.)

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

The fund may concentrate its investments in an industry or group of industries to the extent that its index is also so concentrated.

30 Fund details

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund primarily follows the performance of a mix of international large-cap stocks, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the fund’s performance is normally below that of the index.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in certain securities in its benchmark index, match the securities’ weighting to the benchmark, or the fund may invest in securities not in the index, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. In certain circumstances, the fund may value securities based on fair value developed using methods approved by the fund’s board of trustees. To the extent the fund calculates its net asset value (NAV) based on fair value prices, the fund’s performance may diverge from its index. In addition, the fund may not invest in issuers located in certain countries due to these considerations. The fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

Currency Risk. As result of the fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the fund would be adversely affected.

Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Fund details 31

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

A description of the funds’ policies and procedures with respect to the disclosure of a fund’s portfolio securities is available in the Statement of Additional Information.

32 Fund details

This section provides further details about each fund’s financial history for the past five years. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The funds’ independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in a fund’s annual report (see back cover).

Schwab ^® S&P 500 Index Fund

On September 9, 2009, the Investor Share class, Select Share class, and e.Shares class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the financial highlights information of the fund’s former Select Shares is shown below.


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		16.28			15.28			24.28			21.56			18.88

Income (loss) from investment operations:
Net investment income (loss)		0.35			0.20			0.44			0.41			0.37
Net realized and unrealized gains (losses)		2.31			1.22			(9.02	)		2.68			2.65

Total from investment operations		2.66			1.42			(8.58	)		3.09			3.02
Less distributions:
Distributions from net investment income		(0.24	)		(0.42	)		(0.42	)		(0.37	)		(0.34	)

Net asset value at end of period		18.70			16.28			15.28			24.28			21.56

Total return (%)		16.50			9.81			(35.92	)		14.50			16.18
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.09			0.13	²		0.19			0.19			0.19
Gross operating expenses		0.10			0.16			0.21			0.20			0.21
Net investment income (loss)		1.97			2.09			2.06			1.78			1.74
Portfolio turnover rate		2			3	³		3			2			3
Net assets, end of period ($ x 1,000,000)		10,007			8,718			2,598			4,345			4,038


¹		Effective September 9, 2009, the Investor Share class, the e.Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for the period ended 10/31/09 is a blended rate.


³		Portfolio turnover excludes the impact of investment activity resulting from a merger with another fund.

Financial highlights 33

Schwab 1000 Index ^® Fund

On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Investor Shares. Accordingly, the past performance information of the fund’s former Investor Shares is shown below.


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		31.00			28.69			45.81			40.40			35.31

Income (loss) from investment operations:
Net investment income (loss)		0.57	²		0.54	²		0.66	²		0.60	²		0.50	²
Net realized and unrealized gains (losses)		4.80			2.41			(17.13	)		5.33			5.05

Total from investment operations		5.37			2.95			(16.47	)		5.93			5.55
Less distributions:
Distributions from net investment income		(0.58	)		(0.64	)		(0.62	)		(0.52	)		(0.46	)
Distributions from net realized gains		—			—			(0.03	)		—			—

Total distributions		(0.58	)		(0.64	)		(0.65	)		(0.52	)		(0.46	)

Net asset value at end of period		35.79			31.00			28.69			45.81			40.40

Total return (%)		17.51			10.72			(36.43	)		14.81			15.84
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.29			0.38	³		0.49			0.48			0.49
Gross operating expenses		0.35			0.44			0.49			0.48			0.49
Net investment income (loss)		1.71			1.96			1.68			1.39			1.34
Portfolio turnover rate		5			4			4			6			5
Net assets, end of period ($ x 1,000,000)		4,575			4,279			2,260			3,974			3,918


¹		Effective September 18, 2009, the Select Shares class and the Investor Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Investor Shares.


²		Calculated based on the average shares outstanding during the period.


³		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for the period ended 10/31/09 is a blended rate.

34 Financial highlights

Schwab Small-Cap Index Fund ^®

On August 21, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		15.14			13.85			25.35			25.97			22.36

Income (loss) from investment operations:
Net investment income (loss)		0.22	²		0.18	²		0.33	²		0.35	²		0.27	²
Net realized and unrealized gains (losses)		3.97			1.40			(7.89	)		2.36			3.67

Total from investment operations		4.19			1.58			(7.56	)		2.71			3.94
Less distributions:
Distributions from net investment income		(0.15	)		(0.29	)		(0.32	)		(0.28	)		(0.18	)
Distributions from net realized gains		—			—			(3.62	)		(3.05	)		(0.15	)

Total distributions		(0.15	)		(0.29	)		(3.94	)		(3.33	)		(0.33	)

Net asset value at end of period		19.18			15.14			13.85			25.35			25.97

Total return (%)		27.85			11.98			(34.48	)		11.35			17.78
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.19			0.28	³		0.42			0.42			0.42
Gross operating expenses		0.20			0.33			0.42			0.42			0.42
Net investment income (loss)		1.23			1.41			1.78			1.43			1.10
Portfolio turnover rate		33			26			64			31			29
Net assets, end of period ($ x 1,000,000)		1,406			1,142			628			969			889


¹		Effective August 21, 2009, the Investor Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Calculated based on the average shares outstanding during the period.


³		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for the period ended 10/31/09 is a blended rate.

Financial highlights 35

Schwab Total Stock Market Index Fund ^®

On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance information of the fund’s former Select Shares is shown below.


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		18.50			17.08			27.04			23.90			20.83

Income (loss) from investment operations:
Net investment income (loss)		0.37			0.24			0.40			0.37			0.31
Net realized and unrealized gains (losses)		3.02			1.55			(9.93	)		3.09			3.04

Total from investment operations		3.39			1.79			(9.53	)		3.46			3.35
Less distributions:
Distributions from net investment income		(0.32	)		(0.37	)		(0.37	)		(0.32	)		(0.28	)
Distributions from net realized gains		—			—			(0.06	)		—			—

Total distributions		(0.32	)		(0.37	)		(0.43	)		(0.32	)		(0.28	)

Net asset value at end of period		21.57			18.50			17.08			27.04			23.90

Total return (%)		18.53			10.92			(35.76	)		14.62			16.23
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.09			0.21	²		0.38			0.37			0.38
Gross operating expenses		0.11			0.28			0.38			0.37			0.38
Net investment income (loss)		1.85			2.02			1.71			1.49			1.41
Portfolio turnover rate		3			5			1			0	³		3
Net assets, end of period ($ x 1,000,000)		1,470			1,205			585			906			762


¹		Effective September 18, 2009, the Investor Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for the period ended October 31, 2009 is a blended rate.


³		Less than 1%.

36 Financial highlights

Schwab International Index Fund ^®


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09 ¹			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		16.26			13.95			25.95			21.14			17.09

Income (loss) from investment operations:
Net investment income (loss)		0.48			0.37			0.68			0.54			0.50
Net realized and unrealized gains (losses)		1.01			2.58			(12.13	)		4.93			3.93

Total from investment operations		1.49			2.95			(11.45	)		5.47			4.43
Less distributions:
Distributions from net investment income		(0.44	)		(0.64	)		(0.55	)		(0.66	)		(0.38	)

Net asset value at end of period		17.31			16.26			13.95			25.95			21.14

Total return (%)		9.31			22.55			(45.02	)		26.50			26.35
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.19			0.32	²		0.50			0.50			0.50
Gross operating expenses		0.22			0.41			0.54			0.54			0.55
Net investment income (loss)		2.88			2.92			3.15			2.34			2.60
Portfolio turnover rate		13			21			10			5			11
Net assets, end of period ($ x 1,000,000)		1,471			1,369			711			1,264			954


¹		Effective August 21, 2009, the Investor Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Select Shares.


²		Effective May 5, 2009, the net operating expense limitation was lowered. The ratio presented for the period ended 10/31/09 is a blended rate.

Financial highlights 37

The investment adviser for the funds is Charles Schwab Investment Management, Inc., 211 Main Street, San Francisco, CA 94105. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 82 mutual funds and approximately $187 billion in assets.

As the investment adviser, the firm oversees the asset management and administration of the funds. As compensation for these services, the firm receives a management fee from each fund. For the 12 months ended 10/31/10, these fees were 0.06% for the Schwab S&P 500 Index Fund, 0.18% for the Schwab 1000 Index ^® Fund, 0.15% for the Schwab Small-Cap Index Fund ^® , 0.05% for the Schwab Total Stock Market Index Fund ^® , and 0.13% for the Schwab International Index Fund ^® . These figures, which are expressed as a percentage of each fund’s average daily net assets, represent the actual amounts paid, including the effects of reductions.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the Schwab Total Stock Market Index Fund ^® and co-management of each of the remaining funds. Prior to joining the firm in November 1998, he worked for 20 years in equity management.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds, except the Schwab Total Stock Market Index Fund. He joined the firm in 1998, became Manager, Portfolio Operations in 2000, Manager, Portfolio Operations and Analytics in 2005 and was named to his current position in 2007.

38 Fund management

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with a fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the fund on purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the fund. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The fund is not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of a fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with the fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent. The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the funds” section of the prospectus. If you do not exercise one of these options within ninety days, the fund reserves the right to redeem your shares.

Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Investing in the funds 39

(including but not limited to defined benefit plans, defined contribution plans, 401(k) plans), foundations and endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of a Schwab Funds as a result of a reorganization of a fund. The funds reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for a fund’s shares. Eligible Investors must open an account with the fund through the fund’s transfer agent prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Initial and additional direct purchases by mail

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

40 Investing in the funds

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of the fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The fund and its service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

Additional direct redemption information

Direct exchange privileges

Upon request, and subject to certain limitations, shares of the funds may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. In order to exchange your shares to another fund, you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging or converting. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by the fund containing the information indicated below.

The funds reserve the right to suspend or terminate the privilege of exchanging shares of the funds by mail or by telephone at any time.

Direct exchanges by telephone

If you authorized the telephone redemption option in the account application, you may exchange fund shares by telephone by calling the fund’s transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account registration; (b) the class of shares to be exchanged (if applicable); (c) the name of the fund from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct redemptions by telephone” for more information regarding transacting with the funds’ transfer agent via telephone.

Direct exchanges by mail

Investing in the funds 41

exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

In valuing its securities, a fund uses market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, a fund may value securities based on fair values developed using methods approved by the fund’s Board of Trustees.

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


Minimum initial investment

$100

The minimum may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. The minimum may also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.

Choose an option for fund distributions. If you are an Eligible Investor placing direct orders with a fund, you will have one of the three options described below for fund distributions. If you don’t indicate a choice, you will receive the first option. If you are placing orders through an intermediary, you will select from the options for fund distributions provided by your intermediary, which may be different than those provided by the funds to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature

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

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

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

Each fund reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive a fund’s investment minimums.

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

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

Payments by the investment adviser or its affiliates

42 Investing in the funds

Shareholder servicing plan

Pursuant to the Plan, each fund’s shares are subject to an annual shareholder servicing fee up to the amount set forth in the table below. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab (or, in the case of payments made to Schwab, pursuant to Schwab’s written agreement with the funds). Payments under the Plan are made as described above regardless of Schwab’s or the service provider’s actual cost of providing the services. If the cost of providing the services under the Plan is less than the payments received, the unexpended portion of the fees may be retained as profit by Schwab or the service provider.


Fund		Shareholder Servicing Fee

Schwab S&P 500 Index Fund		0.02%

Schwab 1000 Index Fund		0.10%

Schwab Small-Cap Index Fund		0.02%

Schwab Total Stock Market Index Fund		0.02%

Schwab International Index Fund		0.02%

Policy regarding short-term or excessive trading

The funds are intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the funds’ performance by disrupting the efficient management of the funds, increasing fund transaction costs and taxes, causing the funds to maintain higher cash balances, and diluting the value of the funds’ shares.

In order to discourage market timing, the funds’ Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by fund shareholders. Each fund seeks to deter market timing through several methods. These methods may include: fair value pricing, imposition of redemption fees and trade activity monitoring. Fair value pricing and redemption fees are discussed more thoroughly in the subsequent pages of this prospectus and are considered to be key elements of the funds’ policy regarding short term or excessive trading. Trade activity monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to the funds.

Investing in the funds 43

If trades are effected through a financial intermediary, each fund or its service providers will work with the intermediary to monitor possible market timing activity. The funds reserve the right to contact the intermediary to provide certain shareholder transaction information and may require the intermediary to restrict the shareholder from future purchases or exchanges in the funds. Transactions by fund shareholders investing through intermediaries may also be subject to the restrictions of the intermediary’s own frequent trading policies, which may differ from those of the funds. Each fund may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the fund through such intermediary. Each fund will defer to an intermediary’s policies only after the fund determines that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The funds reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

Redemption fee

Customer identification and verification and anti-money laundering program

Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will allow the fund or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.

44 Investing in the funds

this information. In certain instances, the fund or your financial intermediary is required to collect documents, which will be used solely to establish and verify your identity.

Any investment in a fund typically involves several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is different, you should consult your tax advisor about the tax implications of your investment in the fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.

Shareholders in a fund which invests in non-U.S. securities may have additional tax considerations as a result of foreign tax payments made by the fund. Typically, these payments will reduce the fund’s dividends but will still be included in your taxable income. You may be able to claim a tax credit or deduction for your portion of foreign taxed paid by the fund, however.

Investing in the funds 45

46 Investing in the funds

Notes

To learn more

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

The SAI, the funds’ annual and semi-annual reports and other related materials are available from the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the funds, including the funds’ SAI, at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.

SEC File Numbers



Schwab S&P 500 Index Fund		811-7704

Schwab 1000 Index ^® Fund		811-6200

Schwab Small-Cap Index Fund ^®		811-7704

Schwab Total Stock Market Index Fund ^®		811-7704

Schwab International Index Fund ^®		811-7704

REG13644FLT-19

Schwab Equity Index Funds

Prospectus
February 28, 2011

Schwab Fundamental Index* Funds

Prospectus

February 28, 2011

• Schwab Fundamental US Large Company* Index Fund SFLNX

• Schwab Fundamental US Small-Mid Company* Index Fund SFSNX

• Schwab Fundamental International* Large Company Index Fund SFNNX

• Schwab Fundamental International* Small-Mid Company Index Fund SFILX

• Schwab Fundamental Emerging Markets* Index Fund SFENX


*	SCHWAB is a registered trademark of Charles Schwab & Co., Inc. FUNDAMENTAL INDEX, FUNDAMENTAL US LARGE COMPANY, FUNDAMENTAL US SMALL-MID COMPANY, FUNDAMENTAL EMERGING MARKETS and FUNDAMENTAL INTERNATIONAL are trademarks of Research Affiliates LLC.

Schwab Fundamental Index Funds



Fund summaries

Schwab Fundamental US Large Company Index Fund		1

Schwab Fundamental US Small-Mid Company Index Fund		5

Schwab Fundamental International Large Company Index Fund		9

Schwab Fundamental International Small-Mid Company Index Fund		14

Schwab Fundamental Emerging Markets Index Fund		19

Fund details

Investment objectives, strategies, risks		24

Schwab Fundamental US Large Company Index Fund		24

Schwab Fundamental US Small-Mid Company Index Fund		26

Schwab Fundamental International Large Company Index Fund		29

Schwab Fundamental International Small-Mid Company Index Fund		32

Schwab Fundamental Emerging Markets Index Fund		35

About the funds		38

Portfolio holdings		38

Financial highlights		39

Fund management		44

Investing in the funds		45

Investing through a financial intermediary		45

Investing directly with the funds		45

Share price		48

Additional policies affecting your investment		48

Distributions and taxes		51

Schwab Fundamental US Large Company Index Fund

Ticker Symbol: SFLNX

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI US 1000 Index. ¹

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.27
Distribution (12b-1) fees		None
Other expenses		0.18

Total annual fund operating expenses		0.45
Less expense reduction		(0.10)

Total annual fund operating expenses after expense reduction ¹		0.35


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.35% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$36	$113	$197	$443

Portfolio turnover

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental US Large Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund.

Schwab Fundamental US Large Company Index Fund 1

Principal investment strategies

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI US 1000 Index (the “Index”). The Index is composed of the largest 1000 listed companies incorporated in the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

It is the fund’s policy that, under normal circumstances, it will invest at least 90% of its net assets in stocks included in the Index. The fund will generally give the same weight to a given stock as the Index does. However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the Index’s weighting of the stock. The fund may sell securities that are represented in the Index in anticipation of their removal from the Index, or buy securities that are not yet represented in the Index in anticipation of their addition to the Index.

The fund uses an “indexing” investment approach, which attempts to replicate, before expenses, the performance of the Index by purchasing a basket of securities that compose the Index. Using this approach, the investment adviser seeks a correlation, over time, of 0.95 or better between the fund’s performance and the performance of the Index; a figure of 1.00 would represent perfect correlation. However, it is possible that the investment adviser may determine to utilize instead a “sampling” methodology in seeking to achieve the fund’s objective. Sampling means that the investment adviser uses quantitative analysis to select stocks from the Index universe to obtain a representative sample of stocks that resembles the Index in terms of key risk factors, performance attributes and other characteristics. In certain circumstances it may not be possible or practicable for the fund to invest in all of the stocks comprising the Index or in proportion to their weightings in the Index.

There can be no guarantee that the performance of the fund will achieve a high degree of correlation with that of the Index. A number of factors may affect the fund’s ability to achieve a high correlation with its Index, including the degree to which the fund utilizes a sampling technique. The correlation between the performance of the fund and its Index may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and spin-offs), timing variances, and differences between the fund’s portfolio and the Index resulting from legal restrictions (such as diversification requirements) that apply to the fund but not to the Index.

Like many index funds, the fund also may invest in derivatives, principally futures contracts, and lend its securities to minimize the gap in performance that exists between any index fund and its corresponding index. This gap occurs mainly because, unlike the Index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. By using futures, the fund can gain market exposure and potentially offset a 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.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

A significant percentage of the Index may be composed of securities in a single industry or sector of the economy. If the fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

2 Schwab Fundamental US Large Company Index Fund

Large-Cap Risk. Although the Index encompasses stocks from many different sectors of the economy, its performance primarily reflects that of large company stocks, which tend to go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or mid or small company stocks, for instance — the fund’s large-cap holdings could reduce performance.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class.

Derivatives Risk. The fund’s use of derivative instruments involves risks different from or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on the fund.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Sampling Index Tracking Risk. If the fund uses a sampling method, the fund will not fully replicate the benchmark Index and may hold securities not included in the Index. As a result, the fund is subject to the risk that the investment adviser’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. If the fund utilizes a sampling approach, it may not track the return of the Index as well as it would if the fund purchased all of the securities in its benchmark Index.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 27, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 27.43% Q2 2009
Worst quarter: (24.05%) Q4 2008

Schwab Fundamental US Large Company Index Fund 3

Average annual total returns (%) as of 12/31/10


			Since
			Inception
	1 year		(4/2/07)
Before taxes		19.71%		0.92%
After taxes on distributions		19.41%		0.63%
After taxes on distributions and sale of shares		13.15%		0.72%
Comparative Index (reflects no deduction for expenses or taxes)
FTSE RAFI US 1000 Index		19.98%		0.94%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since April 2007.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since February 2009.

Purchase and sale of fund shares

The fund is open for business each day that the New York Stock Exchange is open. When you place intermediary orders to purchase, exchange or redeem fund shares through Charles Schwab & Co., Inc. (Schwab) or another financial intermediary, you must follow Schwab’s or the other financial intermediary’s transaction procedures.


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

4 Schwab Fundamental US Large Company Index Fund

Schwab Fundamental US Small-Mid Company Index Fund

Ticker Symbol: SFSNX

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI US Mid Small 1500 Index. ¹

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.30
Distribution (12b-1) fees		None
Other expenses		0.23

Total annual fund operating expenses		0.53
Less expense reduction		(0.18)

Total annual fund operating expenses after expense reduction ¹		0.35


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.35% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$36	$113	$197	$443

Portfolio turnover

¹ Index ownership — “FTSE ^® ” is trademark of The Financial Times Limited and the London Exchange Plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental US Small-Mid Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund.

Schwab Fundamental US Small-Mid Company Index Fund 5

Principal investment strategies

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI US Mid Small 1500 Index (the “Index”). The Index is composed of approximately 1500 listed small and medium sized companies incorporated in the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

6 Schwab Fundamental US Small-Mid Company Index Fund

established companies. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. During a period when mid- and small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s small- and mid-cap holdings could reduce performance.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows how the fund’s investment results have varied from year to year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 27, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 35.25% Q2 2009
Worst quarter: (29.42%) Q4 2008

Schwab Fundamental US Small-Mid Company Index Fund 7

Average annual total returns (%) as of 12/31/10


			Since
			Inception
	1 year		(4/2/07)
Before taxes		29.88%		4.11%
After taxes on distributions		27.96%		3.58%
After taxes on distributions and sale of shares		19.82%		3.28%
Comparative Index (reflects no deduction for expenses or taxes)
FTSE RAFI US Mid Small 1500 Index		29.36%		4.93%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since February 2009.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

8 Schwab Fundamental US Small-Mid Company Index Fund

Schwab Fundamental International Large Company
Index Fund

Ticker Symbol: SFNNX

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Developed ex US 1000 Index. ¹

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.30
Distribution (12b-1) fees		None
Other expenses		0.31

Total annual fund operating expenses		0.61
Less expense reduction		(0.26)

Total annual fund operating expenses after expense reduction ¹		0.35


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.35% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$36	$113	$197	$443

Portfolio turnover

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental International Large Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund.

Schwab Fundamental International Large Company Index Fund 9

Principal investment strategies

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Developed ex US 1000 Index (the “Index”). The Index is composed of the largest 1000 listed companies incorporated outside the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

The fund uses an “indexing” investment approach, which attempts to replicate, before expenses, the performance of the Index by purchasing a basket of securities that compose the Index. Using this approach, the investment adviser seeks a correlation, over time, of 0.95 or better between the fund’s performance and the performance of the Index; a figure of 1.00 would represent perfect correlation. However, it is possible that the investment adviser may determine to utilize instead a “sampling” methodology in seeking to achieve the fund’s objective. Sampling means that the investment adviser uses quantitative analysis to select stocks from the Index universe to obtain a representative sample of stocks that resembles the Index in terms of key risk factors, performance attributes and other characteristics. In certain circumstances it may not be possible of practicable for the fund to invest in all of the stocks comprising the Index or in proportion to their weightings in the Index.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

10 Schwab Fundamental International Large Company Index Fund

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Exchange Traded Funds (ETFs) Risk. The fund may purchase shares of ETFs to gain exposure to a particular portion of the market while awaiting an opportunity to purchase securities directly. When the fund invests in an ETF, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Schwab Fundamental International Large Company Index Fund 11

Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The performance and financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 34.65% Q2 2009
Worst quarter: (21.04%) Q4 2008

Average annual total returns (%) as of 12/31/10


			Since
			Inception
	1 year		(4/2/07)
Before taxes		7.05%		(2.64%	)
After taxes on distributions		6.61%		(2.95%	)
After taxes on distributions and sale of shares		5.09%		(2.16%	)
Comparative Index (reflects no deduction for expenses or taxes)
FTSE RAFI Developed ex US 1000 Index		7.53%		(1.39%	)

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since February 2009.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

12 Schwab Fundamental International Large Company Index Fund

Tax information

Payments to financial intermediaries

Schwab Fundamental International Large Company Index Fund 13

Schwab Fundamental International Small-Mid Company
Index Fund

Ticker Symbol: SFILX

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Developed ex US Mid Small 1500 Index. ¹

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.40
Distribution (12b-1) fees		None
Other expenses		0.67

Total annual fund operating expenses		1.07
Less expense reduction		(0.52)

Total annual fund operating expenses after expense reduction ¹		0.55


¹	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.55% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$56	$176	$307	$689

Portfolio turnover

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental International Small-Mid Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund.

