Schwab Core Equity Fund (SWANX) N-CSR Certified annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-7704

Schwab Capital Trust

(Exact name of registrant as specified in charter)

101 Montgomery Street, San Francisco, California 94104

(Address of principal executive offices) (Zip code)

Evelyn Dilsaver
Schwab Capital Trust
101 Montgomery Street, San Francisco, California 94104

(Name and address of agent for service)

Registrant’s telephone number, including area code: (415) 627-7000

Date of fiscal year end: October 31

Date of reporting period: October 31, 2006

TABLE OF CONTENTS

	Item 1: Report(s) to Shareholders.
	Item 2: Code of Ethics.
	Item 3: Audit Committee Financial Expert.
	Item 4: Principal Accountant Fees and Services.
	Item 5: Audit Committee of Listed Registrants.
	Item 6: Schedule of Investments.
	Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
	Item 8: Portfolio Managers of Closed-End Management Investment Companies.
	Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
	Item 10: Submission of Matters to a Vote of Security Holders.
	Item 11: Controls and Procedures.
	Item 12: Exhibits.
EXHIBIT 99.CERT
EXHIBIT 99.906CERT

Item 1: Report(s) to Shareholders.

Schwab Equity Index Funds

Annual Report
October 31, 2006

Schwab S&P 500 Index Fund

Schwab Institutional Select®
S&P 500 Fund

Schwab 1000 Index® Fund

Schwab Small-Cap
Index Fund®

Schwab Total Stock Market
Index Fund®

Schwab International
Index Fund®
 
 

Six cost-efficient ways to tap into the power of
the stock market for long-term growth potential.

In this report

Performance at a Glance	1
From the Chairman	2
From the President	3
Investment Environment	4
Schwab S&P 500 Index Fund	6
Schwab Institutional Select® S&P 500 Fund	8
Schwab 1000 Index® Fund	10
Schwab Small-Cap Index Fund®	12
Schwab Total Stock Market Index Fund®	14
Schwab International Index Fund®	16
Fund Expenses	18
Financial Statements	20
Financial Notes	63
Investment Advisory Agreement Approval	72
Trustees and Officers	74
Glossary	78

 

Select Shares^® are available on many Schwab Funds^®

Schwab Funds offers Select Shares, a shares class that carries lower expenses than Investor Shares™ in exchange for higher investment minimums on many of its funds. Select Shares are available for initial purchases of $50,000 or more of a single fund in a single account and for shareholders who add to their existing Investor Share position, bringing the value to or above $50,000. We encourage shareholders of Investor Shares to review their portfolio to see if they are eligible to exchange into Select Shares. If you believe you are eligible, you should contact Schwab or your financial intermediary to request a tax-free interclass exchange into Select Shares. Instructions for performing a tax-free interclass exchange can also be referenced on the Schwab Funds website at www.schwab.com/schwabfunds under Schwab Funds Investor Information. Select Shares may not be available through financial intermediaries other than Charles Schwab & Co., Inc.

Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab).

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

	Total Return for the Report Period
Schwab S&P 500 Index Fund
Investor Shares (Ticker Symbol: SWPIX)		16.03	%
Select Shares (Ticker Symbol: SWPPX)		16.18	%
e.Shares (Ticker Symbol: SWPEX)1		16.20	%
Benchmark: S&P 500® Index		16.34	%
Performance Details		pages 6–7
Schwab Institutional Select® S&P 500 Fund (Ticker Symbol: ISLCX)		16.39	%
Benchmark: S&P 500® Index		16.34	%
Performance Details		pages 8–9
Schwab 1000 Index® Fund
Investor Shares (Ticker Symbol: SNXFX)		15.84	%
Select Shares (Ticker Symbol: SNXSX)		16.01	%
Benchmark: Schwab1000 Index®		16.26	%
Performance Details		pages 10–11
Schwab Small-Cap Index Fund®
Investor Shares (Ticker Symbol: SWSMX)		17.62	%
Select Shares (Ticker Symbol: SWSSX)		17.78	%
Benchmark: Schwab Small-Cap Index®		17.94	%
Performance Details		pages 12–13
Schwab Total Stock Market Index Fund®
Investor Shares (Ticker Symbol: SWTIX)		16.05	%
Select Shares (Ticker Symbol: SWTSX)		16.23	%
Benchmark: Dow Jones Wilshire 5000 Composite IndexSM		16.61	%
Performance Details		pages 14–15
Schwab International Index Fund®
Investor Shares (Ticker Symbol: SWINX)		26.15	%
Select Shares (Ticker Symbol: SWISX)		26.35	%
Benchmark: Schwab International Index®		26.76	%
Performance Details		pages 16–17
Minimum Initial Investment2
Investor Shares ($1,000 for retirement, education and custodial accounts)		$  2,500
Select Shares®		$50,000
e.Shares ($500 for retirement, education and custodial accounts)		$  1,000
Institutional Select S&P 500 Fund		$75,000

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the funds’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

¹One year return presented in the table differs from the return in the Financial Highlights. This is a result of the calculation of the Financial Highlights return adhering to GAAP presentation.

²Please see prospectus for further detail and eligibility requirements.

Schwab Equity Index Funds    1

From the Chairman

Dear Shareholder, I founded Schwab over thirty years ago to be a home for serious investors. That mission continues to guide us today as we constantly strive to improve and innovate. By doing this, and providing some of the highest quality products and services — at a competitive price — we remain true to our heritage. I take particular pride in the Schwab Funds. Founded over 15 years ago, Schwab Funds now includes more than 50 funds with over $170 billion in assets. With a variety of investment strategies, Schwab Funds provides a range of innovative investment choices that can serve as a foundation for your asset allocation plan, including the Schwab Equity Index Funds, contained within this book. Schwab Funds are managed by Charles Schwab Investment Management, Inc., one of the largest mutual fund managers in the U.S. Our portfolio managers share a passion for market analysis and use some of the most sophisticated financial models in the country. I am proud of their depth of experience, which reflects an average of 14 years in the investment industry. Furthermore, I am impressed by the commitment that our managers bring to the stewardship of their funds, for you, their shareholders. In closing, I want to thank you for investing with us. We work every day to warrant the trust you have placed in us; that will never change. Sincerely,

2    Schwab Equity Index Funds

From the President

Evelyn Dilsaver is President and CEO of Charles Schwab Investment Management, Inc. and of each of the funds covered in this report. She joined the firm in 1992 and has held a variety of executive positions at Schwab.

Dear Shareholder, I am pleased to present the annual report for the Schwab Equity Index Funds for the period ended October 31, 2006. Thanks to the support of investors like you, Schwab Equity Index Funds assets were over $21 billion as of this report date. Schwab Equity Index Funds let you tap into the power of the stock market for long-term growth potential. Indexing can be a highly effective approach to stock investing. In fact, for the one-year report period, I’m pleased to note that all but one of our equity index funds beat their respective fund category averages. What’s more, since an indexing strategy generally results in lower turnover, this can mean fewer taxable capital gain distributions to shareholders. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the funds’ ticker symbols and report period returns for the funds and their benchmarks. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.schwabfunds.com. This website contains regular updates about the Schwab Funds. I encourage you to visit the website to stay informed about your fund. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Schwab Funds. Sincerely,   Past performance is no guarantee of future results.

Schwab Equity Index Funds    3

The Investment Environment
 

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund. As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Product (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth.

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
n  16.34%	S&P 500® Index: measures U.S. large-cap stocks
n19.98%	Russell 2000® Index: measures U.S. small-cap stocks
n  27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
n  5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data source: Charles Schwab & Co., Inc.

4    Schwab Equity Index Funds

The Investment Environment  continued

In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of the end of the report period. In its statement, the Fed noted that the economy appeared to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only 2.2% in the third quarter of 2006.

Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico, as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds.

The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact.

Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

    

Schwab Equity Index Funds    5

Schwab S&P 500 Index Fund

Larry Mano, (right) vice president and senior portfolio manager, is responsible for the co-management of the fund.   Tom Brown, (left) associate portfolio manager, is responsible for the dayto-day co-management of the fund.	The Schwab S&P 500 Index Fund Investor Shares ended the one-year period with a positive return of 16.03%, tracking the benchmark, the S&P 500 Index, which was up 16.34%. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. The S&P 500 Index includes the stocks of 500 leading U.S. publicly traded companies from a broad range of industries and is market-capitalization weighted. Therefore, its returns are most heavily influenced by the largest names in the index. Sectors with the best performance during the report period were Telecommunication Services, Materials, and Consumer Discretionary. On the downside, Information Technology (IT) and Health Care sectors trailed, with such IT industry heavyweights as Dell Inc., and Intel Corp. struggling. Top performing industry groups included Diversified Telecommunication Services, Metals and Mining, and Road and Rail. Conversely, Diversified Consumer Services, Internet Software and Services, and Wireless Telecommunication industry groups generated negative returns. Stocks that performed well during the period included Allegheny Technologies Inc., NVIDIA Corp. and Exxon Mobil Corp.
As of 10/31/06:
Style Assessment1

Statistics
Number of Holdings	502
Weighted Average Market Cap ($ x 1,000,000)	96,440
Price/Earnings Ratio (P/E)	17.4
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Financials	22.1	%
Information Technology	15.4	%
Health Care	12.4	%
Industrials	10.9	%
Consumer Discretionary	10.3	%
Consumer Staples	9.5	%
Energy	9.4	%
Telecommunication Services	3.5	%
Utilities	3.4	%
Materials	3.0	%
Others	0.1	%
Total	100.0	%

 

Top Holdings % of Net Assets2
Exxon Mobil Corp.	3.4	%
General Electric Co.	2.9	%
Citigroup, Inc.	2.0	%
Microsoft Corp.	2.0	%
Bank of America Corp.	2.0	%
Procter & Gamble Co.	1.6	%
Johnson & Johnson	1.6	%
Pfizer, Inc.	1.6	%
American International Group, Inc.	1.4	%
Altria Group, Inc.	1.4	%
Total	19.9	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

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 fund. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in the fund.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

6    Schwab Equity Index Funds

Schwab S&P 500 Index Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1	Performance of a Hypothetical $10,000 Investment in e.Shares1

Pre-Tax Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (5/1/96)		16.03	%		6.94	%		8.26	%	n/a
Select Shares® (5/19/97)		16.18	%		7.12	%		n/a		6.96%
e.Shares® (5/1/96)		16.20	%		7.04	%		8.36	%	n/a
Benchmark: S&P 500® Index		16.34	%		7.25	%		8.63	%	(5/19/97) 7.13%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		7.76	%	(5/19/97) 6.63%
Average Annual Total Returns After Tax1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (5/1/96)
Pre-Liquidation (still own shares)		15.41	%		6.41	%		7.80	%		n/a
Post-Liquidation (shares were sold)		10.39	%		5.65	%		7.01	%		n/a
Select Shares® (5/19/97)
Pre-Liquidation (still own shares)		15.89	%		6.60	%		n/a			6.50	%
Post-Liquidation (shares were sold)		10.86	%		5.84	%		n/a			5.83	%
e.Shares® (5/1/96)
Pre-Liquidation (still own shares)		15.90	%		6.54	%		7.90	%		n/a
Post-Liquidation (shares were sold)		10.86	%		5.79	%		7.11	%		n/a
Fund Category: Morningstar Large-Cap Blend
Pre-Liquidation (still own shares)		6.56	%		5.96	%		6.25	%		n/a
Post-Liquidation (shares were sold)		5.04	%		5.31	%		5.97	%		n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies, including this fund.

Schwab Equity Index Funds    7

Schwab Institutional Select^® S&P 500 Fund

Larry Mano, (right) vice president and senior portfolio manager, is responsible for the co-management of the fund.   Tom Brown, (left) associate portfolio manager, is responsible for the dayto-day co-management of the fund.	Schwab Institutional Select S&P 500 Fund ended the one-year period with a positive return of 16.39%, tracking the benchmark, the S&P 500 Index, which was up 16.34%. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. The S&P 500 Index includes the stocks of 500 leading U.S. publicly traded companies from a broad range of industries and is market-capitalization weighted. Therefore, its returns are most heavily influenced by the largest names in the index. Sectors with the best performance during the report period were Telecommunication Services, Materials, and Consumer Discretionary. On the downside, Information Technology (IT) and Health Care sectors trailed, with such IT industry heavyweights as Dell Inc., and Intel Corp. struggling. Top performing industry groups included Diversified Telecommunication Services, Metals and Mining, and Road and Rail. Conversely, Diversified Consumer Services, Internet Software and Services, and Wireless Telecommunication industry groups generated negative returns. Stocks that performed well during the period included Allegheny Technologies Inc., NVIDIA Corp. and Exxon Mobil Corp.
As of 10/31/06:
Style Assessment1

Statistics
Number of Holdings	506
Weighted Average Market Cap ($ x 1,000,000)	96,160
Price/Earnings Ratio (P/E)	17.4
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Financials	22.0	%
Information Technology	15.3	%
Health Care	12.3	%
Industrials	10.8	%
Consumer Discretionary	10.3	%
Energy	9.4	%
Consumer Staples	9.4	%
Telecommunication Services	3.5	%
Utilities	3.4	%
Materials	2.9	%
Others	0.7	%
Total	100.0	%

 

Top Holdings % of Net Assets2
Exxon Mobil Corp.	3.4	%
General Electric Co.	2.9	%
Citigroup, Inc.	2.0	%
Microsoft Corp.	2.0	%
Bank of America Corp.	1.9	%
Procter & Gamble Co.	1.6	%
Johnson & Johnson	1.6	%
Pfizer, Inc.	1.6	%
American International Group, Inc.	1.4	%
Altria Group, Inc.	1.4	%
Total	19.8	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

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 fund. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in the fund.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

8    Schwab Equity Index Funds

Schwab Institutional Select S&P 500 Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$75,000 Investment¹

 

 

Pre-Tax Average Annual Total Returns1,2
	1 year			5 years			Since Inception
Fund: Institutional Select® S&P 500 Fund (2/1/99)		16.39	%		7.19	%		2.46	%
Benchmark: S&P 500® Index		16.34	%		7.25	%		2.55	%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		3.08	%
Average Annual Total Returns After Tax1,2
	1 year			5 years			Since Inception
Fund: Institutional Select S&P 500 Fund (2/1/99)
Pre-Liquidation (still own shares)		16.14	%		6.67	%		2.03	%
Post-Liquidation (shares were sold)		10.90	%		5.89	%		1.84	%
Fund Category: Morningstar Large-Cap Blend
Pre-Liquidation (still own shares)		6.56	%		5.96	%		n/a
Post-Liquidation (shares were sold)		5.04	%		5.31	%		n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies, including this Fund.

Schwab Equity Index Funds    9

Schwab 1000 Index^® Fund

Larry Mano, (right) vice president and senior portfolio manager, is responsible for the co-management of the fund.   Tom Brown, (left) associate portfolio manager, is responsible for the dayto-day co-management of the fund.	The Schwab 1000 Index Fund Investor Shares returned 15.84% for the period, slightly underperforming its benchmark, the Schwab 1000 Index, which gained 16.26%. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. The Schwab 1000 Index is comprised of the stocks of the largest 1000 publicly traded companies in the United States. The Index is market-capitalization weighted, and therefore, its returns are most heavily influenced by the largest names in the index. Sectors that performed well for the period included Telecommunication Services and Materials, while Health Care and Information Technology appreciated the least. From an industry group perspective, Diversified Telecommunication Services and Metals and Mining were among the top performers, while Diversified Consumer Services produced negative returns. Top performing stocks included such names as Exxon Mobil Corp. and Bank of America Corp. Exxon Mobil’s stock continued to climb throughout the year as net income continued to rise, propelled by increased production and discovery of new wells. On the downside, holdings in Yahoo!, Inc. and Dell, Inc. detracted from returns.
As of 10/31/06:
Style Assessment1

Statistics
Number of Holdings	976
Weighted Average Market Cap ($ x 1,000,000)	85,243
Price/Earnings Ratio (P/E)	18.1
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Financials	23.0	%
Information Technology	15.2	%
Health Care	12.0	%
Consumer Discretionary	11.5	%
Consumer Staples	9.3	%
Energy	8.8	%
Utilities	3.3	%
Telecommunication Services	3.2	%
Materials	3.1	%
Industrials	10.6	%
Total	100.0	%

 

Top Holdings % of Net Assets2
Exxon Mobil Corp.	2.9	%
General Electric Co.	2.4	%
Microsoft Corp.	2.0	%
Bank of America Corp.	1.7	%
Citigroup, Inc.	1.7	%
Procter & Gamble Co.	1.4	%
Wal-Mart Stores, Inc.	1.3	%
Johnson & Johnson	1.3	%
Pfizer, Inc.	1.3	%
American International Group, Inc.	1.2	%
Total	17.2	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

10    Schwab Equity Index Funds

Schwab 1000 Index Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Pre-Tax Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (4/2/91)		15.84	%		7.70	%		8.64	%	n/a
Select Shares® (5/19/97)		16.01	%		7.85	%		n/a		7.48%
Benchmark: Schwab 1000® Index		16.26	%		8.06	%		8.99	%	(5/19/97) 7.69%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		7.76	%	(5/19/97) 6.63%
Average Annual Total Returns After Tax1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (4/2/91)
Pre-Liquidation (still own shares)		15.63	%		7.30	%		8.25	%	n/a
Post-Liquidation (shares were sold)		10.54	%		6.42	%		7.41	%	n/a
Select Shares® (5/19/97)
Pre-Liquidation (still own shares)		15.77	%		7.40	%		n/a		7.08%
Post-Liquidation (shares were sold)		10.68	%		6.52	%		n/a		6.33%
Fund Category: Morningstar Large-Cap Blend
Pre-Liquidation (still own shares)		6.56	%		5.96	%		6.25	%	n/a
Post-Liquidation (shares were sold)		5.04	%		5.31	%		5.97	%	n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies.

Schwab Equity Index Funds    11

Schwab Small-Cap Index Fund^®

Larry Mano, (right) vice president and senior portfolio manager, is responsible for the co-management of the fund.   Tom Brown, (left) associate portfolio manager, is responsible for the dayto-day co-management of the fund.	The Schwab Small-Cap Index Fund Investor Shares returned 17.62% for the report period, trailing its benchmark, the Schwab Small-Cap Index, which posted 17.94%. The Schwab Small-Cap Index is comprised of the stocks of the second- largest 1,000 publicly traded companies in the United States. The Index is market-capitalization weighted, and therefore, its returns are most heavily influenced by the largest names in the index. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. Sectors such as Materials and Industrials lead performance, while Consumer Staples lagged in returns. Within the fund, Industrial Conglomerates and Marine industry groups contributed positively, while Distributors and Household Products produced negative returns for the period. Stocks such as Continental Airlines, Inc. and Veritas DGC, Inc. were among the top performers. One of the fund’s largest holdings, Veritas received a cash and stock offer to be purchased, which helped boost the company’s stock price. Conversely, positions in Chet Networks, Inc. and Openwave Systems, Inc. detracted from performance.
As of 10/31/06:
Style Assessment1

Statistics
Number of Holdings	983
Weighted Average Market Cap ($ x 1,000,000)	1,509
Price/Earnings Ratio (P/E)	25.8
Price/Book Ratio (P/B)	2.4

 

Sector Weightings % of Investments
Financials	21.6	%
Consumer Discretionary	17.0	%
Information Technology	16.0	%
Industrials	14.5	%
Health Care	9.4	%
Energy	8.0	%
Materials	5.0	%
Utilities	3.6	%
Consumer Staples	3.4	%
Telecommunication Services	1.2	%
Others	0.3	%
Total	100.0	%

 

Top Holdings % of Net Assets2
Continental Airlines, Inc., Class B	0.3	%
OfficeMax, Inc.	0.3	%
Albermarie Corp.	0.2	%
Steel Dynamics, Inc.	0.2	%
Boardwalk Pipeline Partners L.P.	0.2	%
Carpenter Technology Corp.	0.2	%
Veritas DGC, Inc.	0.2	%
Polycom, Inc.	0.2	%
Holly Corp.	0.2	%
Brookdale Senior Living, Inc.	0.2	%
Total	2.2	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

Small-company stocks are subject to greater volatility than other asset classes.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

12    Schwab Equity Index Funds

Schwab Small-Cap Index Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Pre-Tax Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (12/3/93)		17.62	%		11.79	%		9.60	%	n/a
Select Shares® (5/19/97)		17.78	%		11.95	%		n/a		9.53%
Benchmark: Schwab Small-Cap Index®		17.94	%		11.98	%		10.37	%	(5/19/97) 10.06%
Fund Category: Morningstar Small-Cap Blend		16.35	%		13.54	%		11.03	%	(5/19/97) 10.57%
Average Annual Total Returns After Tax1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (12/3/93)
Pre-Liquidation (still own shares)		17.40	%		11.37	%		8.83	%		n/a
Post-Liquidation (shares were sold)		11.69	%		10.07	%		8.07	%		n/a
Select Shares® (5/19/97)
Pre-Liquidation (still own shares)		17.53	%		11.49	%		n/a			8.69	%
Post-Liquidation (shares were sold)		11.83	%		10.19	%		n/a			7.94	%
Fund Category: Morningstar Large-Cap Blend
Pre-Liquidation (still own shares)		4.38	%		12.39	%		8.66	%		n/a
Post-Liquidation (shares were sold)		4.97	%		11.35	%		8.44	%		n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies, including this fund.

Schwab Equity Index Funds    13

Schwab Total Stock Market Index Fund^®

Larry Mano, vice president and senior portfolio manager, is responsible for the co-management of the fund.	The Schwab Total Stock Market Index Fund Investor Shares returned 16.05% during the one-year period, tracking its benchmark, the Dow Jones Wilshire 5000 Composite Index, which was up 16.61%. The Dow Jones Wilshire 5000 Composite Index includes all publicly traded stocks of companies headquartered in the United States for which pricing information is readily available, currently more than 7,000 stocks. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. Sectors that provided positive returns included Telecommunication Services and Materials, while on the downside, Health Care and Consumer Staples trailed. Within the Fund, industry groups that performed well were Diversified Telecommunication Services and Metals and Mining. Conversely, underperformers included Distributors and Diversified Consumer Services. From a stock perspective, Exxon Mobil Corp. and Bank of America Corp. weighed in as top contributors in the fund. Although many banks are experiencing narrower profit margins as a result of the inverted yield curve, Bank of America Corp. stock continued to rise throughout the year. Conversely, stocks like Yahoo!, Inc. and Dell, Inc. detracted from returns.
As of 10/31/06:
Style Assessment1

Statistics
Number of Holdings	2,581
Weighted Average Market Cap ($ x 1,000,000)	76,998
Price/Earnings Ratio (P/E)	18.6
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Financials	22.8	%
Information Technology	15.3	%
Consumer Discretionary	12.3	%
Health Care	11.8	%
Industrials	11.0	%
Consumer Staples	8.6	%
Energy	8.6	%
Utilities	3.4	%
Materials Telecommunication	3.2	%
Services	3.0	%
Total	100.0	%

 

Top Holdings % of Net Assets2
Exxon Mobil Corp.	2.6	%
General Electric Co.	2.1	%
Microsoft Corp.	1.7	%
Citigroup, Inc.	1.5	%
Bank of America Corp.	1.5	%
Procter & Gamble Co.	1.3	%
Johnson & Johnson	1.2	%
Pfizer, Inc.	1.2	%
Wal-Mart Stores, Inc.	1.1	%
American International Group, Inc.	1.1	%
Total	15.3	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

“Dow Jones”, “Wilshire”, “The DJW 5000^SM”, “The Dow Jones Wilshire 5000^SM” and “The Dow Jones Wilshire 5000 Composite Index^SM” are service marks of Dow Jones & Company, Inc. and Wilshire Associates Incorporated. The Schwab Total Stock Market Index Fund, based on The Dow Jones Wilshire 5000 Composite Index^SM, is not sponsored, endorsed, sold or promoted by Dow Jones or Wilshire; and, neither Dow Jones nor Wilshire makes any representation regarding the advisability of investing in such a product.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

14    Schwab Equity Index Funds

Schwab Total Stock Market Index Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Pre-Tax Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year			5 Years			Since Inception
Investor Shares (6/1/99)		16.05	%		8.64	%		3.29	%
Select Shares® (6/1/99)		16.23	%		8.80	%		3.45	%
Benchmark: Dow Jones Wilshire 5000 Composite® Index		16.61	%		8.89	%		3.46	%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		2.84	%
Average Annual Total Returns After Tax1,2
Fund Class and Inception Date	1 Year			5 Years			Since Inception
Investor Shares (6/1/99)
Pre-Liquidation (still own shares)		15.85	%		8.26	%		2.99	%
Post-Liquidation (shares were sold)		10.66	%		7.27	%		2.65	%
Select Shares® (6/1/99)
Pre-Liquidation (still own shares)		15.71	%		8.33	%		3.07	%
Post-Liquidation (shares were sold)		10.52	%		7.33	%		2.72	%
Fund Category: Morningstar Large-Cap Blend
Pre-Liquidation (still own shares)		6.56	%		5.96	%		n/a
Post-Liquidation (shares were sold)		5.04	%		5.31	%		n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies.