14 Schwab Fundamental International Small-Mid Company Index Fund

Principal investment strategies

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Developed ex US Mid Small 1500 Index (the “Index”). The Index is composed of approximately 1500 small- and medium-sized non U.S.-listed companies ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

The fund may use an “indexing” investment approach, which attempts to replicate, before expenses, the performance of the Index by purchasing a basket of securities that compose the Index. Using this approach, the investment adviser seeks a correlation, over time, of 0.95 or better between the fund’s performance and the performance of the Index; a figure of 1.00 would represent perfect correlation. However, it is possible that the investment adviser may determine to utilize instead a “sampling” methodology in seeking to achieve the fund’s objective. Sampling means that the investment adviser uses quantitative analysis to select stocks from the Index universe to obtain a representative sample of stocks that resembles the Index in terms of key risk factors, performance attributes and other characteristics.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Schwab Fundamental International Small-Mid Company Index Fund 15

Small- and Mid-Cap Risk. Historically, mid- and small-cap stocks have been riskier than large-cap stocks. Mid-and small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. During a period when mid- and small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s small- and mid-cap holdings could reduce performance.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

16 Schwab Fundamental International Small-Mid Company Index Fund

performance. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 37.55% Q2 2009
Worst quarter: (12.65%) Q1 2009

Average annual total returns (%) as of 12/31/10


			Since
			inception
	1 year		(1/31/08)
Before taxes		18.62%		4.77%
After taxes on distributions		17.98%		4.09%
After taxes on distributions and sale of shares		12.51%		3.81%
Comparative Index (reflects no deduction for expenses or taxes)
FTSE RAFI Developed ex US Mid Small 1500 Index		19.50%		7.45%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since February 2009.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

Schwab Fundamental International Small-Mid Company Index Fund 17

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

18 Schwab Fundamental International Small-Mid Company Index Fund

Schwab Fundamental Emerging Markets Index Fund

Ticker Symbol: SFENX

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Emerging Index. ¹

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee ¹ (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.50
Distribution (12b-1) fees		None
Other expenses ¹		0.47
Acquired fund fees and expenses (AFFE) ²		0.01

Total annual fund operating expenses ²		0.98
Less expense reduction		(0.37)

Total annual fund operating expenses (including AFFE) after expense reduction ^2,3		0.61


¹	Restated to reflect current expenses.
²	The total annual fund operating expenses in the fee table may differ from the expense ratios in the fund’s “Financial highlights” because the financial highlights include only the fund’s direct operating expenses and do not include “Acquired fund fees and expenses (AFFE)”, which reflect the estimated amount of the fees and expenses incurred indirectly by the fund through its investments in other investment companies during its prior fiscal year.
³	The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.60% for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. This agreement is limited to the fund’s direct operating expenses and does not apply to AFFE.

Example

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$62	$195	$340	$762

Portfolio turnover

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental Emerging Markets Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund.

Schwab Fundamental Emerging Markets Index Fund 19

in a taxable account. These costs, which are not reflected in the annual fund operating expenses or in the example, affect the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 91% of the average value of its portfolio.

Principal investment strategies

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Emerging Index (the “Index”). The Index is composed of the 350 companies from emerging markets with the largest fundamental values ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighing each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

It is the fund’s policy that, under normal circumstances, it will invest at least 80% of its net assets in stocks included in the Index, including depositary receipts representing securities of the Index; which may be in the form of American Depositary receipts (“ADRs”), Global Depositary receipts (“GDRs”) and European Depositary receipts (“EDRs”). The fund will generally give the same weight to a given stock as the Index does. However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the Index’s weighting of the stock. The fund may sell securities that are represented in the Index in anticipation of their removal from the Index, or buy securities that are not yet represented in the Index in anticipation of their addition to the Index. The fund does not hedge its exposure to foreign currencies. However, the fund may use forward contracts to lock in exchange rates for the portfolio securities purchased or sold, but awaiting settlement. These transactions establish a rate of exchange that can be expected to be received upon settlement of the securities.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

20 Schwab Fundamental Emerging Markets Index Fund

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Large-Cap Risk. Certain of the risks of this fund are associated with its investments in the large-cap segments of a stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds for instance — the fund’s large-cap holdings could reduce performance.

Small- and Mid-Cap Risk. Historically, mid- and small-cap stocks have been riskier than large-cap stocks. Mid- and small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. During a period when mid- and small-cap stocks fall behind other types of investments — bonds for instance — the fund’s small- and mid-cap holdings could reduce performance.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Schwab Fundamental Emerging Markets Index Fund 21

investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. If the fund utilizes a sampling approach, it may not track the return of the Index as well as it would if the fund purchased all of the securities in its benchmark Index.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

The bar chart below shows the fund’s investment results for the past calendar year, and the following table shows how the fund’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the fund by comparing the fund’s performance with a broad measure of market performance. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus. On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance information of the fund’s former Institutional Shares is shown below.

Annual total returns (%) as of 12/31

Best quarter: 34.84% Q2 2009
Worst quarter: (9.10%) Q2 2010

Average annual total returns (%) as of 12/31/10


			Since
			Inception
	1 year		(1/31/08)
Before taxes		16.10%		5.37%
After taxes on distributions		15.02%		4.85%
After taxes on distributions and sale of shares		11.24%		4.44%
Comparative Index (reflects no deduction for expenses or taxes)
FTSE RAFI Emerging Index		18.26%		7.81%

22 Schwab Fundamental Emerging Markets Index Fund

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio managers

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He has been a portfolio manager of the fund since February 2009.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Fundamental Emerging Markets Index Fund 23

Fund details

Schwab Fundamental US Large Company Index Fund

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI US 1000 Index ¹ . The fund’s investment objective is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

Investment strategy

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI US 1000 Index (the “Index”). The Index is composed of the largest 1000 listed companies incorporated in the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

It is the fund’s policy that, under normal circumstances, it will invest at least 90% of its net assets in stocks included in the Index. The fund will notify its shareholders at least 60 days before changing this policy. The fund will generally give the same weight to a given stock as the Index does. However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the Index’s weighting of the stock. The fund may sell securities that are represented in the Index in anticipation of their removal from the Index, or buy securities that are not yet represented in the Index in anticipation of their addition to the Index.

24 Fund details

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund invests in companies within the U.S. stock market, as measured by the Index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market, even though these stocks may go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or mid- or small company stocks, for instance — the fund’s performance also will lag those investments. In addition, because of the fund’s expenses, the fund’s performance may be below that of the Index.

At times the segment of the equity markets represented by the Index may underperform other market segments. A significant percentage of the Index may be composed of securities in a single industry or sector of the economy. If the fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. Because of the way the Index is composed, the Index may perform differently or worse than an equity index that is based solely on market capitalization.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark Index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in all of the securities in its benchmark Index or may invest in securities not in the Index, because the investment adviser may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in the benchmark Index, or match the securities’ weightings to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. The fund may attempt to offset the effects of not being invested in certain Index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark Index, because the benchmark Index does not have to manage cash flows and does not incur any costs.

Derivatives Risk. The fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index, instrument or certain securities and a predetermined amount.

Fund details 25

not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or Index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions, provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Schwab Fundamental US Small-Mid Company Index Fund

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI US Mid Small 1500 Index. ¹ The fund’s investment objective is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

Investment strategy

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI US Mid Small 1500 Index (the “Index”). The Index is composed of approximately 1500 listed small and medium sized companies incorporated in the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental US Small-Mid Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund. More complete information may be found in the Statement of Additional Information (see back cover).

26 Fund details

correlation, over time, of 0.95 or better between the fund’s performance and the performance of the Index; a figure of 1.00 would represent perfect correlation. However, it is possible that the investment adviser may determine to utilize instead a “sampling” methodology in seeking to achieve the fund’s objective. Sampling means that the investment adviser uses quantitative analysis to select stocks from the Index universe to obtain a representative sample of stocks that resembles the Index in terms of key risk factors, performance attributes and other characteristics. In certain circumstances it may not be possible or practicable for the fund to invest in all of the stocks comprising the Index or in proportion to their weightings in the Index.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund invests in smaller companies within the U.S. stock market, as measured by the Index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market, even though these stocks may go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s performance also will lag those investments. In addition, because of the fund’s expenses, the fund’s performance may be below that of the Index.

Fund details 27

the investment adviser may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in the benchmark Index, or match the securities’ weightings to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. The fund may attempt to offset the effects of not being invested in certain Index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark Index, because the benchmark Index does not have to manage cash flows and does not incur any costs.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

28 Fund details

Schwab Fundamental International Large Company Index Fund

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Developed ex US 1000 Index. ¹ The fund’s investment objective is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

Investment strategy

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Developed ex US 1000 Index (the “Index”). The Index is composed of the largest 1000 listed companies incorporated outside the United States, ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental International Large Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund. More complete information may be found in the Statement of Additional Information (see back cover).

Fund details 29

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund invests in larger companies outside the U.S. stock market, as measured by the Index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market, even though these stocks may go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or small company stocks, for instance — the fund’s performance also will lag those investments. In addition, because of the fund’s expenses, the fund’s performance may be below that of the Index.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark Index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark Index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in all of the securities in its benchmark Index or may invest in securities not in the Index, because the investment adviser may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in the benchmark Index, or match the securities’ weightings to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. In addition, the fund may not invest in issuers located in certain countries due to these considerations. The fund may attempt to offset the effects of not being invested in certain Index securities by making substitute investments, but these efforts may not be successful. In certain circumstances, the fund may value securities based on fair values developed using methods approved by the fund’s board of trustees. To the extent the fund calculates its net asset value (NAV) based on fair value prices, the fund’s performance may diverge from its Index. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark Index, because the benchmark Index does not have to manage cash flows and does not incur any costs.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

30 Fund details

companies. The fund may also experience more rapid or extreme changes in value as compared to a fund that invests solely in securities of U.S. companies because the securities’ markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

Fund details 31

Schwab Fundamental International Small-Mid Company Index Fund

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Developed ex US Mid Small 1500 Index. ¹ The fund’s investment objective is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

Investment strategy

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Developed ex US Mid Small 1500 Index (the “Index”). The Index is composed of approximately 1500 small- and medium-sized non U.S.-listed companies ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighting each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental International Small-Mid Company Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund. More complete information may be found in the Statement of Additional Information (see back cover).

32 Fund details

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

Investment Style Risk. The fund invests in companies outside the U.S. stock market, as measured by the Index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market, even though these stocks may go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investments — bonds or U.S. securities, for instance — the fund’s performance also will lag those investments. In addition, because of the fund’s expenses, the fund’s performance may be below that of the Index.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark Index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark Index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in all of the securities in its benchmark Index or may invest in securities not in the Index, because the investment adviser may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in the benchmark Index, or match the securities’ weightings to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. In certain circumstances, the fund may value securities based on fair values developed using methods approved by the fund’s board of trustees. To the extent the fund calculates its net asset value (NAV) based on fair value prices, the fund’s performance may diverge from its Index. In addition, the fund may not invest in issuers located in certain countries due to these considerations. The fund may attempt to offset the effects of not being invested in certain Index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark Index, because the benchmark Index does not have to manage cash flows and does not incur any costs.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Fund details 33

remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value as compared to a fund that invests solely in securities of U.S. companies because the securities’ markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

34 Fund details

Schwab Fundamental Emerging Markets Index Fund

Investment objective

The fund seeks investment results that correspond generally (before fees and expenses) to the price and yield of the FTSE RAFI Emerging Index. ¹ The fund’s investment objective is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

Investment strategy

To pursue its goal, the fund primarily invests in stocks that are included in the FTSE RAFI Emerging Index (the “Index”). The Index is composed of the 350 companies from emerging markets with the largest fundamental values ranked by four fundamental financial measures of size: sales, cash flows, book value and dividends. An overall weight is calculated for each company by equally weighing each fundamental measure. Each of the companies in the Index is assigned a weight equal to its fundamental weight. The Index is rebalanced and reconstituted annually. The Index is compiled and calculated by FTSE International Limited (“FTSE”) in conjunction with Research Affiliates LLC (“RA”), and the method of calculating the components of the Index is subject to change.

It is the fund’s policy that, under normal circumstances, it will invest at least 80% of its net assets in stocks included in the Index, including depositary receipts, representing securities of the Index, which may be in the form of American Depositary receipts (“ADRs”), Global Depositary receipts (“GDRs”) and European Depositary receipts (“EDRs”). The fund will notify its shareholders at least 60 days before changing this policy. The fund will generally give the same weight to a given stock as the Index does. However, when the investment adviser believes it is in the best interest of the fund, such as to avoid purchasing odd-lots ( i.e. , purchasing less than the usual number of shares traded for a security), for tax considerations, or to address liquidity considerations with respect to a stock, the investment adviser may cause the fund’s weighting of a stock to be more or less than the Index’s weighting of the stock. The fund may sell securities that are represented in the Index in anticipation of their removal from the Index, or buy securities that are not yet represented in the Index in anticipation of their addition to the Index. The fund does not hedge its exposure to foreign currencies. However, the fund may use forward contracts to lock is exchange rates for the portfolio securities purchased or sold, but awaiting settlement. These transactions establish a rate of exchange that can be expected to be received upon settlement of the securities.

¹ Index ownership — “FTSE ^® ” is a trademark of The Financial Times Limited and the London Stock Exchange plc and is used by the fund under license. “Research Affiliates”, “Fundamental Index” and “RAFI” are trademarks of Research Affiliates LLC (“RA”). Schwab Fundamental Emerging Markets Index Fund is not sponsored, endorsed, sold or promoted by FTSE or RA, and FTSE and RA do not make any representation regarding the advisability of investing in shares of the fund. More complete information may be found in the Statement of Additional Information (see back cover).

Fund details 35

The fund may concentrate its investments in an industry or group of industries to the extent that the Index the fund is designed to track is also so concentrated.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

Small- and Mid-Cap Risk. Historically, mid- and small-cap stocks have been riskier than large-cap stocks. Mid-and small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. During a period when mid- and small-cap stocks fall behind other types of investments — bonds for instance — the fund’s small- and mid-cap holdings could reduce performance.

Tracking Error Risk. As an index fund, the fund seeks to track the performance of its benchmark Index, although it may not be successful in doing so. The divergence between the performance of the fund and its benchmark Index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, the fund may not invest in all of the securities in its benchmark Index or may invest in securities not in the Index, because the investment adviser may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, the fund may not invest in certain securities in the benchmark Index, or match the securities’ weightings to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. In certain circumstances, the fund may value securities based on fair values developed using methods approved by the fund’s board of trustees. To the extent the fund calculates its net asset value (NAV) based on fair value prices, the fund’s performance may diverge from its Index. In addition, the fund may not invest in issuers located in certain countries due to these considerations. The fund may attempt to offset the effects of not being invested in certain Index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of the fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark Index, because the benchmark Index does not have to manage cash flows and does not incur any costs.

Concentration Risk. To the extent that the fund’s or the Index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse

36 Fund details

economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset class.

Foreign Investment Risk. The fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value as compared to a fund that invests solely in securities of U.S. companies because the securities’ markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. These risks may be heightened in connection with investments in emerging markets.

The fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.

Fund details 37

Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When the fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.

About the funds

The funds in this prospectus are index funds and share the same basic investment strategy: each of the funds tracks a FTSE RAFI* Index which is based on the “Fundamental Index” methodology. In contrast to most equity indices, which generally are based on market capitalization, the FTSE RAFI Index Series selects and weights stocks based on four fundamental financial measures: sales, cash flows, book value and dividends. The universe of stocks is ranked by equally-weighting each of these fundamental measures. The stocks are then selected based on their rankings and assigned weights equal to their fundamental weights.

This strategy distinguishes a Fundamental Index fund from an “actively managed” mutual fund. Instead of choosing investments for the fund based on portfolio management’s judgment, an index is used to determine which securities the fund should own.

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

The investment objective of each fund is not fundamental and therefore may be changed by the fund’s board of trustees without shareholder approval.

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

A description of each fund’s policies and procedures with respect to the disclosure of its portfolio securities is available in the fund’s SAI.

* RAFI is a registered trademark of Research Affiliates LLC.

38 Fund details

Schwab Fundamental U.S. Large Company Index Fund

On October 27, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the financial highlights of the fund’s former Institutional Shares are shown below.


	11/1/09–			11/1/08–			11/1/07–			4/2/07 ² –
	10/31/10			10/31/09 ¹			10/31/08			10/31/07
Per-Share Data ($)

Net asset value at beginning of period		7.63			6.47			10.75			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.14			0.10			0.20			0.05
Net realized and unrealized gains (losses)		1.37			1.26			(4.38	)		0.70

Total from investment operations		1.51			1.36			(4.18	)		0.75
Less distributions:
Distributions from net investment income		(0.09	)		(0.20	)		(0.09	)		—
Distributions from net realized gains		—			—			(0.01	)		—

Total distributions		(0.09	)		(0.20	)		(0.10	)		—

Net asset value at end of period		9.05			7.63			6.47			10.75

Total return (%)		19.95			22.04			(39.22	)		7.50	³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.35			0.35			0.35			0.35	⁴
Gross operating expenses		0.45			0.53			0.52			0.60	⁴
Net investment income (loss)		1.77			1.88			2.19			1.66	⁴
Portfolio turnover rate		27			28			26			2	³
Net assets, end of period ($ x 1,000,000)		1,019			663			277			345


¹		Effective October 27, 2009, the Investor Share class, the Select Share class and the Institutional Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Not Annualized.


⁴		Annualized.

Financial highlights 39

Schwab Fundamental U.S. Small-Mid Company Index Fund


	11/1/09–			11/1/08–			11/1/07–			4/2/07 ² –
	10/31/10			10/31/09 ¹			10/31/08			10/31/07
Per-Share Data ($)

Net asset value at beginning of period		7.88			6.30			10.36			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.09			0.06			0.05			0.05
Net realized and unrealized gains (losses)		2.19			1.59			(4.04	)		0.31

Total from investment operations		2.28			1.65			(3.99	)		0.36
Less distributions:
Distributions from net investment income		(0.06	)		(0.07	)		(0.06	)		—
Distributions from net realized gains		—			—			(0.01	)		—

Total distributions		(0.06	)		(0.07	)		(0.07	)		—

Net asset value at end of period		10.10			7.88			6.30			10.36

Total return (%)		29.07			26.68			(38.73	)		3.60	³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.35			0.35			0.35			0.35	⁴
Gross operating expenses		0.53			0.60			0.71			0.89	⁴
Net investment income (loss)		1.03			1.00			1.44			1.36	⁴
Portfolio turnover rate		41			29			37			4	³
Net assets, end of period ($ x 1,000,000)		412			298			131			33


¹		Effective October 27, 2009, the Investor Share class, the Select Share class and the Institutional Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Not annualized.


⁴		Annualized.

40 Financial highlights

Schwab Fundamental International Large Company Index Fund

On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offered multiple classes of shares. The financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the financial highlights of the fund’s former Institutional Shares are shown below.


	11/1/09–			11/1/08–			11/1/07–			4/2/07 ² –
	10/31/10			10/31/09 ¹			10/31/08			10/31/07
Per-Share Data ($)

Net asset value at beginning of period		7.69			6.01			11.40			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.21			0.16			0.28			0.08
Net realized and unrealized gains (losses)		0.41			1.81			(5.56	)		1.32

Total from investment operations		0.62			1.97			(5.28	)		1.40
Less distributions:
Distributions from net investment income		(0.22	)		(0.29	)		(0.09	)		—
Distributions from net realized gains		—			—			(0.02	)		—

Total distributions		(0.22	)		(0.29	)		(0.11	)		—

Net asset value at end of period		8.09			7.69			6.01			11.40

Total return (%)		8.27			34.89			(46.70	)		14.00	³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.35			0.35			0.35			0.36	^4,5
Gross operating expenses		0.61			0.76			0.74			1.28	⁴
Net investment income (loss)		2.70			2.80			3.41			2.30	⁴
Portfolio turnover rate		65			82			74			50	³
Net assets, end of period ($ x 1,000,000)		301			253			145			166


¹		Effective October 19, 2009, the Investor Share class, the Select Share class and the Institutional Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Not annualized.


⁴		Annualized.


⁵		The ratio of net operating expenses would have been 0.35%, if interest expense had not been incurred.

Financial highlights 41

Schwab International Small-Mid Company Index Fund


	11/1/09–			11/1/08–			1/31/08 ² –
	10/31/10			10/31/09 ¹			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		9.00			6.22			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.16	³		0.12	³		0.27	³
Net realized and unrealized gains (losses)		1.09			2.92			(4.05	)

Total from investment operations		1.25			3.04			(3.78	)
Less distributions:
Distributions from net investment income		(0.29	)		(0.26	)		—

Net asset value at end of period		9.96			9.00			6.22

Total return (%)		14.32			51.19			(37.80	) ⁴
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.55			0.55			0.56	^5,6
Gross operating expenses		1.07			3.82			5.44	⁵
Net investment income (loss)		1.77			1.59			3.55	⁵
Portfolio turnover rate		63			81			132	⁴
Net assets, end of period ($ x 1,000,000)		74			47			3


¹		Effective October 19, 2009, the Investor Share class, the Select Share class and the Institutional Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Calculated based on the average shares outstanding during the period.


⁴		Not annualized.


⁵		Annualized.


⁶		The ratio of net operating expenses would have been 0.55%, if interest expenses had not been incurred.

42 Financial highlights

Schwab Fundamental Emerging Markets Index Fund


	11/1/09–			11/1/08–			1/31/08 ² –
	10/31/10			10/31/09 ¹			10/31/08
Per-Share Data ($)

Net asset value at beginning of period		8.91			5.74			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.17			0.05			0.16
Net realized and unrealized gains (losses)		1.81			3.27			(4.42	)

Total from investment operations		1.98			3.32			(4.26	)
Less distributions:
Distributions from net investment income		(0.08	)		(0.15	)		—

Net asset value at end of period		10.81			8.91			5.74

Total return (%)		22.36			59.55			(42.60	) ³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.61	⁴		0.61	⁴		0.61	^4,5
Gross operating expenses		0.98			1.70			4.06	⁵
Net investment income (loss)		2.31			1.56			2.31	⁵
Portfolio turnover rate		91			103			159	³
Net assets, end of period ($ x 1,000,000)		294			119			6


¹		Effective October 19, 2009, the Investor Share class, the Select Share and the Institutional Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Institutional Shares.