Schwab Equity Index Funds    15

Schwab International Index Fund^®

Larry Mano, (right) vice president and senior portfolio manager, is responsible for the co-management of the fund.   Tom Brown, (left) associate portfolio manager, is responsible for the dayto-day co-management of the fund.	The Schwab International Index Fund Investor Shares returned an 26.15% for the one-year period, closely tracking its benchmark, the Schwab International Index, which returned 26.76%. The Index is market-capitalization weighted and therefore, its returns are most heavily influenced by the largest names in the Index. Bear in mind that indices are unmanaged and unlike the fund, do not include operational and transaction costs. The Schwab International Index is comprised of stocks of 350 of the largest publicly traded companies stocks within 21 developed countries. Within the Fund, United Kingdom and Japan were the top contributors to total return, while Austria and Portugal were on the bottom end of the return scale. Sectors that performed well during the period included Financials and Materials. On the downside, Information Technology and Telecommunications Services appreciated the least. From an individual stock standpoint, HSBC Holdings plc and UBS AG were among the top contributors to returns. Conversely, stocks such as NTT DoCoMo, Inc. and Vodafone Group PLC, both wireless telecommunication services, detracted from overall returns.
As of 10/31/06:
Style Assessment1

Country Weightings % of Investments
United Kingdom	24.4	%	Spain	4.7	%
Japan	18.9	%	Australia	4.3	%
France	10.3	%	Netherlands	4.1	%
Germany	7.6	%	Italy	3.3	%
Switzerland	7.6	%	Other	8.1	%
Canada	6.7	%	Total	100.0	%

Statistics
Number of Holdings	347
Weighted Average Market Cap ($ x 1,000,000)	69,079
Price/Earnings Ratio (P/E)	15.8
Price/Book Ratio (P/B)	2.4

 

Sector Weightings % of Investments
Financials	34.5	%
Energy	10.3	%
Consumer Discretionary	9.0	%
Consumer Staples	7.6	%
Materials	7.4	%
Health Care	7.4	%
Telecommunication Services	6.3	%
Industrials	6.3	%
Utilities	5.8	%
Information Technology	4.8	%
Other	0.6	%
Total	100.0	%

 

Top Holdings % of Net Assets2
BP plc	2.2	%
HSBC Holdings plc	2.1	%
Total SA	1.6	%
Novartis AG — Reg’d.	1.6	%
Royal Dutch Shell plc, Class A	1.6	%
Toyota Motor Corp.	1.6	%
GlaxoSmithKline plc	1.5	%
Nestle S.A.	1.4	%
Vodafone Group plc	1.3	%
UBS AG	1.3	%
Total	16.2	%

 

Manager views and portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

Foreign securities can involve risks such as political and economic instability and currency risk.

¹Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

²This list is not a recommendation of any security by the investment adviser.

16    Schwab Equity Index Funds

Schwab International Index Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Pre-Tax Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (9/9/93)		26.15	%		13.53	%		7.16	%	n/a
Select Shares® (5/19/97)		26.35	%		13.70	%		n/a		6.39%
Benchmark: Schwab International® Index		26.76	%		14.21	%		7.66	%	(5/19/97) 6.74%
Fund Category: Morningstar Foreign Large-Cap Blend		26.31	%		12.90	%		7.29	%	(5/19/97) 6.05%
Average Annual Total Returns After Tax1,2
Fund Class and Inception Date	1 Year			5 Years			10 Years			Since Inception
Investor Shares (9/9/93)
Pre-Liquidation (still own shares)		25.73	%		12.89	%		6.61	%		n/a
Post-Liquidation (shares were sold)		17.31	%		11.43	%		5.93	%		n/a
Select Shares® (5/19/97)
Pre-Liquidation (still own shares)		25.88	%		13.01	%		n/a			5.83	%
Post-Liquidation (shares were sold)		17.47	%		11.55	%		n/a			5.21	%
Fund Category: Morningstar Foreign Large-Cap Blend
Pre-Liquidation (still own shares)		15.10	%		11.98	%		5.48	%		n/a
Post-Liquidation (shares were sold)		10.70	%		10.61	%		5.17	%		n/a

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower.

²The pre-tax total return and the graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. After-tax returns are calculated using the highest historical individual federal marginal income tax rates in effect as of 10/31/06 and do not reflect the impact of state and local taxes or the alternative minimum tax. Actual returns depend on an investor’s situation and may differ from those shown. After-tax returns may not be relevant to investors who hold their fund shares through tax-deferred arrangements. Pre-liquidation after-tax returns reflect the tax effects of purchases and sales of securities within the fund portfolios and assume investors continue to hold fund shares at the end of the measurement periods. Post-liquidation figures assume investors sold fund shares at the end of the measurement periods and reflect both the effects of taxable distributions and any taxable gains or losses realized upon the sale of shares. Source for category information: Morningstar, Inc. Some funds in this category may not use tax-efficient strategies, including this fund.

Schwab Equity Index Funds    17

Fund Expenses (unaudited)

Examples for a $1,000 Investment

 

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab S&P 500 index Fund
Investor Shares
Actual Return		0.37	%	$	1,000	$	1,059.70	$	1.92
Hypothetical 5% Return		0.37	%	$	1,000	$	1,023.34	$	1.89
Select Shares®
Actual Return		0.19	%	$	1,000	$	1,060.50	$	0.99
Hypothetical 5% Return		0.19	%	$	1,000	$	1,024.25	$	0.97
e.Shares®
Actual Return		0.22	%	$	1,000	$	1,060.20	$	1.14
Hypothetical 5% Return		0.22	%	$	1,000	$	1,024.10	$	1.12
Schwab Institutional Select®
S&P 500 Fund
Actual Return		0.10	%	$	1,000	$	1,061.80	$	0.52
Hypothetical 5% Return		0.10	%	$	1,000	$	1,024.70	$	0.51
Schwab 1000 Index® Fund
Investor Shares
Actual Return		0.49	%	$	1,000	$	1,055.10	$	2.54
Hypothetical 5% Return		0.49	%	$	1,000	$	1,022.74	$	2.50
Select Shares
Actual Return		0.34	%	$	1,000	$	1,055.90	$	1.76
Hypothetical 5% Return		0.34	%	$	1,000	$	1,023.49	$	1.73
Schwab Small-Cap Index Fund®
Investor Shares
Actual Return		0.58	%	$	1,000	$	1,007.00	$	2.93
Hypothetical 5% Return		0.58	%	$	1,000	$	1,022.30	$	2.96
Select Shares
Actual Return		0.42	%	$	1,000	$	1,007.80	$	2.13
Hypothetical 5% Return		0.42	%	$	1,000	$	1,023.14	$	2.14

 

¹  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²  Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

18    Schwab Equity Index Funds

Fund Expenses continued (unaudited)

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab Total Stock Market Index Fund®
Investor Shares
Actual Return		0.54	%	$	1,000	$	1,050.70	$	2.79
Hypothetical 5% Return		0.54	%	$	1,000	$	1,022.48	$	2.75
Select Shares
Actual Return		0.39	%	$	1,000	$	1,051.50	$	2.02
Hypothetical 5% Return		0.39	%	$	1,000	$	1,023.24	$	1.99
Schwab International Index Fund®
Investor Shares
Actual Return		0.69	%	$	1,000	$	1,040.90	$	3.55
Hypothetical 5% Return		0.69	%	$	1,000	$	1,021.73	$	3.52
Select Shares
Actual Return		0.50	%	$	1,000	$	1,041.90	$	2.57
Hypothetical 5% Return		0.50	%	$	1,000	$	1,022.68	$	2.55

 

¹  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²  Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

Schwab Equity Index Funds    19

Schwab S&P 500 Index Fund

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		18.79			17.61			16.36			13.79			16.45
Income or loss from investment operations:
Net investment income		0.34			0.34			0.23			0.20			0.20
Net realized and unrealized gains or losses		2.64			1.14			1.23			2.57			(2.68	)
Total income or loss from investment operations		2.98			1.48			1.46			2.77			(2.48	)
Less distributions:
Dividends from net investment income		(0.30	)		(0.30	)		(0.21	)		(0.20	)		(0.18	)
Net asset value at end of period		21.47			18.79			17.61			16.36			13.79
Total return (%)		16.03			8.44			9.03			20.39			(15.32	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.36			0.37			0.37			0.36			0.35
Gross operating expenses		0.36			0.40			0.45			0.46			0.46
Net investment income		1.57			1.74			1.35			1.45			1.21
Portfolio turnover rate		3			4			3			3			8
Net assets, end of period ($ x 1,000,000)		3,685			3,666			3,849			3,510			2,760

 

20    See financial notes.

Schwab S&P 500 Index Fund

Financial Highlights continued

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		18.88			17.68			16.41			13.83			16.50
Income or loss from investment operations:
Net investment income		0.37			0.36			0.26			0.24			0.22
Net realized and unrealized gains or losses		2.65			1.16			1.24			2.57			(2.69	)
Total income or loss from investment operations		3.02			1.52			1.50			2.81			(2.47	)
Less distributions:
Dividends from net investment income		(0.34	)		(0.32	)		(0.23	)		(0.23	)		(0.20	)
Net asset value at end of period		21.56			18.88			17.68			16.41			13.83
Total return (%)		16.18			8.66			9.25			20.62			(15.20	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.19			0.19			0.19			0.19			0.19
Gross operating expenses		0.21			0.25			0.30			0.31			0.31
Net investment income		1.74			1.92			1.53			1.63			1.37
Portfolio turnover rate		3			4			3			3			8
Net assets, end of period ($ x 1,000,000)		4,038			3,938			4,119			3,692			3,029

 

See financial notes.    21

Schwab S&P 500 Index Fund

Financial Highlights continued

e.Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		18.81			17.62			16.37			13.79			16.46
Income or loss from investment operations:
Net investment income		0.35			0.39			0.26			0.23			0.23
Net realized and unrealized gains or losses		2.67			1.11			1.21			2.56			(2.71	)
Total income or loss from investment operations		3.02			1.50			1.47			2.79			(2.48	)
Less distributions:
Dividends from net investment income		(0.33	)		(0.31	)		(0.22	)		(0.21	)		(0.19	)
Net asset value at end of period		21.50			18.81			17.62			16.37			13.79
Total return (%)		16.25			8.58			9.10			20.55			(15.32	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.21			0.24			0.28			0.28			0.28
Gross operating expenses		0.21			0.25			0.30			0.31			0.31
Net investment income		1.72			1.88			1.44			1.54			1.28
Portfolio turnover rate		3			4			3			3			8
Net assets, end of period ($ x 1,000,000)		241			220			249			246			220

 

22    See financial notes.

Schwab S&P 500 Index Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. A copy of the fund’s most recently filed quarterly schedule of portfolio holdings, included on the fund’s Form N-CSR (with respect to the fund’s second and fourth fiscal quarters) or Form N-Q (with respect to the fund’s first and third fiscal quarters), is available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.9%	Common Stock	5,588,418	7,950,692
0.1%	Short-Term Investment	8,212	8,212
—%	U.S. Treasury Obligation	2,983	2,983
100.0%	Total Investments	5,599,613	7,961,887
1.6%	Collateral Invested for Securities on Loan	128,448	128,448
(1.6)%	Other Assets and Liabilities, Net		(125,539	)
100.0%	Net Assets		7,964,796

 

Security and Number of Shares		% of Net Assets	Value ($ x 1,000)
Common Stock 99.9% of net assets
Automobiles & Components 0.6%
Other Securities	1,970,427	0.6	46,304
Banks 5.7%
U.S. Bancorp	1,139,832	0.5	38,572
Wachovia Corp.	1,202,870	0.8	66,759
Wells Fargo & Co.	2,151,676	1.0	78,084
Other Securities	5,930,244	3.4	274,265
		5.7	457,680
Capital Goods 8.5%
3M Co.	482,761	0.5	38,061
General Electric Co. (b)	6,641,667	2.9	233,189
The Boeing Co.	512,990	0.5	40,967
Tyco International Ltd.	1,304,215	0.5	38,383
United Technologies Corp.	647,334	0.5	42,543
Other Securities	4,837,222	3.6	285,365
		8.5	678,508
Commercial Services & Supplies 0.6%
Other Securities	1,175,319	0.6	44,497
Consumer Durables & Apparel 1.2%
Other Securities	2,253,790	1.2	93,606
Consumer Services 1.8%
Other Securities	3,661,042	1.8	143,622
Diversified Financials 10.4%
American Express Co.	795,834	0.6	46,007
Bank of America Corp.	2,926,732	2.0	157,663
Citigroup, Inc.	3,183,543	2.0	159,686
JPMorgan Chase & Co.	2,236,116	1.3	106,081
Merrill Lynch & Co., Inc.	570,290	0.6	49,855
Morgan Stanley	685,848	0.7	52,419
The Charles Schwab Corp. (c)	660,696	0.2	12,038
The Goldman Sachs Group, Inc. (a)	276,667	0.7	52,509
Other Securities	3,291,125	2.3	191,456
		10.4	827,714
Energy 9.4%
ChevronTexaco Corp.	1,409,919	1.2	94,747
ConocoPhillips	1,057,004	0.8	63,674
Exxon Mobil Corp. (b)	3,823,631	3.4	273,084
Schlumberger Ltd.	755,559	0.6	47,661
Other Securities	5,874,484	3.4	272,006
		9.4	751,172
Food & Staples Retailing 2.3%
Wal-Mart Stores, Inc.	1,582,493	1.0	77,985
Other Securities	2,846,731	1.3	103,612
		2.3	181,597
Food, Beverage & Tobacco 4.8%
Altria Group, Inc.	1,343,189	1.4	109,242
PepsiCo, Inc.	1,058,158	0.8	67,129
The Coca-Cola Co.	1,312,447	0.8	61,317
Other Securities	3,753,356	1.8	142,956
		4.8	380,644
Health Care Equipment & Services 4.2%
UnitedHealth Group, Inc.	872,408	0.5	42,556
Other Securities	6,337,354	3.7	291,773
		4.2	334,329
Household & Personal Products 2.4%
Procter & Gamble Co. (b)	2,042,670	1.6	129,485
Other Securities	1,117,440	0.8	60,526
		2.4	190,011

See financial notes.    23

Schwab S&P 500 Index Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets	Value ($ x 1,000)
Insurance 4.8%
American International Group, Inc.	1,663,332	1.4	111,726
Other Securities	5,441,524	3.4	270,533
		4.8	382,259
Materials 3.0%
Other Securities	5,003,096	3.0	235,791
Media 3.5%
Comcast Corp., Class A *	1,353,032	0.7	55,028
The Walt Disney Co.	1,370,176	0.5	43,106
Time Warner, Inc.	2,604,429	0.7	52,115
Other Securities	3,981,604	1.6	128,308
		3.5	278,557
Pharmaceuticals & Biotechnology 8.2%
Abbott Laboratories	977,375	0.6	46,435
Amgen, Inc. *	755,118	0.7	57,321
Johnson & Johnson	1,896,195	1.6	127,804
Merck & Co., Inc.	1,417,127	0.8	64,366
Pfizer, Inc.	4,721,357	1.6	125,824
Wyeth	861,882	0.6	43,982
Other Securities	4,914,572	2.3	189,734
		8.2	655,466
Real Estate 1.1%
Other Securities	1,518,077	1.1	90,503
Retailing 3.7%
Home Depot, Inc.	1,311,913	0.6	48,974
Other Securities	6,274,142	3.1	246,417
		3.7	295,391
Semiconductors & Semiconductor Equipment 2.7%
Intel Corp.	3,704,566	1.0	79,055
Other Securities	5,471,207	1.7	134,679
		2.7	213,734
Software & Services 5.5%
Google, Inc., Class A *	135,170	0.8	64,394
Microsoft Corp. (b)	5,556,763	2.0	159,535
Oracle Corp. *	2,550,731	0.6	47,112
Other Securities	5,667,006	2.1	162,823
		5.5	433,864
Technology Hardware & Equipment 6.8%
Apple Computer, Inc. *	544,625	0.6	44,158
Cisco Systems, Inc. *	3,909,298	1.2	94,331
Hewlett-Packard Co.	1,764,558	0.9	68,359
International Business Machines Corp.	978,747	1.1	90,368
Motorola, Inc.	1,602,800	0.5	36,961
QUALCOMM, Inc.	1,062,758	0.5	38,674
Other Securities	12,961,227	2.0	169,334
		6.8	542,185
Telecommunication Services 3.5%
AT&T Corp.	2,489,859	1.1	85,278
BellSouth Corp.	1,158,380	0.7	52,243
Verizon Communications, Inc.	1,868,151	0.9	69,122
Other Securities	3,940,624	0.8	73,680
		3.5	280,323
Transportation 1.8%
United Parcel Service, Inc., Class B	688,790	0.7	51,900
Other Securities	1,655,405	1.1	89,065
		1.8	140,965
Utilities 3.4%
Other Securities	6,516,810	3.4	271,970	��

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		% of Net Assets		Value ($ x 1,000)
Short-Term Investment 0.1% of net assets
Other Securities		8,212		—	8,212
U.S. Treasury Obligation 0.0% of net assets
Other Securities		3,000		—	2,983

 

End of Investments.

24    See financial notes.

Schwab S&P 500 Index Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan  1.6% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		128,448,347		128,448

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $5,647,753, and the unrealized appreciation and depreciation were $2,828,797 and ($514,663), respectively, with a net unrealized appreciation of $2,314,134.

In addition to the above, the fund held the following at 10/31/06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		105		7,262		389

 

* Non-income producing security.

(a) All or a portion of this security is on loan.

(b) All or a portion of this security is held as collateral for open futures contracts.

(c) Issuer is affiliated with the fund’s adviser.

See financial notes.    25

Schwab S&P 500 Index Fund

Statement of

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $125,069 (cost $5,599,613)	$	7,961,887
Collateral invested for securities on loan		128,448
Receivables:
Dividends		6,842
Fund shares sold		5,969
Income from securities on loan		12
Interest		1
Prepaid expenses	+	47
Total assets		8,103,206
Liabilities
Collateral for securities on loan		128,448
Payables:
Investment adviser and administrator fees		60
Transfer agent and shareholder services fees		110
Fund shares redeemed		9,395
Trustee fees		8
Due to brokers for futures		4
Accrued expenses	+	385
Total liabilities		138,410
Net Assets
Total assets		8,103,206
Total liabilities	–	138,410
Net assets	$	7,964,796
Net Assets by Source
Capital received from investors		6,413,638
Net investment income not yet distributed		100,766
Net realized capital losses		(912,271	)
Net unrealized capital gains		2,362,663
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	3,685,095			171,631		$21.47
Select Shares	$	4,038,410			187,284		$21.56
e.Shares	$	241,291			11,225		$21.50

 

26    See financial notes.

Schwab S&P 500 Index Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (including $71 from affiliated issuer)	$	150,397
Interest		749
Lending of securities	+	223
Total Investment Income		151,369
Net Realized Gains and Losses
Net realized losses on investments		(97,747	)
Net realized gains on futures contracts	+	3,990
Net realized losses		(93,757	)
Net Unrealized Gains and Losses
Net unrealized gains on investments		1,135,806
Net unrealized gains on futures contracts	+	347
Net unrealized gains		1,136,153
Expenses
Investment adviser and administrator fees		7,070
Transfer agent and shareholder service fees:
Investor Shares		9,211
Select Shares		3,947
e.Shares		224
Shareholder reports		407
Portfolio accounting fees		269
Custodian fees		220
Registration fees		174
Professional fees		80
Trustees’ fees		57
Overdraft expense		63
Other expenses	+	141
Total expenses		21,863
Expense reduction by adviser and Schwab		–670
Net expenses		21,193
Increase in Net Assets from Operations
Total investment income		151,369
Net expenses		–21,193
Net investment income		130,176
Net realized losses		(93,757	)
Net unrealized gains	+	1,136,153
Increase in net assets from operations	$	1,172,572

 

See financial notes.    27

Schwab S&P 500 Index Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment income	$	130,176		$	150,655
Net realized gains or losses		(93,757	)		77,682
Net unrealized gains	+	1,136,153			464,991
Increase in net assets from operations		1,172,572			693,328
Distributions Paid
Dividends from net investment income
Investor Shares		57,584			64,372
Select Shares		67,949			75,732
e.Shares	+	3,805			4,246
Total dividends from net investment income	$	129,338		$	144,350

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		17,732		$	353,074			24,608		$	453,452
Select Shares		30,407			606,896			44,426			826,293
e.Shares	+	2,578			51,641			2,521			46,535
Total shares sold		50,717		$	1,011,611			71,555		$	1,326,280
Shares Reinvested
Investor Shares		2,823		$	55,000			3,370		$	61,509
Select Shares		3,056			59,681			3,694			67,604
e.Shares	+	177			3,443			210			3,838
Total shares reinvested		6,056		$	118,124			7,274		$	132,951
Shares Redeemed
Investor Shares		(44,003	)	$	(874,140	)		(51,474	)	$	(955,673	)
Select Shares		(54,785	)		(1,094,191	)		(72,497	)		(1,349,747	)*
e.Shares	+	(3,222	)		(63,959	)		(5,182	)		(96,047	)
Total shares redeemed		(102,010	)	$	(2,032,290	)		(129,153	)	$	(2,401,467	)
Net transactions in fund shares		(45,237	)	$	(902,555	)		(50,324	)	$	(942,236	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06					11/1/04–10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		415,377		$	7,824,117		465,701		$	8,217,375
Total increase or decrease	+	(45,237	)		140,679		(50,324	)		(393,258	)
End of period		370,140		$	7,964,796		415,377		$	7,824,117
Net investment income not yet distributed				$	100,766				$	100,796

 

*   Includes $430,561 redemption in-kind by Schwab MarketTrack All Equity, Growth and Balanced Portfolios.

28    See financial notes.

Schwab Institutional Select® S&P 500 Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		9.57			8.95			8.30			7.00			8.36
Income or loss from investment operations:
Net investment income		0.16			0.15			0.13			0.12			0.12
Net realized and unrealized gains or losses		1.39			0.62			0.64			1.30			(1.37	)
Total income or loss from investment operations		1.55			0.77			0.77			1.42			(1.25	)
Less distributions:
Dividends from net investment income		(0.13	)		(0.15	)		(0.12	)		(0.12	)		(0.11	)
Net asset value at end of period		10.99			9.57			8.95			8.30			7.00
Total return (%)		16.39			8.64			9.36			20.65			(15.18	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.10			0.10			0.15			0.15			0.15
Gross operating expenses		0.28			0.33			0.35			0.36			0.37
Net investment income		1.84			1.82			1.56			1.65			1.38
Portfolio turnover rate		2			3			3			4			12
Net assets, end of period ($ x 1,000,000)		2,080			1,246			348			272			203

 

See financial notes.    29

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. A copy of the fund’s most recently filed quarterly schedule of portfolio holdings, included on the fund’s Form N-CSR (with respect to the fund’s second and fourth fiscal quarters) or Form N-Q (with respect to the fund’s first and third fiscal quarters), is available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
98.9%	Common Stock	1,812,825	2,057,718
0.6%	Short-Term Investment	11,977	11,977
0.2%	U.S. Treasury Obligation	3,282	3,282
—%	Warrant	—	2
99.7%	Total Investments	1,828,084	2,072,979
7.8%	Collateral Invested for Securities on Loan	162,875	162,875
(7.5)%	Other Assets and Liabilities, Net		(155,474	)
100.0%	Net Assets		2,080,380

 

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Common Stock 98.9% of net assets
Automobiles & Components 0.6%
Other Securities	511,467	0.6	11,907
Banks 5.7%
U.S. Bancorp	294,951	0.5	9,981
Wachovia Corp.	317,754	0.8	17,635
Wells Fargo & Co.	558,874	1.0	20,282
Other Securities	1,537,705	3.4	71,159
		5.7	119,057
Capital Goods 8.4%
3M Co.	125,029	0.5	9,857
General Electric Co. (b)	1,713,315	2.9	60,155
The Boeing Co.	132,934	0.5	10,616
Tyco International Ltd.	334,344	0.5	9,840
United Technologies Corp.	167,820	0.5	11,029
Other Securities	1,239,207	3.5	73,327
		8.4	174,824
Commercial Services & Supplies 0.6%
Other Securities	317,444	0.6	11,659
Consumer Durables & Apparel 1.2%
Other Securities	588,960	1.2	24,479
Consumer Services 1.8%
Other Securities	961,616	1.8	37,693
Diversified Financials 10.3%
American Express Co.	203,021	0.6	11,737
Bank of America Corp. (b)	752,276	1.9	40,525
Citigroup, Inc. (b)	820,551	2.0	41,159
JPMorgan Chase & Co.	577,849	1.3	27,413
Merrill Lynch & Co., Inc.	147,141	0.6	12,863
Morgan Stanley	177,941	0.7	13,600
The Charles Schwab Corp. (c)	171,623	0.2	3,127
The Goldman Sachs Group, Inc. (a)	71,694	0.7	13,607
Other Securities	847,484	2.3	49,403
		10.3	213,434
Energy 9.3%
ChevronTexaco Corp.	363,287	1.2	24,413
ConocoPhillips	271,861	0.8	16,377
Exxon Mobil Corp. (b)	986,722	3.4	70,472
Schlumberger Ltd. (a)	196,488	0.6	12,394
Other Securities	1,539,837	3.3	70,920
		9.3	194,576
Food & Staples Retailing 2.2%
Wal-Mart Stores, Inc. (b)	405,276	0.9	19,972
Other Securities	732,121	1.3	26,665
		2.2	46,637
Food, Beverage & Tobacco 4.7%
Altria Group, Inc. (b)	347,476	1.4	28,260
PepsiCo, Inc.	273,595	0.8	17,357
The Coca-Cola Co.	338,214	0.8	15,801
Other Securities	972,639	1.7	37,004
		4.7	98,422
Health Care Equipment & Services 4.1%
UnitedHealth Group, Inc.	223,590	0.5	10,907
Other Securities	1,627,970	3.6	74,648
		4.1	85,555
Household & Personal Products 2.4%
Procter & Gamble Co.	526,953	1.6	33,403
Other Securities	294,273	0.8	15,889
		2.4	49,292

30    See financial notes.

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Insurance 4.7%
American International Group, Inc.	431,354	1.4	28,974
Other Securities	1,410,985	3.3	69,802
		4.7	98,776
Materials 3.0%
Other Securities	1,310,227	3.0	61,632
Media 3.4%
Comcast Corp., Class A (a)(b)*	347,379	0.7	14,128
The Walt Disney Co.	348,799	0.5	10,973
Time Warner, Inc. (a)	675,004	0.7	13,507
Other Securities	1,033,032	1.5	33,320
		3.4	71,928
Pharmaceuticals & Biotechnology 8.1%
Abbott Laboratories (b)	253,614	0.6	12,049
Amgen, Inc. (b)*	194,310	0.7	14,750
Johnson & Johnson	486,334	1.6	32,779
Merck & Co., Inc.	362,967	0.8	16,486
Pfizer, Inc. (b)	1,212,987	1.6	32,326
Wyeth	223,309	0.6	11,395
Other Securities	1,270,471	2.2	49,173
		8.1	168,958
Real Estate 1.2%
Other Securities	397,606	1.2	24,156
Retailing 3.7%
Home Depot, Inc.	337,022	0.6	12,581
Other Securities	1,618,260	3.1	63,585
		3.7	76,166
Semiconductors & Semiconductor Equipment 2.6%
Intel Corp. (b)	957,272	0.9	20,428
Other Securities	1,417,797	1.7	34,779
		2.6	55,207
Software & Services 5.4%
Google, Inc., Class A (a)*	35,263	0.8	16,799
Microsoft Corp. (b)	1,433,501	2.0	41,156
Oracle Corp.*	669,403	0.6	12,364
Other Securities	1,469,060	2.0	41,827
		5.4	112,146
Technology Hardware & Equipment 6.8%
Apple Computer, Inc. (a)*	141,159	0.6	11,445
Cisco Systems, Inc. (b)*	1,013,155	1.2	24,447
Hewlett-Packard Co.	456,585	0.9	17,688
International Business Machines Corp.	253,427	1.1	23,399
QUALCOMM, Inc.	274,179	0.5	9,977
Other Securities	3,833,997	2.5	54,338
		6.8	141,294
Telecommunication Services 3.5%
AT&T Corp. (a)	644,616	1.1	22,078
BellSouth Corp.	301,323	0.6	13,590
Verizon Communications, Inc.	481,086	0.9	17,800
Other Securities	1,030,088	0.9	19,276
		3.5	72,744
Transportation 1.8%
United Parcel Service, Inc., Class B (a)	179,457	0.7	13,522
Other Securities	445,794	1.1	23,353
		1.8	36,875
Utilities 3.4%
Other Securities	1,691,328	3.4	70,301

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		% of Net Assets		Value ($ x 1,000)
Short-Term Investment 0.6% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		11,977		0.6	11,977
U.S. Treasury Obligation 0.2% of net assets
Other Securities		3,300		0.2	3,282

 

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Warrants 0.0% of net assets
Other Securities	11,390		—	2

 

End of Investments.