²		Commencement of operations.


³		Not annualized.


⁴		The ratio of net operating expenses would have been 0.60%, if interest expenses had not been incurred.


⁵		Annualized.

Financial highlights 43

As the investment adviser, the firm oversees the asset management and administration of the funds. As compensation for these services, the firm receives a management fee from each fund.

For the 12 months ended 10/31/10, these fees were 0.18% for the Schwab Fundamental US Large Company Index Fund, 0.14% for the Schwab Fundamental US Small-Mid Company Index Fund, 0.07% for the Schwab Fundamental International Large Company Index Fund, 0.00% for the Schwab Fundamental International Small-Mid Company Index Fund and 0.16% for the Schwab Fundamental Emerging Markets Index Fund. These figures, which are expressed as a percentage of each fund’s average daily net assets, represent the actual amounts paid, including the effects of reductions.

Larry Mano, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds. Prior to joining the firm in November 1998, he worked for 20 years in equity management.

Ron Toll, a portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds. He joined the firm in March 1998, became Manager, Portfolio Operations in 2000, Manager, Portfolio Operations and Analytics in 2005 and was named to his current position in 2007.

Additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the funds is available in the SAI.

44 Fund management

Placing orders through your intermediary

Only certain intermediaries are authorized to accept orders on behalf of a fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with a fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent, Boston Financial Data Services (transfer agent). The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the funds” section of the prospectus. If you do not exercise one of these options within ninety days, the funds reserve the right to redeem your shares.

Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following fund policies:


•	The funds may take up to seven days to pay sale proceeds.

•	The funds reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Investing in the funds 45

shareholders who receive shares of Schwab Funds as a result of a reorganization of a fund. The funds reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

Initial and additional direct purchases by wire

Initial and additional direct purchases by mail

Subject to acceptance by a fund, payment for the purchase of shares received by mail will be credited to a shareholder’s account at the net asset value per share of the fund next determined after receipt, even though the check may not yet have been converted into federal funds. For purposes of calculating the purchase price of fund shares, a purchase order is received by a fund on the day that it is in good order unless it is rejected by the fund’s transfer agent. For a cash purchase order of fund shares to be in good order on a particular day, a check must be received on or before the close of a fund (generally 4:00 p.m. Eastern time or the close of the NYSE, whichever is earlier) on that day. If the payment is received by a fund after the deadline, the purchase price of fund shares will be based upon the next determination of net asset value of fund shares. No currency, third party checks, foreign checks, starter checks, credit card checks, traveler’s checks or money orders will be accepted by the funds.

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The funds may take up to seven days to pay sale proceeds.

•	The funds reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

46 Investing in the funds

Direct redemptions by telephone

The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

Additional direct redemption information

Direct exchange privileges

Upon request, and subject to certain limitations, shares of a fund may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. In order to exchange your shares to another fund, you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by a fund containing the information indicated below.

The funds reserve the right to suspend or terminate the privilege of exchanging shares of the funds by mail or by telephone at any time.

Direct exchanges by telephone

Direct exchanges by mail

Investing in the funds 47

exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

Shareholders of Schwab Fundamental International Large Company Index Fund, Schwab Fundamental International Small-Mid Company Index Fund and Schwab Fundamental Emerging Markets Index Fund should be aware that because foreign markets are often open on weekends and other days when the funds are closed, the value of a fund’s portfolio may change on days when it is not possible to buy or sell shares of the fund.


Minimum initial investment

$100

The minimum may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. The minimum may also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.


Option		Feature

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

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

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

Each fund reserves certain rights, including the following:


•	To automatically redeem your shares upon 60 days’ written notice if the value of your investment in the fund falls below the stated minimum balance requirement for the fund.

•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive the fund’s investment minimums.

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

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

48 Investing in the funds

Payments by the investment adviser or its affiliates

The investment adviser or its affiliates may make cash payments out of their own resources, or provide products and services at a discount, to certain brokerage firms, banks, retirement plan service providers and other financial intermediaries that perform shareholder, recordkeeping, sub-accounting and other administrative services in connection with investments in fund shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the funds may pay to those intermediaries. The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing, promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, distribution-related services provided by such intermediaries are paid by the investment adviser or its affiliates, not by the funds or their shareholders.

Shareholder servicing plan

Pursuant to the Plan, each fund’s shares are subject to an annual shareholder servicing fee of up to 0.10%. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab (or, in the case of payments made to Schwab, pursuant to Schwab’s written agreement with the funds). Payments under the Plan are made as described above regardless of Schwab’s or the service provider’s actual cost of providing the services. If the cost of providing the services under the Plan is less than the payments received, the unexpended portion of the fees may be retained as profit by Schwab or the service provider.

Policy regarding short-term or excessive trading

The funds or their service providers maintain risk-based surveillance procedures designed to detect market timing in fund shares in amounts that might be detrimental to the funds. Under these procedures, the funds have requested that service providers to the funds monitor transactional activity in amounts and frequency determined by each fund to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. If a fund, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into the fund by that shareholder. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to comply with applicable laws.

Investing in the funds 49

such intermediary. The funds will defer to an intermediary’s policies only after the funds determine that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the funds and in a pattern of activity that potentially could be detrimental to the funds. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The funds reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

Redemption fee

Customer identification and verification and anti-money laundering program

50 Investing in the funds

financial intermediary are unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.

Shareholders in the Schwab Fundamental International Large Company Index Fund, Schwab Fundamental International Small-Mid Company Index Fund and Schwab Fundamental Emerging Markets Index Fund may have additional tax considerations as a result of foreign tax payments made by the funds. Typically, these payments will reduce the fund’s dividends but will still be included in your taxable income. You may be able to claim a tax credit or deduction for your portion of foreign taxes paid by the fund, however.

Investing in the funds 51

have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against U.S. federal income tax liability.

52 Investing in the funds

Notes

To learn more

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

SEC File Number



Schwab Fundamental Index Funds		811-7704

REG37409FLT-06

Schwab Fundamental Index Funds

Prospectus
February 28, 2011


Prospectus February 28, 2011

COMMAND PERFORMANCE ^TM

Laudus MarketMasters Funds ^®

Laudus Small-Cap MarketMasters Fund ^tm

Investor Shares
SWOSX

Select Shares
SWMSX

Laudus International MarketMasters Fund ^tm

Investor Shares
SWOIX

Select Shares
SWMIX

Laudus MarketMasters Funds ^®



Fund summaries

Laudus Small-Cap MarketMasters Fund ^tm		1

Laudus International MarketMasters Fund ^tm		5

Fund details

Investment objectives, strategies, risks		9

Laudus Small-Cap MarketMasters Fund ^tm		9

Laudus International MarketMasters Fund ^tm		11

Portfolio holdings		15

Financial highlights		16

Fund management		18

Investing in the funds		22

Investing through a financial intermediary		22

Investing directly with the funds		22

Share price		25

Additional policies affecting your investment		25

Distributions and taxes		28

Laudus Small-Cap MarketMasters Fund

Ticker Symbol: Investor Shares: SWOSX Institutional Shares: SWMSX

Investment objective

The fund seeks long-term capital appreciation.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


		Investor Shares		Select Shares ^®


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)	2.00	2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees	1.17	1.17
Distribution (12b-1) fees	None	None
Other expenses ¹	0.33	0.28

Total annual fund operating expenses	1.50	1.45
Less expense reduction	(0.04)	(0.14)

Total annual fund operating expenses after expense reduction ²	1.46	1.31


¹	Restated to reflect current fees and expenses.

The investment adviser and its affiliates have agreed to limit the fund’s total annual fund operating expenses (excluding interest, taxes, and certain non-routine expenses) of the Investor Shares and Select Shares to 1.46% and 1.31%, respectively, for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the fund’s operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.

Expenses on a $10,000 investment


	1 year	3 years	5 years	10 years
Investor Shares	$149	$462	$797	$1,746
Select Shares ^®	$133	$415	$718	$1,579

Portfolio Turnover

Laudus Small-Cap MarketMasters Fund ^tm 1

Principal investment strategies

Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in equity securities of companies with small market capitalizations or investments with similar economic characteristics, such as futures. Companies with small market capitalizations generally are those with market capitalizations of $2.5 billion or less but may include companies with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $3 billion.

Charles Schwab Investment Management, Inc. (CSIM) allocates portions of the fund’s assets to several investment managers, who then manage their respective portions under the general supervision of CSIM. In choosing the investment managers and their allocations, CSIM considers a number of factors, including market trends, its own outlook for a given market capitalization or investment style category, and the investment managers’ performance in various market conditions. In addition to monitoring and coordinating the investment managers, CSIM also manages the cash portion of the fund.

In determining which securities to buy and sell, the investment managers use active management methods — that is, methods based on their judgments about such factors as a company’s financial condition and prospects, its stock price, and the economy in general. Although each investment manager uses its own securities selection process and invests within a specific market capitalization range and investment style, all investment managers look for securities that have the potential for capital appreciation.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Investment Style Risk. The fund’s investment managers attempt to reduce the impact of the performance of any given investment style by investing in both value and growth style stocks. But whenever value stocks fall out of favor with investors, they may underperform growth stocks, and vice versa.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Mid- and Small-Cap Risk. Historically, mid- and small-cap stocks have been riskier than large-cap stocks, and may move sharply, especially during market upturns and downturns. Mid- and small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small- or mid-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s mid- and small-cap holdings could reduce performance.

Management Risk. As with all actively managed funds, the strategies of the fund’s managers — its investment adviser and investment managers — may not achieve their desired results.

Multi-Manager Risk. Although CSIM monitors and seeks to coordinate the overall management of the fund, each investment manager makes investment decisions independently, and it is possible that the investment styles of the investment managers may not complement one another. As a result, the fund’s exposure to a given stock, industry or investment style could unintentionally be smaller or larger than if the fund had a single manager.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

2 Laudus Small-Cap MarketMasters Fund ^tm

Performance

Because the fund originally used a multi-fund strategy, its performance prior to June 3, 2002, does not reflect the fund’s current strategy and may have been different if it did.

Annual total returns (%) as of 12/31

Investor Shares

Best quarter: 27.68% Q2 2003
Worst quarter: (24.50%) Q4 2008

Average annual total returns (%) as of 12/31/10


							Since
	1 year		5 years		10 years		Inception
Investor Shares
Before taxes		23.38%		3.74%		5.27%		5.47%	¹
After taxes on distributions		23.38%		3.08%		4.79%		4.54%	¹
After taxes on distributions and sale of shares		15.20%		3.08%		4.52%		4.34%	¹
Select Shares ^®
Before taxes		23.54%		3.90%				5.26%	²
Comparative Index (reflects no deduction for expenses or taxes)
Russell 2000 Index		26.85%		4.47%		6.33%		5.78%	³


¹	Inception: 9/16/97
²	Inception: 6/9/04
³	From: 9/16/97

The after-tax figures reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. The after-tax figures are shown for one share class only, and would be different for the other share class. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your fund shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Fund management

The fund’s investment adviser is Charles Schwab Investment Management, Inc.

Subject to oversight by the fund’s Board of Trustees, the investment adviser acts as the “manager of managers” for the fund and has overall responsibility for the management of the fund. The investment adviser may recommend the appointment of additional or replacement investment managers to the fund’s Board of Trustees. The fund and the investment adviser have received exemptive relief from the SEC to permit the investment adviser and the fund to hire or terminate investment managers without shareholder approval, subject to certain conditions. One of the conditions requires approval by the Board of Trustees before any such hiring is implemented. In addition, the exemptive order currently prohibits the investment adviser from entering into sub-advisory agreements with affiliates of the investment adviser without shareholder approval. Within 90 days of the hiring of any new investment manager, the investment adviser will furnish shareholders of the affected fund with the required information about the new investment manager.

Laudus Small-Cap MarketMasters Fund ^tm 3

Portfolios manager

Caroline Lee-Tsao, a managing director and portfolio manager of the investment adviser, manages the fund. She has been a portfolio manager of the fund since November 2005.

Investment managers

The fund has four investment managers: TAMRO Capital Partners, LLC, TCW Investment Management Company, Tocqueville Asset Management LP and Neuberger Berman Management LLC. TAMRO Capital Partners LLC is responsible for managing approximately 33% of the fund’s assets. The table below shows the individuals who serve as portfolio managers for TAMRO Capital Partners LLC.


	Year founded/
	assets under
Investment manager	management	Portfolio	Employment
and address	(as of 12/31/10)	manager(s)	experience
TAMRO Capital Partners LLC 1701 Duke Street Suite 250 Alexandria, VA 22314	Founded: 2000 Successor Founded: 2007 $1.44 billion	Philip D. Tasho, CFA, Principal, Chief Executive Officer and Chief Investment Officer	Began investment career in 1980. Co-founded TAMRO in 2000. From 1995 to 2000, Chairman, Chief Executive Officer and Chief Investment Officer of Riggs Investment Management Co. (RIMCO).
		Timothy A. Holland, CFA Partner, Co-Portfolio Manager	Began investment career in 2000. Joined TAMRO in 2005 as an equity analyst. Promoted to co-portfolio manager in 2010. From 1993 to 2000 worked in financial services public relations.

For information on the fund’s other investment managers, please see the “Fund management” section in the prospectus.

Purchase and sale of fund shares

The fund is open for business each day that the New York Stock Exchange is open. When you place orders to purchase, exchange or redeem fund shares through Charles Schwab & Co., Inc. (Schwab) or another financial intermediary, you must follow Schwab’s or the other financial intermediary’s transaction procedures.


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the Investor Shares of the fund is $100 and $50,000 for Select Shares of the fund. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

4 Laudus Small-Cap MarketMasters Fund ^tm

Laudus International MarketMasters Fund ^tm

Ticker Symbol: Investor Shares: SWOIX Select Shares ^® : SWMIX

Investment objective

The fund seeks long-term capital appreciation.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


		Investor Shares		Select Shares ^®


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)	2.00	2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees	1.27	1.27
Distribution (12b-1) fees	None	None
Other expenses ¹	0.33	0.22
Acquired fund fees and expenses (AFFE) ²	0.01	0.01

Total annual fund operating expenses ²	1.61	1.50
Less expense reduction	—	(0.02)

Total annual fund operating expenses (including AFFE) after expense reduction ^2,3	1.61	1.48


¹	Restated to reflect current fees and expenses.
²	The total annual fund operating expenses in this fee table may differ from the expense ratios in the fund’s “Financial highlights” because the financial highlights include only the fund’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect the estimated amount of the fees and expenses incurred indirectly by the fund through its investments in other investment companies during the prior fiscal year.
³	The investment adviser and its affiliates have agreed to limit the fund’s total annual fund operating expenses (excluding interest, taxes, and certain non-routine expenses) of the Investor Shares and Select Shares to 1.65% and 1.47%, respectively, for so long as the investment adviser serves as the adviser to the fund. This agreement may only be amended or terminated with the approval of the fund’s Board of Trustees. This agreement is limited to the fund’s direct operating expenses and does not apply to AFFE.

Example

Expenses on a $10,000 investment


	1 year	3 years	5 years	10 years
Investor Shares	$164	$508	$876	$1,911
Select Shares ^®	$151	$468	$808	$1,768

Portfolio Turnover

Laudus International MarketMasters Fund ^tm 5

the fund’s performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 83% of the average value of its portfolio.

Principal investment strategies

To pursue its goal, the fund normally invests a substantial amount of its assets in equity securities of companies outside the United States. The fund expects to invest in companies across all market capitalization ranges. The fund typically focuses on developed markets but may invest in companies from emerging markets as well. In determining whether a company is international, the portfolio managers will consider various factors, including where the company is headquartered, where the company’s principal operations are located, where the company’s revenues are derived, where the principal trading market is located and the country in which the company was legally organized. The weight given to each of these factors will vary depending on the circumstances in a given case.

Charles Schwab Investment Management (CSIM) allocates portions of the fund’s assets to several investment managers, who then manage their respective portions under the general supervision of CSIM. In choosing the investment managers and their allocations, CSIM considers a number of factors, including global economic trends, its own outlook for a given market capitalization or investment style category and regions and countries that offer the greatest potential for growth, and the investment managers’ performance in various market conditions. In addition to monitoring and coordinating the investment managers, CSIM also manages the cash portion of the fund.

In determining which securities to buy and sell, the investment managers use active management methods — that is, methods based on their judgments about such factors as a company’s financial condition and prospects, its stock price, regional and country trends, and the economy in general. Although each investment manager uses its own securities selection process and invests within a specific investment style, all investment managers look for securities that have the potential for capital appreciation.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — large-cap and mid-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

Management Risk. As with all actively managed funds, the strategies of the fund’s managers — its investment adviser and investment managers — may not achieve their desired results.

6 Laudus International MarketMasters Fund ^tm

Emerging Market Risk. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions that more developed countries. Such countries often have less uniformity in accounting and reporting requirements, unreliable securities valuation and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the fund’s investments in emerging market countries.

Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.

Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Performance

Because the fund originally used a multi-fund strategy, its performance prior to June 3, 2002, does not reflect the fund’s current strategy and may have been different if it did.

Annual total returns (%) as of 12/31

Investor Shares

Best quarter: 27.81% Q2 2009
Worst quarter: (25.19%) Q4 2008

Average annual total returns (%) as of 12/31/10


							Since
	1 year		5 years		10 years		Inception
Investor Shares
Before taxes		21.54%		6.59%		7.06%		9.63%	¹
After taxes on distributions		21.49%		5.92%		6.46%		8.32%	¹
After taxes on distributions and sale of shares		14.42%		5.71%		6.04%		7.90%	¹
Select Shares ^®
Before taxes		21.75%		6.73%				9.52%	²
Comparative Index (reflects no deduction for expenses or taxes)
MSCI EAFE Index		8.21%		2.94%		3.94%		5.04%	³


¹	Inception: 10/16/96
²	Inception: 4/2/04
³	From: 10/16/96

Laudus International MarketMasters Fund ^tm 7

Fund management

The fund’s investment adviser is Charles Schwab Investment Management, Inc.

Portfolio manager

Caroline Lee-Tsao, a managing director and portfolio manager of the investment adviser, manages the funds. She has been a portfolio manager of the fund since November 2005.

Investment managers

The fund has five investment managers: American Century Global Management Inc., Harris Associates L.P., Mondrian Investment Partners Limited, Wentworth, Hauser and Violich, Inc./Hirayama Investments, LLC and William Blair & Company, LLC. As of December 31, 2011, none of the managers managed more than 30% of the fund’s assets. For information on the fund’s investment managers, please see the “ Fund management” section in the prospectus.

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for Investor Shares of the fund is $100 and $50,000 for Select Shares of the fund. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

8 Laudus International MarketMasters Fund ^tm

Fund details

Laudus Small-Cap MarketMasters Fund ^tm

Investment objective

The fund seeks long-term capital appreciation.

Investment strategy

Under normal circumstances, the fund pursues its goal by investing at least 80% of its net assets in equity securities of companies with small market capitalizations or investments with similar economic characteristics, such as futures. The fund will notify its shareholders at least 60 days before changing this policy. Companies with small market capitalizations generally are those with market capitalizations of $2.5 billion or less but may include companies with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $3 billion.

CSIM allocates portions of the fund’s assets to several investment managers, who then manage their respective portions under the general supervision of CSIM. In choosing the investment managers and their allocations, CSIM considers a number of factors, including market trends, its own outlook for a given market capitalization or investment style category, and the investment managers’ performance in various market conditions. In addition to monitoring and coordinating the investment managers, CSIM also manages the cash portion of the fund.

There are thousands of small-cap companies, which historically have made up approximately 10%-20% of the total U.S. market capitalization. These companies are found in every industry, although they tend to be concentrated in high-growth sectors such as technology.

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

The following table identifies the fund’s investment managers, their areas of focus and asset allocation. For more details, see the “Fund management” section of this prospectus.


		Allocation of
Investment manager	Investment style	net assets (%) ¹
TAMRO Capital Partners LLC	Small-cap blend		33.22
TCW Investment Management Company	Small/mid-cap blend		22.18
Tocqueville Asset Management LP	Small-cap blend/value		26.48
Neuberger Berman Management LLC	Small-cap growth		14.63
Cash and other assets	—		3.49


¹	As of December 31, 2010.

TAMRO Capital Partners LLC (“TAMRO”) combines valuation with a unique thematic, bottom-up approach to identify investment opportunities for their core small cap strategy. TAMRO’s investment philosophy is that over time, companies with a sustainable competitive advantage generate both premium returns and command premium multiples. However, company miscues or industry headwinds can cause investors to mis-price these companies’ securities as they focus on near-term difficulties and ignore longer-term potential. TAMRO seeks to capitalize on the investment opportunity created by this mis-pricing. They use a combination of quantitative tools and fundamental research and seek to mitigate risk by identifying entry points where the expected upside return is a least three times as great as the potential downside risk. Investments fall into three categories: Leaders (best of class companies), Laggards (companies undergoing a restructuring) and Innovators (companies with a history of new products or services). While each category has qualities specific to it, all share the key characteristics of sustainable competitive advantage: a differentiated product or service offering; capable and motivated leadership and financial strength. Reasons TAMRO sells a security include a rich valuation relative to fundamentals, loss of confidence in management or more attractive opportunities.

Fund details 9

TCW Investment Management Company (“TCW”) seeks to achieve capital appreciation through investment in inefficiently priced small and medium-sized companies through bottom-up, fundamental research. TCW sells positions when the level of earnings growth is achieved, and the market values of these earnings are at levels commensurate with other companies sharing these growth prospects.

Tocqueville Asset Management LP (“Tocqueville”) is a manager of small-cap domestic equities utilizing a Contrarian-Value approach. They seek unique, financially strong companies that have considerable long-term potential but are experiencing near-term profitability issues which have caused the stock to fall by 50% or more in value, thus limiting downside risk. Intensive fundamental analysis is performed during the first twelve months to develop confidence in understanding the company’s problem plus their plan for recovery. Tocqueville constantly assesses the probability that management will succeed in showing important progress. They build positions over 3-12 months as management executes on their plan to restore profitability but typically sell if no improvement is realized within 4-6 quarters from initial purchase. Positions are retained until investors begin to recognize the improving outlook for fundamentals. Typically, the holding period is three years. Positions will be sold sooner if management fails to show progress with their business plan.

Neuberger Berman Management LLC seeks growth of capital. Its portfolio managers employ a disciplined investment strategy when selecting small-cap growth stocks, which they define as those with a total market capitalization of no more than the largest capitalization of a company in the Russell 2000 Growth Index. Using fundamental research and quantitative analysis, they look for fast-growing companies with above average sales and competitive returns on equity relative to their peers. In doing so, the managers analyze such factors as financial condition, market share and competitive leadership of the company’s products, earnings growth relative to competitors, market valuation in comparison to a stock’s own historical norms and the stocks of other small-cap companies.