See financial notes.    31

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Collateral Invested for Securities on Loan 7.8% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		162,875,434		162,875

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $1,840,898, and the unrealized appreciation and depreciation were $272,607 and ($40,526), respectively, with a net unrealized appreciation of $232,081.

In addition to the above, the fund held the following at 10/31/06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contracts
S&P 500 Index, e-mini, Long, expires 12/15/06		177		12,241		276
S&P 500 Index, Long, expires 12/14/06		20		6,916		31
						307

 

* Non-income producing security.

(a) All or a portion of security is on loan.

(b) All or a portion of this security is held as collateral for open futures contracts.

(c) Issuer is affiliated with the fund’s adviser.

32    See financial notes.

Schwab Institutional Select S&P 500 Fund

Statement of

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $159,574 (cost $1,828,084)	$	2,072,979
Collateral invested for securities on loan		162,875
Receivables:
Fund shares sold		7,132
Dividends		1,712
Income from securities on loan		9
Interest		1
Prepaid expenses	+	12
Total assets		2,244,720
Liabilities
Collateral for securities on loan		162,875
Payables:
Investments bought		906
Transfer agent and shareholder service fees		17
Fund shares redeemed		410
Trustee fees		2
Accrued expenses	+	130
Total liabilities		164,340
Net Assets
Total assets		2,244,720
Total liabilities	–	164,340
Net assets	$	2,080,380
Net Assets by Source
Capital received from investors		1,872,353
Net investment income not yet distributed		24,468
Net realized capital losses		(61,643	)
Net unrealized capital gains		245,202
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$2,080,380			189,370		$	10.99

 

See financial notes.    33

Schwab Institutional Select S&P 500 Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (including $3 from affiliated issuer)	$	29,778
Interest		1,339
Securities on loan	+	79
Total Investment Income		31,196
Net Realized Gains and Losses
Net realized losses on investments		(9,622	)
Net realized losses on futures contracts	+	(15	)
Net realized losses		(9,637	)
Net Unrealized Gains and Losses
Net unrealized gains on investments		226,651
Net unrealized gains on futures contracts	+	403
Net unrealized gains		227,054
Expenses
Investment adviser and administrator fees		2,577
Transfer agent and shareholder service fees		1,491
Registration fees		106
Portfolio accounting fees		83
Custodian fees		72
Shareholder reports		63
Professional fees		35
Trustees’ fees		15
Overdraft expense		5
Other expenses	+	29
Total expenses		4,476
Expense reduction by adviser and Schwab	–	2,863
Net expenses		1,613
Increase in Net Assets from Operations
Total investment income		31,196
Net expenses	–	1,613
Net investment income		29,583
Net realized losses		(9,637	)
Net unrealized gains	+	227,054
Increase in net assets from operations	$	247,000

 

34    See financial notes.

Schwab Institutional Select S&P 500 Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment income	$	29,583		$	15,535
Net realized losses		(9,637	)		(626	)
Net unrealized gains	+	227,054			24,327
Increase in net assets from operations		247,000			39,236
Distributions Paid
Dividends from net investment income	$	18,248		$	6,241

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		85,032		$	868,441			102,956		$	975,330	*
Shares Reinvested		1,660			16,500			537			4,985
Shares Redeemed	+	(27,532	)		(279,438	)		(12,169	)		(115,050	)
Net transactions in fund shares		59,160		$	605,503			91,324		$	865,265

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		130,210	$	1,246,125		38,886	$	347,865
Total increase	+	59,160		834,255		91,324		898,260
End of period		189,370	$	2,080,380		130,210	$	1,246,125
Net investment income not yet distributed			$	24,468			$	13,237

 

*   Includes $430,561 subscription by Schwab MarketTrack All Equity, Growth and Balanced Portfolios.

See financial notes.    35

Schwab 1000 Index® Fund

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		35.31			32.54			30.25			25.25			29.57
Income or loss from investment operations:
Net investment income		0.50	1		0.55			0.37			0.33			0.31
Net realized and unrealized gains or losses		5.05	1		2.70			2.26			4.99			(4.36	)
Total income or loss from investment operations		5.55			3.25			2.63			5.32			(4.05	)
Less distributions:
Dividends from net investment income		(0.46	)		(0.48	)		(0.34	)		(0.32	)		(0.27	)
Net asset value at end of period		40.40			35.31			32.54			30.25			25.25
Total return (%)		15.84			10.04			8.78			21.34			(13.87	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.49			0.50			0.50			0.49			0.46
Gross operating expenses		0.49			0.50			0.50			0.51			0.52
Net investment income		1.34			1.49			1.15			1.27			1.04
Portfolio turnover rate		5			6			5			5			9
Net assets, end of period ($ x 1,000,000)		3,918			4,166			4,258			3,974			3,223

 

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/2/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		35.34			32.56			30.27			25.26			29.58
Income or loss from investment operations:
Net investment income		0.56	1		0.56			0.42			0.37			0.35
Net realized and unrealized gains or losses		5.04	1		2.74			2.25			4.99			(4.36	)
Total income or loss from investment operations		5.60			3.30			2.67			5.36			(4.01	)
Less distributions:
Dividends from net investment income		(0.51	)		(0.52	)		(0.38	)		(0.35	)		(0.31	)
Net asset value at end of period		40.43			35.34			32.56			30.27			25.26
Total return (%)		16.01			10.21			8.90			21.52			(13.77	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.34			0.35			0.35			0.35			0.35
Gross operating expenses		0.34			0.35			0.35			0.36			0.37
Net investment income		1.48			1.63			1.30			1.41			1.15
Portfolio turnover rate		5			6			5			5			9
Net assets, end of period ($ x 1,000,000)		2,924			2,328			2,138			1,996			1,588

 

¹   Calculated based on the average shares outstanding during the period.

36    See financial notes.

Schwab 1000 Index Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. A copy of the fund’s most recently filed quarterly schedule of portfolio holdings, included on the fund’s Form N-CSR (with respect to the fund’s second and fourth fiscal quarters) or Form N-Q (with respect to the fund’s first and third fiscal quarters), is available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.7%	Common Stock	3,188,068	6,819,942
0.1%	Foreign Common Stock	4,103	6,923
—%	U.S. Treasury Obligation	795	795
—%	Warrant	—	197
99.8%	Total Investments	3,192,966	6,827,857
3.2%	Collateral Invested for Securities on Loan	220,793	220,793
(3.0)%	Other Assets and Liabilities, Net		(207,045	)
100.0%	Net Assets		6,841,605

 

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Common Stock 99.7% of net assets
Automobiles & Components 0.5%
Other Securities	1,535,296	0.5	36,204
Banks 5.4%
U.S. Bancorp	821,655	0.4	27,805
Wachovia Corp.	881,989	0.7	48,950
Wells Fargo & Co.	1,491,396	0.8	54,123
Other Securities	5,588,273	3.5	238,029
		5.4	368,907
Capital Goods 8.0%
General Electric Co. (b)	4,723,322	2.4	165,836
The Boeing Co.	369,989	0.4	29,547
United Technologies Corp.	464,763	0.5	30,544
Other Securities	5,935,472	4.7	319,810
		8.0	545,737
Commercial Services & Supplies 0.8%
Other Securities	1,431,572	0.8	54,633
Consumer Durables & Apparel 1.3%
Other Securities	2,014,165	1.3	88,983
Consumer Services 2.1%
Other Securities	3,437,944	2.1	142,169
Diversified Financials 9.3%
American Express Co. (b)	564,077	0.5	32,609
Bank of America Corp. (b)	2,111,568	1.7	113,750
Citigroup, Inc.	2,255,962	1.7	113,159
JPMorgan Chase & Co.	1,584,338	1.1	75,161
Merrill Lynch & Co., Inc.	414,062	0.5	36,197
Morgan Stanley	488,648	0.6	37,347
The Charles Schwab Corp. (b)(c)	579,415	0.2	10,557
The Goldman Sachs Group, Inc.	195,032	0.5	37,015
Other Securities	3,365,841	2.5	182,942
		9.3	638,737
Energy 8.8%
ChevronTexaco Corp.	1,001,377	1.0	67,293
ConocoPhillips	739,016	0.7	44,518
Exxon Mobil Corp.	2,732,622	2.9	195,164
Schlumberger Ltd.	539,906	0.5	34,057
Other Securities	5,854,566	3.7	258,509
		8.8	599,541
Food & Staples Retailing 2.3%
Wal-Mart Stores, Inc. (b)	1,856,777	1.3	91,502
Other Securities	1,915,384	1.0	69,625
		2.3	161,127
Food, Beverage & Tobacco 4.9%
Altria Group, Inc. (b)	929,615	1.1	75,606
PepsiCo, Inc.	739,687	0.7	46,926
The Coca-Cola Co.	1,077,204	0.7	50,327
Other Securities	4,341,835	2.4	161,124
		4.9	333,983
Health Care Equipment & Services 4.2%
UnitedHealth Group, Inc.	628,712	0.5	30,669
Other Securities	5,725,014	3.7	255,884
		4.2	286,553
Household & Personal Products 2.1%
Procter & Gamble Co. (b)	1,476,519	1.4	93,597
Other Securities	908,332	0.7	48,698
		2.1	142,295

See financial notes.    37

Schwab 1000 Index Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Insurance 6.1%
American International Group, Inc. (b)	1,164,836	1.2	78,242
Berkshire Hathaway, Inc., Class A *	697	1.1	73,516
Other Securities	5,488,671	3.8	262,874
		6.1	414,632
Materials 3.0%
Other Securities	4,990,980	3.0	209,335
Media 4.0%
Comcast Corp., Class A *	989,202	0.6	40,231
News Corp., Class A	1,461,928	0.5	30,481
The Walt Disney Co.	880,202	0.4	27,691
Time Warner, Inc.	2,104,701	0.6	42,115
Other Securities	4,273,721	1.9	132,843
		4.0	273,361
Pharmaceuticals & Biotechnology 7.7%
Abbott Laboratories (b)	686,146	0.5	32,599
Amgen, Inc. (b)*	549,660	0.6	41,725
Eli Lilly & Co.	511,171	0.4	28,631
Genentech, Inc. *	466,519	0.6	38,861
Johnson & Johnson	1,341,617	1.3	90,425
Merck & Co., Inc.	1,002,785	0.7	45,546
Pfizer, Inc.	3,337,510	1.3	88,945
Wyeth	598,983	0.5	30,566
Other Securities	3,697,687	1.8	133,345
		7.7	530,643
Real Estate 2.2%
Other Securities	2,969,531	2.2	148,505
Retailing 3.5%
Home Depot, Inc.	936,295	0.5	34,952
Other Securities	5,287,653	3.0	206,820
		3.5	241,772
Semiconductors & Semiconductor Equipment 2.6%
Intel Corp.	2,613,230	0.8	55,766
Other Securities	5,234,006	1.8	123,074
		2.6	178,840
Software & Services 6.5%
Google, Inc., Class A *	131,796	0.9	62,786
Microsoft Corp. (b)	4,638,788	2.0	133,180
Oracle Corp. *	2,388,510	0.7	44,116
Other Securities	7,048,761	2.9	203,191
		6.5	443,273
Technology Hardware & Equipment 6.1%
Apple Computer, Inc. (b)*	377,914	0.5	30,641
Cisco Systems, Inc. *	2,792,515	1.0	67,383
Hewlett-Packard Co.	1,269,818	0.7	49,193
International Business Machines Corp.	710,390	1.0	65,590
Other Securities	12,316,093	2.9	204,141
		6.1	416,948
Telecommunication Services 3.2%
AT&T Corp. (b)	1,751,248	0.9	59,980
BellSouth Corp.	816,966	0.6	36,845
Verizon Communications, Inc.	1,318,737	0.7	48,793
Other Securities	3,606,275	1.0	71,297
		3.2	216,915
Transportation 1.8%
United Parcel Service, Inc., Class B	491,025	0.6	36,999
Other Securities	1,854,278	1.2	85,702
		1.8	122,701
Utilities 3.3%
Other Securities	5,489,950	3.3	224,148
Foreign Common Stock 0.1% of net assets
Canada 0.0%
Consumer Services 0.0%
Other Securities	65,374	—	1,889
Cayman Islands 0.1%
Energy 0.1%
Other Securities	96,995	0.1	5,034

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		% of Net Assets		Value ($ x 1,000)
U.S. Treasury Obligation 0.0% of net assets
Other Securities		800		—	795
Security and Number of Shares			% of Net Assets		Value ($ x 1,000)
Warrant 0.0% of net assets
Other Securities		12,506		—	197

 

End of Investments.

38    See financial notes.

Schwab 1000 Index Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan 3.2% of net assets
State Street Navigator Security Lending Prime Portfolio		220,792,750		220,793

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $3,195,255, and the unrealized appreciation and depreciation were $3,776,628 and ($144,026), respectively, with a net unrealized appreciation of $3,632,602.

In addition to the above, the fund held the following at 10/31/06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		70		4,841		189

 

* Non-income producing security.

(a) All or a portion of this security is on loan.

(b) All or a portion of this security is held as collateral for open futures contracts.

(c) Issuer is affiliated with the fund’s adviser.

See financial notes.    39

Schwab 1000 Index Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $215,554 (cost $3,192,966)	$	6,827,857
Collateral invested for securities on loan		220,793
Cash		1,227
Receivables:
Investments sold		6,322
Dividends		5,388
Fund shares sold		4,785
Income from securities on loan		51
Prepaid expenses	+	40
Total assets		7,066,463
Liabilities
Collateral invested for securities on loan		220,793
Payables:
Investments bought		185
Investment adviser and administrator fees		126
Transfer agent and shareholder services fees		106
Fund shares redeemed		3,362
Trustee fees		4
Due to brokers for futures		2
Accrued expenses	+	280
Total liabilities		224,858
Net Assets
Total assets		7,066,463
Total liabilities	–	224,858
Net assets	$	6,841,605
Net Assets by Source
Capital received from investors		3,446,994
Net investment income not yet distributed		71,145
Net realized capital losses		(311,614	)
Net unrealized capital gains		3,635,080
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	3,917,627			96,978		$40.40
Select Shares	$	2,923,978			72,324		$40.43

 

40    See financial notes.

Schwab 1000 Index Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (including $75 from affiliated issuer and net of $6 foreign withholding tax)	$	120,115
Interest		451
Lending of securities	+	592
Total Investment Income		121,158
Net Realized Gains and Losses
Net realized gains on investments		200,034
Net realized gains on futures contracts	+	561
Net realized gains		200,595
Net Unrealized Gains and Losses
Net unrealized gains on investments		688,765
Net unrealized gains on futures contracts	+	197
Net unrealized gains		688,962
Expenses
Investment adviser and administrator fees		14,671
Transfer agent and shareholder service fees:
Investor Shares		10,247
Select Shares		2,537
Shareholder reports		380
Portfolio accounting fees		271
Registration fees		193
Custodian fees		159
Professional fees		65
Overdraft expense		62
Trustees’ fees		49
Other expenses	+	80
Total expenses		28,714
Custody credit		–6
Net expenses		28,708
Increase in Net Assets from Operations
Total investment income		121,158
Net expenses	–	28,708
Net investment income		92,450
Net realized gains		200,595
Net unrealized gains	+	688,962
Increase in net assets from operations	$	982,007

 

See financial notes.    41

Schwab 1000 Index Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	92,450	$	101,492
Net realized gains		200,595		45,444
Net unrealized gains	+	688,962		485,599
Increase in net assets from operations		982,007		632,535
Distributions Paid
Dividends from net investment income
Investor Shares		53,026		61,678
Select Shares	+	33,855		33,954
Total dividends from net investment income	$	86,881	$	95,632

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		7,114		$	266,698			10,950		$	375,768
Select Shares	+	17,151			640,701			11,316			393,335
Total shares sold		24,265		$	907,399			22,266		$	769,103
Shares Reinvested
Investor Shares		1,329		$	48,830			1,674		$	56,670
Select Shares	+	769			28,221			840			28,419
Total shares reinvested		2,098		$	77,051			2,514		$	85,089
Shares Redeemed
Investor Shares		(29,454	)	$	(1,101,605	)		(25,490	)	$	(881,852	)
Select Shares	+	(11,469	)		(429,917	)		(11,930	)		(410,943	)
Total shares redeemed		(40,923	)	$	(1,531,522	)		(37,420	)	$	(1,292,795	)
Net transactions in fund shares		(14,560	)	$	(547,072	)		(12,640	)	$	(438,603	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06					11/1/04–10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		183,862		$	6,493,551		196,502		$	6,395,251
Total increase or decrease	+	(14,560	)		348,054		(12,640	)		98,300
End of period		169,302		$	6,841,605		183,862		$	6,493,551
Net investment income not yet distributed				$	71,145				$	67,176

 

42    See financial notes.

Schwab Small-Cap Index Fund®

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		22.31			19.92			18.22			13.27			15.98
Income or loss from investment operations:
Net investment income		0.23	1		0.14			0.13			0.11			0.13
Net realized and unrealized gains or losses		3.67	1		2.38			1.68			4.98			(2.17	)
Total income or loss from investment operations		3.90			2.52			1.81			5.09			(2.04	)
Less distributions:
Dividends from net investment income		(0.14	)		(0.13	)		(0.11	)		(0.14	)		(0.09	)
Distributions from net realized gains		(0.15	)		—			—			—			(0.58	)
Total distributions		(0.29	)		(0.13	)		(0.11	)		(0.14	)		(0.67	)
Net asset value at end of period		25.92			22.31			19.92			18.22			13.27
Total return (%)		17.62			12.66			9.98			38.72			(13.66	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.57			0.58			0.59			0.56			0.49
Gross operating expenses		0.57			0.58			0.59			0.60			0.60
Net investment income		0.94			0.57			0.66			0.74			0.77
Portfolio turnover rate		29			40			39			34			44
Net assets, end of period ($ x 1,000,000)		771			823			869			886			722

 

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/2/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		22.36			19.96			18.25			13.28			16.00
Income or loss from investment operations:
Net investment income		0.27	1		0.17			0.17			0.14			0.14
Net realized and unrealized gains or losses		3.67	1		2.39			1.68			4.99			(2.18	)
Total income or loss from investment operations		3.94			2.56			1.85			5.13			(2.04	)
Less distributions:
Dividends from net investment income		(0.18	)		(0.16	)		(0.14	)		(0.16	)		(0.10	)
Distributions from net realized gains		(0.15	)		—			—			—			(0.58	)
Total distributions		(0.33	)		(0.16	)		(0.14	)		(0.16	)		(0.68	)
Net asset value at end of period		25.97			22.36			19.96			18.25			13.28
Total return (%)		17.78			12.86			10.16			39.02			(13.62	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.42			0.41			0.42			0.41			0.38
Gross operating expenses		0.42			0.43			0.44			0.45			0.45
Net investment income		1.10			0.74			0.82			0.89			0.88
Portfolio turnover rate		29			40			39			34			44
Net assets, end of period ($ x 1,000,000)		889			795			761			759			638

 

¹   Calculated based on the average shares outstanding during the period.

See financial notes.    43

Schwab Small-Cap Index Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.7%	Common Stock	1,241,488	1,654,700
0.2%	Short-Term Investment	3,156	3,156
—%	U.S. Treasury Obligation	679	681
99.9%	Total Investments	1,245,323	1,658,537
15.2%	Collateral Invested for Securities on Loan	251,338	251,338
(15.1)%	Other Assets and Liabilities, Net		(250,387	)
100.0%	Net Assets		1,659,488

 

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Common Stock   99.7% of net assets
Automobiles & Components 0.9%
Other Securities	714,117	0.9	15,228
Banks 8.1%
Other Securities	5,368,264	8.1	134,607
Capital Goods 7.8%
Acuity Brands, Inc.	66,532	0.2	3,296
AGCO Corp. *	125,945	0.2	3,369
Genlyte Group, Inc. *	41,815	0.2	3,231
Lincoln Electric Holdings, Inc.	57,525	0.2	3,537
Quanta Services, Inc. *	170,136	0.2	3,114
Other Securities	3,577,814	6.8	113,473
		7.8	130,020
Commercial Services & Supplies 3.8%
Corrections Corp. of America *	81,973	0.2	3,745
IKON Office Solutions, Inc.	209,821	0.1	3,128
Other Securities	1,950,267	3.5	55,540
		3.8	62,413
Consumer Durables & Apparel 3.6%
Marvel Entertainment, Inc. (a)*	122,630	0.2	3,109
Other Securities	2,201,486	3.4	56,779
		3.6	59,888
Consumer Services 4.9%
American Real Estate Partners L.P. (a)	55,192	0.2	3,455
Jack in the Box, Inc. *	55,481	0.2	3,113
Orient-Express Hotels Ltd., Class A	79,772	0.2	3,147
Other Securities	2,418,392	4.3	70,847
		4.9	80,562
Diversified Financials 2.3%
Other Securities	1,257,839	2.3	38,105
Energy 8.0%
Boardwalk Pipeline Partners, LP (a)	138,835	0.2	3,993
Holly Corp.	79,906	0.2	3,800
Magellan Midstream Partners (a)	92,608	0.2	3,620
Overseas Shipholding Group, Inc.	53,961	0.2	3,375
SEACOR Holdings, Inc. *	34,616	0.2	3,097
Superior Energy Services, Inc. *	104,787	0.2	3,280
Veritas DGC, Inc. *	52,792	0.2	3,802
Other Securities	4,219,211	6.6	107,945
		8.0	132,912
Food & Staples Retailing 1.0%
Rite Aid Corp. (a)*	721,895	0.2	3,379
Other Securities	426,219	0.8	14,112
		1.0	17,491
Food, Beverage & Tobacco 1.7%
Corn Products International, Inc.	101,390	0.2	3,669
Hansen Natural Corp. (a)*	112,460	0.2	3,571
Other Securities	710,152	1.3	21,538
		1.7	28,778
Health Care Equipment & Services 4.9%
Brookdale Senior Living, Inc.	78,669	0.2	3,786
WellCare Health Plans, Inc. *	54,593	0.1	3,207
Other Securities	2,527,824	4.6	73,577
		4.9	80,570
Household & Personal Products 0.7%
Other Securities	977,477	0.7	10,973

44    See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Insurance 4.2%
Arch Capital Group Ltd. *	49,227	0.2	3,165
Odyssey Re Holdings Corp. (a)	96,583	0.2	3,424
Other Securities	2,285,847	3.8	63,836
		4.2	70,425
Materials 5.0%
Albemarle Corp.	63,716	0.2	4,144
Carpenter Technology Corp.	36,101	0.2	3,863
Greif, Inc., Class A	35,431	0.2	3,320
Steel Dynamics, Inc.	67,162	0.2	4,037
Other Securities	3,119,250	4.2	67,487
		5.0	82,851
Media 2.1%
Other Securities	2,541,434	2.1	34,765
Pharmaceuticals & Biotechnology 4.6%
Other Securities	3,258,499	4.6	75,624
Real Estate 7.0%
Alexandria Real Estate Equities, Inc.	31,429	0.2	3,133
Taubman Centers, Inc.	70,883	0.2	3,324
Other Securities	3,930,525	6.6	109,485
		7.0	115,942
Retailing 5.5%
Big Lots, Inc. *	161,833	0.2	3,411
Coldwater Creek, Inc. *	120,979	0.2	3,689
Dick’s Sporting Goods, Inc. *	68,840	0.2	3,425
Guess?, Inc. *	62,886	0.2	3,581
OfficeMax, Inc.	96,592	0.3	4,596
The Men’s Wearhouse, Inc. (b)	82,645	0.2	3,293
Other Securities	3,005,556	4.2	69,752
		5.5	91,747
Semiconductors & Semiconductor Equipment 3.4%
Other Securities	5,309,903	3.4	57,205
Software & Services 7.2%
FactSet Research Systems, Inc.	66,796	0.2	3,400
Hyperion Solutions Corp. *	86,914	0.2	3,251
Sybase, Inc. *	135,719	0.2	3,305
Other Securities	5,990,094	6.6	110,144
		7.2	120,100
Technology Hardware & Equipment 5.3%
Anixter International, Inc. (a)*	52,843	0.2	3,158
Brocade Communications Systems, Inc. (b)*	383,283	0.2	3,108
Polycom, Inc. *	138,739	0.2	3,801
Trimble Navigation Ltd. *	74,801	0.2	3,457
Other Securities	5,027,042	4.5	74,559
		5.3	88,083
Telecommunication Services 1.2%
SBA Communications Corp. *	118,934	0.2	3,177
Time Warner Telecom, Inc., Class A (a)*	160,808	0.2	3,206
Other Securities	1,174,300	0.8	13,129
		1.2	19,512
Transportation 2.9%
Continental Airlines, Inc., Class B (a)*	125,511	0.3	4,629
Other Securities	1,604,810	2.6	42,801
		2.9	47,430
Utilities 3.6%
Dynegy, Inc., Class A *	530,336	0.2	3,224
Sierra Pacific Resources *	214,037	0.2	3,245
Other Securities	2,079,284	3.2	53,000
		3.6	59,469

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)			Value ($ x 1,000)
Short-Term Investment   0.2% of net assets
Other Securities		3,156	0.2	3,156
U.S. Treasury Obligation   0.0% of net assets
Other Securities		685	—	681

 

End of Investments.