The fund may buy and sell portfolio securities actively. In addition, one investment manager may purchase portfolio securities at the same time that another investment manager sells the same securities. As a result, the fund’s portfolio turnover rate and transaction costs will rise, which may lower fund performance and increase the likelihood of capital gain distributions.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Mid- and Small-Cap Risk. Historically, mid- and small-cap stocks have been riskier than large-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Mid- and small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s mid- and small- or mid-cap holdings could reduce performance.

Management Risk. As with all actively managed funds, the strategies of the fund’s managers — its investment adviser and investment managers — may not achieve their desired results. For example, with value stocks, the market might fail to recognize the true worth of an undervalued company, or a manager might misjudge that worth. With growth stocks, whose prices depend largely on expectations of companies’ future growth, a manager’s expectations may prove to be unfounded.

10 Fund details

investment managers may not complement one another. As a result, the fund’s exposure to a given stock, industry or investment style could unintentionally be smaller or larger than if the fund had a single manager.

Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer. An underlying fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.

Laudus International MarketMasters Fund ^tm

Investment objective

The fund seeks long-term capital appreciation.

Investment strategy

CSIM allocates portions of the fund’s assets to several investment managers, who then manage their respective portions under the general supervision of CSIM. In choosing the investment managers and their allocations, CSIM considers a number of factors, including global economic trends, its own outlook for a given market capitalization or investment style category and regions and countries that offer the greatest potential for growth, and the investment managers’ performance in various market conditions. In addition to monitoring and coordinating the investment managers, CSIM also manages the cash portion of the fund.

In determining which securities to buy and sell, the investment managers use active management methods — that is, methods based on their judgments about such factors as a company’s financial condition and prospects, its stock price, regional and country trends, and the economy in general. Although each investment manager uses its own securities selection process and invests within a specific investment style, all investment managers look for securities that have the potential for capital appreciation.

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

Fund details 11

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

The following table identifies the fund’s investment managers, their areas of focus and asset allocation. For more details, see the “Fund management” section of this prospectus.


		Allocation of
Investment manager	Investment style	net assets (%) ¹
American Century Investment Management, Inc.	International small-/mid-cap growth		23.73
Harris Associates L.P.	International large-cap value		17.21
Mondrian Investment Partners Limited	International small-cap value		23.34
Wentworth, Hauser and Violich, Inc./ Hirayama Investments, LLC	International large-cap growth		12.01
William Blair & Company, LLC	International multi-cap growth		20.81
Cash and other assets	—		2.90


¹	As of December 31, 2010

American Century Investment Management, Inc.’s (“American Century”) portfolio managers look for stocks of companies they believe will increase in value over time, using an investment strategy developed by American Century. In implementing this strategy, the portfolio managers use a bottom-up approach to stock selection. This means that they make their investment decisions based primarily on their analysis of individual companies, rather than on broad economic forecasts. Management of the fund is based on the belief that, over the long term, stock price movements follow growth in earnings, revenues and/or cash flow.

Using a variety of analytical research tools, the portfolio managers track financial information for individual companies to identify and evaluate trends in earnings, revenues and other business fundamentals. Under normal market conditions, the fund’s portfolio will primarily consist of securities of companies whose earnings or revenues are not only growing, but growing at an accelerating pace. This includes companies whose growth rates, although still negative, are less negative than prior periods, and companies whose growth rates are expected to accelerate. Other analytical techniques help identify additional signs of business improvement, such as increasing cash flows, or other indications of the relative strength of a company’s business. These techniques help the portfolio managers buy or hold the stocks of companies they believe have favorable growth prospects and sell the stocks of companies whose characteristics no longer meet their criteria.

The portion of the fund managed by American Century will be invested primarily in equity securities of companies that are small- and medium-sized at the time of purchase and are located in foreign developed countries or emerging market countries. The portfolio managers generally consider small-sized companies to include those with a market capitalization within the range of the MSCI AC World ex-US Small-Cap Growth Index and medium-sized companies to include those with a market capitalization within the range of the MSCI AC World ex-US Mid-Cap Growth Index; however the portfolio managers do not eliminate companies from consideration based solely on market capitalization. If the companies in which the fund invests are successful, these companies may grow into medium- and large-sized companies. In addition, if the portfolio managers determine that the availability of small- and medium-sized companies in which to invest is not adequate to meet the fund’s investment needs, the portfolio managers may invest in large-sized companies.

In addition to locating strong companies with earnings, revenue and/or cash flow growth, the portfolio managers believe that it is important to diversify the fund’s holdings across different countries and geographical regions in an effort to manage the risks of an international portfolio. For this reason, the portfolio managers also consider the prospects for relative economic growth among countries or regions, economic and political conditions, expected inflation rates, currency exchange fluctuations and tax considerations when making investments.

The portfolio managers do not attempt to time the market. Instead, under normal market conditions, they intend to keep the fund essentially fully invested in stocks regardless of the movement of stock prices generally.

Harris Associates L.P. (“Harris”) is a value investor and utilizes a fundamental, bottom-up investment approach. They look for above-average businesses trading at below-average prices that are run by managers who act to maximize the value of the business for shareholders. Harris purchases stock that they believe to be out-of-favor for temporary (not secular) reasons, and trade at a significant discount to their estimated intrinsic business value. For each of the stocks on Harris’s internal, approved list, buy and sell targets are established when the stock is first added to this list. These targets, determined by the analyst, are reviewed regularly to ensure they reflect current company fundamentals. Harris sells a stock for four reasons: when a stock achieves 90% of its fair value; when there is a significantly more attractive investment; when they detect a deterioration in company fundamentals; or when they discern that management is no longer a steward of shareholder interests.

12 Fund details

Mondrian Investment Partners Limited (“Mondrian”) In managing its segment of the fund’s assets, Mondrian conducts research on a global basis in an effort to identify securities that have the potential for long term total return. The center of the research effort is a value-oriented dividend discount methodology toward individual securities and market analysis that identifies value across country boundaries. This approach focuses on future anticipated dividends and discounts the value of those dividends back to what they would be worth if they were being paid today. Comparisons of the values of different possible investments are then made. In an international portfolio, currency returns can be an integral component of an investment’s total return. Mondrian uses a purchasing power parity approach to assess the value of individual currencies. Purchasing power parity attempts to identify the amount of goods and services that a dollar will buy in the United States and compares that to the amount of a foreign currency required to buy the same amount of goods and services in another country.

Wentworth, Hauser and Violich, Inc. (“WHV”) and its affiliated sub-adviser Hirayama Investments, LLC believe superior investment performance depends primarily on investing in the most attractive global economic sectors. During the 1990’s, Mr. Richard K. Hirayama (portfolio manager) recognized that the world’s investment landscape had evolved from being influenced by regional or country-specific events to an environment defined primarily by two dominant global forces: 1) globalization of the business world by economic sectors and 2) categorization of stocks by sectors rather than by country of origin. To take advantage of this changed environment, WHV adopted a top-down sector based approach.

Mr. Hirayama looks for those sectors of the global economy best positioned for growth and those securities therein poised to best capture that growth. Particular attention is devoted to identifying supply and demand imbalances that are likely to persist over time.

The WHV International Equity strategy typically concentrates on growth oriented large-cap securities. While the long-term focus is on large capitalization growth oriented stocks, in certain economic environments smaller capitalization securities and/or value oriented securities may be purchased due to their return potential.

WHV utilizes a five-step investment process to arrive at the final portfolio. First, the relative attractiveness of 10 global economic sectors is analyzed. Top-down sector allocation is of primary importance. Sector weightings are based on upside potential and downside risk. Second, the potential of 67 industry groups is examined. Third, the attractiveness of 51 countries is analyzed. Country selection is of secondary importance relative to sector/industry selection and is a residual of the strategy’s top down sector selection process. Fourth, a universe of foreign equity securities is researched. Particular attention is paid to growth oriented securities presenting future earnings growth potential. Lastly, a portfolio is constructed focusing on those economic sectors with potential for superior earnings growth.

WHV will sell a stock when it reaches relative over-valuation; the fundamentals of the sector/industry, region, country, or company indicate signs of deterioration; or concerns develop regarding specific company business risk, accounting or management.

William Blair & Company, LLC (“William Blair”) seeks companies that historically have had superior growth, profitability and quality relative to companies within the same industry worldwide, and that are expected to continue such performance. Companies with above-average returns on equity, strong balance sheets and consistent, above-average earnings growth at reasonable valuation levels will be the primary focus. Stock selection will take into account both local and global comparisons. William Blair will vary the geographic diversification and types of securities based upon their continuous evaluation of economic, market and political trends throughout the world, by considering such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries and other pertinent financial, social, national and political factors. William Blair will seek investment opportunities in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. Companies become candidates for sale if their long-term growth outlook is compromised or if management’s actions alter the outlook or risk profile for the business.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Fund details 13

Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

Emerging Markets Risk. Emerging market countries are countries that the World Bank or the United Nations considers to be emerging or developing. Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and unreliable securities valuation. It is sometimes difficult to obtain and enforce court judgments in such countries and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

Large- and Mid-Cap Risk. Certain of the risks of this fund are associated with its investments in the large- and mid-cap segments of the stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap stocks fall behind other types of investments — small-cap stocks, for instance — the fund’s large- and mid-cap holdings could reduce performance.

Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — the fund’s small-cap holdings could reduce performance.

Multi-Manager Risk. Although CSIM monitors and seeks to coordinate the overall management of the fund, each investment manager makes investment decisions independently, and it is possible that the investment styles of the investment managers may not complement one another. As a result, the fund’s exposure to a given region, country, stock, industry or investment style could unintentionally be smaller or larger than if the fund had a single manager.

14 Fund details

Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer. An underlying fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.

A description of the funds’ policies and procedures with respect to the disclosure of the funds’ portfolio securities is available in the funds’ Statement of Additional Information.

Fund details 15

This section provides further details about the financial history of each share class of each fund for the past five years. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The funds’ independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the funds’ annual report (see back cover).

Laudus Small-Cap MarketMasters Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
Investor Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.40			8.78			13.74			14.20			13.38

Income (loss) from investment operations:
Net investment income (loss)		(0.08	) ¹		(0.05	) ¹		(0.04	) ¹		(0.08	) ¹		(0.13	)
Net realized and unrealized gains (losses)		2.20			0.67			(4.59	)		1.81			2.08

Total from investment operations		2.12			0.62			(4.63	)		1.73			1.95
Less distributions:
Distributions from net investment income		—			(0.00	) ²		—			—			—
Distributions from net realized gains		—			—			(0.33	)		(2.19	)		(1.13	)

Total distributions		—			(0.00	) ²		(0.33	)		(2.19	)		(1.13	)

Net asset value at end of period		11.52			9.40			8.78			13.74			14.20

Total return (%)		22.55			7.10			(34.34	)		13.79			15.33
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.46			1.48	³		1.48			1.51	⁴		1.48	⁴
Gross operating expenses		1.50			1.50			1.48			1.59			1.63
Net investment income (loss)		(0.72	)		(0.64	)		(0.38	)		(0.60	)		(0.82	)
Portfolio turnover rate		78			129			134			83			105
Net assets, end of period ($ x 1,000,000)		68			64			64			99			95


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
Select Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06

Per-Share Data ($)

Net asset value at beginning of period		9.49			8.86			13.85			14.27			13.41

Income (loss) from investment operations:
Net investment income (loss)		(0.06	) ¹		(0.04	) ¹		(0.04	) ¹		(0.04	) ¹		(0.02	)
Net realized and unrealized gains (losses)		2.21			0.68			(4.62	)		1.81			2.01

Total from investment operations		2.15			0.64			(4.66	)		1.77			1.99
Less distributions:
Distributions from net investment income		—			(0.01	)		—			—			—
Distributions from net realized gains		—			—			(0.33	)		(2.19	)		(1.13	)

Total distributions		—			(0.01	)		(0.33	)		(2.19	)		(1.13	)

Net asset value at end of period		11.64			9.49			8.86			13.85			14.27

Total return (%)		22.66			7.29			(34.28	)		14.04			15.61
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.32	⁵		1.33	³		1.37			1.36	⁶		1.16	⁶
Gross operating expenses		1.45			1.45			1.44			1.66			1.55
Net investment income (loss)		(0.58	)		(0.48	)		(0.31	)		(0.29	)		(0.43	)
Portfolio turnover rate		78			129			134			83			105
Net assets, end of period ($ x 1,000,000)		337			292			260			437			7


¹		Calculated based on the average shares outstanding during the period.


²		Per share amount was less than $0.01.


³		Effective February 28, 2009, the operating expense limitation was lowered. The ratio presented for the period ended 10/31/09 is a blended rate.


⁴		The ratio of net operating expenses would have been 1.55% and 1.55% for the periods ended 10/31/06 and 10/31/07, respectively, if custody credits had not been incurred.


⁵		The ratio of net operating expenses would have been 1.31% if certain non-routine expense had not been incurred.


⁶		The ratio of net operating expenses would have been 1.36% and 1.37% for the periods ended 10/31/06 and 10/31/07, respectively, if custody credits had not been incurred.

16 Financial highlights

Laudus International MarketMasters Fund ^tm


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
Investor Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		15.04			11.78			25.96			20.73			16.78

Income (loss) from investment operations:
Net investment income (loss)		0.09			0.14			0.20			0.14			0.13
Net realized and unrealized gains (losses)		3.41			3.63			(12.25	)		6.84			3.98

Total from investment operations		3.50			3.77			(12.05	)		6.98			4.11
Less distributions:
Distributions from net investment income		(0.18	)		(0.51	)		(0.10	)		(0.16	)		(0.16	)
Distributions from net realized gains		—			—			(2.03	)		(1.59	)		—

Total distributions		(0.18	)		(0.51	)		(2.13	)		(1.75	)		(0.16	)

Net asset value at end of period		18.36			15.04			11.78			25.96			20.73

Total return (%)		23.47			33.64			(49.97	)		36.01			24.66
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.60			1.62			1.59			1.56	¹		1.57	¹
Gross operating expenses		1.62			1.63			1.59			1.59			1.64
Net investment income (loss)		0.53			0.95			0.95			0.62			0.52
Portfolio turnover rate		83			96			88			71			90
Net assets, end of period ($ x 1,000,000)		849			931			918			2,297			1,320


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
Select Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		15.05			11.80			26.00			20.77			16.81

Income (loss) from investment operations:
Net investment income (loss)		0.10			0.15			0.23			0.15			0.19
Net realized and unrealized gains (losses)		3.43			3.64			(12.27	)		6.86			3.96

Total from investment operations		3.53			3.79			(12.04	)		7.01			4.15
Less distributions:
Distributions from net investment income		(0.20	)		(0.54	)		(0.13	)		(0.19	)		(0.19	)
Distributions from net realized gains		—			—			(2.03	)		(1.59	)		—

Total distributions		(0.20	)		(0.54	)		(2.16	)		(1.78	)		(0.19	)

Net asset value at end of period		18.38			15.05			11.80			26.00			20.77

Total return (%)		23.68			33.82			(49.91	)		36.16			24.88
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.48	²		1.47			1.48	²		1.44	³		1.39	³
Gross operating expenses		1.50			1.58			1.54			1.55			1.60
Net investment income (loss)		0.69			1.08			1.08			0.73			0.72
Portfolio turnover rate		83			96			88			71			90
Net assets, end of period ($ x 1,000,000)		948			630			540			1,255			628


¹		The ratio of net operating expenses would have been 1.64% and 1.59% for the periods ended 10/31/06 and 10/31/07, respectively, if custody credits had not been incurred.


²		The ratio of net operating expenses would have been 1.47% if certain non-routine expenses had not been incurred.


³		The ratio of net operating expenses would have been 1.47% and 1.47% for the periods ended 10/31/06 and 10/31/07, respectively, if custody credits had not been incurred.

Financial highlights 17

The investment adviser for the funds is Charles Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 84 mutual funds and approximately $187 billion in assets.

As the investment adviser, the firm oversees the asset management and administration of the funds. As compensation for these services, the firm receives a management fee from each fund. For the 12 months ended 10/31/10, these fees were 1.14% for the Laudus Small-Cap MarketMasters Fund ^tm and 1.27% for the Laudus International MarketMasters Fund ^tm . These figures, which are expressed as a percentage of each fund’s average daily net assets, represent the actual amounts paid, including the effects of reductions, and are based on the fees that applied for that period. CSIM pays the investment managers out of the management fee it receives.

A discussion regarding the basis for the Board of Trustees’ approval of each fund’s investment advisory agreement and sub-advisory agreements is available in the funds’ 2010 annual report, which covers the period of 11/1/09 through 10/31/10.

Caroline Lee-Tsao, a managing director and portfolio manager of the investment adviser, manages the funds. Prior to joining the firm in November 2005, she worked in asset management for over four years overseeing sub-adviser relationships in the pension group of a major corporation. She has also had three years of previous experience in investment management at another financial services firm.

The funds’ investment managers

The table below shows each fund’s current investment managers and the individuals who serve as portfolio managers for each investment manager’s portion of fund assets.

Laudus Small-Cap MarketMasters Fund ^tm


	Year founded/
	assets under
Investment manager	management	Portfolio	Employment
and address	(as of 12/31/10)	manager(s)	experience
TAMRO Capital Partners LLC 1701 Duke Street Suite 250 Alexandria, VA 22314	Founded: 2000 Successor Founded: 2007 $1.44 billion	Philip D. Tasho, CFA, Principal, Chief Executive Officer and Chief Investment Officer	Began investment career in 1980. Co-founded TAMRO in 2000. From 1995 to 2000, Chairman, Chief Executive Officer and Chief Investment Officer of Riggs Investment Management Co. (RIMCO).
		Timothy A. Holland, CFA Partner, Co-Portfolio Manager	Began investment career in 2000. Joined TAMRO in 2005 as an equity analyst. Promoted to co-portfolio manager in 2010. From 1993 to 2000 worked in financial services public relations.
TCW Investment Management Company 865 South Figueroa St., Suite 1800 Los Angeles, CA 90017	1971 $116 billion	Susan I. Suvall, Group Managing Director	Began investment career in 1981. Joined TCW in 1985 as a Special Situation Analyst, named to current position in 1998.

18 Fund management


	Year founded/
	assets under
Investment manager	management	Portfolio	Employment
and address	(as of 12/31/10)	manager(s)	experience
		John A. Gibbons III, Managing Director U.S. Equities	Mr. Gibbons is Co-Portfolio Manager of TCW’s Value Added and Value Opportunities strategies and joined TCW in 2000. Prior to that, he was associated with Odin Partners, L.P., Merrill Lynch & Co., Inc. and Bear, Stearns and Co., Inc. where he worked as an Equity Research Analyst specializing in consumer product companies. Previously, he was a Corporate Loan Officer with FleetBoston Financial Corp, which merged with Bank of America in 2004. Mr. Gibbons received his BA from Bowdoin College and holds an MBA from the Fuqua School of Business at Duke University.
Tocqueville Asset Management LP 40 W 57th Street New York, NY 10019	1985 $10.9 billion	P. Drew Rankin, Managing Director, and Co-Manager	Mr. Rankin manages separate accounts for institutional clients following U.S. small cap and healthcare strategies. He is a member of the Investment Committee. Mr. Rankin began his career in 1970 at Irving Trust Company, where he was a Healthcare analyst and Senior Manager of Trust Investments. In 1982, he joined the Columbia University Endowment Fund as Value Portfolio Manager and Healthcare analyst. In 1986, Mr. Rankin co-founded Personal Business Management Group, a private investment firm and family office. He joined Tocqueville as a Senior Partner in 1994. Mr. Rankin has a BS degree from Pennsylvania State University and an MBA from New York University.
		Allen Huang CFA, Senior Equity Analyst, and Co-Manager	Mr. Huang has ten years of investment experience including seven with Tocqueville. Prior to joining Tocqueville, he spent three years as an Analyst and Corporate Controller overseeing venture capital investments in broadband infrastructure entities at Lotus Pacific, Inc. Mr. Huang holds an MBA from Brigham Young University and a BA from Denison University.
Neuberger Berman Management LLC 605 Third Avenue New York, NY 10158	1939 $32.2 billion	David H. Burshtan, Vice President	David Burshtan is a portfolio manager on the Growth Equity team. He joined the firm in 2002. Previously, he held portfolio manager and analyst positions at Northern Trust, Scudder-Kemper Investments and Texas Commerce Bank. He began his investment career in 1998 as an analyst at Rotan Mosle. David graduated from Brown University with a B.A. and received an M.B.A. from the University of Chicago.

Fund management 19

Laudus International MarketMasters Fund ^tm


	Year founded/
	assets under
Investment manager	management	Portfolio	Employment
and address	(as of 12/31/10)	manager(s)	experience
American Century Investment Management, Inc. 4500 Main Street Kansas City, MO 64111	1958 $103.5 billion	Trevor Gurwich, Vice President and Portfolio Manager	Rejoined the team that manages International Small Cap Strategy in August 2005. He previously was a member of the International Small Cap and/or International Small-Mid Cap strategy team from June 2001 until January 2004. From January 2004 to August 2005, he was a member of the global growth investment team. He joined American Century in July 1998 and became a portfolio manager in March 2001.
		Mark S. Kopinski, CIO — International Equity, Senior Vice President and Senior Portfolio Manager	Has been a member of the team that manages International Small-Mid Cap strategy since rejoining American Century in April 1997 as a portfolio manager and has been a member of the team that manages the International Small Cap strategy since August 2008.
		Brian Brady, Vice President and Senior Portfolio Manager	Has been a member of the team that manages International Small-Mid Cap Strategy since joining American Century in June 1994. He became a portfolio manager in November 1998.
		Indraneel Das, Portfolio Manager	Has been a member of the International Small Cap strategy since 2005. He previously was a member of the International Small Cap team from 2001 until 2002. He joined American Century Investments in 1998 and became a portfolio manager in 2011.
Harris Associates L.P. Two North LaSalle Suite 500 Chicago, IL 60602-3790	1976 $61.5 billion	David G. Herro, CFA, Partner, Chief Investment Officer, International Equities and Portfolio Manager	Began investment career in 1986. Joined Harris Associates in 1992.
		Robert A. Taylor, CFA, Partner, Director of International Research and Portfolio Manager	He joined Harris Associates in 1994 as an International Analyst and was named Director of International Research in the fall of 2004.
Mondrian Investment Partners Limited Fifth Floor 10 Gresham Street London EC2V 7JD	1990 $68.4 billion	Ormala Krishnan, PhD (Investment and Finance), Senior Portfolio Manager primarily responsible for day-to-day management and investment decisions.	Began investment career in 1993. Joined Mondrian in May 2000 as a portfolio manager, emerging markets. Named to current position in 2003 and currently heads the international small capitalization team.
Wentworth, Hauser and Violich, Inc./ Hirayama Investments, LLC 301 Battery Street Suite 400 San Francisco, CA 94111	1937 $15.2 billion	Richard K. Hirayama, Senior Vice President, Portfolio Manager and Analyst at WHV. At Hirayama Investments, Managing Member.	Began investment career in 1969. Joined WHV in 1990. Developed the WHV International Equity strategy in 1995. Founded Hirayama Investments, LLC in 2008.

20 Fund management


	Year founded/
	assets under
Investment manager	management	Portfolio	Employment
and address	(as of 12/31/10)	manager(s)	experience
William Blair & Company, LLC 222 West Adams St. Chicago, IL 60606	1935 $44.2 billion	W. George Greig, Principal, International Equity Portfolio Manager	George Greig joined William Blair & Company in 1996 as International Growth Team leader. He also serves as the global strategist for William Blair & Company’s Investment Management Group and on the firm’s Executive Committee. Prior to joining the firm, George headed international equities for PNC Bank in Philadelphia and previously served as Investment Director with London-based Framlington Group PLC, where he also managed global and emerging markets funds. George has over 25 years of experience in domestic and international investment research and portfolio management. Mr. Greig holds an M.B.A. from Wharton School of the University of Pennsylvania and a B.S. from Massachusetts Institute of Technology.

Fund management 21

In this section, you will find information on buying, selling and exchanging shares. You may invest in the funds through an intermediary by placing orders through your brokerage account at Charles Schwab & Co., Inc. (Schwab) or an account with another broker/dealer, investment adviser, 401(k) plan, employee benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of the funds (intermediary orders). Eligible Investors (as defined herein) may invest directly in the funds by placing orders through the funds’ transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with a fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the fund on purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the fund. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The fund is not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of a fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with the fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent. The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the funds” section of the prospectus. If you do not exercise one of these options within ninety days, the fund reserves the right to redeem your shares.

Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Only Eligible Investors (as defined below) may purchase shares directly from the fund’s transfer agent, Boston Financial Data Services. Eligible Investors include, but are not limited to, qualified and non-qualified employee benefit plans (including but not limited to defined benefit plans, defined contribution plans, 401(k) plans), foundations and

22 Investing in the funds

endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of a Schwab Funds as a result of a reorganization of a fund. The funds reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for a fund’s shares. Eligible Investors must open an account with the fund through the fund’s transfer agent prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Initial and additional direct purchases by mail

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

Investing in the funds 23

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of the fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The fund and its service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

Additional direct redemption information

Direct exchange privileges

Upon request, and subject to certain limitations, shares of the funds may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. In order to exchange your shares to another fund, you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging or converting. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by the fund containing the information indicated below.

The funds reserve the right to suspend or terminate the privilege of exchanging shares of the funds by mail or by telephone at any time.

Direct exchanges by telephone

If you authorized the telephone redemption option in the account application, you may exchange fund shares by telephone by calling the fund’s transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account registration; (b) the class of shares to be exchanged (if applicable); (c) the name of the fund from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct redemptions by telephone” for more information regarding transacting with the funds’ transfer agent via telephone.

Direct exchanges by mail

24 Investing in the funds

exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

In valuing its securities, a fund uses market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, a fund may value securities based on fair values developed using methods approved by the fund’s Board of Trustees.

Shareholders of the Laudus International MarketMasters Fund ^tm should be aware that because foreign markets are often open on weekends and other days when the fund is closed, the value of the fund’s portfolio may change on days when it is not possible to buy or sell shares of the fund.

Investment minimums

Choose a fund and share class then decide how much you want to invest. Your choice may depend on the amount of your investment. The minimums shown below are for each fund and share class. The Select Shares have lower expenses than the Investor Shares. You may convert your Investor Shares into Select Shares at any time if your account balance in the fund is at least $50,000. You must contact the fund, Schwab or your other intermediary to request an interclass exchange of your Investor Shares for Select Shares — conversion is not automatic. If you no longer meet the minimum balance requirement for Select Shares, the funds reserve the right to redeem your shares. Select Shares may not be available through intermediaries other than Charles Schwab & Co., Inc.


Share class	Minimum initial investment	Minimum balance

Investor Shares	$100	None

Select Shares ^®	$50,000	$40,000

Certain investment managers, including CSIM and managers in Schwab Institutional, may aggregate the investments of their underlying customer accounts for purposes of meeting the Select Shares initial minimum investment and minimum balance requirements.

The minimum may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. The minimum may also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.

Investing in the funds 25

by your intermediary, which may be different than those provided by the funds to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature

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

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

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

Each fund reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive a fund’s investment minimums.

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

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

Payments by the investment adviser or its affiliates

Shareholder servicing plan

Pursuant to the Plan, each fund’s shares are subject to an annual shareholder servicing fee up to 0.20% for Select Shares and 0.25% for Investor Shares. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab (or, in the case of payments made to Schwab, pursuant to Schwab’s written agreement with the funds) and a fund will pay no more than 0.20% for Select Shares and 0.25% for Investor Shares of the average annual daily net asset value of the fund shares owned by shareholders holding shares through such service provider. Payments under the Plan are made as described above regardless of Schwab’s or the service provider’s actual cost of providing the services. If the cost of providing the services under the Plan is less than the payments received, the unexpended portion of the fees may be retained as profit by Schwab or the service provider.

Policy regarding short-term or excessive trading

The funds are intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the funds’ performance by disrupting the efficient management of the funds, increasing fund transaction costs and taxes, causing the funds to maintain higher cash balances, and diluting the value of the funds’ shares.

26 Investing in the funds

If trades are effected through a financial intermediary, the fund or its service providers will work with the intermediary to monitor possible market timing activity. The funds reserve the right to contact the intermediary to provide certain shareholder transaction information and may require the intermediary to restrict the shareholder from future purchases or exchanges in the fund. Transactions by fund shareholders investing through intermediaries may also be subject to the restrictions of the intermediary’s own frequent trading policies, which may differ from those of the funds. The funds may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the funds through such intermediary. The funds will defer to an intermediary’s policies only after the funds determine that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to a fund and in a pattern of activity that potentially could be detrimental to the fund. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The funds reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing. The Board of Trustees has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable. For example, a fund may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; when a security’s primary trading market is closed during regular market hours; or when a security’s value is materially affected by events occurring after the close of the security’s primary trading market.

By fair valuing securities whose prices may have been affected by events occurring after the close of trading, each fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the net asset value of the fund’s shares, and seeks to help ensure that the prices at which the fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders.

Redemption fee

Investing in the funds 27

procedures designed to provide reasonable assurances that such activity will be identified and terminated, including the imposition of the redemption fee described above, no policy or procedure can guarantee that all such activity will in fact be identified or that such activity can be completely eliminated. The funds reserve the right to modify or eliminate the redemption fees or waivers at any time.

Customer identification and verification and anti-money laundering program

The funds or your financial intermediary are required by law to reject your new account application if the required identifying information is not provided. The fund or your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they are unable to obtain this information. In certain instances, the fund or your financial intermediary is required to collect documents, which will be used solely to establish and verify your identity.

The funds will accept investments and your order will be processed at the NAV next determined after receipt of your application in proper form (or upon receipt of all identifying information required on the application). The funds, however, reserve the right to close and/or liquidate your account at the then-current day’s price if the fund or your financial intermediary is unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.

Customer identification and verification is part of the funds’ overall obligation to deter money laundering under Federal law. The funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the funds from being used for money laundering or the financing of terrorist activities. In this regard, the funds reserve the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of the funds or in cases when a fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the funds are required to withhold such proceeds.

Any investment in the funds typically involves several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is different, you should consult your tax advisor about the tax implications of your investment in a fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.

As a shareholder, you are entitled to your share of the dividends and gains your fund earns. Every year, each fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record. During the fourth quarter of the year, typically in early November, an estimate of each fund’s year-end distribution, if any, may be made available on the fund’s website: www.schwab.com/schwabfunds.

Generally, any sale or exchange of your shares is a taxable event. For tax purposes, an exchange of your shares for shares of another Schwab Fund or Laudus MarketMasters Fund is treated the same as a sale. An exchange between classes within a fund is not reported as a taxable sale. A sale may result in a capital gain or loss for you. The gain or loss generally will be treated as short term if you held the shares for 12 months or less, long term if you held the shares longer. Absent further legislation, the reduced maximum rates on long-term capital gains will cease to apply to taxable years beginning after December 31, 2012. Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed

28 Investing in the funds

received) by you with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if you purchase other substantially identical shares within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.

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

Investing in the funds 29

Notes


Prospectus February 28, 2011

COMMAND PERFORMANCE ^TM

Laudus MarketMasters Funds ^®

To learn more

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

Annual and semi-annual reports, which are mailed to current fund investors, contain more information about a fund’s holdings and detailed financial information about a fund. Annual reports also contain information from a fund’s managers about strategies, recent market conditions and trends and their impact on fund performance.

For a free copy of any of these documents or to request other information or ask questions about the fund, call Schwab at 1-800-435-4000. In addition, you may visit www.laudusfunds.com/prospectus for a free copy of a prospectus, SAI or an annual or semi-annual report.

The SAI, the funds’ annual and semi-annual reports and other related materials are available from the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the funds, including the funds’ SAI, at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.

SEC File Number



Laudus MarketMasters Funds		811-7704

REG23308FLT-20

Schwab Balanced Fund ^tm SWOBX

Prospectus

February 28, 2011

Schwab Balanced Fund ^tm



Fund summary

Schwab Balanced Fund ^tm		1

Fund details

Investment objective, strategies, risks		6

Portfolio holdings		10

Financial highlights		11

Fund management		12

Investing in the fund		13

Investing through a financial intermediary		13

Investing directly with the fund		13

Share price		16

Additional policies affecting your investment		16

Distributions and taxes		19

Schwab Balanced Fund ^tm

Ticker Symbol: SWOBX

Investment objective

The fund seeks capital growth and income.

Fund fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the fund.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual fund operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		None
Distribution (12b-1) fees		None
Other expenses		0.20
Acquired fund fees and expenses (AFFE) ¹		0.74

Total annual fund operating expenses ¹		0.94
Less expense reduction		(0.20)

Total annual fund operating expenses (including AFFE) after expense reduction ^1,2		0.74

Example

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$76	$237	$411	$918

Portfolio turnover

Schwab Balanced Fund ^TM 1

Principal investment strategies

To pursue its goal, the fund generally invests in a diversified group of other Schwab and/or Laudus Funds (the “underlying funds”) in accordance with its target portfolio allocation. The fund’s target allocation is intended to allocate investments among various asset classes such as equity, fixed income and money market funds. Each underlying fund invests its assets in a different segment of the stock or bond market in accordance with its own investment objectives and policies. Normally, the fund invests 55-65% of its assets in equity securities (including stocks and equity funds) and 35-45% in fixed income securities (including bonds and fixed income funds), money market funds, cash or cash equivalents. This allocation is designed to provide a mix of the growth opportunities of stock investing with the income opportunities of bonds and other fixed income securities. Under normal circumstances, the fund will invest at least 25% of its assets in equity securities and at least 25% of its assets in fixed income securities.

Within the stock fund allocation, the portfolio manager typically allocates the fund’s investments among underlying large-cap and small-cap stock funds, but may also invest in international stock funds or other equity funds with an international component, including underlying funds with some exposure to emerging market securities.

Within the bond fund allocation, the portfolio manager allocates investments among underlying bond funds based on a number of factors including total return potential and the maturities and credit quality of their holdings.

The fund intends to invest in a combination of underlying funds; however, the fund may invest a portion of its assets directly in equity and fixed income securities, as well as other mutual funds or exchange traded funds (ETFs) to maintain its asset allocations. The underlying funds may invest in derivatives, principally futures contracts. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100% of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.

Principal risks

The fund is subject to risks, any of which could cause an investor to lose money. The fund’s principal risks include:


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Management Risk.* The underlying funds are actively managed mutual funds. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser) will make poor security selections. An underlying fund’s adviser applies its own investment techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee that they will produce the desired results.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to fall over short or extended periods of time.

	•	*Large- and Mid-Cap Risk.* Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more vulnerable to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments — small-cap stocks, for instance — an underlying fund’s large- and mid-cap holdings could reduce performance.

2 Schwab Balanced Fund ^TM


	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — large-cap and mid-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Fixed Income Risk.* Interest rates rise and fall over time, which will affect an underlying fund’s yield and share price. The credit quality of a portfolio investment could also cause a fund’s share price to fall. A fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed income securities may be paid off earlier or later than expected. Either situation could cause a fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. Below investment-grade bonds (junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities

	•	*ETF Risk.* When an underlying fund invests in an ETF, it will bear a proportionate share of the ETF’s expenses. In addition, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio of securities.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Emerging Market Risk.* Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Such countries often have less uniformity in accounting and reporting requirements, unreliable securities valuation and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund’s investments in emerging market countries.

	•	*Derivatives Risk.* An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Leverage Risk.* Certain underlying fund transactions, such as derivatives, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose a fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of a fund’s portfolio securities, which means even a small amount of leverage can have a disproportionately larger impact on the fund.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.


	•	*Portfolio Turnover Risk.* Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gain distributions

Direct Investment Risk. The fund may invest a portion of its assets directly in equity and fixed income securities, as well as other mutual funds or ETFs, to maintain its asset allocations. The fund’s direct investment in these securities is subject to the same or similar risks as an underlying fund’s investment in the same security.

For more information on the risks of investing in the fund please see the “Fund details” section in the prospectus.

Schwab Balanced Fund ^TM 3

Performance

Because the fund originally used a different asset allocation strategy and a multi-fund strategy, its performance prior to June 3, 2002 does not reflect the fund’s current strategy and may have been different if it did. From June 3, 2002 to February 28, 2008, the fund used a manager of managers strategy, and, therefore, its performance during this time does not reflect the fund’s current multi-fund strategy and may have been different if it did.

Annual total returns (%) as of 12/31

Best quarter: 11.02% Q2 2003
Worst quarter: (11.45%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		11.62%		2.67%		3.43%
After taxes on distributions		11.10%		1.63%		2.62%
After taxes on distributions and sale of shares		7.66%		1.93%		2.63%
Comparative Indices (reflect no deductions for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		1.41%
Barclays Capital U.S. Aggregate Bond Index		6.54%		5.80%		5.84%

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Purchase and sale of fund shares


	•	by telephone at 1-800-407-0256; or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

4 Schwab Balanced Fund ^TM

The minimum initial investment for the fund is $100. The fund may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab Balanced Fund ^TM 5

Fund details

Investment objective, strategies and risks

Investment objective

The fund seeks capital growth and income.

Investment strategy

To pursue its goal, the fund generally invests in a diversified group of other Schwab and/or Laudus Funds (the “underlying funds”) in accordance with its target portfolio allocations. The fund’s target allocation is intended to allocate investments among various asset classes such as equity, fixed income and money market funds.

The fund mainly invests in stock and bond funds, which the adviser chooses within the framework of an asset allocation strategy. Based on analysis of economic outlooks and market conditions, the adviser determines whether and how much to adjust the fund’s allocation.

Within the underlying stock fund allocation, the portfolio manager typically allocates the fund’s investments among large-cap and small-cap stock funds, but may also invest in international stock funds or other equity funds with an international component, including funds with some exposure to emerging market securities.

Within the underlying bond fund allocation, the portfolio manager allocates investments among bond funds based on a number of factors including total return potential and the maturities and credit quality of their holdings.

The fund intends to invest in a combination of underlying funds; however, the fund may invest directly in equity and fixed income securities and other mutual funds or ETFs to maintain its asset allocations. The underlying funds also may invest in derivatives, including futures contracts and short sales. For temporary defensive purposes during unusual economic or market conditions or for liquidity purposes, the fund may invest up to 100% of its assets directly in cash, money market instruments, repurchase agreements and other short-term obligations. When the fund engages in such activities, it may not achieve its investment objective.

Asset allocation and investment strategies

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

Normally, the fund invests 55-65% of its assets in equity securities (including stocks and equity funds) and 35-45% in fixed income securities (including bonds and fixed income funds), money market funds, cash or cash equivalents. This allocation is designed to provide a mix of the growth opportunities of stock investing with the income opportunities of bonds and other fixed income securities. Under normal circumstances, the fund will invest at least 25% of its assets in fixed income securities and at least 25% of its assets in equity securities.

6 Fund details

Each underlying fund focuses on a different segment of the stock or bond market. The following are the fund’s current underlying funds and each underlying fund’s investment objective and strategy, listed according to their corresponding category in the fund’s asset allocation.


Equity Funds		Objective/Strategy

Schwab Core Equity Fund		Seeks long-term capital growth. The fund invests, under normal circumstances, at least 80% of its net assets in equity securities of U.S. companies. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P 500 ^® Index.

Laudus Small-Cap MarketMasters Fund		Seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of its net assets in equity securities of companies with small market capitalizations or investments with similar economic characteristics, such as futures. Companies with small market capitalizations generally are those with market capitalizations of $2.5 billion or less but may include companies with market capitalizations of up to $5 billion so long as the purchase of those securities would not cause the average weighted market capitalization of the fund to exceed $3 billion.

Bond Funds		Objective/Strategy


Schwab Total Bond Market Fund		Seeks high current income by tracking the performance of the Barclays Capital U.S. Aggregate Bond Index (“Barclays Index”). The fund primarily invests in a diversified portfolio of investment grade debt instruments with varying maturities and is designed to track the performance of the Barclays Index. The Barclays Index includes investment-grade government, corporate, mortgage-, commercial mortgage- and asset-backed bonds that are denominated in U.S. dollars and have maturities longer than one year.

Principal investment risks

The fund is subject to risks, any of which could cause an investor to lose money.

Asset Allocation Risk. The fund’s particular asset allocation can have a significant effect on performance. The fund manages its allocation with long-term performance in mind, and does not seek any particular type of performance in the short-term. Because the risks and returns of different asset classes can vary widely over any given time period, the fund’s performance could suffer if a particular asset class does not perform as expected.

Exchange Traded Funds (ETF) Risk. ETFs generally are investment companies whose shares are bought and sold on a securities exchange. The fund may purchase shares of ETFs to gain exposure to a particular portion of the market while awaiting an opportunity to purchase securities directly. When the fund invests in an ETF, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the EFT’s expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.


	•	*Investment Risk.* The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Management Risk.* The underlying funds are actively managed mutual funds. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser) will make poor security selections. An underlying

Fund details 7


		fund’s adviser applies its own investment techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee that they will produce the desired results. In addition, with respect to certain of the underlying funds, the investment adviser makes investment decisions for the fund using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the desired results in the future. In addition, if market dynamics change, the effectiveness of this strategy may be limited. Either of these risks may cause these underlying funds to underperform other funds with a similar investment objective.


	•	*Equity Risk.* The prices of equity securities in which the underlying funds invest rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time. Due to their fixed income features, preferred stocks provide higher income potential than issuers’ common stocks, but typically are more sensitive to interest rate changes than the underlying common stock. The rights of common stockholders are generally subordinate to the rights associated with an issuer’s preferred stocks and the rights of preferred stockholders are generally subordinate to the rights associated with an issuer’s debt securities on the distribution of an issuer’s assets in the event of a liquidation.

	•	*Large- and Mid-Cap Risk.* An underlying fund’s investments in large- and mid-cap companies will reflect the risks associated with the large-cap and mid-cap segments of the stock market. Both large-cap and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap stocks fall behind other types of investments — small-cap stocks, for instance — an underlying fund’s large- and mid-cap holdings could reduce performance.

	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Accordingly, underlying funds that invest in small-cap securities may be more volatile than underlying funds that invest in large- and mid-cap securities. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. In addition, smaller companies may have limited financial resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies. Further, smaller companies may have less publicly available information and, when available, it may be inaccurate or incomplete. During a period when small-cap stocks fall behind other types of investments — large-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Interest Rate Risk.* An underlying fund’s investments in fixed income securities are subject to the risk that interest rates rise and fall over time. As with any investment whose yield reflects current interest rates, an underlying fund’s yield will change over time. During periods when interest rates are low, an underlying fund’s yield (and total return) also may be low. Changes in interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the fund’s share price to fall. This risk is greater when the underlying fund holds bonds with longer maturities. To the extent that the investment adviser (or sub-adviser) of an underlying fund anticipates interest rate trends imprecisely, the underlying fund could miss yield opportunities or its share price could fall. Inflation-protected securities may react differently to interest rate changes than other types of debt securities and, as discussed below, tend to react to changes in “real” interest rates.

	•	*Credit Risk.* Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the fund’s share price to fall. The underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Below investment-grade bonds (junk bonds) involve greater risks of default or downgrade and are more volatile than investment-grade bonds. Below investment-grade bonds also involve greater risk of price declines than investment-grade securities due to actual or perceived changes in an issuer’s creditworthiness. In addition, issuers of below investment-grade bonds may be more susceptible than other issuers to economic downturns. Such bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the bonds.

8 Fund details


	•	*Prepayment and Extension Risk.* An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price. In addition, rising interest rates tend to extend the duration of certain fixed income securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, an underlying fund that holds these securities may exhibit additional volatility. This is known as extension risk. When interest rates decline, borrowers may pay off their fixed income securities sooner than expected. This can reduce the returns of an underlying fund because the fund will have to reinvest that money at the lower prevailing interest rates. This is known as prepayment risk.


	•	*Exchange Traded Funds (ETF) Risk.* When an underlying fund invests in an ETF, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the ETF’s expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, lack of liquidity in an ETF can result in its value being more volatile than the underlying portfolio securities.


	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions, or changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges). In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. An underlying fund with foreign investments may also experience more rapid or extreme changes in value than a fund that invests solely in securities of U.S. companies because the securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. There also is the risk that the cost of buying, selling, and holding foreign securities, including brokerage, tax, and custody costs, may be higher than those involved in domestic transactions. During any period when foreign securities underperform other types of investments — U.S. securities, for instance — the performance of an underlying fund that focuses its investments in foreign securities will lag these investments.


	•	*Emerging Market Risk.* Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements, unreliable securities valuation and greater risk associated with the custody of securities. It is sometimes difficult to obtain and enforce court judgments in such countries, and there is often a greater potential for nationalization and/or expropriation of assets by the government of an emerging market country. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.


	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the underlying fund would be adversely affected. Currencies in non-U.S. countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention by U.S. or foreign governments, central banks or supranational agencies, such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United State or abroad.

	•	*Convertible Securities Risk.* Certain underlying funds may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exercised for a prescribed amount of common stock at a specified time and price. Convertible securities provide an opportunity for equity participation, with the potential for a higher dividend or interest yield and lower price volatility compared to common stock. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increase as interest rates decline, and the credit standing of the issuer. The price of a convertible security will also normally vary in some proportion to changes in the price of the underlying common stock because of the conversion or exercise feature.

Fund details 9


	•	*Liquidity Risk.* Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer. An underlying fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.

	•	*Derivatives risk.* An underlying fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index, instrument or certain securities and a predetermined amount. An underlying fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk, market risk, credit risk, leverage risk and management risk, are discussed elsewhere in this section. An underlying fund’s use of derivatives is also subject to lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the underlying fund to realize higher amounts of short-term capital gain. These risks could cause the underlying fund to lose more than the principal amount invested.

	•	*Leverage Risk.* Certain underlying fund transactions, such as derivatives, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose the underlying fund to greater risk. In a reverse repurchase agreement, the underlying fund would sell a security and enter into an agreement to repurchase the security at a specified future date and price. Leverage tends to magnify the effect of any decrease or increase in the value of the underlying fund’s portfolio securities. The use of leverage may cause the underlying fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.