See financial notes.    45

Schwab Small-Cap Index Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   15.2% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		251,338,226		251,338

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $1,245,704, and the unrealized appreciation and depreciation were $498,655 and ($85,822), respectively, with a net unrealized appreciation of $412,833.

In addition to the above, the fund held the following at 10/31/2006. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
Russell 2000 Index, e-mini Futures, Long expires 12/31/06		51		3,932		182

 

*       Non-income producing security.

 

(a)     All or a portion of this security is on loan.

 

(b)     All or a portion of this security is held as collateral for open futures contracts.

46    See financial notes.

Schwab Small-Cap Index Fund

Statement of

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $244,675 (cost $1,245,323)	$	1,658,537
Collateral invested for securities on loan		251,338
Receivables:
Investments sold		714
Dividends		859
Fund shares sold		450
Income from securities on loan		191
Interest		1
Prepaid expenses	+	10
Total assets		1,912,100
Liabilities
Collateral for securities on loan		251,338
Payables:
Investment adviser and administrator fees		42
Transfer agent and shareholder services fees		24
Fund shares redeemed		1,087
Due to brokers for futures		19
Trustee fees		2
Accrued expenses	+	100
Total liabilities		252,612
Net Assets
Total assets		1,912,100
Total liabilities	–	252,612
Net assets	$	1,659,488
Net Assets by Source
Capital received from investors		1,041,234
Net investment income not yet distributed		12,783
Net realized capital gains		192,075
Net unrealized capital gains		413,396
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	770,598			29,729		$25.92
Select Shares	$	888,890			34,222		$25.97

 

See financial notes.    47

Schwab Small-Cap Index Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (net of $11 foreign withholding tax)	$	22,891
Interest		288
Lending of securities	+	2,035
Total Investment Income		25,214
Net Realized Gains and Losses
Net realized gains on investments		190,721
Net realized gains on futures contracts	+	1,683
Net realized gains		192,404
Net Unrealized Gains and Losses
Net unrealized gains on investments		62,567
Net unrealized gains on futures contracts	+	116
Net unrealized gains		62,683
Expenses
Investment adviser and administrator fees		4,907
Transfer agent and shareholder service fees:
Investor Shares		2,060
Select Shares		839
Custodian fees		109
Shareholder reports		107
Portfolio accounting fees		105
Registration fees		61
Professional fees		49
Trustees’ fees		17
Overdraft Expense		8
Other expenses	+	25
Total expenses		8,287
Expense reduction by adviser and Schwab	–	43
Net expenses		8,244
Increase in Net Assets from Operations
Total investment income		25,214
Net expenses	–	8,244
Net investment income		16,970
Net realized gains		192,404
Net unrealized gains	+	62,683
Increase in net assets from operations	$	272,057

 

48    See financial notes.

Schwab Small-Cap Index Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	16,970	$	10,894
Net realized gains		192,404		81,311
Net unrealized gains	+	62,683		109,886
Increase in net assets from operations		272,057		202,091
Distributions Paid
Dividends from net investment income
Investor Shares		4,995		5,474
Select Shares	+	6,216		5,977
Total dividends from net investment income		11,211		11,451
Distributions from net realized gains
Investor Shares		5,339		—
Select Shares	+	5,156		—
Total distributions from net realized gains		10,495		—
Total distributions	$	21,706	$	11,451

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		2,811		$	68,930			4,246		$	91,743
Select Shares	+	5,327			128,328			5,026			109,688
Total shares sold		8,138		$	197,258			9,272		$	201,431
Shares Reinvested
Investor Shares		414		$	9,611			237		$	5,085
Select Shares	+	451			10,498			256			5,502
Total shares reinvested		865		$	20,109			493		$	10,587
Shares Redeemed
Investor Shares		(10,390	)	$	(251,597	)		(11,218	)	$	(243,579	)
Select Shares	+	(7,116	)		(174,607	)		(7,843	)		(170,831	)
Total shares redeemed		(17,506	)	$	(426,204	)		(19,061	)	$	(414,410	)
Net transactions in fund shares		(8,503	)	$	(208,837	)		(9,296	)	$	(202,392	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06					11/1/04–10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		72,454		$	1,617,974		81,750		$	1,629,726
Total increase or decrease	+	(8,503	)		41,514		(9,296	)		(11,752	)
End of period		63,951		$	1,659,488		72,454		$	1,617,974
Net investment income not yet distributed				$	12,783				$	8,490

 

See financial notes.    49

Schwab Total Stock Market Index Fund®

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		20.77			19.04			17.48			14.35			16.62
Income or loss from investment operations:
Net investment income		0.30			0.29			0.19			0.16			0.16
Net realized and unrealized gains or losses		3.01			1.69			1.53			3.14			(2.27	)
Total income or loss from investment operations		3.31			1.98			1.72			3.30			(2.11	)
Less distributions:
Dividends from net investment income		(0.25	)		(0.25	)		(0.16	)		(0.17	)		(0.16	)
Net asset value at end of period		23.83			20.77			19.04			17.48			14.35
Total return (%)		16.05			10.45			9.93			23.24			(12.86	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.53			0.54			0.56			0.53			0.40
Gross operating expenses		0.53			0.54			0.56			0.59			0.62
Net investment income		1.27			1.37			1.07			1.18			1.11
Portfolio turnover rate		3			2			2			3			2
Net assets, end of period ($ x 1,000,000)		607			600			592			469			263

 

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		20.83			19.09			17.52			14.37			16.65
Income or loss from investment operations:
Net investment income		0.31			0.31			0.22			0.20			0.19
Net realized and unrealized gains or losses		3.04			1.71			1.54			3.14			(2.29	)
Total income or loss from investment operations		3.35			2.02			1.76			3.34			(2.10	)
Less distributions:
Dividends from net investment income		(0.28	)		(0.28	)		(0.19	)		(0.19	)		(0.18	)
Net asset value at end of period		23.90			20.83			19.09			17.52			14.37
Total return (%)		16.23			10.63			10.10			23.50			(12.81	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.38			0.39			0.39			0.36			0.27
Gross operating expenses		0.38			0.39			0.41			0.44			0.47
Net investment income		1.41			1.52			1.23			1.35			1.24
Portfolio turnover rate		3			2			2			3			2
Net assets, end of period ($ x 1,000,000)		762			617			548			429			264

 

50    See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. A copy of the fund’s most recently filed quarterly schedule of portfolio holdings, included on the fund’s Form N-CSR (with respect to the fund’s second and fourth fiscal quarters) or Form N-Q (with respect to the fund’s first and third fiscal quarters), is available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.6%	Common Stock	1,038,021	1,363,639
0.1%	Foreign Common Stock	425	994
—%	Preferred Stock	64	94
—%	U.S. Treasury Obligation	308	308
—%	Rights	—	—
99.7%	Total Investments	1,038,818	1,365,035
3.9%	Collateral Invested for Securities on Loan	52,763	52,763
(3.6)%	Other Assets and Liabilities, Net		(49,183	)
100.0%	Net Assets		1,368,615

 

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Common Stock   99.6% of net assets
Automobiles & Components 0.6%
Other Securities	328,986	0.6	7,894
Banks 5.9%
U.S. Bancorp	158,531	0.4	5,365
Wachovia Corp.	163,314	0.7	9,064
Wells Fargo & Co.	275,154	0.8	9,985
Other Securities	1,490,956	4.0	55,630
		5.9	80,044
Capital Goods 7.9%
General Electric Co. (c)	815,966	2.1	28,649
The Boeing Co.	68,800	0.4	5,494
United Technologies Corp.	84,068	0.4	5,525
Other Securities	1,395,957	5.0	68,318
		7.9	107,986
Commercial Services & Supplies 1.2%
Other Securities	486,321	1.2	16,279
Consumer Durables & Apparel 1.6%
Other Securities	602,274	1.6	21,892
Consumer Services 2.4%
Other Securities	907,962	2.4	33,079
Diversified Financials 8.9%
American Express Co.	105,150	0.5	6,079
Bank of America Corp. (c)	381,577	1.5	20,556
Citigroup, Inc. (c)	412,286	1.5	20,680
JPMorgan Chase & Co.	295,944	1.0	14,040
Merrill Lynch & Co., Inc.	79,800	0.5	6,976
Morgan Stanley	90,300	0.5	6,902
The Charles Schwab Corp. (d)	111,120	0.2	2,025
The Goldman Sachs Group, Inc. (a)	38,700	0.5	7,345
Other Securities	710,373	2.7	37,064
		8.9	121,667
Energy 8.5%
ChevronTexaco Corp.	178,939	0.9	12,025
ConocoPhillips	131,623	0.6	7,929
Exxon Mobil Corp. (c)	493,166	2.6	35,222
Schlumberger Ltd.	100,000	0.5	6,308
Other Securities	1,318,551	3.9	54,797
		8.5	116,281
Food & Staples Retailing 2.2%
Wal-Mart Stores, Inc.	309,100	1.1	15,232
Other Securities	442,868	1.1	14,462
		2.2	29,694
Food, Beverage & Tobacco 4.5%
Altria Group, Inc.	168,800	1.0	13,729
PepsiCo, Inc.	140,800	0.7	8,932
The Coca-Cola Co.	202,200	0.7	9,447
Other Securities	821,464	2.1	29,677
		4.5	61,785
Health Care Equipment & Services 4.4%
UnitedHealth Group, Inc.	118,880	0.4	5,799
Other Securities	1,345,183	4.0	54,405
		4.4	60,204
Household & Personal Products 1.9%
Procter & Gamble Co. (c)	269,915	1.3	17,110
Other Securities	184,447	0.6	9,425
		1.9	26,535

See financial notes.    51

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets		Value ($ x 1,000)
Insurance 5.5%
American International Group, Inc.	211,922	1.1	14,235
Berkshire Hathaway, Inc., Class A *	121	0.9	12,762
Other Securities	1,079,478	3.5	48,862
		5.5	75,859
Materials 3.1%
Other Securities	1,097,579	3.1	43,021
Media 4.0%
Comcast Corp., Class A *	151,336	0.5	6,155
News Corp., Class A	253,950	0.4	5,295
The Walt Disney Co.	195,410	0.5	6,148
Time Warner, Inc.	367,052	0.6	7,345
Other Securities	988,988	2.0	29,389
		4.0	54,332
Pharmaceuticals & Biotechnology 7.4%
Abbott Laboratories	125,705	0.5	5,972
Amgen, Inc. *	103,268	0.6	7,839
Eli Lilly & Co.	92,400	0.4	5,175
Genentech, Inc. *	83,300	0.5	6,939
Johnson & Johnson	246,370	1.2	16,605
Merck & Co., Inc.	183,552	0.6	8,337
Pfizer, Inc.	610,192	1.2	16,262
Wyeth	109,400	0.4	5,583
Other Securities	918,458	2.0	28,669
		7.4	101,381
Real Estate 2.5%
Other Securities	762,819	2.5	33,851
Retailing 4.0%
Home Depot, Inc.	162,300	0.5	6,059
Other Securities	1,408,353	3.5	49,041
		4.0	55,100
Semiconductors & Semiconductor Equipment 2.6%
Intel Corp.	483,832	0.8	10,325
Other Securities	1,235,866	1.8	25,309
		2.6	35,634
Software & Services 6.2%
Google, Inc., Class A *	22,900	0.8	10,909
Microsoft Corp. (c)	800,850	1.7	22,992
Oracle Corp. *	434,449	0.6	8,024
Other Securities	1,681,198	3.1	43,096
		6.2	85,021
Technology Hardware & Equipment 6.1%
Apple Computer, Inc. *	65,000	0.4	5,270
Cisco Systems, Inc. *	511,909	0.9	12,352
Hewlett-Packard Co.	239,636	0.7	9,283
International Business Machines Corp.	131,510	0.9	12,142
Other Securities	2,634,030	3.2	44,362
		6.1	83,409
Telecommunication Services 3.0%
AT&T Corp.	318,806	0.8	10,919
BellSouth Corp.	151,887	0.5	6,850
Verizon Communications, Inc.	247,572	0.7	9,160
Other Securities	776,188	1.0	14,015
		3.0	40,944
Transportation 1.8%
United Parcel Service, Inc., Class B	91,480	0.5	6,893
Other Securities	444,119	1.3	18,308
		1.8	25,201
Utilities 3.4%
Other Securities	1,229,814	3.4	46,546
Foreign Common Stock   0.1% of net assets
Cayman Islands 0.1%
Energy 0.1%
Other Securities	19,155	0.1	994
Preferred Stock   0.0% of net assets
Real Estate 0.0%
Other Securities	1,200	—	94

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		% of Net Assets		Value ($ x 1,000)
U.S. Treasury Obligation   0.0% of net assets
Other Securities		310		—	308

 

52    See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

Security and Number of Shares		% of Net Assets	Value ($ x 1,000)
Rights   0.0% of net assets
Other Securities	1,640	—	—

 

End of Investments.

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   3.9% of net assets
State Street Navigator Security Lending Prime Portfolio		52,763,359		52,763

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $1,039,468 and the unrealized appreciation and depreciation were $419,712 and ($94,145), respectively, with a net unrealized appreciation of $325,567.

In addition to the above, the fund held the following at 10/31/06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contracts
Russell 2000 Index, e-mini, Long expires 12/31/06		10		771		56
S&P 500 Index, e-mini, Long, expires 12/15/06		10		692		36
						92

 

*     Non-income producing security.

(a)     All or a portion of this security is on loan.

(b)     Fair-valued by Management. Please see the complete schedule of holdings.

(c)     All or a portion of this security is held as collateral for open futures contracts. Please see the complete schedule of holdings.

(d)     Issuer is affiliated with the fund’s adviser.

See financial notes.    53

Schwab Total Stock Market Index Fund

Statement of

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $51,285 (cost $1,038,818)	$	1,365,035
Collateral invested for securities on loan		52,763
Receivables:
Investments sold		2,944
Fund shares sold		1,349
Dividends		1,051
Income from securities on loan		22
Prepaid expenses	+	8
Total assets		1,423,172
Liabilities
Collateral invested for securities on loan		52,763
Payables:
Investments bought		22
Investment adviser and administrator fees		29
Transfer agent and shareholder services fees		19
Fund shares redeemed		919
Payable to custodian		715
Due to brokers for futures		3
Trustee fees		2
Accrued expenses	+	85
Total liabilities		54,557
Net Assets
Total assets		1,423,172
Total liabilities	–	54,557
Net assets	$	1,368,615
Net Assets by Source
Capital received from investors		1,043,168
Net investment income not yet distributed		13,499
Net realized capital losses		(14,361	)
Net unrealized capital gains		326,309
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	606,548			25,453		$23.83
Select Shares	$	762,067			31,889		$23.90

 

54    See financial notes.

Schwab Total Stock Market Index Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (including $9 from affiliated issuer and net of $2 foreign withholding tax)	$	22,687
Interest		261
Lending of securities	+	193
Total Investment Income		23,141
Net Realized Gains and Losses
Net realized gains on investments		3,248
Net realized gains on futures contracts	+	402
Net realized gains		3,650
Net Unrealized Gains and Losses
Net unrealized gains on investments		172,007
Net unrealized gains on futures contracts	+	27
Net unrealized gains		172,034
Expenses
Investment adviser and administrator fees		3,234
Transfer agent and shareholder service fees:
Investor Shares		1,526
Select Shares		678
Portfolio accounting fees		127
Registration fees		87
Shareholder reports		69
Custodian fees		59
Professional fees		47
Trustees’ fees		14
Overdraft expense		4
Other expenses	+	24
Total expenses		5,869
Increase in Net Assets from Operations
Total investment income		23,141
Net expenses	–	5,869
Net investment income		17,272
Net realized gains		3,650
Net unrealized gains	+	172,034
Increase in net assets from operations	$	192,956

 

See financial notes.    55

Schwab Total Stock Market Index Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	17,272	$	17,477
Net realized gains		3,650		3,994
Net unrealized gains	+	172,034		97,829
Increase in net assets from operations		192,956		119,300
Distributions Paid
Dividends from net investment income
Investor Shares		7,046		7,770
Select Shares	+	8,255		7,956
Total dividends from net investment income	$	15,301	$	15,726

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		3,959		$	87,655			5,085		$	102,573
Select Shares	+	8,052			178,696			6,795			138,664
Total shares sold		12,011		$	266,351			11,880		$	241,237
Shares Reinvested
Investor Shares		302		$	6,537			362		$	7,203
Select Shares	+	315			6,824			328			6,531
Total shares reinvested		617		$	13,361			690		$	13,734
Shares Redeemed
Investor Shares		(7,691	)	$	(169,892	)		(7,672	)	$	(155,939	)
Select Shares	+	(6,111	)		(136,146	)		(6,203	)		(126,000	)
Total shares redeemed		(13,802	)	$	(306,038	)		(13,875	)	$	(281,939	)
Net transactions in fund shares		(1,174	)	$	(26,326	)		(1,305	)	$	(26,968	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06					11/1/04–10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		58,516		$	1,217,286		59,821		$	1,140,680
Total increase or decrease	+	(1,174	)		151,329		(1,305	)		76,606
End of period		57,342		$	1,368,615		58,516		$	1,217,286
Net investment income not yet distributed				$	13,499				$	11,788

 

56    See financial notes.

Schwab International Index Fund®

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		17.07			14.82			12.74			10.47			12.22
Income or loss from investment operations:
Net investment income		0.48			0.35			0.26			0.23			0.21
Net realized and unrealized gains or losses		3.92			2.18			2.05			2.25			(1.82	)
Total income or loss from investment operations		4.40			2.53			2.31			2.48			(1.61	)
Less distributions:
Dividends from net investment income		(0.35	)		(0.28	)		(0.23	)		(0.21	)		(0.14	)
Net asset value at end of period		21.12			17.07			14.82			12.74			10.47
Total return (%)		26.15			17.30			18.40			24.24			(13.34	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.69			0.68			0.69			0.65			0.58
Gross operating expenses		0.70			0.72			0.73			0.74			0.76
Net investment income		2.41			2.05			1.78			2.01			1.70
Portfolio turnover rate		11			10			1			7			13
Net assets, end of period ($ x 1,000,000)		706			595			550			494			443

 

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/2/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		17.09			14.83			12.75			10.47			12.23
Income or loss from investment operations:
Net investment income		0.50			0.38			0.28			0.25			0.21
Net realized and unrealized gains or losses		3.93			2.19			2.05			2.26			(1.82	)
Total income or loss from investment operations		4.43			2.57			2.33			2.51			(1.61	)
Less distributions:
Dividends from net investment income		(0.38	)		(0.31	)		(0.25	)		(0.23	)		(0.15	)
Net asset value at end of period		21.14			17.09			14.83			12.75			10.47
Total return (%)		26.35			17.56			18.56			24.50			(13.31	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.50			0.50			0.50			0.49			0.47
Gross operating expenses		0.55			0.57			0.58			0.59			0.61
Net investment income		2.60			2.23			1.97			2.19			1.81
Portfolio turnover rate		11			10			1			7			13
Net assets, end of period ($ x 1,000,000)		954			776			687			629			536

 

See financial notes.    57

Schwab International Index Fund

Portfolio Holdings as of October 31, 2006

This section shows the fund’s 50 largest portfolio holdings in unaffiliated issuers and any holdings exceeding 1% of the fund’s total net assets as of the report date. The remaining securities held by the fund are grouped as “Other Securities” in each category. You can request a complete schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-800-435-4000. This complete schedule, filed on the fund’s Form N-CSR, is also available on the SEC’s website at http://www.sec.gov.

In addition, the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. A copy of the fund’s most recently filed quarterly schedule of portfolio holdings, included on the fund’s Form N-CSR (with respect to the fund’s second and fourth fiscal quarters) or Form N-Q (with respect to the fund’s first and third fiscal quarters), is available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.4%	Foreign Common Stock	967,386	1,649,642
0.3%	Short-Term Investment	4,182	4,182
99.7%	Total Investments	971,568	1,653,824
5.8%	Collateral Invested for Securities on Loan	96,480	96,480
(5.5)%	Other Assets and Liabilities, Net		(91,025	)
100.0%	Net Assets		1,659,279

 

Security and Number of Shares			% of Net Assets		Value ($ x 1,000)
Foreign Common Stock   99.4% of net assets
Australia 4.3%
BHP Billiton Ltd.		582,860	0.8	12,406
Other Securities		3,873,498	3.5	58,530
			4.3	70,936
Austria 0.2%
Other Securities		58,241	0.2	3,621
Belgium 1.3%
Fortis		205,652	0.5	8,624
Other Securities		197,580	0.8	12,292
			1.3	20,916
Canada 6.7%
Royal Bank of Canada (a)		201,446	0.5	8,934
Other Securities		2,960,648	6.2	101,941
			6.7	110,875
Denmark 0.5%
Other Securities		105,407	0.5	8,004
Finland 1.1%
Nokia Oyj		653,383	0.8	12,987
Other Securities		255,790	0.3	5,692
			1.1	18,679
France 10.3%
Axa		292,677	0.7	11,134
BNP Paribas		131,357	0.9	14,426
Sanofi-Aventis		154,055	0.8	13,118
Societe Generale		58,802	0.6	9,762
Suez SA		202,911	0.5	9,089
Total SA		393,890	1.6	26,645
Other Securities		1,462,887	5.2	86,468
			10.3	170,642
Germany 7.6%
Allianz AG		63,388	0.7	11,779
DaimlerChrysler AG		162,404	0.6	9,285
Deutsche Bank AG		82,735	0.6	10,464
Deutsche Telekom AG		485,962	0.5	8,425
E.ON AG		112,817	0.8	13,584
Siemens AG *		142,378	0.8	12,844
Other Securities		875,463	3.6	59,780
			7.6	126,161
Greece 0.3%
Other Securities		123,264	0.3	4,529
Hong Kong 0.8%
Other Securities		1,888,420	0.8	13,768
Ireland 0.7%
Other Securities	��	491,102	0.7	11,912
Italy 3.3%
Eni S.p.A. (a)		419,043	0.8	12,676
Other Securities		5,739,239	2.5	42,022
			3.3	54,698
Japan 18.8%
Canon, Inc.		190,995	0.6	10,200
Honda Motor Co., Ltd.		246,039	0.5	8,684
Mitsubishi UFJ Financial Group, Inc.		1,612	1.2	20,448
Mizuho Financial Group, Inc.		1,666	0.8	12,950
Sumitomo Mitsui Financial Group, Inc.		1,014	0.7	11,081
Takeda Pharmaceutical Co., Ltd.		130,200	0.5	8,359
Toyota Motor Corp.		438,703	1.6	25,904
Other Securities		11,851,680	12.9	214,892
			18.8	312,518

58    See financial notes.

Schwab International Index Fund

Portfolio Holdings continued

Security and Number of Shares			% of Net Assets		Value ($ x 1,000)
Netherlands 4.1%
ABN AMRO Holding N.V.		300,416	0.5	8,754
ING Groep N.V.		366,162	1.0	16,217
Other Securities		1,805,220	2.6	43,171
			4.1	68,142
Norway 0.4%
Other Securities		340,039	0.4	6,923
Portugal 0.2%
Other Securities		717,379	0.2	4,052
Singapore 0.5%
Other Securities		1,602,960	0.5	8,016
Spain 4.6%
Banco Bilbao Vizcaya Argentaria S.A.		552,339	0.8	13,331
Banco Santander Central Hispano S.A.		1,013,916	1.0	17,547
Telefonica S.A.		777,060	0.9	14,960
Other Securities		836,907	1.9	31,145
			4.6	76,983
Sweden 1.8%
Telefonaktiebolaget LM Ericsson, Class B		2,372,504	0.6	8,968
Other Securities		1,174,867	1.2	20,664
			1.8	29,632
Switzerland 7.6%
Credit Suisse Group		199,166	0.7	12,006
Nestle S.A.	��	65,820	1.4	22,492
Novartis AG–Reg’d.		436,697	1.6	26,508
Roche Holdings AG		111,022	1.2	19,439
UBS AG		348,598	1.3	20,815
Other Securities		541,279	1.4	23,971
			7.6	125,231
United Kingdom 24.3%
Anglo American plc		240,109	0.6	10,867
AstraZeneca plc		253,064	0.9	14,914
Barclays plc		1,053,619	0.9	14,196
BP plc		3,203,910	2.2	35,817
Diageo plc		445,768	0.5	8,242
GlaxoSmithKline plc		932,267	1.5	24,845
HBOS plc		605,157	0.8	12,537
HSBC Holdings plc		1,805,836	2.1	34,267
Lloyds TSB Group plc		895,483	0.6	9,565
Rio Tinto plc		167,659	0.6	9,277
Royal Bank of Scotland Group plc		501,714	1.1	17,860
Royal Dutch Shell plc, Class A		749,220	1.6	26,070
Royal Dutch Shell plc, Class B		434,049	0.9	15,596
Tesco plc		1,227,342	0.5	9,208
Vodafone Group plc		8,348,655	1.3	21,512
Other Securities		23,960,527	8.2	138,631
			24.3	403,404

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		% of Net Assets		Value ($ x 1,000)
Short-Term Investment   0.3% of net assets
Other Securities		4,182		0.3	4,182

 

End of Investments.

Security and Number of Shares			Value ($ x 1,000)
Collateral Invested for Securities on Loan   5.8% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust.	96,479,879	5.8	96,480

 

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $986,474, and the unrealized appreciation and depreciation were $699,603 and ($32,253), respectively, with a net unrealized appreciation of $667,350.

At 10/31/06, the prices of certain foreign securities held by the fund aggregating $1,515,837 were adjusted from their closing market prices following the guidelines adopted by the fund’s Board of Trustees.

*        Non-income producing security.

(a)     All or a portion of this security is on loan.

See financial notes.    59

Schwab International Index Fund

Statement of

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $92,211 (cost $971,568)	$	1,653,824
Collateral invested for securities on loan		96,480
Cash		123
Foreign currency, at value (cost $379)		384
Receivables:
Fund shares sold		4,309
Dividends		1,823
Reclaims		202
Income from securities on loan		35
Prepaid expenses	+	9
Total assets		1,757,189
Liabilities
Collateral invested for securities on loan		96,480
Payables:
Investments bought		21
Investment advisors and administrator fees		52
Transfer agent and shareholder services fees		20
Fund shares redeemed		875
Trustee fees		2
Accrued expenses	+	460
Total liabilities		97,910
Net Assets
Total assets		1,757,189
Total liabilities	–	97,910
Net assets	$	1,659,279
Net Assets by Source
Capital received from investors		1,202,536
Net investment income not yet distributed		34,946
Net realized capital losses		(260,470	)
Net unrealized capital gains		682,267
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	705,737			33,410		$21.12
Select Shares	$	953,542			45,100		$21.14

 

60    See financial notes.

Schwab International Index Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (net of $3,993 foreign withholding tax)	$	45,893
Interest		275
Lending of securities	+	1,345
Total Investment Income		47,513
Net Realized Gains and Losses
Net realized gains on investments		36,532
Net realized gains on foreign currency transactions		29
Net realized gains on futures contracts	+	34
Net realized gains		36,595
Net Unrealized Gains and Losses
Net unrealized gains on investments		278,152
Net unrealized gains on foreign currency transactions	+	55
Net unrealized gains		278,207
Expenses
Investment adviser and administrator fees		6,041
Transfer agent and shareholder service fees:
Investor shares		1,641
Select shares		876
Custodian fees		630
Portfolio accounting fees		94
Shareholder reports		91
Professional fees		49
Trustees’ fees		15
Registration fees		8
Overdraft expense		4
Other expenses	+	11
Total expenses		9,460
Expense reduction by adviser and Schwab	–	557
Net expenses		8,903
Increase in Net Assets from Operations
Total investment income		47,513
Net expenses	–	8,903
Net investment income		38,610
Net realized gains		36,595
Net unrealized gains	+	278,207
Increase in net assets from operations	$	353,412

 

See financial notes.    61

Schwab International Index Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	38,610	$	29,254
Net realized gains		36,595		15,815
Net unrealized gains	+	278,207		169,670
Increase in net assets from operations		353,412		214,739
Distributions Paid
Dividends from net investment income
Investor Shares		12,022		10,423
Select Shares	+	17,265		14,231
Total dividends from net investment income	$	29,287	$	24,654

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		5,781		$	111,778			5,337		$	85,930
Select Shares	+	7,746			148,437			7,993			128,120
Total shares sold		13,527		$	260,215			13,330		$	214,050
Shares Reinvested
Investor Shares		619		$	11,010			617		$	9,445
Select Shares	+	882			15,675			864			13,224
Total shares reinvested		1,501		$	26,685			1,481		$	22,669
Shares Redeemed
Investor Shares		(7,861	)	$	(150,978	)		(8,209	)	$	(132,435	)
Select Shares	+	(8,930	)		(171,954	)		(9,795	)		(160,690	)
Total shares redeemed		(16,791	)	$	(322,932	)		(18,004	)	$	(293,125	)
Net transactions in fund shares		(1,763	)	$	(36,032	)		(3,193	)	$	(56,406	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06					11/1/04–10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		80,273		$	1,371,186		83,466		$	1,237,507
Total increase or decrease	+	(1,763	)		288,093		(3,193	)		133,679
End of period		78,510		$	1,659,279		80,273		$	1,371,186
Net investment income not yet distributed				$	34,946				$	25,265

 

62    See financial notes.

Schwab Equity Index Funds

Financial Notes

1.   Business Structure of the Funds

Each of the funds discussed in this report is a series of Schwab Capital Trust, except Schwab 1000 Index Fund, which is a series of Schwab Investments. Both Schwab Capital Trust and Schwab Investments (trust) are no-load, open-end management investment companies. Each company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in each trust including the funds discussed in this report, which are highlighted:

Schwab Capital Trust (organized May 7, 1993)
Schwab S&P 500 Index Fund
Schwab Institutional Select® S&P 500 Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®
Schwab MartketTrack All Equity Portfolio^TM
Schwab MarketTrack Growth Portfolio^TM
Schwab MarketTrack Balanced Portfolio^TM
Schwab MarketTrack Conservative Portfolio^TM
Laudus U.S. MarketMasters Fund^TM
Laudus Small-Cap MarketMasters Fund^TM
Laudus International MarketMasters Fund^TM
Schwab Viewpoints Fund^TM
Schwab Premier Equity Fund®
Schwab Core Equity Fund^TM
Schwab Dividend Equity Fund^TM
Schwab Large-Cap Growth Fund^TM
Schwab Small-Cap Equity Fund^TM
Schwab Hedged Equity Fund^TM
Schwab Financial Services Fund^TM
Schwab Health Care Fund^TM
Schwab Technology Fund^TM
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund Schwab Investments (organized October 26, 1990)
Schwab 1000 Index® Fund
Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fund^TM
Schwab Total Bond Market Fund^TM
Schwab Inflation Protected Fund^TM
Schwab GNMA Fund^TM
Schwab Tax-Free YieldPlus Fund^TM
Schwab Short/Intermediate Tax-Free Bond Fund^TM
Schwab Long-Term Tax-Free Bond Fund^TM
Schwab California Tax-Free YieldPlus Fund^TM
Schwab California Short/Intermediate
Tax-Free Bond Fund^TM
Schwab California Long-Term Tax-Free Bond Fund Fund^TM

 

The Schwab Equity Index Funds, with the exception of Schwab Institutional Select S&P 500 Fund, offer multiple share classes. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums. In addition, one share class, e.Shares®, is available only to clients of Schwab Institutional®, Charles Schwab Trust Company and certain tax-advantaged retirement plans, and can only be traded electronically. Schwab S&P 500 Index Fund offers three classes of shares: Investor Shares, Select Shares® and e.Shares®. Schwab 1000 Index Fund, Schwab Small-Cap Index Fund, Schwab Total Market Index Fund and Schwab International Index Fund each offer two classes of shares: Investor Shares and Select Shares®. Schwab Institutional Select S&P 500 Fund offers one share class.

Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies in the preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America.

    63

Schwab Equity Index Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

(a)   Security Valuation:

The funds value the securities in their portfolios every business day. The funds use the following policies to value various types of securities:

Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate.

Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the fund’s investment adviser using guidelines adopted by the fund’s Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security’s primary pricing source is not able or willing to provide a price, or certain foreign securities’ closing market prices adjusted for changes in value that may occur between the close of foreign exchange and the time at which Fund shares are priced. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures.

Futures and forwards: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day’s exchange rates (for forwards). When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly.

Short-term securities (60 days or less to maturity): valued at amortized cost.

Mutual funds: valued at their respective net asset values as determined by those funds in accordance with the 1940 Act for a given day.

(b)   Portfolio Investments:

Futures Contract: The funds may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements.

One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities.

Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “initial margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount.

Futures are traded publicly on exchanges, and their market value changes daily. A fund records the change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

Forward Currency Contract: The Schwab International Index Fund may invest in forward currency contracts in connection with the purchase and sale of portfolio securities to minimize the uncertainty of changes in future exchange rates. “Forwards” as they are known, are contracts to buy and sell a currency at a set price on a future date. Forwards are similar to futures except that they are not publicly traded, but are agreements directly between two parties.

As with futures, forwards involve certain risks that are not fully reflected in the fund’s financials. If counter-parties to the contracts or if the value of the foreign currency changes unfavorably, the fund could sustain a loss.

Securities Lending: The funds may loan securities to certain brokers, dealers and other financial institutions that pay the funds negotiated fees. The funds receive cash, letters of credit or U.S. Government securities as collateral on these loans. All of the cash collateral received is reinvested in high quality, short-term investments. The value of the collateral must be at least

64    

Schwab Equity Index Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

102% of the market value of the loaned securities as of the first day of the loan, and at least 100% each day thereafter. If the value of the collateral falls below 100%, it will be adjusted the following day.

(c)   Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.

(d)   Investment Income:

Interest income is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(e)   Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their net assets.

For funds offering multiple share classes, the net investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to its average daily net assets.

(f)   Foreign Currency Translation:

Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date.

(g)   Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year.

Each fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law.

(h)   Custody Credit:

Each fund has an arrangement with its custodian bank under which the fund receives a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts (if any) are disclosed in the statement of operations as a reduction to the fund’s operating expenses.

(i)   Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(j)   Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

    65

Schwab Equity Index Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

(k)   Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

(l)   New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Fund’s financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:
(All dollar amounts are × 1,000)

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”), is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

For its advisory and administrative services to each fund, the investment adviser is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

Average daily net assets	S&P 500 Index Fund			Institutional Select S&P 500 Fund		1000 Index Fund			Small-Cap Index Fund			Total Stock Market Index Fund			International Index Fund
First $500 million		0.15	%		0.18%		0.30	%		0.33	%		0.30	%		0.43	%
Over $500 million		0.09	%		0.18%		0.22	%		0.28	%		0.22	%		0.38	%
Over $1 billion		0.09	%		0.15%		0.22	%		n/a			n/a			n/a
Over $5 billion		0.08	%		n/a		0.20	%		n/a			n/a			n/a
Over $10 billion		0.07	%		n/a		0.18	%		n/a			n/a			n/a

 

For its transfer agent and shareholder services, Schwab is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

	Transfer Agent Fees			Shareholder Service Fees
Investor Shares		0.05	%		0.20	%
Select Shares		0.05	%		0.05	%*
e.Shares*		0.05	%		0.05	%
Institutional Select Fund Shares		0.05	%		0.05	%

 

*  e.Shares is only offered by S&P 500 Index Fund

66    

Schwab Equity Index Funds

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses, through February 27, 2007, as follows:

	S&P 500 Index Fund			Institutional Select S&P 500 Fund		1000 Index Fund			Small-Cap Index Fund			Total Stock Market Index Fund			International Index Fund
Investor Shares		0.37	%		n/a		0.51	%		0.60	%		0.58	%		0.69	%
Select Shares		0.19	%		n/a		0.36	%		0.42	%		0.39	%		0.50	%
e.Shares*		0.28	%		n/a		n/a			n/a			n/a			n/a
Institutional Select Shares		n/a			0.10%		n/a			n/a			n/a			n/a

 

*  e.Shares is only offered by S&P 500 Index Fund

The funds may engage in certain transactions involving related parties. For instance, a fund may own shares of The Charles Schwab Corporation if that company is included in its index. The funds also may let other Schwab Funds buy and sell fund shares, particularly Schwab MarketTrack Portfolios, which seek to provide investors with allocated portfolios of Schwab Index funds. As of October 31, 2006, the percentages of fund shares owned by other Schwab Funds are:

	S&P 500 Index Fund		Institutional Select S&P 500 Fund			1000 Index Fund		Small-Cap Index Fund			Total Stock Market Index Fund		International Index Fund
Schwab MarketTrack Portfolios:
All Equity Portfolio		—		11.3	%		—		7.9	%		—		9.5	%
Growth Portfolio		—		8.2	%		—		8.5	%		—		8.6	%
Balanced Portfolio		—		4.1	%		—		4.8	%		—		4.8	%
Conservative Portfolio		—		0.1	%		—		1.9	%		—		1.9	%
Schwab Annuity Portfolios:
Growth Portfolio II		—		0.6	%		—		0.5	%		—		0.5	%

 

The funds may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. As of October 31, 2006, each fund’s total security transactions with other Schwab Funds were as follows:

Schwab S&P 500 Index Fund		—
Institutional Select S&P 500 Fund	$	38,351
1000 Index Fund		919
Small-Cap Index Fund		151,724
Total Stock Market Index Fund		—
International Index Fund		—

 

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for any fund during the period.

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limit the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.

    67

Schwab Equity Index Funds

Financial Notes (continued)

4.  Purchases and Sales of Investment Securities:
        (All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:

	Purchases of Securities		Sales/Maturities of Securities
S&P 500 Index Fund	$	211,595	$1,067,493
Institutional Select S&P 500 Fund		648,618	24,017
1000 Index Fund		354,445	886,836
Small-Cap Index Fund		476,516	587,563
Total Stock Market Index Fund		36,722	47,112
International Index Fund		175,256	193,979

 

5.   Redemption Fee:
(All dollar amounts are × 1,000)

The funds impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. For shares purchased on or before 4/29/05 and held less than 180 days, the S&P 500 Index Fund, the 1000 Index Fund, the Small-Cap Index Fund, the Total Market Index Fund and the Institutional Select S&P 500 Fund each charged a redemption fee of 0.75% and the International Index Fund charged a redemption fee of 1.50%. For shares purchased after 4/29/05, the funds charge a redemption fees of 2.00% on shares held 30 days or less. The redemption amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
S&P 500 Index Fund
Investor Shares	$	57	$192
Select Shares		60	200
e.Shares		2	15
Institutional Select S&P 500 Fund		31	40
1000 Index Fund
Investor Shares		87	151
Select Shares		22	65
Small-Cap Index Fund
Investor Shares		19	44
Select Shares		5	50
Total Stock Market Index Fund
Investor Shares		15	38
Select Shares		28	32
International Index Fund
Investor Shares		18	52
Select Shares		63	106

 

68    

Schwab Equity Index Funds

Financial Notes (continued)

6.  Borrowing:
        (All dollar amounts are × 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The Schwab Funds have custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation, and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Fund	Amount Outstanding at 10/31/06		Average Borrowing*		Weighted Average Interest Rate*(%)
Schwab S&P 500 Index Fund	$	—	$	6,094		4.94
Schwab Institutional Select S&P 500 Fund		—		1,970		4.78
Schwab 1000 Index Fund		—		—		—
Schwab Small-Cap Index Fund		—		2,451		5.00
Schwab Total Stock Market Index Fund		715		1,874		4.74
Schwab International Index Fund		—		600		5.15

 

*  Based on the number of days for which the borrowing is outstanding.

7.   Federal Income Taxes:
(All dollar amounts are × 1,000)

As of October 31, 2006, the components of undistributable earnings on a tax-basis were as follows:

	S&P 500 Index Fund			Institutional Select S&P 500 Fund			1000 Index Fund			Small-Cap Index Fund			Total Stock Market Index Fund			International Index Fund
Undistributed ordinary income	$	100,766		$	24,467		$	70,645		$	59,382		$	13,299		$	47,026
Undistributed long-term capital gains		—			—			—			145,855			—			—
Unrealized appreciation on investments		2,828,797			272,607			3,776,628			498,655			419,712			699,603
Unrealized depreciation on investments		(514,663	)		(40,526	)		(144,026	)		(85,822	)		(94,145	)		(32,253	)
Other unrealized appreciation/depreciation		—			—			—			182			—			11
Net unrealized appreciation/ (depreciation)		2,314,134			232,081			3,632,602			413,015			325,567			667,361

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2006, the following funds had capital loss carry forwards expiring in:

Expire	S&P 500 Index Fund		Institutional Select S&P 500 Fund		1000 Index Fund		Small-Cap Index Fund		Total Stock Market Index Fund		International Index Fund
2008	$	26,504	$	—	$	—	$	—	$	—	$	—
2009		50,224	$	16,907		—		—		—		97,628
2010		400,268		27,646		132,657		—		8,568		112,722
2011		72,381		1,609		164,037		—		3,976		39,016
2012		29,212				11,942		—		874		8,278
2013		175,896				—		—		—		—
2014		109,257		2,359		—		—		—		—
Total	$	863,742	$	48,521	$	308,636		—	$	13,418	$	257,644

 

    69

Schwab Equity Index Funds

Financial Notes (continued)

7.  Federal Income Taxes (continued):

For tax purposes, realized capital losses, occurring after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. As of October 31, 2006, the funds had aggregate deferred realized capital losses as follows:

	S&P 500 Index Fund		Institutional Select S&P 500 Fund		1000 Index Fund		Small-Cap Index Fund		Total Stock Market Index Fund		International Index Fund
Deferred capital losses	$	—	$	—	$	—	$	—	$	—	$	—
Capital losses utilized	$	—	$	—	$	200,195	$	—	$	3,960	$	—

 

The tax-basis components of distributions paid during the current and prior fiscal years were:

	S&P 500 Index Fund		Institutional Select S&P 500 Fund		1000 Index Fund		Small-Cap Index Fund		Total Stock Market Index Fund		International Index Fund
Current period distributions
Ordinary income	$	129,338	$	18,249	$	86,881	$	11,211	$	15,301	$	29,287
Long-term capital gains		—		—		—		10,495		—		—
Return of capital
Prior period distributions
Ordinary income		144,350		6,241		95,632		11,451		15,726		24,654
Long-term capital gains		—		—		—		—		—		—
Return of capital

 

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

	S&P 500 Index Fund			Institutional Select S&P 500 Fund			1000 Index Fund			Small-Cap Index Fund			Total Stock Market Index Fund			International Index Fund
Capital shares	$	(74	)	$	(8	)	$	235		$	560		$	(28	)	$	—
Undistributed net investment income		(868	)		(104	)		(1,600	)		(1,466	)		(260	)		358
Net realized capital gains and losses		942			112			1,365			906			288			(358	)

 

Other Federal Tax Information (unaudited)
(All dollar amounts are × 1,000)

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction:

	Percentage
S&P 500 Index Fund		100.00	%
Institutional Select S&P 500 Fund		97.68
1000 Index Fund		100.00
Small-Cap Index Fund		81.82
Total Stock Market Index Fund		100.00
International Index Fund		—

 

For the fiscal year ended October 31, 2006, the fund’s designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

S&P 500 Index Fund	$	129,338
Institutional Select S&P Fund		18,249
1000 Index Fund		86,881
Small-Cap Index Fund		11,137
Total Stock Market Index Fund		15,301
International Index Fund		29,287

 

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Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of:
Schwab S&P 500 Index Fund
Schwab Institutional Select S&P 500 Fund
Schwab 1000 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund

In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab 1000 Index Fund (one of the portfolios constituting Schwab Investments), Schwab S&P 500 Index Fund, Schwab Institutional Select S&P 500 Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and Schwab International Index Fund (five of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

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Investment Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Capital Trust and Schwab Investments (collectively, the “Trust”) and CSIM (the “Agreement”) with respect to existing funds in the Trust, including the funds covered in this annual report, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement.

Fund Performance.  The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund’s

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performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement.

Fund Expenses.  With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement.

Profitability.  With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement.

Economies of Scale.  The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

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Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust and Schwab Investments, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996–1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6—Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

 

74    

Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

 

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust and Schwab Investments since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust and Schwab Investments since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

 

    75

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust and Schwab Investments since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust and Schwab Investments since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer — Fixed Income (Officer of Schwab Capital Trust and Schwab Investments since 2004.)	Senior Vice President and Chief Investment Officer — Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer — Equities (Officer of Schwab Capital Trust and Schwab Investments since 2004.)	Senior Vice President and Chief Investment Officer—Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust and Schwab Investments since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust and Schwab Investments since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

76    

Officers of the Trust  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

 

¹  Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²  In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³  The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

    77

Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

78    

Notes

Notes

Schwab Funds® offers you an extensive family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available Schwab Funds.

Whether you’re an experienced investor or just starting out, Schwab Funds can help you achieve your financial goals. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any Schwab Fund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.

Proxy Voting Policies, Procedures and Results

A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/schwabfunds, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.

Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at www.sec.gov.

The Schwab Funds Family®

Stock Funds

Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Institutional Select® S&P 500 Fund
Schwab S&P 500 Index Fund
Schwab 1000 Index® Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®

Asset Allocation Funds

Schwab Viewpoints Fund™
Schwab MarketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

Bond Funds

Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fund™
Schwab Total Bond Market Fund™
Schwab GNMA Fund™
Schwab Inflation Protected Fund™
Schwab Tax-Free YieldPlus Fund™
Schwab Short/Intermediate Tax-Free Bond Fund™
Schwab Long-Term Tax-Free Bond Fund™
Schwab California Tax-Free YieldPlus Fund™
Schwab California Short/Intermediate
    Tax-Free Bond Fund™
Schwab California Long-Term Tax-Free Bond Fund™

Schwab Money Funds

Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.¹ Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments^®.

¹  Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money.

Investment Adviser
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104

Funds
Schwab Funds®
P.O. Box 3812, Englewood, CO 80155—3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved.

Member SIPC

Printed on recycled paper.

MFR13810-09

Schwab Active Equity Funds

Annual Report

October 31, 2006

Schwab Premier Equity Fund®

Schwab Core Equity Fund™

Schwab Dividend Equity Fund™

Schwab Large-Cap Growth Fund™

Schwab Small-Cap Equity Fund™

Schwab Hedged Equity Fund™

Schwab Financial Services Fund™

Schwab Health Care Fund™

Schwab Technology Fund™

The power of Schwab Equity Ratings®. The convenience and diversification of mutual funds.

In this report

Performance at a Glance	1
From the Chairman	2
From the President	3
Investment Environment	4
Schwab Premier Equity Fund®	6
Schwab Core Equity Fund™	8
Schwab Dividend Equity Fund™	10
Schwab Large-Cap Growth Fund™	12
Schwab Small-Cap Equity Fund™	14
Schwab Hedged Equity Fund™	16
Schwab Financial Services Fund™	18
Schwab Health Care Fund™	20
Schwab Technology Fund™	22
Fund Expenses	24
Financial Statements	26
Financial Notes	87
Investment Advisory Agreement Approval	98
Trustees and Officers	100
Glossary	104

 

Select Shares® are available on many Schwab Funds®

Schwab Funds offers Select Shares, a shares class that carries lower expenses than Investor Shares™ in exchange for higher investment minimums on many of its funds. Select Shares are available for initial purchases of $50,000 or more of a single fund in a single account and for shareholders who add to their existing Investor Share position, bringing the value to or above $50,000. We encourage shareholders of Investor Shares to review their portfolio to see if they are eligible to exchange into Select Shares. If you believe you are eligible, you should contact Schwab or your financial intermediary to request a tax-free interclass exchange into Select Shares. Instructions for performing a tax-free interclass exchange can also be referenced on the Schwab Funds website at www.schwab.com/schwabfunds under Schwab Funds Investor Information. Select Shares may not be available through financial intermediaries other than Charles Schwab & Co., Inc.

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.
Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab).
Schwab Equity Ratings® are produced by the Schwab Center for Investment Research®.

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Total Return for the Report Period
Schwab Premier Equity Fund®
Investor Shares (Ticker Symbol: SWPNX)		17.22%
Select Shares (Ticker Symbol: SWPSX)		17.28%
Benchmark: S&P 500® Index		16.34%
Fund Category: Morningstar Large-Cap Blend		14.74%
Performance Details		pages 6–7
Schwab Core Equity Fund™
(Ticker Symbol: SWANX)		17.02%
Benchmark: S&P 500® Index		16.34%
Fund Category: Morningstar Large-Cap Blend		14.74%
Performance Details		pages 8–9
Schwab Dividend Equity Fund™
Investor Shares (Ticker Symbol: SWDIX)		17.63%
Select Shares (Ticker Symbol: SWDSX)		17.86%
Benchmark: S&P 500® Index		16.34%
Fund Category: Morningstar Large-Cap Value		17.90%
Performance Details		pages 10–11
Schwab Large-Cap Growth Fund™
Investor Shares (Ticker Symbol: SWLNX)		13.80%
Select Shares (Ticker Symbol: SWLSX)		14.04%
Benchmark: Russell 1000 Growth Index		10.84%
Fund Category: Morningstar Large-Cap Growth		9.03%
Performance Details		pages 12–13
Schwab Small-Cap Equity Fund™
Investor Shares (Ticker Symbol: SWSIX)		15.71%
Select Shares (Ticker Symbol: SWSCX)		15.89%
Benchmark: S&P Small-Cap 600 Index		16.10%
Fund Category: Morningstar Small-Cap Blend		16.35%
Performance Details		pages 14–15
Schwab Hedged Equity Fund™
Investor Shares (Ticker Symbol: SWHIX)		12.71%
Select Shares (Ticker Symbol: SWHEX)1		12.89%
Benchmark: S&P 500® Index		16.34%
Fund Category: Morningstar Long-Short		7.46%
Performance Details		pages 16–17
Schwab Financial Services Fund™
(Ticker Symbol: SWFFX)		14.85%
Benchmark: S&P 1500 Super Composite		19.40%
Financials Sector Index
Fund Category: Morningstar Financial Services		18.51%
Performance Details		pages 18–19
Schwab Health Care Fund™
(Ticker Symbol: SWHFX)		7.27%
Benchmark: S&P 1500 Super Composite		10.72%
Health Care Sector Index
Fund Category: Morningstar Health Care		8.44%
Performance Details		pages 20–21
Schwab Technology Fund™
(Ticker Symbol: SWTFX)		8.40%
Benchmark: S&P 1500 Super Composite		10.97%
Technology Sector Index
Fund Category: Morningstar Technology		10.16%
Performance Details		pages 22–23
Minimum Initial Investment2
Investor Shares ($1,000 for retirement, education and custodial accounts)	$2,500
Select Shares	$50,000

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the funds’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

Source for category information: Morningstar, Inc.

¹One year return presented in the table differs from the return in the Financial Highlights. This is a result of the calculation of the Financial Highlights return adhering to GAAP presentation.

²Please see prospectus for further detail and eligibility requirements.