	•	*Short Sales Risk.* Certain underlying funds may engage in short sales, which are transactions in which the underlying fund sells a security it does not own. To complete a short sale, the underlying fund must borrow the security to deliver to the buyer. The underlying fund is then obligated to replace the borrowed security by purchasing the security at the market price at the time of replacement. This price may be more or less than the price at which the security was sold by the underlying fund and the underlying fund will incur a loss if the price of the security sold short increases between the time of the short sale and the time the underlying fund replaces the borrowed security.


	•	*Portfolio Turnover Risk.* Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the underlying fund’s performance and may increase the likelihood of capital gain distributions.

Direct Investment Risk. The fund may invest a portion of its assets directly in equity and fixed income securities, as well as other mutual funds or ETFs to maintain its asset allocations. The fund’s direct investment in these securities is subject to the same or similar risks as an underlying fund’s investment in the same security.

A description of the fund’s policies and procedures with respect to the disclosure of its portfolio securities is available in the fund’s SAI.

10 Fund details

This section provides further details about the fund’s financial history for the past five years. Certain information reflects financial results for a single fund share. “Total return” shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund’s independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund’s annual report (see back cover).


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08 ¹			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.99			9.82			13.86			13.39			12.85

Income (loss) from investment operations:
Net investment income (loss)		0.17	²		0.22	²		0.20	²		0.25	²		0.25	²
Net realized and unrealized gains (losses)		1.03			0.64			(3.26	)		1.06			0.83

Total from investment operations		1.20			0.86			(3.06	)		1.31			1.08
Less distributions:
Distributions from net investment income		(0.19	)		(0.37	)		(0.29	)		(0.24	)		(0.16	)
Distributions from net realized gains		—			(0.32	)		(0.69	)		(0.60	)		(0.38	)

Total distributions		(0.19	)		(0.69	)		(0.98	)		(0.84	)		(0.54	)

Net asset value at end of period		11.00			9.99			9.82			13.86			13.39

Total return (%)		12.08			9.45			(23.56	)		10.24			8.59
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ³		0.00	⁴		0.00			0.36			1.02	⁵		1.03	⁵
Gross operating expenses ³		0.20			0.17			0.53			1.27			1.26
Net investment income (loss)		1.67			2.41			1.81			1.84			1.90
Portfolio turnover rate		8			21			267			244			244
Net assets, end of period ($ x 1,000,000)		88			86			85			112			122


¹		Effective February 28, 2008, the Investor Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Investor Shares.


²		Calculated based on the average shares outstanding during the period.


³		The expenses incurred by underlying funds in which the fund invests are not included in this ratio.


⁴		Less than 0.005%; the ratio of net operating expenses would have been 0.00%, if certain non-routine expenses had not been incurred.


⁵		The ratio of net operating expenses would have been 1.10% for periods ended 10/31/06 and 10/31/07, respectively, if custody credits and dividend and interest expenses on short sales had not been incurred.

Financial highlights 11

The investment adviser for the fund is Charles Schwab Investment Management, Inc., (“CSIM” or the “investment adviser”), 211 Main Street, San Francisco, CA 94105. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 84 mutual funds and approximately $187 billion in assets.

As the investment adviser, CSIM oversees the asset management and administration of the fund. The firm currently does not receive a fee for the services it performs for the Schwab Balanced Fund. However, the firm is entitled to receive an annual management fee from each of the underlying funds.

A discussion regarding the basis for the Board of Trustees’ approval of the fund’s investment advisory agreement is available in the fund’s 2010 annual report, which covers the period of 11/1/09 through 10/31/10.

Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the fund. He has been the portfolio manager of the fund since 2008. From 2003, until his appointment, he held vice president level positions in product development, investment operations and audit at the firm. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry, with more than 6 of those years spent in portfolio management.

Additional information about the portfolio manager’s compensation, other accounts managed by the portfolio manager and the portfolio manager’s ownership of securities in the fund is available in the SAI.

12 Fund management

Investing in the fund

In this section, you will find information on buying, selling and exchanging shares. You may invest in the fund through an intermediary by placing orders through your brokerage account at Charles Schwab & Co., Inc. (Schwab) or an account with another broker/dealer, investment adviser, 401(k) plan, employee benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of the fund (intermediary orders). Eligible Investors (as defined herein) may invest directly in the fund by placing orders through the fund’s transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.

Investing directly with the fund

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with the fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the fund on purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the fund. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The fund is not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of the fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. Second, you may maintain a direct account with the fund if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the fund’s transfer agent. The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the fund” section of the prospectus. If you do not exercise one of these options within ninety days, the fund reserves the right to redeem your shares.

Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Investing in the funds 13

endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of a Schwab fund as a result of a reorganization of a fund. The fund reserves the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with the fund are subject to involuntary redemption by the fund.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for the fund’s shares. Eligible Investors must open an account with the fund through the fund’s transfer agent, prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Initial and additional direct purchases by mail

Subject to acceptance by the fund, you may open an account and make your initial purchase and any additional purchases of the fund’s shares by mail. To open an account by mail, complete and sign the account application and mail the account application, all supporting documents and a check for the desired purchase amount to the transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Additional investments may be made at any time by mailing a check (payable to Schwab Funds) to the transfer agent at the address above. Be sure to include your account number on your check.

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following fund policies:


•	The fund may take up to seven days to pay sale proceeds.

•	The fund reserves the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

14 Investing in the funds

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of the fund next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The fund and its service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

Additional direct redemption information

Direct exchange privileges

Upon request, and subject to certain limitations, shares of the fund may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. To exchange your shares to another fund or class of shares, you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by the fund containing the information indicated below.

The fund reserves the right to suspend or terminate the privilege of exchanging shares of the fund by mail or by telephone at any time.

Direct exchanges by telephone

Direct exchanges by mail

To exchange fund shares by mail, simply send a letter of instruction to the fund’s transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. The letter of instruction must include: (a) your account number; (b) the class of shares to be exchanged; (c) the fund from and the fund into which the exchange is to be

Investing in the funds 15

made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

The fund is open for business each day that the New York Stock Exchange (NYSE) is open. The fund calculates its share price each business day as of the close of the NYSE (generally 4 p.m. Eastern time). The fund’s share price is its net asset value per share, or NAV, which is the fund’s net assets divided by the number of its shares outstanding. Orders to buy, sell or exchange shares that are received by the fund in good order on or prior to the close of the fund (generally 4 p.m. Eastern time) will be executed at the next share price calculated that day.

In valuing underlying fund investments, the fund uses the NAVs reported by the underlying funds. In valuing its securities, the fund uses market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, the fund may value securities based on fair values developed using methods approved by the fund’s Board of Trustees.

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


Minimum initial investment

$100

This minimum may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. This minimum may also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.

Choose an option for fund distributions. If you are an Eligible Investor placing direct orders with the fund, you will have one of the three options described below for fund distributions. If you don’t indicate a choice, you will receive the first option. If you are placing orders through an intermediary, you will select from the options for fund distributions provided by your intermediary, which may be different than those provided by the fund to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature

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

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

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

The fund reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive the fund’s investment minimums.

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

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

Payments by the investment adviser or its affiliates

16 Investing in the funds

intermediaries that perform shareholder, recordkeeping, sub-accounting and other administrative services in connection with investments in fund shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the fund may pay to those intermediaries. The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing, promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, the payments are paid by, and the discounts are discounted by, the investment adviser or its affiliates, not by the fund or its shareholders.

Shareholder servicing plan

The Board of Trustees has adopted a Shareholder Servicing Plan (the “Plan”) on behalf of the fund. The Plan enables the fund to bear expenses relating to the provision by service providers, including Schwab, of certain account maintenance, customer liaison and shareholder services to the current shareholders of the fund. The fund is not subject to any fee under the Plan.

Policy regarding short-term or excessive trading

The fund is intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the fund’s performance by disrupting the efficient management of the fund, increasing fund transaction costs and taxes, causing the fund to maintain higher cash balances, and diluting the value of the fund’s shares.

To discourage market timing, the fund’s Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by fund shareholders. The fund seeks to deter market timing through several methods. These methods may include: fair value pricing, imposition of redemption fees and trade activity monitoring. Fair value pricing and redemption fees are discussed more thoroughly in the subsequent pages of this prospectus and are considered to be key elements of the fund’s policy regarding short term or excessive trading. Trade activity monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to the fund.

Although these methods are designed to discourage market timing, there can be no guarantee that the fund will be able to identify and restrict investors that engage in such activities. In addition, some of these methods are inherently subjective and involve judgment in their application. The fund and its service providers seek to make these judgments and applications uniformly and in a manner that they believe is consistent with interests of the fund’s long-term shareholders. The fund may amend these policies and procedures in response to changing regulatory requirements or to enhance the effectiveness of the program.

The fund or its service providers maintain risk-based surveillance procedures designed to detect market timing in fund shares in amounts that might be detrimental to the fund. Under these procedures, the fund has requested that service providers to the fund monitor transactional activity in amounts and frequency determined by the fund to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. If the fund, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into the fund by that shareholder. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to comply with applicable laws.

If trades are effected through a financial intermediary, the fund or its service providers will work with the intermediary to monitor possible market timing activity. The fund reserves the right to contact the intermediary to provide certain shareholder transaction information and may require the intermediary to restrict the shareholder from future purchases or exchanges in the fund. Transactions by fund shareholders investing through intermediaries may also be subject to the restrictions of the intermediary’s own frequent trading policies, which may differ from those of the fund. The fund may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the fund through such intermediary. The fund will defer to an intermediary’s policies only after the fund determines that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the fund and in a pattern of activity that potentially could be detrimental to the fund. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their fund transactions.

The fund reserves the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

The Board of Trustees has adopted procedures to fair value the fund’s securities when market prices are not “readily available” or are unreliable. For example, the fund may fair value a security when a security is de-listed or its trading is

Investing in the funds 17

halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; when a security’s primary trading market is closed during regular market hours; or when a security’s value is materially affected by events occurring after the close of the security’s primary trading market.

By fair valuing securities whose prices may have been affected by events occurring after the close of trading, the fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of the fund’s portfolio holdings and the net asset value of the fund’s shares, and seeks to help ensure that the prices at which the fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders.

The fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. Due to the subjective and variable nature of fair value pricing, there can be no assurance that the fund could obtain the fair value assigned to the security upon the sale of such security. The respective prospectuses for the underlying funds in which the fund invests explain the circumstances in which those funds will use fair value pricing and the effects of fair value pricing.

Redemption fee

Shares redeemed or exchanged within 30 days of purchase, which shall be calculated to include the 30th day, will be subject to a fee of 2%, which is intended to limit short-term trading in the fund, or to the extent that short-term trading persists, to impose the costs of that type of activity on the shareholders who engage in it. The fund treats shares that have been held the longest as being redeemed first. The fund retains the redemption fees for the benefit of the remaining shareholders. Fund shares purchased with reinvested dividends are not subject to redemption fees. The fund reserves the right, in its sole discretion, to waive such fee when, in its judgment, such waiver would be in the best interests of the fund and its long-term shareholders. The fund may waive the redemption fee for retirement plans, wrap or fee-based programs, charitable giving funds, unregistered separate accounts, redemptions pursuant to rebalancing programs or systematic withdrawal plans established by the fund or financial intermediaries, and registered investment companies and redemptions initiated by the fund. In addition, certain financial intermediaries may use criteria and methods for tracking, applying and calculating the fees that are different from the fund’s but which the fund, in its discretion, may determine are in the best interests of the fund and its long-term shareholders. While the fund discourages mutual fund market timing and maintains procedures designed to provide reasonable assurances that such activity will be identified and terminated, including the imposition of the redemption fee described above, no policy or procedure can guarantee that all such activity will in fact be identified or that such activity can be completely eliminated. The fund reserves the right to modify or eliminate the redemption fees or waivers at any time.

Customer identification and verification and anti-money laundering program

Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will allow the fund or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.

The fund or your financial intermediary are required by law to reject your new account application if the required identifying information is not provided. The fund or your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they are unable to obtain this information. In certain instances, the fund or your financial intermediary is required to collect documents that will be used solely to establish and verify your identity.

The fund will accept investments and your order will be processed at the NAV next determined after receipt of your application in proper form (or upon receipt of all identifying information required on the application). The fund, however, reserves the right to close and/or liquidate your account at the then-current day’s price if the fund or your financial intermediary is unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.

Customer identification and verification is part of the fund’s overall obligation to deter money laundering under Federal law. The fund has adopted an Anti-Money Laundering Compliance Program designed to prevent the fund from being used for money laundering or the financing of terrorist activities. In this regard, the fund reserves the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of the fund or in cases when the fund is requested or compelled to do so by governmental or law enforcement authority. If your

18 Investing in the funds

account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the fund is required to withhold such proceeds.

Any investment in the fund typically involves several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is different, you should consult your tax advisor about the tax implications of your investment in the fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.

As a shareholder, you are entitled to your share of the dividends and gains the fund earns. Every year, the fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record. During the fourth quarter of the year, typically in early November, an estimate of the fund’s year-end distributions, if any, may be made available on the fund’s website: www.schwab.com/schwabfunds.

Unless you are investing through an IRA, 401(k) or other tax-advantaged retirement account, your fund distributions generally have tax consequences. The fund’s net investment income and short-term capital gains are distributed as dividends and will be taxable as ordinary income or qualified dividend income. Other capital gain distributions are taxable as long-term capital gains, regardless of how long you have held your shares in the fund. Absent further legislation, the reduced maximum rates on qualified dividend income and long-term capital gains will cease to apply to taxable years beginning after December 31, 2012. Distributions generally are taxable in the tax year in which they are declared, whether you reinvest them or take them in cash.

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

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

The fund may be required to withhold U.S. federal income tax on all taxable distributions payable to shareholders if they fail to provide the fund with their correct taxpayer identification number or to make required certifications, or if they have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against U.S. federal income tax liability.

Investing in the funds 19

Notes

To learn more

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

Annual and semi-annual reports, which are mailed to current fund investors, contain more information about the fund’s holdings and detailed financial information about the fund. Annual reports also contain information from the fund’s managers about strategies, recent market conditions and trends and their impact on fund performance.

For a free copy of any of these documents or to request other information or ask questions about the fund, call Schwab at 1-800-435-4000. In addition, you may visit www.schwabfunds.com/prospectus for a free copy of a prospectus, SAI or an annual or semi-annual report.

The SAI, the fund’s annual and semi-annual reports and other related materials are available from the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the fund, including the fund’s SAI, at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.

SEC File Numbers



Schwab Balanced Fund		811-7704

REG34630FLT-05

Schwab Balanced Fund ^tm

Prospectus
February 28, 2011

Schwab MarketTrack Portfolios ^®

Prospectus

February 28, 2011

• Schwab MarketTrack All Equity Portfolio ^tm Investor Shares: SWEGX

• Schwab MarketTrack Growth Portfolio ^tm Investor Shares: SWHGX, P Shares: SWPGX

• Schwab MarketTrack Balanced Portfolio ^tm Investor Shares: SWBGX

• Schwab MarketTrack Conservative Portfolio ^tm Investor Shares: SWCGX

Schwab MarketTrack Portfolios ^®



Portfolio summaries

Schwab MarketTrack All Equity Portfolio ^TM		1

Schwab MarketTrack Growth Portfolio ^TM		6

Schwab MarketTrack Balanced Portfolio ^TM		11

Schwab MarketTrack Conservative Portfolio ^TM		16

Portfolio details

Investment objectives, strategies, risks		21

Schwab MarketTrack All Equity Portfolio ^TM		21

Schwab MarketTrack Growth Portfolio ^TM		23

Schwab MarketTrack Balanced Portfolio ^TM		25

Schwab MarketTrack Conservative Portfolio ^TM		27

Portfolio holdings		29

Financial highlights		30

Portfolio management		34

Investing in the portfolios

Investing through a financial intermediary		34

Investing directly with the Portfolios		35

Share price		37

Additional policies affecting your investment		37

Distributions and taxes		40

Schwab MarketTrack All Equity Portfolio ^tm

Ticker Symbol: Investor Shares: SWEGX

Investment objective

The portfolio seeks high capital growth through an all-stock portfolio.

Portfolio fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the portfolio.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual portfolio operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.23
Distribution (12b-1) fees		None
Other expenses		0.31
Acquired fund fees and expenses (AFFE) ¹		0.14

Total annual portfolio operating expenses ¹		0.68
Less expense reduction		(0.04)

Total annual portfolio operating expenses (including AFFE) after expense reduction ^1,2		0.64

The total annual portfolio operating expenses in the fee table may differ from the expense ratios in the portfolio’s “Financial highlights” because the financial highlights include only the portfolio’s direct operating expenses and do not include acquired fund fees and expenses (AFFE), which reflect the estimated amount of the fees and expenses incurred indirectly by the portfolio through its investments in the underlying funds during its prior fiscal year.

The investment adviser and its affiliates have agreed to limit the total annual portfolio operating expenses (excluding interest, taxes and certain non-routine expenses) of the portfolio to 0.50% for so long as the investment adviser serves as the adviser to the portfolio. This agreement may only be amended or terminated with the approval of the portfolio’s Board of Trustees. This agreement is limited to the portfolio’s direct operating expenses and does not apply to AFFE.

Example

This example is intended to help you compare the cost of investing in the portfolio with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the portfolio for the time periods indicated and then redeem all of your shares at the end of those time periods. The example also assumes that your investment has a 5% return each year and that the portfolio’s operating expenses remain the same. The figures are based on total annual portfolio operating expenses (including AFFE) after expense reduction. 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.

Expenses on a $10,000 investment


1 year	3 years	5 years	10 years
$65	$205	$357	$798

Portfolio turnover

The portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when portfolio shares are held in a taxable account. These costs, which are not reflected in the annual portfolio operating expenses or in the example, affect the portfolio’s performance. During the most recent fiscal year, the portfolio’s portfolio turnover rate was 8% of the average value of its portfolio.

Schwab MarketTrack All Equity Portfolio ^tm 1

Principal investment strategies

To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation is 100% in stock investments, with certain percentages for different segments of the stock market. It is the portfolio’s policy that, under normal circumstances, it will invest at least 80% of its net assets in stock investments; typically the actual percentage is considerably higher.

The portfolio’s allocation focuses on stock investments for long-term growth. The portfolio seeks to remain close to the target allocations of 45% in large-cap, 30% in international and 25% in small-cap stocks and typically does not change its target allocation.

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

The portfolio invests mainly in other Schwab Funds ^® , particularly three of the Equity Index Funds. These underlying funds seek to track the total returns of various stock market indices. They typically invest in the stocks included in the index they are tracking, and generally give each stock the same weight as the index does. The underlying funds may invest in derivatives, principally futures contracts, and lend their securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index. Each underlying fund focuses on a different segment of the stock market.

The portfolio manager monitors the portfolio’s holdings and cash flow and manage them as needed in order to maintain the portfolio’s target allocation. The managers may permit modest deviations from the target allocation for certain periods of time, in order to reduce transaction costs.

Principal risks

The portfolio is subject to risks, any of which could cause an investor to lose money. The portfolio’s principal risks include:

Asset Allocation Risk. The portfolio is subject to asset allocation risk, which is the risk that the selection of the underlying funds and the allocation of the portfolio’s assets among the various asset classes and market segments will cause the portfolio to underperform other funds with a similar investment objective.

Market Risk. 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.

Underlying Fund Investment Risk. The value of your investment in the portfolio is based primarily on the prices of the underlying funds that the portfolio purchases. In turn, the price of each underlying fund is based on the value of its securities. Before investing in the portfolio, investors should assess the risks associated with the underlying funds in which the portfolio may invest and the types of investments made by those underlying funds. These risks include any combination of the risks described below, although the portfolio’s exposure to a particular risk will be proportionate to the portfolio’s overall asset allocation and underlying fund allocation.


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic

2 Schwab MarketTrack All Equity Portfolio ^tm


		conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s large-cap holdings could reduce performance.


	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.

Direct Investment Risk. The portfolio may invest directly in individual securities to maintain its allocations. The portfolio’s direct investment in these securities is subject to the same or similar risks as an underlying fund’s investment in the same security.

For more information on the risks of investing in the portfolio please see the “Portfolio details” section in the prospectus.

Performance

The bar chart below shows how the portfolio’s investment results have varied from year to year, and the following table shows how the portfolio’s average annual total returns for various periods compared to that of an index. This information provides some indication of the risks of investing in the portfolio. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus.

Schwab MarketTrack All Equity Portfolio ^tm 3

Annual total returns (%) as of 12/31

Best quarter: 20.79% Q2 2009
Worst quarter: (22.99%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		14.90%		2.89%		2.67%
After taxes on distributions		14.70%		2.41%		2.24%
After taxes on distributions and sale of shares		9.95%		2.37%		2.13%
Comparative Index (reflects no deduction for expenses or taxes)
S&P 500 ^{^®} Index		15.06%		2.29%		1.41%

The after-tax figures reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your portfolio shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the portfolio. He has been the portfolio manager of the portfolio since 2008.

Purchase and sale of portfolio shares

The portfolio is open for business each day that the New York Stock Exchange is open. When you place orders to purchase, exchange or redeem portfolio shares through an account at Charles Schwab & Co., Inc. (Schwab) or another intermediary, you must follow Schwab’s or the other financial intermediary’s transaction procedures.

Eligible Investors (as determined by the portfolio and which generally are limited to institutional investors) may invest directly in the portfolio by placing purchase, exchange and redemption orders through the portfolio’s transfer agent. Eligible Investors must contact the transfer agent by phone or in writing to obtain an account application. Eligible Investors may contact the transfer agent:


	•	by telephone at 1-800-407-0256, or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the portfolio is $100. The portfolio may waive the minimum initial investment for certain investors.

Tax information

Dividends and capital gains distributions received from the portfolio will generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.

4 Schwab MarketTrack All Equity Portfolio ^tm

Payments to financial intermediaries

If you purchase shares of the portfolio through a broker-dealer or other financial intermediary (such as a bank), the portfolio and its related companies may pay the intermediary for the sale of portfolio shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the portfolio over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

Schwab MarketTrack All Equity Portfolio ^tm 5

Schwab MarketTrack Growth Portfolio ^tm

Ticker Symbol: Investor Shares: SWHGX P Shares: SWPGX

Investment objective

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

Portfolio fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the portfolio.


Shareholder fees (fees paid directly from your investment)	InvestorShares	P Shares
Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)	2.00	None


Annual portfolio operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees	0.23	0.23
Distribution (12b-1) fees	None	None
Other expenses	0.29	0.14
Acquired fund fees and expenses (AFFE) ¹	0.20	0.20

Total annual portfolio operating expenses ¹	0.72	0.57
Less expense reduction	(0.02)	(0.02)

Total annual portfolio operating expenses (including AFFE) after expense reduction ^1,2	0.70	0.55

The investment adviser and its affiliates have agreed to limit the total annual portfolio operating expenses (excluding interest, taxes and certain non-routine expenses) of the Investor Shares and P Shares to 0.50% and 0.35%, respectively, for so long as the investment adviser serves as the adviser to the portfolio. This agreement may only be amended or terminated with the approval of the portfolio’s Board of Trustees. This agreement is limited to the portfolio’s direct operating expenses and does not apply to AFFE.