Schwab Active Equity Funds    1

Charles Schwab
Chairman From the Chairman Dear Shareholder, I founded Schwab over thirty years ago to be a home for serious investors. That mission continues to guide us today as we constantly strive to improve and innovate. By doing this, and providing some of the highest quality products and services — at a competitive price — we remain true to our heritage. I take particular pride in the Schwab Funds. Founded over 15 years ago, Schwab Funds now includes more than 50 funds with over $170 billion in assets. With a variety of investment strategies, Schwab Funds provides a range of innovative investment choices that can serve as a foundation for your asset allocation plan. The Schwab Active Equity Funds, included in this report, are powered by Schwab Equity Ratings and use the same stock-ranking expertise that has helped Schwab’s model equity portfolio achieve industry recognition in Barron’s annual stock-selection competitions. Schwab Equity Ratings are based upon a disciplined, systematic approach that evaluates approximately 3,000 U.S. stocks on the basis of a wide variety of investment criteria. Schwab Funds are managed by Charles Schwab Investment Management, Inc., one of the largest mutual fund managers in the U.S. Our portfolio managers share a passion for market analysis and use some of the most sophisticated financial models in the country. I am proud of their depth of experience, which reflects an average of 14 years in the investment industry. Furthermore, I am impressed by the commitment that our managers bring to the stewardship of their funds, for you, their shareholders. In closing, I want to thank you for investing with us. We work every day to warrant the trust you have placed in us; that will never change. Sincerely, Barron’s awarded Schwab the first-place rank for the five-year period from June 30, 2001 to June 30, 2006, and for the three year period from June 30, 2003 to June 30, 2006, for “best of” stock recommendation lists submitted by certain brokerage firms to Zacks Investment Research, Inc., an independent firm that analyzes broker research. Barron’s also awarded Schwab the first-place rank for the five-year periods from December 31, 2000 to December 31, 2005, and for the three year periods from December 31, 2001 to December 31, 2004, and the 2001 to 2003 for “best of” stock recommendation lists. Schwab’s model performance results are simulated model portfolio performance results, which do not represent actual investment performance or trading. The results of Schwab’s model performance are not an indicator of the returns a Schwab client would have realized or will realize in relying on Schwab Equity Ratings® or for mutual funds that use Schwab Equity Ratings as part of their methodology. For further information about Schwab Equity Ratings, see schwab.com.  

2    Schwab Active Equity Funds

Evelyn Dilsaver is President and
CEO of Charles Schwab Investment
Management, Inc. and of each of
the funds covered in this report.
She joined the firm in 1992 and
has held a variety of executive
positions at Schwab.
From the President Dear Shareholder, I am pleased to present the annual report for the Schwab Active Equity Funds for the period ended October 31, 2006. The funds in this report leverage Schwab Equity Ratings, Schwab’s industry-recognized, disciplined stock-rating approach. With the support of investors like you, Schwab Active Equity Funds assets were over $6 billion as of this report date. While we are pleased with the growth of assets, we are also mindful of the need to ensure the funds’ size does not hamper the portfolio manager’s ability to execute its investment strategy and continue to deliver strong performance to shareholders. For this reason, we closed the Schwab Premier Equity Fund to new investors earlier this year, and have notified shareholders of our intention to close the Schwab Small-Cap Equity Fund on January 31, 2007. Existing shareholders of the fund and certain eligible investors, as defined in the prospectus, will still be able to purchase shares of the fund. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the funds’ ticker symbols and report period returns for the funds, their benchmarks and category averages. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.schwabfunds.com. This website contains regular updates about the Schwab Funds. I encourage you to visit the website to stay informed about your fund. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Schwab Funds. Sincerely,

Schwab Active Equity Funds    3

The Investment Environment

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for
the overall management of the fund. As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Price (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth. In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of  

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
n  16.34%	S&P 500® Index: measures U.S. large-cap stocks
n  19.98%	Russell 2000® Index: measures U.S. small-cap stocks
n  27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
n    5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data source: Charles Schwab & Co., Inc.

4    Schwab Active Equity Funds

The Investment Environment  continued

the end of the report period. In its statement, the Fed noted that the economy appeared to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only 2.2% in the third quarter of 2006.

Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico, as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds.

The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact.

Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

    

Schwab Active Equity Funds    5

Schwab Premier Equity Fund^®

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Premier Equity Fund Investor Shares returned 17.22% for the one-year period ended October 31, 2006, outperforming its benchmark, the S&P 500 Index, which was up 16.34% for the same period. The fund’s emphasis on stock holdings with smaller market capitalization than the benchmark contributed positively to the fund’s performance as they outperformed their larger counterparts. A significant amount of the fund’s performance can be attributed to Schwab Equity Rating’s rigorous stock evaluation and its ability to identify stocks likely to outperform the market. From an industry group perspective, an overweight to the Materials industry group positively contributed to performance, as well as an underweight to Capital Goods. Top performers from a stock selection standpoint include such names as Veritas DGC, Inc., AMR Corporation, and BEA Systems. One of the fund’s largest holdings, Veritas received a cash and stock offer to be purchased, which helped boost the company’s stock price. On the downside, an overweight to the Insurance, Health Care Equipment and Services, and Software and Services industry groups detracted from returns. Stocks that underperformed during the period included Autodesk, Inc. and Red Hat, Inc., whose stock price dipped in October 2006 as a competitor announced its plans to offer similar support services at lower prices.

As of 10/31/06:

Statistics
Number of Holdings	101
Weighted Average Market Cap ($ x 1,000,000)	30,113
Price/Earnings Ratio (P/E)	19.9
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Financials	22.8	%
Information Technology	15.0	%
Health Care	12.5	%
Industrials	10.8	%
Consumer Discretionary	9.5	%
Energy	9.0	%
Consumer Staples	8.7	%
Materials	4.8	%
Utilities Telecommunication	3.5	%
Services	2.8	%
Others	0.6	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Veritas DGC, Inc.	1.5	%
Franklin Resources, Inc.	1.3	%
Pactiv Corp.	1.3	%
Exxon Mobil Corp.	1.3	%
Hewlett-Packard Co.	1.3	%
Nationwide Financial Services, Inc., Class A	1.3	%
General Mills, Inc.	1.2	%
Greif, Inc., Class A	1.2	%
Cameron International Corp.	1.2	%
J.C.Penny Co., Inc.	1.2	%
Total	12.8	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹ This list is not a recommendation of any security by the investment adviser.

6    Schwab Active Equity Funds

Schwab Premier Equity Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			Since Inception
Investor Shares (3/21/05)		17.22	%		15.05	%
Select Shares (3/21/05)		17.28	%		15.15	%
Benchmark: S&P 500® Index		16.34	%		11.52	%
Fund Category: Morningstar Large-Cap Blend		14.74	%		11.05	%

 

Style Assessment³

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab Active Equity Funds    7

Schwab Core Equity Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Core Equity Fund posted a return of 17.02%, outperforming its benchmark, the S&P 500 Index, which returned 16.34% for the one-year report period. A leading contributor to the fund’s performance was its emphasis on smaller market capitalization holdings relative to the benchmark, as they outperformed large-capitalization stocks for the report period. A significant amount of the fund’s performance can be attributed to Schwab Equity Rating’s rigorous stock evaluation and its ability to identify stocks likely to outperform the market. From an industry group standpoint, an overweight to Diversified Financials and Transportation contributed to returns. In addition, an underweight to Energy proved beneficial as energy stocks declined during the report period. Stocks that performed well during the period included such names as Lockheed Martin Corporation, CSX Corporation, and Hewlett-Packard Company. On the downside, an overweight to the Insurance and Health Care Equipment and Services industry groups contained returns. From a stock perspective, positions in Aetna, Inc., Radian Group, Inc., and Computer Sciences Corporation detracted from the fund’s performance.

As of 10/31/06:

Statistics
Number of Holdings	90
Weighted Average Market Cap ($ x 1,000,000)	62,672
Price/Earnings Ratio (P/E)	17.7
Price/Book Ratio (P/B)	2.9

 

Sector Weightings % of Investments
Financials	22.9	%
Health Care	16.9	%
Information Technology	16.0	%
Industrials	12.9	%
Consumer Discretionary	8.8	%
Materials	5.8	%
Energy	5.1	%
Consumer Staples	5.0	%
Telecommunication Services	2.7	%
Utilities	2.1	%
Others	1.8	%
Total	100.0	%

 

Top Holdings % of Net Assets1
The Boeing Co.	4.7	%
Exxon Mobil Corp.	4.5	%
Franklin Resources, Inc.	4.0	%
MetLife, Inc.	4.0	%
Hewlett-Packard Co.	3.9	%
Pfizer, Inc.	3.9	%
Lockheed Martin Corp.	3.8	%
International Business Machines Corp.	3.4	%
Merck & Co., Inc.	3.2	%
American Express Co.	2.8	%
Total	38.2	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

8    Schwab Active Equity Funds

Schwab Core Equity Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment in Investor Shares¹

 

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			5 years			10 years
Fund: Schwab Core Equity Fund (7/1/96)		17.02	%		8.80	%		9.26	%
Benchmark: S&P 500® Index		16.34	%		7.25	%		8.63	%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		7.76	%

 

Style Assessment³

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab Active Equity Funds    9

Schwab Dividend Equity Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Dividend Equity Fund Investor Shares returned 17.63%, outperforming its benchmark, the S&P 500 Index, which gained 16.34% for the same period. This fund is designed to seek current income and capital appreciation by primarily investing in dividend-paying stocks. Among the contributing factors to the fund’s performance was an emphasis on higher yielding stocks relative to the benchmark, as they outperformed stocks that paid no dividends for the report period. A significant amount of the fund’s performance can be attributed to Schwab Equity Rating’s rigorous stock evaluation and its ability to identify stocks likely to outperform the market. From an industry group perspective, an overweight to the Telecommunication Services group positively contributed to performance, as well as an underweight to Health Care Equipment and Services. Holdings that contributed to the fund’s performance included such names as Reynolds American, Inc., Bellsouth Corporation, and Merck & Co., Inc. On the downside, an overweight to Insurance and Utilities detracted from returns. Stocks that underperformed during the report period included such names as Intel Corporation, Sunoco, Inc., and Temple-Inland, Inc.

As of 10/31/06:

Statistics
Number of Holdings	121
Weighted Average Market Cap ($ x 1,000,000)	57,009
Price/Earnings Ratio (P/E)	17.2
Price/Book Ratio (P/B)	2.6

 

Sector Weightings % of Investments
Financials	26.4	%
Industrials	11.4	%
Consumer Staples	11.2	%
Health Care	8.9	%
Utilities	8.5	%
Information Technology	7.5	%
Materials	6.7	%
Telecommunication Services	6.2	%
Consumer Discretionary	6.1	%
Energy	4.6	%
Others	2.5	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Lockheed Martin Corp.	2.1	%
Reynolds American, Inc.	2.0	%
Raytheon Co.	1.8	%
Newell Rubermaid, Inc.	1.7	%
Exxon Mobil Corp.	1.7	%
AT&T Corp.	1.7	%
JPMorgan Chase & Co.	1.5	%
BellSouth Corp.	1.5	%
Lincoln National Corp.	1.4	%
Hewlett-Packard Co.	1.4	%
Total	16.8	%

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

10    Schwab Active Equity Funds

Schwab Dividend Equity Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			3 years			Since Inception
Investor Shares (9/2/03)		17.63	%		14.82	%		16.07	%
Select Shares (9/2/03)		17.86	%		14.98	%		16.22	%
Benchmark: S&P 500® Index		16.34	%		11.43	%		12.34	%
Fund Category: Morningstar Large-Cap Value		17.90	%		13.45	%		13.82	%

 

Style Assessment³

 

Yields1
SEC Yield
Investor Shares	1.57%
Select Shares	1.72%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns and yields would have been lower. These returns and yields do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab Active Equity Funds    11

Schwab Large-Cap Growth Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Large-Cap Growth Fund Investor Shares returned 13.80% for the one-year report period, well above its benchmark, the Russell 1000 Growth Index, which gained 10.84% for the same period. One factor contributing to the fund’s outperformance was that the fund’s holdings were slightly lower in market capitalization relative to the benchmark. A significant amount of the fund’s performance can be attributed to Schwab Equity Rating’s rigorous stock evaluation and its ability to identify stocks likely to outperform the market. An overweight to Diversified Financials relative to the fund’s benchmark positively contributed to returns, as did an underweight to Software and Services and Energy industry groups. Among the stocks that performed well during the period were Hewlett-Packard Company, Applied Biosystems Group, and Lockheed Martin Corporation. Lockheed Martin, the world’s largest defense contractor, raised its profit forecast as the company continued to pursue and win lucrative contracts, which had a positive impact on the portfolio. Detracting from the fund’s performance were an overweight to Consumer Durables & Apparel, Capital Goods, and Health Care Equipment and Services industry groups. From a stock selection standpoint, positions in such companies as Harman International Industries, Inc., Express Scripts, and Federated Investors, Inc. detracted from returns.

As of 10/31/06:

Statistics
Number of Holdings	90
Weighted Average Market Cap ($ x 1,000,000)	47,966
Price/Earnings Ratio (P/E)	19.6
Price/Book Ratio (P/B)	4.1

 

Sector Weightings % of Investments
Information Technology	24.3	%
Health Care	20.9	%
Financials	13.2	%
Industrials	12.0	%
Consumer Discretionary	11.5	%
Materials	4.5	%
Consumer Staples	3.7	%
Energy	1.8	%
Telecommunication Services	1.5	%
Utilities	1.4	%
Others	5.2	%
Total	100.0	%

 

Top Holdings % of Net Assets1
International Business Machines Corp.	4.9	%
Franklin Resources, Inc.	4.8	%
Hewlett-Packard Co.	4.8	%
The McGraw-Hill Cos., Inc.	4.7	%
The Boeing Co.	4.5	%
Pfizer, Inc.	3.1	%
Lockheed Martin Corp.	3.0	%
Baxter International, Inc.	3.0	%
BMC Software, Inc.	2.5	%
Freeport-McMoRan Copper & Gold, Inc., Class B	2.4	%
Total	37.7	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

12    Schwab Active Equity Funds

Schwab Large-Cap Growth Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			Since Inception
Investor Shares (10/3/05)		13.80	%		9.82	%
Select Shares (10/3/05)		14.04	%		10.04	%
Benchmark: Russell 1000 Growth Index		10.84	%		8.95	%
Fund Category: Morningstar Large-Cap Growth		9.03	%		7.16	%

 

Style Assessment³

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab Active Equity Funds    13

Schwab Small-Cap Equity Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Small-Cap Equity Fund Investor Shares posted positive returns of 15.71% for the one-year period, slightly underperforming its benchmark, the S&P Small-Cap 600 Index, which returned 16.10% for the same period. From a market cap perspective, the fund was positioned such that its net holdings were slightly higher in market capitalization relative to the benchmark, which positively contributed to the fund’s performance. Although the fund slightly underperformed its benchmark, stock selection remained a key contributing factor in the fund’s performance. With respect to industry group selections, the fund benefited from an underweight to the Utilities, Health Care Equipment and Services, and Consumer Durables and Apparel industry groups relative to its benchmark’s weightings in those respective areas. As mentioned above, stock selection remained a key contributor to the fund’s performance, with such holdings in Veritas DGC, Inc., EMCOR Group, Inc., and Greif, Inc. benefiting the fund. Detracting from performance, however, was an overweight in the Automobiles and Components, Capital Goods, and Insurance industry groups. In addition, the fund’s weighting in Real Estate was lower than the S&P 600, which detracted from returns as a result of this industry group’s strong performance for the one-year period. Underperformers included such names as EarthLink, Inc., Spherion Corporation, and American Greetings Corporation.

As of 10/31/06:

Statistics
Number of Holdings	147
Weighted Average Market Cap ($ x 1,000,000)	1,586
Price/Earnings Ratio (P/E)	25.7
Price/Book Ratio (P/B)	2.5

 

Sector Weightings % of Investments
Industrials	21.0	%
Information Technology	20.2	%
Consumer Discretionary	14.3	%
Health Care	12.2	%
Financials	12.0	%
Materials	9.4	%
Energy	4.5	%
Telecommunication Services	1.2	%
Consumer Staples	1.0	%
Utilities	0.7	%
Others	3.5	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Veritas DGC, Inc.	3.7	%
Magellan Health Services, Inc.	3.0	%
Teleflex, Inc.	2.9	%
Kellwood Co.	2.9	%
Greif, Inc., Class A	2.9	%
EMCOR Group, Inc.	2.9	%
CSG Systems International, Inc.	2.6	%
Mentor Corp.	2.6	%
Sierra Health Services, Inc.	2.6	%
The Men’s Wearhouse, Inc.	2.6	%
Total	28.7	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

14    Schwab Active Equity Funds

Schwab Small-Cap Equity Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			3 years			Since Inception
Investor Shares (7/1/03)		15.71	%		20.32	%		24.11	%
Select Shares (7/1/03)		15.89	%		20.52	%		24.30	%
Benchmark: S&P Small-Cap 600 Index		16.10	%		16.03	%		19.61	%
Fund Category: Morningstar Small-Cap Blend		16.35	%		14.38	%		18.30	%

 

Style Assessment³

Small company stocks are subject to greater volatility than other asset classes.

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab Active Equity Funds    15

Schwab Hedged Equity Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Hedged Equity Fund Investor Shares returned 12.71% for the one-year report period, beating the Morningstar Long-Short Fund category average yet underperforming the benchmark, the S&P 500 Index, which returned 16.34%. The fund seeks long-term capital appreciation with lower volatility than that of broad market indices, such as the S&P 500 Index. To pursue this investment objective, the fund establishes long and short positions in equity securities. While short positions are generally used to hedge against volatility, they cannot completely eliminate that risk. An increase in the value of the shorted stocks, such as occurred during this report period, had a negative impact on fund performance. The fund’s long positions favored holdings that were smaller in market cap than those of the benchmark, which positively contributed to returns, as small-cap stocks outperformed their larger counterparts. Industry group selection, on the other hand, was negative for the report period and slightly detracted from overall return. In terms of individual stocks, long positions that contributed to overall returns included Nucor Corporation and Archer Daniels Midland Company. Conversely, short positions of several materials stocks detracted from performance when their values increased.

As of 10/31/06:

Statistics
Number of Holdings
Long Holdings	140
Short Positions	86
Weighted Average Market Cap ($ x 1,000,000)
Long Holdings	29,114
Short Positions	3,338
Price/Earnings Ratio (P/E)
Long Holdings	25.8
Short Positions	27.2
Price/Book Ratio (P/B)
Long Holdings	2.9
Short Positions	2.9

 

Top Long Holdings % of Net Assets1
Principal Financial Group, Inc.	2.6	%
Exxon Mobil Corp.	2.5	%
Applied Biosystems Group-Applera Corp.	2.5	%
ConAgra Foods, Inc.	2.5	%
Lexmark International, Inc., Class A	2.4	%
Total	12.5	%

 

Top Short Holdings % of Net Assets1
Equinix, Inc.	1.7	%
Affymetrix, Inc.	1.4	%
Pacific Sunwear of California, Inc.	1.3	%
NII Holdings, Inc.	1.3	%
Conor Medsystems, Inc.	1.3	%
Total	7.0	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

16    Schwab Active Equity Funds

Schwab Hedged Equity Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			3 years			Since Inception
Investor Shares (3/1/05)		12.71	%		n/a			11.83%
Select Shares (9/3/02)		12.89	%		14.07	%		13.76%
Benchmark: S&P 500® Index		16.34	%		11.43	%		(3/1/05) 10.41%
								(9/3/02) 12.29%
Fund Category: Morningstar Long-Short		7.46	%		5.54	%		(3/1/05) 5.62%
								(9/3/02) 9.76%

 

The Hedged Equity Fund’s long positions can decline in value at the same time the value of its shorted stocks increases, thereby increasing the potential for loss. The potential loss associated with short positions is much greater than the original value of the securities sold. The use of borrowing and short sales may cause the fund to have higher expenses than those of equity funds that do not use such techniques.

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

Schwab Active Equity Funds    17

Schwab Financial Services Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Financial Services Fund returned 14.85%, underperforming its benchmark, the S&P 1500 SuperComposite Financials Sector Index, which was up 19.40% for the one-year period. The fund was positioned such that its holdings were smaller in market capitalization relative to its benchmark, which contributed to performance, as small-cap stocks outperformed large-cap stocks for the period. However, overall stock selection detracted from returns. The fund favored holdings with higher growth characteristics than the benchmark (i.e., higher price-to-earnings and price-to-book ratios), which detracted from performance. From an industry group perspective, the fund benefited from an overweight to Diversified Financials. Top performers for the period included such names as Investment Technology Group, Inc. and Franklin Resources, Inc. On the downside, the fund’s underweight to Real Estate Investment Trusts (REITs), owners of commercial real estate properties, hurt returns, as this group performed well for the one-year period. In addition, an overweight to the Insurance industry group also detracted from performance. Among stocks that underperformed during the period were St. Paul Travelers Companies, Inc. and Radian Group.

As of 10/31/06:

Statistics
Number of Holdings	45
Weighted Average Market Cap ($ x 1,000,000)	37,277
Price/Earnings Ratio (P/E)	14.0
Price/Book Ratio (P/B)	2.0

 

Industry Weightings % of Investments
Diversified Financials	44.7	%
Insurance	28.4	%
Banks	24.1	%
Real Estate	1.8	%
Others	1.0	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Franklin Resources, Inc.	5.1	%
American Express Co.	4.9	%
Bank of America Corp.	4.9	%
JP Morgan Chase & Co.	4.9	%
Mellon Financial Corp.	4.8	%
Comerica, Inc.	4.7	%
Northern Trust Corp.	4.5	%
MetLife, Inc.	4.5	%
Genworth Financial, Inc., Class A	4.1	%
Radian Group, Inc.	4.0	%
Total	46.4	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

18    Schwab Active Equity Funds

Schwab Financial Services Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment¹

 

 

Average Annual Total Returns1,2
	1 year			5 years			Since Inception
Fund: Schwab Financial Services Fund™ (7/3/00)		14.85	%		13.76	%		10.95	%
Benchmark: S&P 1500 Super Composite Financials Sector Index		19.40	%		11.09	%		9.81	%
Fund Category: Morningstar Financial Services		18.51	%		11.88	%		11.88	%

 

Since the Financial Services fund focuses its investments on companies involved in specific sectors, this fund may involve a greater degree of risk than an investment in mutual funds that do not concentrate their investments.

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

Schwab Active Equity Funds    19

Schwab Health Care Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Health Care Fund returned 7.27% for the one-year reporting period, trailing its benchmark, the S&P 1500 SuperComposite Health Care Sector Index, which gained 10.72% for the same period. One positive contributor to the fund’s performance was the fund’s emphasis toward stock holdings with smaller market capitalization than the benchmark. Industry group selection dampened the fund’s performance, as an overweight to the Health Care Equipment and Services industry group detracted from returns. An underweight to the Pharmaceuticals and Biotechnology industry group detracted from returns as well. From a style perspective, the fund gained from its higher volatility holdings. However, with respect to stock selection, gains by top contributors such as Applied Biosystems Group-Applera Corporation and Merck and Co., Inc. were offset by losses in companies such as Barr Pharmaceuticals, Inc. and HMO providers Sierra Health Services, Inc. and Aetna, Inc.

As of 10/31/06:

Statistics
Number of Holdings	53
Weighted Average Market Cap ($ x 1,000,000)	38,627
Price/Earnings Ratio (P/E)	23.0
Price/Book Ratio (P/B)	3.2

 

Industry Weightings % of Investments
Pharmaceutical & Biotechnology	55.6	%
Health Care Equipment & Services	42.7	%
Others	1.7	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Applied Biosystems Group-Applera Corp.	5.8	%
Merck & Co., Inc.	5.5	%
Pfizer, Inc.	4.9	%
Johnson & Johnson	4.9	%
Becton Dickinson & Co.	4.8	%
AmerisourceBergen Corp.	4.3	%
McKesson Corp.	4.1	%
Schering-Plough Corp.	4.0	%
King Pharmaceuticals, Inc.	3.8	%
Sierra Health Services, Inc.	3.5	%
Total	45.6	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

20    Schwab Active Equity Funds

Schwab Health Care Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.
Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment¹

 

 

Average Annual Total Returns1,2
	1 year			5 years			Since Inception
Fund: Schwab Health Care Fund™ (7/3/00)		7.27	%		10.95	%		7.03	%
Benchmark: S&P 1500 Super Composite Health Care Sector Index		10.72	%		2.75	%		1.69	%
Fund Category: Morningstar Health Care		8.44	%		4.36	%		2.04	%

Since the Health Care fund focuses its investments on companies involved in specific sectors, this fund may involve a greater degree of risk than an investment in mutual funds that do not concentrate their investments.

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

Schwab Active Equity Funds    21

Schwab Technology Fund™

Jeffrey Mortimer, (lower left) CFA,
senior vice president and chief invest
ment officer, equities, is responsible
for the overall management of
the fund. Vivienne Hsu, (upper right) CFA, vice
president and senior equities portfolio
manager, is responsible for the day-today
co-management of the fund. Larry Mano, (upper left) vice president
and senior portfolio manager,
is responsible for the day-to-day
co-management of the fund. Paul Alan Davis, (lower right) CFA,
director and portfolio manager, is
responsible for the day-to-day
co-management of the fund. The Schwab Technology Fund retuned 8.40%, yet trailed its benchmark, the S&P 1500 SuperComposite Technology Sector Index, which gained 10.97% for the one-year report period. Among the contributing factors to the fund’s performance was an emphasis on smaller market capitalization stocks relative to the benchmark, as smaller-capitalization stocks outperformed large-capitalization stocks for the report period. Industry group selection was negative during the one-year period; an overweight to the Semiconductor and Software and Services industry groups relative to the fund’s benchmark slightly detracted from returns. From a stock selection perspective, top performers included such names as Hewlett-Packard Company and Apple Computer, Inc. On the downside, holdings in EarthLink, Inc. and Computer Sciences Company detracted from overall returns. Of noteworthy mention, the fund did not have any holdings in Microsoft Corporation, which accounts for a considerable portion of the benchmark. During the report period, Microsoft Corporation experienced a decline in stock price, followed by a major rebound later in the period that contributed to the benchmark’s return.

As of 10/31/06:

Statistics
Number of Holdings	51
Weighted Average Market Cap ($ x 1,000,000)	32,094
Price/Earnings Ratio (P/E)	28.3
Price/Book Ratio (P/B)	2.8

 

Industry Weightings % of Investments
Technology Hardware & Equipment	43.8	%
Software & Services	41.5	%
Semiconductors & Semiconductor Equipment	13.6	%
Other	1.1	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Hewlett-Packard Co.	7.5	%
International Business Machines Corp.	5.5	%
BMC Software, Inc.	4.9	%
Electronic Data Systems Corp.	4.3	%
Texas Instruments, Inc.	4.2	%
Xerox Corp.	4.0	%
Motorola, Inc.	3.9	%
Global Payments, Inc.	3.7	%
Lexmark International, Inc., Class A	3.5	%
Cisco Systems, Inc.	3.2	%
Total	44.7	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

22    Schwab Active Equity Funds

Schwab Technology Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment¹

 

 

Average Annual Total Returns1,2
	1 year			5 years			Since Inception
Fund: Schwab Technology Fund™ (7/3/00)		8.40	%		6.51	%		(9.56	)%
Benchmark: S&P 1500 Super Composite Technology Sector Index		10.97	%		3.34	%		(11.71	)%
Fund Category: Morningstar Technology		10.16	%		3.41	%		(13.34	)%

Since the Technology fund focuses its investments on companies involved in specific sectors, this fund may involve a greater degree of risk than an investment in mutual funds that do not concentrate their investments.

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

Schwab Active Equity Funds    23

Fund Expenses (Unaudited)

Examples for a $1,000 Investment

 

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab Premier Equity Fund®
Investor Shares
Actual Return		1.16	%	$	1,000	$	1,026.30	$	5.92
Hypothetical 5% Return		1.16	%	$	1,000	$	1,019.36	$	5.90
Select Shares®
Actual Return		1.01	%	$	1,000	$	1,027.10	$	5.16
Hypothetical 5% Return		1.01	%	$	1,000	$	1,020.11	$	5.14
Schwab Core Equity Fund™
Actual Return		0.75	%	$	1,000	$	1,066.70	$	3.91
Hypothetical 5% Return		0.75	%	$	1,000	$	1,021.42	$	3.82
Schwab Dividend Equity Fund™
Investor Shares
Actual Return		1.04	%	$	1,000	$	1,068.30	$	5.42
Hypothetical 5% Return		1.04	%	$	1,000	$	1,019.96	$	5.30
Select Shares
Actual Return		0.89	%	$	1,000	$	1,069.30	$	4.64
Hypothetical 5% Return		0.89	%	$	1,000	$	1,020.72	$	4.53
Schwab Large-Cap Growth Fund™
Investor Shares
Actual Return		1.20	%	$	1,000	$	1,051.30	$	6.20
Hypothetical 5% Return		1.20	%	$	1,000	$	1,019.16	$	6.11
Select Shares
Actual Return		0.99	%	$	1,000	$	1,053.20	$	5.12
Hypothetical 5% Return		0.99	%	$	1,000	$	1,020.21	$	5.04
Schwab Small-Cap Equity Fund™
Investor Shares
Actual Return		1.30	%	$	1,000	$	1,002.80	$	6.56
Hypothetical 5% Return		1.30	%	$	1,000	$	1,018.65	$	6.61
Select Shares
Actual Return		1.12	%	$	1,000	$	1,003.40	$	5.66
Hypothetical 5% Return		1.12	%	$	1,000	$	1,019.56	$	5.70

 

¹Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²Expenses for each fund or share Class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

24    Schwab Active Equity Funds

Fund Expenses continued (unaudited)

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab Hedged Equity Fund™
Investor Shares
Actual Return		2.11	%	$	1,000	$	1,082.77	$	11.08
Hypothetical 5% Return		2.11	%	$	1,000	$	1,014.57	$	10.71
Select Shares
Actual Return		1.90	%	$	1,000	$	1,084.07	$	9.98
Hypothetical 5% Return		1.90	%	$	1,000	$	1,015.63	$	9.65
Schwab Financial Services Focus Fund
Actual Return		0.99	%	$	1,000	$	1,016.10	$	5.03
Hypothetical 5% Return		0.99	%	$	1,000	$	1,020.21	$	5.04
Schwab Health Care Focus Fund
Actual Return		0.83	%	$	1,000	$	1,045.90	$	4.28
Hypothetical 5% Return		0.83	%	$	1,000	$	1,021.02	$	4.23
Schwab Technology Focus Fund
Actual Return		0.97	%	$	1,000	$	981.40	$	4.84
Hypothetical 5% Return		0.97	%	$	1,000	$	1,020.32	$	4.94

 

¹Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²Expenses for each fund or share Class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

Schwab Active Equity Funds    25

Schwab Premier Equity Fund®

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			3/21/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.70			10.00
Income from investment operations:
Net investment income		0.01			0.02
Net realized and unrealized gains		1.83			0.68
Total income from investment operations		1.84			0.70
Less distributions:
Dividends from net investment income		(0.04	)		—
Net asset value at end of period		12.50			10.70
Total return (%)		17.22			7.00	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.17			0.78	3
Gross operating expenses		1.18			1.23	3
Net investment income		0.01			0.52	3
Portfolio turnover rate		73			33	2
Net assets, end of period ($ x 1,000,000)		690			364

 

Select Shares	11/1/05— 10/31/06			3/21/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.71			10.00
Income from investment operations:
Net investment income		0.02			0.03
Net realized and unrealized gains		1.83			0.68
Total income from investment operations		1.85			0.71
Less distributions:
Dividends from net investment income		(0.05	)		—
Net asset value at end of period		12.51			10.71
Total return (%)		17.28			7.10	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.02			0.68	3
Gross operating expenses		1.03			1.08	3
Net investment income		0.17			0.63	3
Portfolio turnover rate		73			33	2
Net assets, end of period ($ x 1,000,000)		857			481

¹   Commencement of operations

²   Not annualized

²   Annualized

26    See financial notes.

Schwab Premier Equity Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.8%	Common Stock	1,330,671	1,542,720
0.6%	Short-Term Investment	9,270	9,270
—%	U.S. Treasury Obligation	119	119
100.4%	Total Investments	1,340,060	1,552,109
3.5%	Collateral Invested for Securities on Loan	54,624	54,624
(3.9)%	Other Assets and Liabilities, Net		(60,106	)
100%	Total Net Assets		1,546,627

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   99.8% of net assets
Banks 4.5%
Bank of Hawaii Corp.		225,800		11,780
Comerica, Inc.		228,500		13,297
KeyCorp		435,200		16,163
PNC Financial Services Group, Inc.		190,000		13,306
Radian Group, Inc.		275,200		14,668
				69,214
Capital Goods 6.7%
General Dynamics Corp.		233,800		16,623
Lockheed Martin Corp.		205,000		17,821
Precision Castparts Corp.		250,000		17,015
Raytheon Co.		370,000		18,481
The Boeing Co.		210,100		16,779
Thomas & Betts Corp. *		322,400		16,613
				103,332
Commercial Services & Supplies 2.2%
Equifax, Inc.		300,000		11,409
Republic Services, Inc.		300,000		12,303
Waste Management, Inc.		291,600		10,929
				34,641
Consumer Durables & Apparel 1.1%
Newell Rubbermaid, Inc.		600,000		17,268
Consumer Services 1.1%
International Game Technology		410,000		17,429
Diversified Financials 9.1%
American Express Co.		271,200		15,678
AmeriCredit Corp. *		544,900		13,933
Ameriprise Financial, Inc.		200,000		10,300
Bank of America Corp.		260,000		14,006
Franklin Resources, Inc.		180,000		20,513
Investment Technology Group, Inc. *		328,700		15,350
Mellon Financial Corp.		450,600		17,483
Northern Trust Corp.		287,000		16,853
State Street Corp.		250,000		16,058
				140,174
Energy 9.0%
Cameron International Corp. *		383,200		19,198
Exxon Mobil Corp.		280,100		20,005
Overseas Shipholding Group, Inc.		254,500		15,919
Pride International, Inc. *		591,500		16,331
Schlumberger Ltd.		283,400		17,877
SEACOR Holdings, Inc. *		135,000		12,080
Sunoco, Inc.		225,000		14,879
Veritas DGC, Inc. *		314,000		22,611
				138,900
Food & Staples Retailing 0.6%
The Kroger Co.		425,000		9,558
Food, Beverage & Tobacco 8.1%
Anheuser-Busch Cos., Inc.		350,000		16,597
Archer-Daniels-Midland Co.		422,500		16,266
ConAgra Foods, Inc.		600,000		15,690
General Mills, Inc.		340,000		19,319
H.J. Heinz Co.		250,000		10,540
Reynolds American, Inc. (a)		260,000		16,422
Sara Lee Corp.		830,200		14,196
The Coca-Cola Co.		363,800		16,997
				126,027
Health Care Equipment & Services 5.9%
Aetna, Inc.		330,720		13,632
AmerisourceBergen Corp.		367,900		17,365
Becton Dickinson & Co.		259,900		18,201
CIGNA Corp.		130,000		15,207
McKesson Corp.		344,500		17,256
WellPoint, Inc. *		120,500		9,197
				90,858

See financial notes.    27

Schwab Premier Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Insurance 9.4%
Hanover Insurance Group, Inc.		260,000		11,791
Loews Corp.		448,000		17,436
MetLife, Inc.		300,000		17,139
Nationwide Financial Services, Inc., Class A		385,000		19,604
Principal Financial Group, Inc.		305,000		17,229
Prudential Financial, Inc.		188,300		14,486
The Chubb Corp.		310,000		16,477
The Hartford Financial Services Group, Inc.		174,000		15,168
W. R. Berkley Corp.		420,000		15,481
				144,811
Materials 4.8%
Greif, Inc., Class A		205,000		19,211
Nucor Corp.		311,000		18,165
Pactiv Corp. *		660,000		20,354
Rohm & Haas Co.		322,500		16,712
				74,442
Media 2.6%
CBS Corp., Class B		482,500		13,964
The McGraw-Hill Cos., Inc.		250,000		16,042
The Walt Disney Co.		322,000		10,130
				40,136
Pharmaceuticals & Biotechnology 6.7%
Applied Biosystems Group — Applera Corp.		480,000		17,904
Biogen Idec, Inc. *		289,000		13,756
Johnson & Johnson		147,000		9,908
King Pharmaceuticals, Inc. *		900,000		15,057
Merck & Co., Inc.		351,800		15,979
Pfizer, Inc.		620,000		16,523
Schering-Plough Corp.		650,000		14,391
				103,518
Retailing 4.7%
Expedia, Inc. *		500,000		8,125
J.C. Penney Co., Inc.		250,000		18,808
Nordstrom, Inc.		370,900		17,562
Office Depot, Inc. *		321,500		13,500
Payless Shoesource, Inc. *		537,800		14,386
				72,381
Semiconductors & Semiconductor Equipment 2.4%
Applied Materials, Inc.		770,000		13,390
Micron Technology, Inc. *		575,000		8,309
Texas Instruments, Inc.		508,100		15,335
				37,034
Software & Services 7.1%
BEA Systems, Inc. *		1,100,000		17,897
BMC Software, Inc. *		620,000		18,792
Global Payments, Inc.		380,000		16,610
Intuit, Inc. *		333,200		11,762
Red Hat, Inc. (a)*		690,000		11,302
Sybase, Inc. *		649,700		15,820
Synopsys, Inc. *		797,100		17,943
				110,126
Technology Hardware & Equipment 5.5%
Harris Corp.		270,000		11,502
Hewlett-Packard Co.		510,000		19,757
Intermec, Inc. (a)*		550,000		12,430
Lexmark International, Inc., Class A *		240,000		15,262
Motorola, Inc.		650,000		14,989
NCR Corp. *		281,300		11,680
				85,620
Telecommunication Services 2.8%
ALLTEL Corp.		175,000		9,329
CenturyTel, Inc.		440,000		17,706
Qwest Communications International, Inc. *		1,800,000		15,534
				42,569
Transportation 2.0%
AMR Corp. (a)*		600,000		17,004
FedEx Corp.		115,000		13,172
				30,176
Utilities 3.5%
Allegheny Energy, Inc. *		433,700		18,662
Alliant Energy Corp.		185,000		7,095
FirstEnergy Corp.		225,700		13,282
TXU Corp.		245,000		15,467
				54,506

 

28    See financial notes.

Schwab Premier Equity Fund

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   0.6% of net assets
Repurchase Agreement 0.6%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $9,271 (fully collateralized by Federal National Mortgage Association with a value of $9,511)		9,270		9,270

 

Security Rate, Maturity Date
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill 4.90%, 12/14/06	120	119

 

End of Investments.

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   3.5% of net assets
State Street Navigator Security Lending Prime Portfolio		54,623,850		54,624

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $1,340,060 and the unrealized appreciation and depreciation were $229,132 and ($17,083), respectively, with a net appreciation of $212,049.

* Non-income producing security.

(a) All or a portion of this security is on loan.

See financial notes.    29

Schwab Premier Equity Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $53,356 (cost $1,340,060)	$	1,552,109
Collateral invested for securities on loan		54,624
Cash		11
Receivables:
Investments sold		2,624
Fund shares sold		2,159
Interest		1
Dividends		814
Income from securities on loan		3
Prepaid expenses	+	6
Total assets		1,612,351
Liabilities
Collateral for securities on loan		54,624
Payables:
Investments bought		10,160
Investment adviser and administrator fees		114
Transfer agent and shareholder services fees		22
Fund shares redeemed		748
Trustee fees		1
Accrued expenses	+	55
Total liabilities		65,724
Net Assets
Total assets		1,612,351
Total liabilities		–65,724
Net assets	$	1,546,627
Net Assets by Source
Capital received from investors		1,335,150
Net realized capital losses		(572	)
Net unrealized capital gains		212,049

Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	689,925			55,213		$	12.50
Select Shares	$	856,702			68,465		$	12.51

 

30    See financial notes.

Schwab Premier Equity Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	15,362
Interest		399
Securities on loan	+	54
Total Investment Income		15,815
Net Realized Gains and Losses
Net realized losses on investments		(133	)
Net realized gains on futures contracts	+	107
Net realized losses		(26	)
Net Unrealized Gains and Losses
Net unrealized gains on investments		172,611
Expenses
Investment adviser and administrator fees		11,827
Transfer agent and shareholder service fees:
Investor Shares		1,479
Select Shares		740
Registration fees		289
Portfolio accounting fees		69
Professional fees		40
Shareholder reports		34
Custodian fees		30
Trustees’ fees		13
Overdraft expense		7
Other expenses	+	24
Total expenses		14,552
Custody Credits		–14
Net expenses		14,538
Increase in Net Assets from Operations
Total investment income		15,815
Net expenses		–14,538
Net investment income		1,277
Net realized losses		(26	)
Net unrealized gains	+	172,611
Increase in net assets from operations	$	173,862

 

See financial notes.    31

Schwab Premier Equity Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			3/21/05*–10/31/05
Net investment income	$	1,277		$	2,233
Net realized losses		(26	)		(546	)
Net unrealized gains	+	172,611			39,438
Increase in net assets from operations		173,862			41,125
Distributions Paid
Dividends from net investment income
Investor Shares		1,487			—
Select Shares	+	2,289			—
Total Dividends from net investment income	$	3,776		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						3/21/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		33,411		$	393,500			37,370		$	381,553
Select Shares	+	41,099			485,841			48,755			497,896
Total shares sold		74,510		$	879,341			86,125		$	879,449
Shares Reinvested
Investor Shares		118		$	1,352			—		$	—
Select Shares	+	172			1,981			—			—
Total shares reinvested		290		$	3,333			—		$	—
Shares Redeemed
Investor Shares		(12,348	)	$	(145,311	)		(3,338	)	$	(35,148	)
Select Shares	+	(17,727	)		(205,961	)		(3,834	)		(40,287	)
Total shares redeemed		(30,075	)	$	(351,272	)		(7,172	)	$	(75,435	)
Net transactions in fund shares		44,725		$	531,402			78,953		$	804,014
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				3/21/05*–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		78,953	$	845,139		—	$	—
Total increase or decrease	+	44,725		701,488		78,953		845,139
End of period		123,678	$	1,546,627		78,953	$	845,139
Net investment income not yet distributed			$	—			$	2,233

 

*  Commencement of Operations

32    See financial notes.

Schwab Core Equity Fund™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)1
Net asset value at beginning of period		15.81			13.81			12.71			10.89			12.53
Income or loss from investment operations:
Net investment income		0.10			0.13			0.12			0.10			0.08
Net realized and unrealized gains or losses		2.58			2.03			1.09			1.79			(1.64	)
Total income or loss from investment operations		2.68			2.16			1.21			1.89			(1.56	)
Less distributions:
Dividends from net investment income		(0.09	)		(0.16	)		(0.11	)		(0.07	)		(0.08	)
Net asset value at end of period		18.40			15.81			13.81			12.71			10.89
Total return (%)		17.02			15.74			9.57			17.54			(12.58	)
Ratios/Supplemental Data (%)1
Ratios to average net assets:
Net operating expenses		0.75			0.75			0.75			0.75			0.75
Gross operating expenses		0.81			0.85			0.88			0.88			0.91
Net investment income		0.63			0.93			0.89			0.94			0.63
Portfolio turnover rate		42			48			86			73			114
Net assets, end of period ($ x 1,000,000)		1,125			547			263			237			179

 

¹   Prior to June 1, 2002, the fund’s day-to-day investment management was handled by a subadviser, Symphony Asset Management LLC

See financial notes.    33

Schwab Core Equity Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
98.9%	Common Stock	958,596	1,112,759
1.8%	Short-Term Investment	19,762	19,762
—%	U.S. Treasury Obligation	273	273
100.7%	Total Investments	978,631	1,132,794
0.9%	Collateral Invested for Securities on Loan	10,748	10,748
(1.6)%	Other Assets and Liabilities, Net		(18,235	)
100.0%	Total Net Assets		1,125,307

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   98.9% of net assets
Banks 4.2%
Comerica, Inc.		172,500		10,038
KeyCorp		235,200		8,735
Radian Group, Inc.		534,000		28,462
				47,235
Capital Goods 12.1%
Emerson Electric Co. (a)		88,800		7,495
General Dynamics Corp.		58,400		4,152
Lockheed Martin Corp. (a)		492,800		42,839
Northrop Grumman Corp.		36,400		2,416
Raytheon Co. (a)		542,500		27,098
The Boeing Co. (a)		659,100		52,636
				136,636
Commercial Services & Supplies 0.2%
Equifax, Inc.		70,000		2,662
Consumer Durables & Apparel 2.1%
Hasbro, Inc.		243,800		6,319
Newell Rubbermaid, Inc.		493,900		14,214
Nike, Inc., Class B		27,900		2,564
				23,097
Diversified Financials 9.3%
American Express Co. (a)		552,000		31,911
AmeriCredit Corp. (b)*		87,000		2,225
Franklin Resources, Inc.		393,100		44,798
JPMorgan Chase & Co.		360,000		17,078
Mellon Financial Corp.		115,000		4,462
Moody’s Corp. (a)		44,800		2,970
Northern Trust Corp. (a)		17,500		1,028
				104,472
Energy 5.1%
Exxon Mobil Corp. (a)		708,600		50,608
Pride International, Inc. *		245,400		6,776
				57,384
Food, Beverage & Tobacco 5.0%
ConAgra Foods, Inc.		793,100		20,740
General Mills, Inc.		34,500		1,960
Reynolds American, Inc. (b)		140,000		8,842
The Coca-Cola Co. (a)		540,500		25,252
				56,794
Health Care Equipment & Services 7.1%
Aetna, Inc. (a)		422,800		17,428
AmerisourceBergen Corp.		300,600		14,188
Becton Dickinson & Co.		122,300		8,565
CIGNA Corp.		108,200		12,657
Humana, Inc. *		69,200		4,152
McKesson Corp.		348,300		17,446
WellPoint, Inc. *		68,000		5,190
				79,626
Insurance 9.6%
American Financial Group, Inc.		36,000		1,723
AON Corp. (a)		24,000		835
Genworth Financial, Inc., Class A		105,600		3,531
Loews Corp.		266,700		10,380
MetLife, Inc. (a)		779,900		44,556
Nationwide Financial Services, Inc., Class A (a)		50,000		2,546
Principal Financial Group, Inc.		460,600		26,019
Prudential Financial, Inc.		64,000		4,923
The Chubb Corp.		151,800		8,068
W. R. Berkley Corp.		138,000		5,087
				107,668
Materials 5.9%
Crown Holdings, Inc. *		164,200		3,192
International Paper Co.		325,000		10,839
Monsanto Co.		34,400		1,521
Nucor Corp.		200,000		11,682
Pactiv Corp. *		251,000		7,741
Phelps Dodge Corp.		44,000		4,417
Rohm & Haas Co.		362,500		18,785
Temple-Inland, Inc.		63,700		2,512
The Lubrizol Corp.		115,400		5,193
				65,882

34    See financial notes.

Schwab Core Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Media 3.9%
CBS Corp., Class B		27,000		781
Omnicom Group, Inc.		230,000		23,334
The McGraw-Hill Cos., Inc.		275,000		17,647
Time Warner, Inc. (a)		125,500		2,511
				44,273
Pharmaceuticals & Biotechnology 9.9%
Applera Corp. — Applied Biosystems Group (a)		525,000		19,582
Biogen Idec, Inc. *		40,000		1,904
King Pharmaceuticals, Inc. (a)*		630,000		10,540
Merck & Co., Inc.		792,600		36,000
Pfizer, Inc.		1,648,000		43,919
				111,945
Retailing 2.8%
American Eagle Outfitters, Inc.		165,000		7,557
J.C. Penney Co., Inc.		202,500		15,234
Office Depot, Inc. *		221,400		9,297
				32,088
Semiconductors & Semiconductor Equipment 2.3%
Applied Materials, Inc.		758,900		13,197
Micron Technology, Inc. *		195,000		2,818
Texas Instruments, Inc.		317,100		9,570
				25,585
Software & Services 4.2%
Autodesk, Inc. (a)*		169,000		6,211
BMC Software, Inc. (a)*		267,000		8,093
Electronic Data Systems Corp. (a)		509,200		12,898
Global Payments, Inc.		93,500		4,087
Intuit, Inc. *		193,000		6,813
McAfee, Inc. *		150,500		4,354
Sybase, Inc. (a)*		62,200		1,514
Synopsys, Inc. (a)*		152,500		3,433
				47,403
Technology Hardware & Equipment 9.7%
Hewlett-Packard Co. (a)		1,134,200		43,939
International Business Machines Corp. (a)		416,000		38,409
Lexmark International, Inc., Class A *		62,500		3,974
Motorola, Inc.		338,900		7,815
NCR Corp. *		126,000		5,232
Xerox Corp. (a)*		546,700		9,294
				108,663
Telecommunication Services 2.8%
AT&T Corp.		157,421		5,392
Citizens Communications Co.		1,274,100		18,678
Qwest Communications International, Inc. *		591,600		5,106
Verizon Communications, Inc.		56,300		2,083
				31,259
Transportation 0.6%
CSX Corp. (a)		179,300		6,396
Utilities 2.1%
Edison International (a)		195,600		8,693
FirstEnergy Corp.		100,000		5,885
The AES Corp. *		170,400		3,747
TXU Corp.		85,000		5,366
				23,691

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   1.8% of net assets
Repurchase Agreement 1.8%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $19,765 (fully collateralized by Federal Home Loan Bank with a value of $20,491.)		19,762	19,762
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill 4.94%, 12/14/06		275	273

 

End of Investments.

Security	Number of Shares
Collateral Invested for Securities on Loan   0.9% of net assets
State Street Navigator Security Lending Prime Portfolio		10,748,063	10,748

 

End of collateral invested for securities on loan.

See financial notes.    35

Schwab Core Equity Fund

Portfolio Holdings continued

At 10-31-06 the tax basis cost of the fund’s investments was $978,631, and the unrealized appreciation and depreciation were $163,064 and ($8,901), respectively, with a net unrealized appreciation of $154,163.

In addition to the above, the fund held the following at 10-31-06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		80		5,533		150

 

* Non-income producing security.

(a) All or a portion of this security is held as collateral for open futures contracts.

(b) All or a portion of this security is on loan.

36    See financial notes.

Schwab Core Equity Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $10,514 (cost $978,631)	$	1,132,794
Collateral invested for securities on loan		10,748
Cash		6
Receivables:
Investments sold		18,670
Fund shares sold		7,495
Dividends		625
Interest		3
Income from securities on loan		1
Prepaid expenses	+	5
Total assets		1,170,347
Liabilities
Collateral for securities on loan		10,748
Payables:
Investments bought		33,686
Investment adviser and administrator fees		41
Transfer agent and shareholder services fees		24
Fund shares redeemed		483
Trustee fees		1
Accrued expenses	+	57
Total liabilities		45,040
Net Assets
Total assets		1,170,347
Total liabilities		–45,040
Net assets	$	1,125,307
Net Assets by Source
Capital received from investors		945,801
Net investment income not yet distributed		3,880
Net realized capital gains		21,313
Net unrealized capital gains		154,313
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$1,125,307			61,157		$	18.40

 

See financial notes.    37

Schwab Core Equity Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	10,789
Interest		434
Securities on loan	+	15
Total Investment Income		11,238
Net Realized Gains and Losses
Net realized gains on investments		24,962
Net realized gains on futures contracts	+	224
Net realized gains		25,186
Net Unrealized Gains and Losses
Net unrealized gains on investments		96,124
Net unrealized gains on futures contracts	+	182
Net unrealized gains		96,306
Expenses
Investment adviser and administrator fees		4,232
Transfer agent and shareholder service fees		2,032
Registration fees		144
Shareholder reports		57
Portfolio accounting fees		47
Professional fees		33
Custodian fees		26
Trustees’ fees		11
Overdraft expense		1
Other expenses	+	15
Total expenses		6,598
Custody Credits		–13
Expense reduction by adviser and Schwab		–492
Net expenses		6,093
Increase in Net Assets from Operations
Total investment income		11,238
Net expenses		–6,093
Net investment income		5,145
Net realized gains		25,186
Net unrealized gains	+	96,306
Increase in net assets from operations	$	126,637

 

38    See financial notes.

Schwab Core Equity Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	5,145	$	3,489
Net realized gains		25,186		14,710
Net unrealized gains	+	96,306		28,266
Increase in net assets from operations		126,637		46,465
Distributions Paid
Dividends from net investment income	$	3,509	$	3,112

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		34,999		$	599,052			19,737		$	304,359
Shares Reinvested		182			3,034			184			2,745
Shares Redeemed	+	(8,614	)		(146,741	)		(4,354	)		(66,406	)
Net transactions in fund shares		26,567		$	455,345			15,567		$	240,698
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		34,590	$	546,834		19,023	$	262,783
Total increase	+	26,567		578,473		15,567		284,051
End of period		61,157	$	1,125,307		34,590	$	546,834
Net investment income not yet distributed			$	3,880			$	2,244

 

See financial notes.    39

Schwab Dividend Equity Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			9/2/031— 10/31/03
Per-Share Data ($)
Net asset value at beginning of period		12.80			12.06			10.60			10.00
Income from investment operations:
Net investment income		0.24			0.26			0.29			0.05
Net realized and unrealized gains		1.97			0.93			1.49			0.55
Total income from investment operations		2.21			1.19			1.78			0.60
Less distributions:
Dividends from net investment income		(0.24	)		(0.26	)		(0.32	)		—
Distributions from net realized gains		(0.16	)		(0.19	)		—			—
Total distributions		(0.40	)		(0.45	)		(0.32	)		—
Net asset value at end of period		14.61			12.80			12.06			10.60
Total return (%)		17.63			9.98			17.00			6.00	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.05			1.07			0.65			—
Gross operating expenses		1.05			1.09			1.19			1.34	3
Net investment income		1.78			2.17		��	2.71			3.41	3
Portfolio turnover rate		36			26			39			2	2
Net assets, end of period ($ x 1,000,000)		624			528			267			94
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			9/2/031— 10/31/03
Per-Share Data ($)
Net asset value at beginning of period		12.80			12.06			10.60			10.00
Income from investment operations:
Net investment income		0.26			0.28			0.31			0.05
Net realized and unrealized gains		1.98			0.93			1.48			0.55
Total income from investment operations		2.24			1.21			1.79			0.60
Less distributions:
Dividends from net investment income		(0.28	)		(0.28	)		(0.33	)		—
Distributions from net realized gains		(0.16	)		(0.19	)		—			—
Total distributions		(0.44	)		(0.47	)		(0.33	)		—
Net asset value at end of period		14.60			12.80			12.06			10.60
Total return (%)		17.86			10.17			17.07			6.00	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.90			0.92			0.54			—
Gross operating expenses		0.90			0.94			1.04			1.19	3
Net investment income		1.92			2.32			2.83			3.41	3
Portfolio turnover rate		36			26			39			2	2
Net assets, end of period ($ x 1,000,000)		729			509			252			111

 

¹   Commencement of operations.