Example

Expenses on a $10,000 investment


	1 year		3 years		5 years		10 years


Investor Shares	$	72	$	224	$	390	$	871
P Shares	$	56	$	176	$	307	$	689

Portfolio turnover

6 Schwab MarketTrack Growth Portfolio ^tm

Principal investment strategies

To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes stock, bond and cash investments.

The portfolio’s allocation focuses on stock investments, while including some bonds and cash investments in seeking to reduce the portfolio’s volatility. The portfolio seeks to remain close to the target allocations of 80% stocks, 15% bonds and 5% cash and typically does not change its target allocation.

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 invests mainly in other Schwab Funds ^® , including index funds, which seek to track the total returns of various market indices. Index funds typically invest in the securities included in the index they are tracking, and give each security the same weight as the index does. The underlying funds may invest in derivatives, principally futures contracts, and lend their securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index. Each underlying fund focuses on a different market segment.

Principal risks

The portfolio is subject to risks, any of which could cause an investor to lose money. The portfolio’s principal risks include:

Market Risk. 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.


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s large-cap holdings could reduce performance.

Schwab MarketTrack Growth Portfolio ^tm 7


	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.

For more information on the risks of investing in the portfolio please see the “Portfolio details” section in the prospectus.

Performance

The bar chart below shows how the Investor Shares’ investment results have varied from year to year, and the following table shows how the Investor Shares’ average annual total returns for various periods compared to those of certain indices. This information provides some indication of the risks of investing in the portfolio. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus.

8 Schwab MarketTrack Growth Portfolio ^tm

Annual total returns (%) as of 12/31

Investor Shares

Best quarter: 16.43% Q2 2009
Worst quarter: (18.19%) Q4 2008

Average annual total returns (%) as of 12/31/10


							Since
	1 year		5 years		10 years		inception
Investor Shares
Before taxes		13.37%		3.22%		3.12%		6.35%	¹
After taxes on distributions		13.08%		2.59%		2.52%		5.59%	¹
After taxes on distributions and sale of shares		8.97%		2.60%		2.44%		5.23%	¹
P Shares
Before taxes		13.55%						2.13%	²
Comparative Indices (reflect no deduction for expenses or taxes)
S&P 500 ^{^®} Index		15.06%		2.29%		1.41%		6.92%	³
Barclays Capital U.S. Aggregate Bond Index		6.54%		5.80%		5.84%		6.14%	³


¹	Inception: 11/20/95.
²	Inception: 4/2/06.
³	From: 11/20/95.

The after-tax figures reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. The after-tax returns are shown for one share class only and would be different for the other share class. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your portfolio shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Purchase and sale of portfolio shares


	•	by telephone at 1-800-407-0256, or

	•	or by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

Schwab MarketTrack Growth Portfolio ^tm 9

The minimum initial investment for Investor Shares and P Shares is $100 and $100,000, respectively. The portfolio may waive the minimum initial investment for certain investors. Please note that the P Shares that are offered by the portfolio are only offered to charitable giving funds and tax-advantaged retirement plans.

Tax information

Payments to financial intermediaries

10 Schwab MarketTrack Growth Portfolio ^tm

Schwab MarketTrack Balanced Portfolio ^tm

Ticker Symbol: Investor Shares: SWBGX

Investment objective

The portfolio seeks both capital growth and income.

Portfolio fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the portfolio.


Shareholder fees (fees paid directly from your investment)
Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual portfolio operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.23
Distribution (12b-1) fees		None
Other expenses		0.29
Acquired fund fees and expenses (AFFE) ¹		0.28

Total annual portfolio operating expenses ¹		0.80
Less expense reduction		(0.02)

Total annual portfolio operating expenses (including AFFE) after expense reduction ^1,2		0.78

The investment adviser and its affiliates have agreed to limit the total annual portfolio operating expenses (excluding interest, taxes and certain non-routine expenses) of the portfolio to 0.50% for so long as the investment adviser serves as the adviser to the portfolio. This agreement may only be amended or terminated with the approval of the portfolio Board of Trustees. This agreement is limited to the portfolio’s direct operating expenses and does not apply to AFFE.

Example

Expenses on a $10,000 investment


1 year	3 years		5 years		10 years
$80	$	249	$	433	$	966

Portfolio turnover

Schwab MarketTrack Balanced Portfolio ^tm 11

Principal investment strategies

To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes bond, stock and cash investments.

The portfolio’s allocation is weighted toward stock investments, while including substantial bond investments in seeking to add income and reduce the portfolio’s volatility. The portfolio seeks to remain close to the target allocations of 60% stocks, 35% bonds and 5% cash and typically does not change its target allocation.

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

Principal risks

The portfolio is subject to risks, any of which could cause an investor to lose money. The portfolio’s principal risks include:


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s large-cap holdings could reduce performance.

12 Schwab MarketTrack Balanced Portfolio ^tm


	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.

For more information on the risks of investing in the portfolio please see the “Portfolio details” section in the prospectus.

Performance

The bar chart below shows how the portfolio’s investment results have varied from year to year, and the following table shows how the portfolio’s average annual total returns for various periods compared to those of certain indices. This information provides some indication of the risks of investing in the portfolio. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus.

Schwab MarketTrack Balanced Portfolio ^tm 13

Annual total returns (%) as of 12/31

Best quarter: 12.52% Q2 2009
Worst quarter: (13.61%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		11.50%		3.26%		3.48%
After taxes on distributions		11.04%		2.41%		2.62%
After taxes on distributions and sale of shares		7.69%		2.46%		2.57%
Comparative Indices (reflect no deduction for expenses or taxes)
S&P 500 ^{^®} Index		15.06%		2.29%		1.41%
Barclays Capital U.S. Aggregate Bond Index		6.54%		5.80%		5.84%

The after-tax figures reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your portfolio shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Purchase and sale of portfolio shares


	•	by telephone at 1-800-407-0256, or

	•	or by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the portfolio is $100. The portfolio may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

14 Schwab MarketTrack Balanced Portfolio ^tm

payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the portfolio over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

Schwab MarketTrack Balanced Portfolio ^tm 15

Schwab MarketTrack Conservative Portfolio ^tm

Ticker Symbol: Investor Shares: SWCGX

Investment objective

The portfolio seeks income and more growth potential than an all-bond portfolio.

Portfolio fees and expenses

This table describes the fees and expenses you may pay if you buy and hold shares of the portfolio.


Shareholder fees (fees paid directly from your investment)

Redemption fee (as a % of the amount sold or exchanged within 30 days of purchase)		2.00


Annual portfolio operating expenses (expenses that you pay each year as a % of the value of your investment)
Management fees		0.23
Distribution (12b-1) fees		None
Other expenses		0.33
Acquired fund fees and expenses (AFFE) ¹		0.37

Total annual portfolio operating expenses ¹		0.93
Less expense reduction		(0.06)

Total annual portfolio operating expenses (including AFFE) after expense reduction ^1,2		0.87

Example

Expenses on a $10,000 investment


1 year		3 years		5 years		10 years
$	89	$	278	$	482	$	1,073

Portfolio turnover

16 Schwab MarketTrack Conservative Portfolio ^tm

Principal investment strategies

To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes bond, stock and cash investments.

The portfolio’s allocation is weighted toward bond investments, while including substantial stock investments in seeking to obtain long-term growth. The portfolio seeks to remain close to the target allocations of 55% bonds, 40% stocks and 5% cash and typically does not change its target allocation.

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

Principal risks

The portfolio is subject to risks, any of which could cause an investor to lose money. The portfolio’s principal risks include:


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s large-cap holdings could reduce performance.

Schwab MarketTrack Conservative Portfolio ^tm 17


	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s small-cap holdings could reduce performance.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* An underlying fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.

For more information on the risks of investing in the portfolio please see the “Portfolio details” section in the prospectus.

Performance

The bar chart below shows how the portfolio’s investment results have varied from year to year, and the following table shows how the portfolio’s average annual total returns for various periods compared to those of certain indices. This information provides some indication of the risks of investing in the portfolio. All figures assume distributions were reinvested. Keep in mind that future performance (both before and after taxes) may differ from past performance. For current performance information, please see www.schwabfunds.com/prospectus.

18 Schwab MarketTrack Conservative Portfolio ^tm

Annual total returns (%) as of 12/31

Best quarter: 9.06% Q3 2009
Worst quarter: (8.97%) Q4 2008

Average annual total returns (%) as of 12/31/10


	1 year		5 years		10 years
Before taxes		9.53%		3.23%		3.76%
After taxes on distributions		8.91%		2.23%		2.69%
After taxes on distributions and sale of shares		6.32%		2.28%		2.64%
Comparative Indices (reflect no deduction for expenses or taxes)
S&P 500 ^® Index		15.06%		2.29%		1.41%
Barclays Capital U.S. Aggregate Bond Index		6.54%		5.80%		5.84%

The after-tax figures reflect the highest individual federal income tax rates in effect during the period and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your individual tax situation. In addition, after-tax returns are not relevant if you hold your portfolio shares through a tax-deferred arrangement, such as a 401(k) plan, IRA or other tax-advantaged account.

Investment adviser

Charles Schwab Investment Management, Inc.

Portfolio manager

Purchase and sale of portfolio shares


	•	by telephone at 1-800-407-0256, or

	•	by mail in writing at Boston Financial Data Services, Attn: Schwab Funds, P.O. Box 8283, Boston, MA 02266-8323.

The minimum initial investment for the portfolio is $100. The portfolio may waive the minimum initial investment for certain investors.

Tax information

Payments to financial intermediaries

Schwab MarketTrack Conservative Portfolio ^tm 19

20 Schwab MarketTrack Conservative Portfolio ^tm

Portfolio details

Schwab MarketTrack All Equity Portfolio ^tm

Investment objective

The portfolio seeks high capital growth through an all-stock portfolio.

Investment strategy

Asset allocation

Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the portfolio’s asset allocation:


Allocation		Fund and index


Large-cap		Schwab S&P 500 Index Fund. Seeks to track the S&P 500 Index ^® , a widely recognized index maintained by Standard & Poor’s that includes 500 U.S. publicly traded stocks

Small-cap		Schwab Small-Cap Index Fund ^® . Seeks to track the Schwab Small-Cap Index ^® , which includes the second-largest 1,000 U.S. publicly traded stocks as measured by market capitalization

International		Schwab International Index Fund ^® . Seeks to track the Schwab International Index ^® , which includes 350 of the largest stocks (as measured by free float-adjusted market capitalization) that are publicly traded in developed securities markets outside the United States

The underlying funds may invest in derivatives, principally futures contracts, and lend their securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index. For the large-cap allocation, the portfolio may also invest directly in all of the stocks which comprise the S&P 500 Index (or other similar index), using an indexing strategy. In addition, the portfolio may purchase individual securities to maintain its allocations.

Principal investment risks

The portfolio is subject to risks, any of which could cause an investor to lose money.


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued

Portfolio details 21


		by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.


	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s performance also will lag these investments.

	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s performance may also lag these investments.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* An underlying fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are futures and options on futures. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day.


		An underlying fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk, and market risk, are discussed elsewhere in this section. The fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately larger impact on the fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.


	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of

22 Portfolio details


		the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. An underlying fund will also bear the risk of any decline in value of securities acquired with cash collateral. An underlying fund may pay lending fees to a party arranging the loan.

Schwab MarketTrack Growth Portfolio ^tm

Investment objective

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

Investment strategy

Asset allocation

Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the portfolio’s asset allocation:


Allocation		Fund and index


Large-cap		Schwab S&P 500 Index Fund. Seeks to track the S&P 500 Index ^® , a widely recognized index maintained by Standard & Poor’s that includes 500 U.S. publicly traded stocks

Small-cap		Schwab Small-Cap Index Fund ^® . Seeks to track the Schwab Small-Cap Index ^® , which includes the second-largest 1,000 U.S. publicly traded stocks as measured by market capitalization

International		Schwab International Index Fund ^® . Seeks to track the Schwab International Index ^® , which includes 350 of the largest stocks (as measured by free float-adjusted market capitalization) that are publicly traded in developed securities markets outside the United States

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

Principal investment risks

The portfolio is subject to risk, any of which could cause an investor to lose money.


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as

Portfolio details 23


		downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.


	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s performance also will lag these investments.

	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s performance may also lag these investments.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* A fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. Mortgage- or asset-backed securities are subject to the risk that these bonds may be paid off earlier or later than expected. Either situation could cause the a fund to hold securities paying lower than market rates of interest, which could hurt the fund’s yield or share price. Also, bonds of foreign issuers may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from limited issuer information to the risk of political upheaval. A fund’s use of mortgage dollar rolls

24 Portfolio details


		could cause the fund to lose money if the price of the mortgage-backed securities sold fall below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement.


	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. An underlying fund will also bear the risk of any decline in value of securities acquired with cash collateral. An underlying fund may pay lending fees to a party arranging the loan.

Schwab MarketTrack Balanced Portfolio ^tm

Investment objective

The portfolio seeks both capital growth and income.

Investment strategy

Asset allocation

Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the portfolio’s asset allocation:


Allocation		Fund and index


Large-cap		Schwab S&P 500 Index Fund. Seeks to track the S&P 500 Index ^® , a widely recognized index maintained by Standard & Poor’s that includes 500 U.S. publicly traded stocks

Small-cap		Schwab Small-Cap Index Fund ^® . Seeks to track the Schwab Small-Cap Index ^® , which includes the second-largest 1,000 U.S. publicly traded stocks as measured by market capitalization

International		Schwab International Index Fund ^® . Seeks to track the Schwab International Index ^® , which includes 350 of the largest stocks (as measured by free float-adjusted market capitalization) that are publicly traded in developed securities markets outside the United States

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

Principal investment risks

The portfolio is subject to risk, any of which could cause an investor to lose money.

Portfolio details 25

combination of the risks described below, although the portfolio’s exposure to a particular risk will be proportionate to the portfolio’s overall asset allocation and underlying fund allocation.


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s performance also will lag these investments.

	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s performance may also lag these investments.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

	•	*Derivatives Risk.* A fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause the fund to lose more than the principal amount invested.

	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by

26 Portfolio details


		the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. Mortgage- or asset-backed securities are subject to the risk that these bonds may be paid off earlier or later than expected. Either situation could cause the a fund to hold securities paying lower than market rates of interest, which could hurt the fund’s yield or share price. Also, bonds of foreign issuers may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from limited issuer information to the risk of political upheaval. A fund’s use of mortgage dollar rolls could cause the fund to lose money if the price of the mortgage-backed securities sold fall below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement.


	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. An underlying fund will also bear the risk of any decline in value of securities acquired with cash collateral. An underlying fund may pay lending fees to a party arranging the loan.

Schwab MarketTrack Conservative Portfolio ^tm

Investment objective

The portfolio seeks income and more growth potential than an all-bond portfolio.

Investment strategy

Asset allocation

Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the portfolio’s asset allocation:


Allocation		Fund and index


Large-cap		Schwab S&P 500 Index Fund. Seeks to track the S&P 500 Index ^® , a widely recognized index maintained by Standard & Poor’s that includes 500 U.S. publicly traded stocks

Small-cap		Schwab Small-Cap Index Fund ^® . Seeks to track the Schwab Small-Cap Index ^® , which includes the second-largest 1,000 U.S. publicly traded stocks as measured by market capitalization

International		Schwab International Index Fund ^® . Seeks to track the Schwab International Index ^® , which includes 350 of the largest stocks (as measured by free float-adjusted market capitalization) that are publicly traded in developed securities markets outside the United States

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

Principal investment risks

The portfolio is subject to risks, any of which could cause an investor to lose money.

Portfolio details 27


	•	*Investment Risk.* An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The portfolio may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.

	•	*Investment Style Risk.* The underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund’s expenses, the underlying fund’s performance is normally below that of the index.

	•	*Equity Risk.* The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.

	•	*Tracking Error Risk.* As an index fund, each underlying fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, an underlying fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints, which may result in tracking error. An underlying fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts may not be successful. In addition, cash flows into and out of an underlying fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.

	•	*Large-Cap Risk.* Many of the risks of the underlying funds are associated with its investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund’s performance also will lag these investments.

	•	*Small-Cap Risk.* Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — an underlying fund’s performance may also lag these investments.

	•	*Foreign Investment Risk.* An underlying fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

	•	*Currency Risk.* As a result of an underlying fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected.

28 Portfolio details


	•	*Derivatives Risk.* An underlying fund may use derivatives to enhance returns or hedge against market declines. Examples of derivatives are options, futures, options on futures and swaps. An option is the right to buy or sell an instrument at a specific price before a specific date. A future is an agreement to buy or sell a financial instrument at a specific price on a specific day. A swap is an agreement whereby two parties agree to exchange payment streams calculated in relation to a rate, index, instrument or certain securities and a predetermined amount. A credit default swap is an agreement in which the seller agrees to make a payment to the buyer in the event of a specified credit exchange for a fixed payment or series of fixed payments.


		An underlying fund’s use of derivative instruments involves risks different from or possibly greater than the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as credit risk, leverage risk, liquidity risk, market risk and management risk, are discussed elsewhere in this section. An underlying fund’s use of derivatives is also subject to lack of availability risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause the fund to realize higher amounts of short-term capital gain. These risks could cause the fund to lose more than the principal amount invested.


	•	*Debt Securities Risk.* Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the portfolio fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. Mortgage- or asset-backed securities are subject to the risk that these bonds may be paid off earlier or later than expected. Either situation could cause the a fund to hold securities paying lower than market rates of interest, which could hurt the fund’s yield or share price. Also, bonds of foreign issuers may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from limited issuer information to the risk of political upheaval. A fund’s use of mortgage dollar rolls could cause the fund to lose money if the price of the mortgage-backed securities sold fall below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement.

	•	*Liquidity Risk.* A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price.

	•	*Securities Lending Risk.* An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. When an underlying fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the fund will also receive a fee or interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent. An underlying fund will also bear the risk of any decline in value of securities acquired with cash collateral. An underlying fund may pay lending fees to a party arranging the loan.

A description of each portfolio’s policies and procedures with respect to the disclosure of its portfolio securities is available in the portfolio’s SAI.

Portfolio details 29

Investing in the portfolios

This section provides further details about the financial history of each share class of the portfolios for the past five years, or if shorter, for its period of operations. Certain information reflects financial results for a single portfolio share. “Total return” show the percentage that an investor in a portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolios’ independent registered public accounting firm, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolios’ annual report (see back cover).

MarketTrack All Equity Portfolio


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		9.82			9.44			15.58			13.63			11.55

Income (loss) from investment operations:
Net investment income (loss)		0.12			0.30			0.20			0.21			0.11
Net realized and unrealized gains (losses)		1.50			0.83			(6.11	)		2.01			2.10

Total from investment operations		1.62			1.13			(5.91	)		2.22			2.21
Less distributions:
Distributions from net investment income		(0.14	)		(0.23	)		(0.22	)		(0.27	)		(0.13	)
Distributions from net realized gains		—			(0.52	)		(0.01	)		—			—

Total distributions		(0.14	)		(0.75	)		(0.23	)		(0.27	)		(0.13	)

Net asset value at end of period		11.30			9.82			9.44			15.58			13.63

Total return (%)		16.62			13.54			(38.46	)		16.55			19.31
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.50			0.50			0.50			0.50			0.50
Gross operating expenses ¹		0.54			0.67			0.73			0.72			0.74
Net investment income (loss)		1.14			3.46			1.46			1.24			0.89
Portfolio turnover rate		8			10			10			0	²		8
Net assets, end of period ($ x 1,000,000)		489			461			429			682			527


¹		The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.


²		Less than 1%.

30 Financial highlights

MarketTrack Growth Portfolio


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
Investor Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		14.51			13.71			21.09			19.16			16.81

Income (loss) from investment operations:
Net investment income (loss)		0.19			0.39			0.37			0.40			0.30
Net realized and unrealized gains (losses)		1.95			1.25			(6.94	)		2.16			2.33

Total from investment operations		2.14			1.64			(6.57	)		2.56			2.63
Less distributions:
Distributions from net investment income		(0.30	)		(0.40	)		(0.41	)		(0.46	)		(0.28	)
Distributions from net realized gains		—			(0.44	)		(0.40	)		(0.17	)		—

Total distributions		(0.30	)		(0.84	)		(0.81	)		(0.63	)		(0.28	)

Net asset value at end of period		16.35			14.51			13.71			21.09			19.16

Total return (%)		14.86			12.95			(32.27	)		13.69			15.83
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.50			0.50			0.50			0.50			0.50
Gross operating expenses ¹		0.52			0.66			0.71			0.70			0.71
Net investment income (loss)		1.25			3.03			1.99			1.94			1.74
Portfolio turnover rate		14			23			10			4			7
Net assets, end of period ($ x 1,000,000)		549			507			454			686			602


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			4/6/06 ² –
P Shares	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		14.51			13.72			21.10			19.18			18.32

Income (loss) from investment operations:
Net investment income (loss)		0.21			0.43			0.37			0.42			0.10
Net realized and unrealized gains (losses)		1.94			1.22			(6.91	)		2.16			0.76

Total from investment operations		2.15			1.65			(6.54	)		2.58			0.86
Less distributions:
Distributions from net investment income		(0.31	)		(0.42	)		(0.44	)		(0.49	)		—
Distributions from net realized gains		—			(0.44	)		(0.40	)		(0.17	)		—

Total distributions		(0.31	)		(0.86	)		(0.84	)		(0.66	)		—

Net asset value at end of period		16.35			14.51			13.72			21.10			19.18

Total return (%)		15.00			13.09			(32.14	)		13.83			4.69	³
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.35			0.35			0.35			0.35			0.35	⁴
Gross operating expenses ¹		0.37			0.51			0.56			0.55			0.56	⁴
Net investment income (loss)		1.43			3.31			2.10			2.07			0.95	⁴
Portfolio turnover rate		14			23			10			4			7	³
Net assets, end of period ($ x 1,000,000)		88			84			94			138			119


¹		The expenses incurred by the underlying funds in which the portfolio invests are not included in this ratio.


²		Commencement of operations.


³		Not annualized.


⁴		Annualized.

Financial highlights 31

MarketTrack Balanced Portfolio


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		13.54			12.74			18.13			17.04			15.46

Income (loss) from investment operations:
Net investment income (loss)		0.23			0.38			0.42			0.47			0.38
Net realized and unrealized gains (losses)		1.50			1.11			(5.06	)		1.41			1.58

Total from investment operations		1.73			1.49			(4.64	)		1.88			1.96
Less distributions:
Distributions from net investment income		(0.31	)		(0.44	)		(0.48	)		(0.50	)		(0.34	)
Distributions from net realized gains		—			(0.25	)		(0.27	)		(0.29	)		(0.04	)

Total distributions		(0.31	)		(0.69	)		(0.75	)		(0.79	)		(0.38	)

Net asset value at end of period		14.96			13.54			12.74			18.13			17.04

Total return (%)		12.92			12.41			(26.59	)		11.38			12.92
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.50			0.50			0.50			0.50			0.50
Gross operating expenses ¹		0.52			0.66			0.72			0.72			0.73
Net investment income (loss)		1.59			3.09			2.57			2.65			2.35
Portfolio turnover rate		22			30			17			6			8
Net assets, end of period ($ x 1,000,000)		450			434			405			598			534


¹		The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.

32 Financial highlights

MarketTrack Conservative Portfolio


	11/1/09–			11/1/08–			11/1/07–			11/1/06–			11/1/05–
	10/31/10			10/31/09			10/31/08			10/31/07			10/31/06
Per-Share Data ($)

Net asset value at beginning of period		12.15			11.34			14.90			14.33			13.42

Income (loss) from investment operations:
Net investment income (loss)		0.24			0.37			0.43			0.49			0.42
Net realized and unrealized gains (losses)		1.08			0.91			(3.40	)		0.78			0.92

Total from investment operations		1.32			1.28			(2.97	)		1.27			1.34
Less distributions:
Distributions from net investment income		(0.25	)		(0.38	)		(0.46	)		(0.51	)		(0.42	)
Distributions from net realized gains		—			(0.09	)		(0.13	)		(0.19	)		(0.01	)

Total distributions		(0.25	)		(0.47	)		(0.59	)		(0.70	)		(0.43	)

Net asset value at end of period		13.22			12.15			11.34			14.90			14.33

Total return (%)		10.98			11.72			(20.59	)		9.12			10.13
Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses ¹		0.50			0.50			0.50			0.50			0.50
Gross operating expenses ¹		0.56			0.68			0.74			0.73			0.74
Net investment income (loss)		1.93			3.31			3.12			3.37			3.12
Portfolio turnover rate		25			25			16			4			11
Net assets, end of period ($ x 1,000,000)		194			181			182			252			232


¹		The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.

Financial highlights 33

Portfolio management

The investment adviser for the portfolios is Charles Schwab Investment Management, Inc. (“CSIM” or the “investment adviser”), 211 Main Street, San Francisco, CA 94105. Founded in 1989, the firm today serves as investment adviser for all of the Schwab Funds ^® , Schwab ETFs ^® and Laudus Funds ^® . As of 10/31/10, CSIM managed 84 mutual funds and approximately $187 billion in assets.

As the investment adviser, the firm oversees the asset management and administration of the portfolios. As compensation for these services, the firm receives a management fee from each portfolio. For the 12 months ended 10/31/10, these fees were 0.20% for the All Equity Portfolio, 0.22% for the Growth Portfolio, 0.21% for the Balanced Portfolio and 0.20% for the Conservative Portfolio. These figures, which are expressed as a percentage of each portfolio’s average daily net assets, represent the actual amounts paid, including the effects of reductions.

A discussion regarding the basis for the Board of Trustees’ approval of each portfolio’s investment advisory agreement is available in each portfolio’s 2010 annual report, which covers the period from 11/1/09 through 10/31/10.

Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day management of the portfolios. He was appointed portfolio manager in 2008. From 2003, until his appointment, he held vice president-level positions in product development, investment operations and audit at the firm. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry, with more than 6 of those years spent in portfolio management.

In this section, you will find information on buying, selling and exchanging shares. You may invest in a portfolio through an intermediary by placing orders through your brokerage account at Charles Schwab & Co., Inc. (Schwab) or an account with another broker/dealer, investment adviser, 401(k) plan, employee benefit plan, administrator, bank, or other financial intermediary (intermediary) that is authorized to accept orders on behalf of the portfolio (intermediary orders). Eligible Investors (as defined herein) may invest directly in a portfolio by placing orders through the portfolio’s transfer agent (direct orders). You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well.

Investing directly with the portfolios

Placing orders through your intermediary

When you place orders through Schwab or other intermediary, you are not placing your orders directly with a portfolio, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the portfolios on purchases, redemptions and exchanges of portfolio shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, portfolio choices, cut-off times for investment and trading restrictions. Your intermediary may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the portfolios. These additional fees may vary over time and would increase the cost of your investment and lower investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The portfolios are not responsible for the failure of your intermediary to carry out its responsibilities.

Only certain intermediaries are authorized to accept orders on behalf of a portfolio. If your portfolio shares are no longer held by an authorized intermediary, the portfolio may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to purchase additional shares. To remove these restrictions, you have two options. First, you may move your shares to Schwab or another intermediary that is authorized to accept portfolio orders. Second, you may maintain a direct account with a portfolio if you meet the eligibility requirements for placing direct orders and your completed account application and supporting documentation is returned to and accepted by the portfolio’s transfer agent, Boston Financial Data Services (transfer agent). The eligibility requirements and instructions for submitting an account application are set forth in the “Investing directly with the portfolios” section of the prospectus. If you do not exercise one of these options within ninety days, the portfolios reserve the right to redeem your shares.

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Buying, selling and exchanging shares through an intermediary

When selling or exchanging shares, you should be aware of the following portfolio policies:


•	The portfolios may take up to seven days to pay sale proceeds.

•	The portfolios reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a portfolio’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

Investor eligibility requirements for placing direct orders

Only Eligible Investors (as defined below) may purchase shares directly from a portfolio’s transfer agent, Boston Financial Services. Eligible Investors include, but are not limited to, qualified and non-qualified employee benefit plans (including but not limited to defined benefit plans, defined contribution plans, 401(k) plans), foundations and endowments, banks, trusts, investment companies and corporate capital and cash management accounts. Eligible Investors may also be shareholders who receive shares of Schwab Funds as a result of a reorganization of a fund. The portfolios reserve the right to determine which potential investors qualify as Eligible Investors. Shares held by a non-Eligible Investor directly with a portfolio are subject to involuntary redemption by the portfolio.

Opening an account to place direct orders

You must satisfy the investor eligibility requirements for direct order clients in order to place direct orders for a portfolio’s shares. Eligible Investors must open an account with a portfolio through the portfolio’s transfer agent prior to placing direct orders. You may obtain an account application by calling the transfer agent at 1-800-407-0256. Your completed application and supporting documents must be returned to, and accepted by, the transfer agent before you can place direct orders. You cannot place direct orders through your Schwab account or through your account at another intermediary.

Initial and additional direct purchases by wire

Subject to acceptance by a portfolio, you may make your initial purchase and any additional purchases of shares by wiring federal funds to the transfer agent. If you have not yet opened an account with a portfolio, you must fax a signed, hard copy of the completed account application and all supporting documents to the transfer agent at 1-816-218-0490. You must call the transfer agent at 1-800-407-0256 prior to the close of a portfolio (generally 4:00 p.m. Eastern time or the close of the New York Stock Exchange (NYSE), whichever is earlier) to place your order and to receive wire instructions. Orders received by the transfer agent in good order on or prior to the close of a portfolio will be processed at the net asset value per share of the portfolio for that day. Your wired funds must be received and accepted by the transfer agent prior to 6:00 p.m. Eastern time or the deadline for the Fedwire Funds Service for initiating third party transfers, whichever is earlier, on the day your purchase order is placed. Please call the transfer agent at 1-800-407-0256 if you have any questions or need additional information.

Initial and additional direct purchases by mail

Subject to acceptance by a portfolio, you may open an account and make your initial purchase and any additional purchases of the portfolio’s shares by mail. To open an account by mail, complete and sign the account application and mail the account application, all supporting documents and a check for the desired purchase amount to the transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Additional investments may be made at any time by mailing a check (payable to Schwab Funds) to the transfer agent at the address above. Be sure to include your account number on your check.

Subject to acceptance by a portfolio, payment for the purchase of shares received by mail will be credited to a shareholder’s account at the net asset value per share of the portfolio next determined after receipt, even though the check may not yet have been converted into federal funds. For purposes of calculating the purchase price of portfolio shares, a purchase order is received by a portfolio on the day that it is in good order unless it is rejected by the portfolio’s transfer agent. For

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a cash purchase order of portfolio shares to be in good order on a particular day, a check must be received on or before the close of a portfolio (generally 4:00 p.m. Eastern time or the close of the NYSE, whichever is earlier) on that day. If the payment is received by a portfolio after the deadline, the purchase price of portfolio shares will be based upon the next determination of net asset value of portfolio shares. No currency, third party checks, foreign checks, starter checks, credit card checks, traveler’s checks or money orders will be accepted by the portfolios.

Direct redemptions and exchanges

When selling or exchanging shares directly, you should be aware of the following portfolio policies:


•	The portfolios may take up to seven days to pay sale proceeds.

•	The portfolios reserve the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a portfolio’s assets, whichever is less. You may incur transaction expenses in converting these securities to cash.

•	Exchange orders are limited to other Schwab Funds ^® or Laudus MarketMasters Funds ^® that are not Sweep Investments ^® and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging.

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

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

Direct redemptions by telephone

If you authorized the telephone redemption option in the account application, you may place a redemption order by calling the transfer agent at 1-800-407-0256 and requesting that the redemption proceeds be wired per the authorized instructions in the account application or mailed to the primary registration address. Your redemption order will be processed at the net asset value per share of a portfolio next determined after receipt of your telephone redemption order by the transfer agent. Please note that the transfer agent may only act on telephone instructions believed by the transfer agent to be genuine. The transfer agent’s records of such instructions are binding on the shareholder. The portfolios and their service providers (including the transfer agent, Schwab and CSIM) are not responsible for any losses or costs that may arise from following telephone instructions that the transfer agent reasonably believes to be genuine. The transfer agent will employ reasonable procedures to confirm that instructions communicated are genuine. These procedures include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone.

Direct redemptions by mail

You may redeem your portfolio shares by mail by sending a request letter to the portfolios’ transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. Your redemption request will be processed by a portfolio at the net asset value per share of the portfolio next determined after the request is received in good order. To be in good order, the redemption request must include the name of the portfolio and the number of shares or the dollar amount to be redeemed, all required signatures and authorizations and any required signature guarantees.

Additional direct redemption information

To protect you, the portfolios and their service providers from fraud, signature guarantees may be required to enable the transfer agent to verify the identity of the person who has authorized a redemption from an account. Signature guarantees are required for (1) redemptions where the proceeds are to be sent to someone other than the registered shareholder(s) at the registered address, (2) redemptions if your account address has changed within the last 10 business days, (3) share transfer requests, and (4) redemptions where the proceeds are wired in connection with bank instructions not already on file with the transfer agent. Signature guarantees may be obtained from certain eligible financial institutions, including, but not limited to, the following: U.S. banks, trust companies, credit unions, securities brokers and dealers, savings and loan associations and participants in the Securities and Transfer Association Medallion Program (“STAMP”), the Stock Exchange Medallion Program (“SEMP”) or the New York Stock Exchange Medallion Signature Program (“MSP”). Signature guarantees from non-U.S. banks that do not include a stamp may require a U.S. consulate stamp. You may contact the transfer agent at 1-800-407-0256 for further details.

Direct exchange privileges

Upon request, and subject to certain limitations, shares of a portfolio may be exchanged into shares of any other Schwab Fund or Laudus MarketMasters Fund that is not a Sweep Investment. In order to exchange your shares to another fund,

36 Investing in the portfolios

you must meet the minimum investment and other requirements for the fund and share class into which you are exchanging or converting. Further, you must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. A new account opened by exchange must be established with the same name(s), address(es) and tax identification number(s) as the existing account. All exchanges will be made based on the respective net asset values next determined following receipt of the request by a portfolio containing the information indicated below.

The portfolios reserve the right to suspend or terminate the privilege of exchanging shares of the portfolios by mail or by telephone at any time.

Direct exchanges by telephone

If you authorized the telephone redemption option in the account application, you may exchange portfolio shares by telephone by calling the portfolios’ transfer agent at 1-800-407-0256. Please be prepared to provide the following information: (a) the account number, tax identification number and account registration; (b) the class of shares to be exchanged (if applicable); (c) the name of the portfolio from which and the fund into which the exchange is to be made; and (d) the dollar or share amount to be exchanged. Please note that the transfer agent may act only on telephone instructions believed by the transfer agent to be genuine. Please see the section entitled “Direct redemptions by telephone” for more information regarding transacting with the portfolios’ transfer agent via telephone.

Direct exchanges by mail

To exchange portfolio shares by mail, simply send a letter of instruction to the portfolios’ transfer agent at Boston Financial Data Services, Attn: Schwab Funds, PO Box 8283, Boston, MA 02266-8323. The letter of instruction must include: (a) your account number; (b) the class of shares to be exchanged (if applicable); (c) the portfolio from and the fund into which the exchange is to be made; (d) the dollar or share amount to be exchanged; and (e) the signatures of all registered owners or authorized parties.

The portfolios are open for business each day that the New York Stock Exchange (NYSE) is open. Each portfolio calculates its share price each business day as of the close of the NYSE (generally 4 p.m. Eastern time). A portfolio’s share price is its net asset value per share, or NAV, which is the portfolio’s net assets divided by the number of its shares outstanding. Orders to buy, sell or exchange shares that are received by a portfolio in good order on or prior to the close of the portfolio (generally 4 p.m. Eastern time) will be executed at the next share price calculated that day.

If you place an order through your Schwab account or an account at another intermediary, please consult with your intermediary to determine when your order will be executed. Generally, you will receive the share price next calculated after a portfolio receives your order from your intermediary. However, some intermediaries, such as Schwab, may arrange with a portfolio for you to receive the share price next calculated after your intermediary has received your order. Some intermediaries may require that they receive orders prior to a specified cut-off time.

In valuing underlying fund investments, the portfolios use the NAVs reported by their underlying funds. In valuing other portfolio securities, the portfolios use market quotes or official closing prices if they are readily available. In cases where quotes are not readily available or the adviser deems them unreliable, a portfolio may value securities based on fair values developed using methods approved by the portfolios’ Board of Trustees.

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


Minimum initial investment

Investor Shares: $100

P Shares: $100,000

Please note that the P Shares that are offered by the Growth Portfolio are only offered to charitable giving funds and tax-advantaged retirement plans.

These minimums may be waived for certain retirement plans, including Schwab Corporate Services retirement plans, and plan participants, and for shareholders who roll into an IRA from an exempted retirement plan. These minimums may

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also be waived for certain other investors, including trustees, officers and employees of Schwab, and for certain investment programs, including programs for education savings or charitable giving.

Choose an option for portfolio distributions.

If you are an Eligible Investor placing direct orders with a portfolio, you will have one of the three options described below for portfolio distributions. If you don’t indicate a choice, you will receive the first option. If you are placing orders through an intermediary, you will select from the options for portfolio distributions provided by your intermediary, which may be different than those provided by the portfolios to Eligible Investors. You should consult with your financial intermediary to discuss available options.


Option		Feature
Reinvestment		All dividends and capital gain distributions are invested automatically in shares of your share class.

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

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

Each portfolio reserves certain rights, including the following:


•	To materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.

•	To change or waive a portfolio or share class’ investment minimums.

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

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

Payments by the investment adviser or its affiliates

The investment adviser or its affiliates may make cash payments out of their own resources, or provide products and services at a discount, to certain brokerage firms, banks, retirement plan service providers and other financial intermediaries that perform shareholder, recordkeeping, sub-accounting and other administrative services in connection with investments in portfolio shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the portfolios may pay to those intermediaries The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing, promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, distribution-related services provided by such intermediaries are paid by the investment adviser or its affiliates, not by the portfolio or its shareholders.

Shareholder servicing plan

The Board of Trustees has adopted a Shareholder Servicing Plan (the “Plan”) on behalf of the portfolios. The Plan enables each portfolio to bear expenses relating to the provision by service providers, including Schwab, of certain account maintenance, customer liaison and shareholder services to the current shareholders of the portfolios. Schwab serves as the portfolios’ paying agent under the Plan for making payments of the shareholder service fee due to the service providers (other than Schwab) under the Plan. All shareholder service fees paid by the portfolios to Schwab in its capacity as the portfolios’ paying agent will be passed through to the service providers, and Schwab will not retain any portion of such fees.

Pursuant to the Plan, each portfolio’s shares are subject to an annual shareholder servicing fee of up to 0.10% for the Schwab MarketTrack Growth Portfolio’s P Shares and 0.25% for the remaining portfolios. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab (or, in the case of payments made to Schwab, pursuant to Schwab’s written agreement with the portfolios). Payments under the Plan are made as described above regardless of Schwab’s or the service provider’s actual cost of providing the services. If the cost of providing the services under the Plan is less than the payments received, the unexpended portion of the fees may be retained as profit by Schwab or the service provider.

Policy regarding short-term or excessive trading

The portfolios are intended for long-term investment and not for short-term or excessive trading (collectively “market timing”). Market timing may adversely impact the portfolios’ performance by disrupting the efficient management of the portfolio, increasing portfolio transaction costs and taxes, causing the portfolios to maintain higher cash balances, and diluting the value of the portfolios’ shares.

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In order to discourage market timing, each portfolio’s Board of Trustees has adopted policies and procedures that are reasonably designed to reduce the risk of market timing by portfolio shareholders. Each portfolio seeks to deter market timing through several methods. These methods may include: fair value pricing, imposition of redemption fees and trade activity monitoring. Fair value pricing and redemption fees are discussed more thoroughly in the subsequent pages of this prospectus and are considered to be key elements of the portfolios’ policy regarding short term or excessive trading. Trade activity monitoring is risk based and seeks to identify patterns of activity in amounts that might be detrimental to a portfolio.

Although these methods are designed to discourage market timing, there can be no guarantee that the portfolios will be able to identify and restrict investors that engage in such activities. In addition, some of these methods are inherently subjective and involve judgment in their application. Each portfolio and its service providers seek to make these judgments and applications uniformly and in a manner that they believe is consistent with interests of the portfolio’s long-term shareholders. The portfolios may amend these policies and procedures in response to changing regulatory requirements or to enhance the effectiveness of the program.

The portfolios or their service providers maintain risk-based surveillance procedures designed to detect market timing in portfolio shares in amounts that might be detrimental to the portfolios. Under these procedures, the portfolios have requested that service providers to the portfolios monitor transactional activity in amounts and frequency determined by the portfolios to be significant to a portfolio and in a pattern of activity that potentially could be detrimental to a portfolio. If a portfolio, in its sole discretion based on these or other factors, determines that a shareholder has engaged in market timing, it may refuse to process future purchases or exchanges into the portfolio by that shareholder. These procedures may be modified from time to time as appropriate to improve the detection of market timing and to comply with applicable laws.

If trades are effected through a financial intermediary, the portfolios or their service providers will work with the intermediary to monitor possible market timing activity. The portfolios reserve the right to contact the intermediary to provide certain shareholder transaction information and may require the intermediary to restrict the shareholder from future purchases or exchanges in the portfolios. Transactions by portfolio shareholders investing through intermediaries may also be subject to the restrictions of the intermediary’s own frequent trading policies, which may differ from those of the portfolios. The portfolios may defer to an intermediary’s frequent trading policies with respect to those shareholders who invest in the portfolios through such intermediary. The portfolios will defer to an intermediary’s policies only after the portfolios determine that the intermediary’s frequent trading policies are reasonably designed to deter transactional activity in amounts and frequency that are deemed to be significant to the portfolios and in a pattern of activity that potentially could be detrimental to the portfolios. Shareholders should consult with their intermediary to determine if additional frequent trading restrictions apply to their portfolio transactions.

The portfolios reserve the right to restrict, reject or cancel within a reasonable time, without prior notice, any purchase or exchange order for any reason.

Fair value pricing

The Board of Trustees has adopted procedures to fair value the portfolios’ securities when market prices are not “readily available” or are unreliable. For example, a portfolio may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; when a security’s primary trading market is closed during regular market hours; or when a security’s value is materially affected by events occurring after the close of the security’s primary trading market.

By fair valuing securities whose prices may have been affected by events occurring after the close of trading, the portfolios seek to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a portfolio’s portfolio holdings and the net asset value of the portfolio’s shares, and seeks to help ensure that the prices at which the portfolio’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders.

Each portfolio makes fair value determinations in good faith in accordance with the portfolio’s valuation procedures. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a portfolio could obtain the fair value assigned to the security upon the sale of such security. The respective prospectuses for the underlying funds in which the portfolios invest explain the circumstances in which those funds will use fair value pricing and the effect of fair value pricing.

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Redemption fee

With the exception of Schwab MarketTrack Growth Portfolio’s P Shares, shares redeemed or exchanged within 30 days of purchase, which shall be calculated to include the 30th day, will be subject to a fee of 2%, which is intended to limit short-term trading in the portfolios, or to the extent that short-term trading persists, to impose the costs of that type of activity on the shareholders who engage in it. Each portfolio treats shares that have been held the longest as being redeemed first. Each portfolio retains the redemption fees for the benefit of the remaining shareholders. Portfolio shares purchased with reinvested dividends are not subject to redemption fees. Each portfolio reserves the right, in its sole discretion, to waive such fee when, in its judgment, such waiver would be in the best interests of the fund and its long-term shareholders. A portfolio may waive the redemption fee for retirement plans, wrap or fee-based programs, charitable giving funds, unregistered separate accounts, redemptions pursuant to rebalancing programs or systematic withdrawal plans established by the portfolio or financial intermediaries, and registered investment companies and redemptions initiated by the portfolio. In addition, certain financial intermediaries may use criteria and methods for tracking, applying and calculating the fees that are different from a portfolio’s but which the portfolio, in its discretion, may determine are in the best interests of the portfolio and its long-term shareholders. While the portfolios discourage mutual fund market timing and maintain procedures designed to provide reasonable assurances that such activity will be identified and terminated, including the imposition of the redemption fee described above, no policy or procedure can guarantee that all such activity will in fact be identified or that such activity can be completely eliminated. The portfolios reserve the right to modify or eliminate the redemption fees or waivers at any time.

Customer identification and verification and anti-money laundering program

Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information that will allow the portfolios or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.

The portfolios or your financial intermediary are required by law to reject your new account application if the required identifying information is not provided. A portfolio or your financial intermediary may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if they are unable to obtain this information. In certain instances, a portfolio or your financial intermediary is required to collect documents, which will be used solely to establish and verify your identity.

The portfolios will accept investments and your order will be processed at the NAV next determined after receipt of your application in proper form (or upon receipt of all identifying information required on the application). The portfolios, however, reserve the right to close and/or liquidate your account at the then-current day’s price if the portfolios or your financial intermediary are unable to verify your identity. As a result, you may be subject to a gain or loss on portfolio shares and will be subject to corresponding tax consequences.

Customer identification and verification is part of a portfolio’s overall obligation to deter money laundering under Federal law. Each portfolio has adopted an Anti-Money Laundering Compliance Program designed to prevent the portfolio from being used for money laundering or the financing of terrorist activities. In this regard, the portfolios reserve the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of portfolio management, they are deemed to be in the best interest of a portfolio or in cases when the portfolio is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if a portfolio is required to withhold such proceeds.