²   Not annualized.

³   Annualized.

40    See financial notes.

Schwab Dividend Equity Fund™

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
97.8%	Common Stock	1,116,547	1,322,353
2.4%	Short-Term Investment	32,670	32,670
—%	U.S. Treasury Obligation	537	537
100.2%	Total Investments	1,149,754	1,355,560
(0.2)%	Other Assets and Liabilities, Net		(2,845	)
100.0%	Total Net Assets		1,352,715

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   97.8% of net assets
Automobiles & Components 0.2%
Ford Motor Co.		300,000		2,484
Banks 10.0%
AmSouth Bancorp		165,000		4,986
Comerica, Inc.		266,700		15,519
First Horizon National Corp.		85,000		3,342
Huntington Bancshares, Inc.		259,000		6,322
KeyCorp		392,500		14,578
National City Corp.		354,800		13,216
PNC Financial Services Group, Inc. (a)		233,400		16,345
Regions Financial Corp.		400,000		15,180
SunTrust Banks, Inc.		150,887		11,919
U.S. Bancorp (a)		449,300		15,204
Wachovia Corp.		255,700		14,192
Washington Mutual, Inc.		107,500		4,547
				135,350
Capital Goods 8.5%
Cooper Industries Ltd., Class A		85,000		7,603
Eaton Corp.		30,000		2,173
Emerson Electric Co.		194,300		16,399
Harsco Corp.		87,200		7,118
Lockheed Martin Corp.		324,000		28,165
Northrop Grumman Corp.		215,400		14,301
Raytheon Co.		487,100		24,331
The Boeing Co. (a)		190,000		15,173
				115,263
Commercial Services & Supplies 2.4%
Avery Dennison Corp.		170,000		10,734
Republic Services, Inc.		135,000		5,536
Waste Management, Inc.		430,000		16,117
				32,387
Consumer Durables & Apparel 3.2%
Hasbro, Inc.		175,000		4,536
Mattel, Inc.		325,000		7,355
Newell Rubbermaid, Inc.		812,600		23,386
VF Corp.		100,000		7,601
				42,878
Diversified Financials 7.8%
American Express Co.		275,000		15,898
Bank of America Corp. (a)		340,400		18,337
Citigroup, Inc.		360,000		18,058
JPMorgan Chase & Co. (a)		430,584		20,427
Mellon Financial Corp.		453,900		17,611
The Bank of New York Co., Inc.		425,000		14,607
				104,938
Energy 4.6%
ChevronTexaco Corp.		100,000		6,720
Exxon Mobil Corp.		320,800		22,912
Marathon Oil Corp.		176,400		15,241
Occidental Petroleum Corp.		60,000		2,816
Schlumberger Ltd.		78,400		4,945
Sunoco, Inc.		150,000		9,920
				62,554
Food & Staples Retailing 0.5%
The Kroger Co.		300,000		6,747
Food, Beverage & Tobacco 9.2%
Altria Group, Inc.		160,000		13,013
Anheuser-Busch Cos., Inc.		225,000		10,669
ConAgra Foods, Inc.		120,000		3,138
General Mills, Inc.		245,000		13,921
Kellogg Co. (a)		290,000		14,590
Loews Corp. — Carolina Group		180,000		10,408
PepsiCo, Inc.		100,000		6,344
Reynolds American, Inc. (a)		426,400		26,931
The Coca-Cola Co.		311,000		14,530
UST, Inc. (a)		200,500		10,739
				124,283
Health Care Equipment & Services 3.0%
AmerisourceBergen Corp.		75,000		3,540
Baxter International, Inc.		255,000		11,722
Becton Dickinson & Co.		179,000		12,536
Dentsply International, Inc.		145,000		4,536
McKesson Corp.		170,000		8,515
				40,849

See financial notes.    41

Schwab Dividend Equity Fund™

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Household & Personal Products 1.5%
Colgate-Palmolive Co.		150,000		9,595
Procter & Gamble Co.		168,950		10,710
				20,305
Insurance 8.7%
AON Corp. (a)		496,250		17,265
Fidelity National Financial, Inc.		155,000		3,457
Fidelity National Title Group, Inc., Class A		162,398		3,574
First American Corp.		82,500		3,368
HCC Insurance Holdings, Inc.		150,000		5,049
Lincoln National Corp.		300,000		18,993
Principal Financial Group, Inc.		140,000		7,909
SAFECO Corp.		201,400		11,719
The Allstate Corp.		218,200		13,389
The Chubb Corp.		276,000		14,669
The St. Paul Travelers Cos., Inc. (a)		308,000		15,748
W. R. Berkley Corp.		82,500		3,041
				118,181
Materials 6.7%
Freeport-McMoRan Copper & Gold, Inc., Class B		194,000		11,733
International Paper Co.		375,000		12,506
MeadWestvaco Corp.		254,000		6,990
Nucor Corp.		100,000		5,841
PPG Industries, Inc.		145,500		9,952
Rohm & Haas Co.		259,000		13,421
Sonoco Products Co.		280,000		9,935
Temple-Inland, Inc.		338,300		13,343
The Lubrizol Corp.		150,000		6,750
				90,471
Media 2.4%
CBS Corp., Class B		425,000		12,299
Regal Entertainment Group, Class A		150,000		3,110
The McGraw-Hill Cos., Inc.		200,000		12,834
Warner Music Group Corp.		150,000		3,889
				32,132
Pharmaceuticals & Biotechnology 5.9%
Abbott Laboratories		180,000		8,552
Bristol-Myers Squibb Co.		400,000		9,900
Johnson & Johnson		237,000		15,974
Merck & Co., Inc.		380,000		17,259
PerkinElmer, Inc.		270,500		5,778
Pfizer, Inc.		573,000		15,270
Schering-Plough Corp.		85,000		1,882
Wyeth		95,000		4,848
				79,463
Retailing 0.4%
Genuine Parts Co.		121,000		5,508
Semiconductors & Semiconductor Equipment 0.9%
Applied Materials, Inc.		465,000		8,086
Microchip Technology, Inc.		135,000		4,446
				12,532
Software & Services 2.2%
Electronic Data Systems Corp.		558,000		14,134
Global Payments, Inc.		25,000		1,093
Microsoft Corp.		500,000		14,355
				29,582
Technology Hardware & Equipment 4.4%
Harris Corp.		155,000		6,603
Hewlett-Packard Co.		490,000		18,983
International Business Machines Corp.		180,000		16,619
Molex, Inc.		100,000		3,490
Motorola, Inc.		615,000		14,182
				59,877
Telecommunication Services 6.3%
ALLTEL Corp. (a)		184,800		9,852
AT&T Corp.		655,037		22,435
BellSouth Corp.		451,600		20,367
Citizens Communications Co.		980,000		14,367
Verizon Communications, Inc.		402,300		14,885
Windstream Corp.		191,069		2,621
				84,527
Transportation 0.5%
FedEx Corp.		60,000		6,872
Utilities 8.5%
Alliant Energy Corp.		305,000		11,697
American Electric Power Co., Inc.		401,000		16,614
Edison International		391,000		17,376
Exelon Corp.		171,400		10,623
FirstEnergy Corp.		284,100		16,719
Pepco Holdings, Inc.		280,000		7,118
PG&E Corp.		360,000		15,530
TECO Energy, Inc.		225,000		3,710
TXU Corp.		250,000		15,783
				115,170

 

42    See financial notes.

Schwab Dividend Equity Fund™

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   2.4% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		32,670		32,670
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill 5.00%, 12/14/06		540		537

 

End of Investments.

At 10-31-06 the tax basis cost of the fund’s investments was $1,150,626, and the unrealized appreciation and depreciation were $214,769 and ($9,835), respectively, with a net unrealized appreciation of $204,934.

In addition to the above, the fund held the following at 10-31-06. All numbers are x1,000 except number of futures contracts.

Security Rate, Maturity Date	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		160		11,066	249

 

(a) All or a portion of this security is held as collateral for open futures contracts.

See financial notes.    43

Schwab Dividend Equity Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value (cost $1,149,754)	$	1,355,560
Receivables:
Investments sold		6,335
Fund shares sold		6,616
Interest		4
Dividends		1,969
Prepaid expenses	+	8
Total assets		1,370,492
Liabilities
Payables:
Investments bought		16,845
Investment adviser and administrator fees		87
Transfer agent and shareholder services fees		19
Fund shares redeemed		792
Trustee fees		2
Accrued expenses	+	32
Total liabilities		17,777
Net Assets
Total assets		1,370,492
Total liabilities		–17,777
Net assets	$	1,352,715
Net Assets by Source
Capital received from investors		1,116,361
Net investment income not yet distributed		1,243
Net realized capital gains		29,056
Net unrealized capital gains		206,055
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	624,057			42,705		$	14.61
Select Shares	$	728,658			49,917		$	14.60

 

44    See financial notes.

Schwab Dividend Equity Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	31,163
Interest		358
Securities on loan	+	1
Total Investment Income		31,522
Net Realized Gains and Losses
Net realized gains on investments		28,776
Net realized gains on futures contracts	+	222
Net realized gains		28,998
Net Unrealized Gains and Losses
Net unrealized gains on investments		134,621
Net unrealized gains on futures contracts	+	307
Net unrealized gains		134,928
Expenses
Investment adviser and administrator fees		8,596
Transfer agent and shareholder service fees:
Investor Shares		1,384
Select Shares		561
Registration fees		95
Portfolio accounting fees		67
Shareholder reports		63
Custodian fees		40
Professional fees		36
Trustees’ fees		13
Overdraft expense		3
Other expenses	+	22
Total expenses		10,880
Increase in Net Assets from Operations
Total investment income		31,522
Net expenses		–10,880
Net investment income		20,642
Net realized gains		28,998
Net unrealized gains	+	134,928
Increase in net assets from operations	$	184,568

 

See financial notes.    45

Schwab Dividend Equity Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	20,642	$	18,557
Net realized gains		28,998		13,364
Net unrealized gains	+	134,928		29,600
Increase in net assets from operations		184,568		61,521
Distributions Paid
Dividends from net investment income
Investor Shares		9,859		8,840
Select Shares	+	11,451		8,874
Total dividends from net investment income		21,310		17,714
Distributions from net realized gains
Investor Shares		6,743		4,838
Select Shares	+	6,563		4,386
Total distributions from net realized gains		13,306		9,224
Total distributions	$	34,616	$	26,938

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		14,325		$	196,579			27,892		$	355,147
Select Shares	+	19,222			265,952			24,348			310,884
Total shares sold		33,547		$	462,531			52,240		$	666,031
Shares Reinvested
Investor Shares		1,006		$	13,421			854		$	10,806
Select Shares	+	972			12,969			731			9,263
Total shares reinvested		1,978		$	26,390			1,585		$	20,069
Shares Redeemed
Investor Shares		(13,861	)	$	(187,504	)		(9,697	)	$	(124,160	)
Select Shares	+	(10,090	)		(135,743	)		(6,148	)		(78,680	)
Total shares redeemed		(23,951	)	$	(323,247	)		(15,845	)	$	(202,840	)
Net transactions in fund shares		11,574		$	165,674			37,980		$	483,260
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		81,048	$	1,037,089		43,068	$	519,246
Total increase	+	11,574		315,626		37,980		517,843
End of period		92,622	$	1,352,715		81,048	$	1,037,089
Net investment income not yet distributed			$	1,243			$	1,911

 

46    See financial notes.

Schwab Large-Cap Growth Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			10/3/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		9.73			10.00
Income or loss from investment operations:
Net investment income or loss		0.01			(0.00	)2
Net realized and unrealized gains or losses		1.33			(0.27	)
Total income or loss from investment operations		1.34			(0.27	)
Less distributions:
Dividends from net investment income		(0.00	)2		—
Net asset value at end of period		11.07			9.73
Total return (%)		13.80			(2.70	)3
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.20			1.20	4
Gross operating expenses		1.26			1.71	4
Net investment income or loss		0.09			(0.61	)4
Portfolio turnover rate		53			4	3
Net assets, end of period ($ x 1,000,000)		70			25
Select Shares	11/1/05— 10/31/06			10/3/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		9.73			10.00
Income or loss from investment operations:
Net investment income or loss		0.02			(0.00	)2
Net realized and unrealized gains or losses		1.35			(0.27	)
Total income or loss from investment operations		1.37			(0.27	)
Less distributions:
Dividends from net investment income		(0.01	)		—
Net asset value at end of period		11.09			9.73
Total return (%)		14.04			(2.70	)3
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.99			0.99	4
Gross operating expenses		1.12			1.56	4
Net investment income or loss		0.26			(0.40	)4
Portfolio turnover rate		53			4	3
Net assets, end of period ($ x 1,000,000)		107			33

 

¹   Commencement of operations.

²   Per share amount was less then $0.01.

³   Not annualized.

⁴   Annualized.

See financial notes.    47

Schwab Large-Cap Growth Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
97.4%	Common Stock	157,393	172,230
5.2%	Short-Term Investment	9,266	9,266
0.1%	U.S. Treasury Obligations	124	124
102.7%	Total Investments	166,783	181,620
2.5%	Collateral Invested for Securities on Loan	4,371	4,371
(5.2)%	Other Assets and Liabilities, Net		(9,127	)
100.0%	Total Net Assets		176,864

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   97.4% of net assets
Banks 1.1%
Comerica, Inc.		3,700		215
Radian Group, Inc.		15,500		826
U.S. Bancorp		25,600		867
				1,908
Capital Goods 11.4%
Cooper Industries Ltd., Class A		1,800		161
Emerson Electric Co.		7,300		616
General Dynamics Corp.		41,400		2,943
ITT Corp.		29,500		1,604
Lockheed Martin Corp.		60,700		5,277
Precision Castparts Corp.		14,000		953
Raytheon Co.		7,500		375
The Boeing Co.		99,800		7,970
Thomas & Betts Corp. *		4,300		222
				20,121
Commercial Services & Supplies 0.5%
Equifax, Inc.		21,500		818
Consumer Durables & Apparel 1.7%
Hasbro, Inc.		29,000		752
Newell Rubbermaid, Inc.		79,300		2,282
				3,034
Consumer Services 0.8%
International Game Technology (a)		31,500		1,339
Diversified Financials 7.9%
American Express Co.		45,000		2,601
Franklin Resources, Inc.		74,500		8,490
Mellon Financial Corp.		15,000		582
Moody’s Corp.		22,500		1,492
Northern Trust Corp.		15,000		881
				14,046
Energy 1.8%
Exxon Mobil Corp.		45,300		3,235
Food, Beverage & Tobacco 3.8%
Anheuser-Busch Cos., Inc.		4,100		194
ConAgra Foods, Inc.		29,500		771
General Mills, Inc.		22,100		1,256
Loews Corp. — Carolina Group		49,500		2,862
The Coca-Cola Co.		35,800		1,673
				6,756
Health Care Equipment & Services 11.5%
Aetna, Inc.		19,900		820
AmerisourceBergen Corp.		45,300		2,138
Baxter International, Inc.		114,200		5,250
Becton Dickinson & Co.		60,800		4,258
Express Scripts, Inc. *		9,000		573
Humana, Inc. (a)*		23,600		1,416
IMS Health, Inc.		52,800		1,471
Laboratory Corp. of America Holdings *		6,300		432
McKesson Corp.		56,700		2,840
WellPoint, Inc. *		15,700		1,198
				20,396
Insurance 4.6%
AFLAC, Inc.		18,500		831
First American Corp.		10,000		408
Genworth Financial, Inc., Class A		15,500		518
HCC Insurance Holdings, Inc.		20,200		680
MetLife, Inc.		37,500		2,142
Principal Financial Group, Inc.		23,500		1,328
Protective Life Corp.		8,000		354
SAFECO Corp.		2,000		116
W. R. Berkley Corp.		45,300		1,670
				8,047

48    See financial notes.

Schwab Large-Cap Growth Fund

Portfolio Holdings continued

Security		Number of Shares		Value ($ x 1,000)
Materials 4.6%
Freeport-McMoRan Copper & Gold, Inc., Class B			71,400		4,318
Nucor Corp.			37,900		2,214
Rohm & Haas Co.			25,000		1,296
Temple-Inland, Inc.			4,500		177
United States Steel Corp.			3,000		203
	��				8,208
Media 5.6%
Omnicom Group, Inc.			15,000		1,522
The McGraw-Hill Cos., Inc. (b)			129,500		8,310
					9,832
Pharmaceuticals & Biotechnology 9.9%
Applied Biosystems Group — Applera Corp. (b)			115,500		4,308
Biogen Idec, Inc. *			36,900		1,756
Gilead Sciences, Inc. *			17,100		1,178
Johnson & Johnson			10,000		674
King Pharmaceuticals, Inc. *			35,600		596
Merck & Co., Inc.			78,000		3,543
Pfizer, Inc.			206,600		5,506
					17,561
Retailing 3.8%
American Eagle Outfitters, Inc.			57,000		2,611
J.C. Penney Co., Inc.			18,900		1,422
Nordstrom, Inc.			45,500		2,154
Office Depot, Inc. *			10,500		441
					6,628
Semiconductors & Semiconductor Equipment 2.6%
Applied Materials, Inc.			112,700		1,960
MEMC Electronic Materials, Inc. *			12,500		444
Micron Technology, Inc. *			9,300		134
Texas Instruments, Inc.			68,500		2,067
					4,605
Software & Services 9.4%
Amdocs Ltd. *			35,100		1,360
Autodesk, Inc. *			22,000		809
BEA Systems, Inc. *			25,500		415
BMC Software, Inc. (a)*			146,500		4,440
Cadence Design Systems, Inc. *			41,000		732
Electronic Data Systems Corp.			29,000		735
Global Payments, Inc.			57,200		2,500
Google, Inc., Class A *			1,100		524
Intuit, Inc. *			115,000		4,060
McAfee, Inc. *			26,000		752
Red Hat, Inc. *			20,000		328
					16,655
Technology Hardware & Equipment 12.9%
Avaya, Inc. *			46,500		596
Cisco Systems, Inc. *			8,500		205
Hewlett-Packard Co.			217,800		8,438
International Business Machines Corp.			94,600		8,734
Lexmark International, Inc., Class A *			58,000		3,688
Motorola, Inc.			52,500		1,211
					22,872
Telecommunication Services 1.6%
Citizens Communications Co.			177,300		2,599
Qwest Communications International, Inc. *			15,900		137
					2,736
Transportation 0.5%
AMR Corp. (a)*			31,000		878
Utilities 1.4%
Edison International			5,500		244
TXU Corp.			36,600		2,311
					2,555

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   5.2% of net assets
Bank of America, London Time Deposit 4.71%, 11/01/06		3,390		3,390
BBH, Grand Cayman Time Deposit 4.71%, 11/01/06		2,486		2,486
Citibank, Nassau Time Deposit 4.71%, 11/01/06		3,390		3,390
				9,266
U.S. Treasury Obligations   0.1% of net assets
U.S. Treasury Bill
4.94%, 12/14/06		69		69
5.01%, 12/14/06		55		55
				124

 

End of Investments.

See financial notes.    49

Schwab Large-Cap Growth Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   2.5% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		4,371,465		4,371

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $166,824, and the unrealized appreciation and depreciation were $16,580 and ($1,784), respectively, with a net unrealized appreciation of $14,796.

In addition to the above, the fund held the following at 10-31-06. All numbers are x1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		35		2,421		5

 

* Non-income producing security.

(a) All or portion of security is on loan.

(b) All or a portion of this security is held as collateral for futures contracts.

50    See financial notes.

Schwab Large-Cap Growth Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $4,216 (cost $166,783)	$	181,620
Collateral invested for securities on loan		4,371
Receivables:
Investments sold		1,832
Fund shares sold		2,591
Dividends		57
Due from brokers for futures		13
Interest		1
Prepaid expenses	+	1
Total assets		190,486
Liabilities
Collateral held for securities on loan		4,371
Payables:
Investments bought		8,988
Investment adviser and administrator fees		11
Transfer agent and shareholder services fees		2
Fund shares redeemed		216
Accrued expenses	+	34
Total liabilities		13,622
Net Assets
Total assets		190,486
Total liabilities		–13,622
Net assets	$	176,864
Net Assets by Source
Capital received from investors		164,762
Net investment income not yet distributed		138
Net realized capital losses		(2,878	)
Net unrealized capital gains		14,842
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	69,981			6,323		$	11.07
Select Shares	$	106,883			9,639		$	11.09

 

See financial notes.    51

Schwab Large-Cap Growth Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	1,136
Interest		77
Securities on loan	+	1
Total Investment Income		1,214
Net Realized Gains and Losses
Net realized losses on investments		(2,707	)
Net Unrealized Gains and Losses
Net unrealized gains on investments		16,025
Net unrealized gains on futures contracts	+	5
Net unrealized gains		16,030
Expenses
Investment adviser and administrator fees		829
Transfer agent and shareholder service fees:
Investor Shares		119
Select Shares		47
Registration fees		62
Professional fees		34
Portfolio accounting fees		24
Custodian fees		8
Trustees’ fees		5
Shareholder reports		4
Other expenses	+	7
Total expenses		1,139
Expense reduction by adviser and Schwab		–93
Net expenses		1,046
Increase in Net Assets from Operations
Total investment income		1,214
Net expenses		–1,046
Net investment income		168
Net realized losses		(2,707	)
Net unrealized gains	+	16,030
Increase in net assets from operations	$	13,491

 

52    See financial notes.

Schwab Large-Cap Growth Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06			10/3/05*—10/31/05
Net investment income or loss	$	168		$	(21	)
Net realized losses		(2,707	)		(171	)
Net unrealized gains or losses	+	16,030			(1,188	)
Increase or decrease in net assets from operations		13,491			(1,380	)
Distributions Paid
Dividends from net investment income
Investor Shares		7			—
Select Shares	+	23			—
Total dividends from net investment income	$	30		$	—

 

Transactions in Fund Shares

 

	11/1/05—10/31/06						10/3/05*—10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		5,260		$	54,737			2,636		$	26,231
Select Shares	+	7,872			83,122			3,385			33,718
Total shares sold		13,132		$	137,859			6,021		$	59,949
Shares Reinvested
Investor Shares		1		$	7			—		$	—
Select Shares	+	2			18			—			—
Total shares reinvested		3		$	25			—		$	—
Shares Redeemed
Investor Shares		(1,554	)	$	(16,061	)		(20	)	$	(188	)
Select Shares	+	(1,620	)		(16,801	)		—			—
Total shares redeemed		(3,174	)	$	(32,862	)		(20	)	$	(188	)
Net transactions in fund shares		9,961		$	105,022			6,001		$	59,761
Shares Outstanding and Net Assets

 

	11/1/05—10/31/06				10/3/05*—10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		6,001	$	58,381		—	$	—
Total increase	+	9,961		118,483		6,001		58,381
End of period		15,962	$	176,864		6,001	$	58,381
Net investment income not yet distributed			$	138			$	—

 

*  Commencement of operations.

See financial notes.    53

Schwab Small Cap Equity Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			7/1/031— 10/31/03
Per-Share Data ($)
Net asset value at beginning of period		15.72			14.13			11.81			10.00
Income or loss from investment operations:
Net investment income or loss		(0.05	)		0.01			(0.04	)		(0.02	)
Net realized and unrealized gains		2.48			3.12			2.58			1.83
Total income from investment operations		2.43			3.13			2.54			1.81
Less distributions:
Dividends from net investment income		(0.00	)4		—			—			—
Distributions from net realized gains		(0.43	)		(1.54	)		(0.22	)		—
Total distributions		(0.43	)		(1.54	)		(0.22	)		—
Net asset value at end of period		17.72			15.72			14.13			11.81
Total return (%)		15.71			23.65			21.74			18.10	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.29			1.28			1.30			1.30	3
Gross operating expenses		1.29			1.38			1.61			1.73	3
Net investment income or loss		(0.39	)		0.11			(0.35	)		(0.54	)3
Portfolio turnover rate		82			90			118			39	2
Net assets, end of period ($ x 1,000,000)		431			170			37			26
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			7/1/031— 10/31/03
Per-Share Data ($)
Net asset value at beginning of period		15.78			14.16			11.81			10.00
Income or loss from investment operations:
Net investment income or loss		(0.02	)		0.00	4		(0.02	)		(0.01	)
Net realized and unrealized gains		2.49			3.16			2.59			1.82
Total income from investment operations		2.47			3.16			2.57			1.81
Less distributions:
Dividends from net investment income		(0.02	)		—			—			—
Distributions from net realized gains		(0.43	)		(1.54	)		(0.22	)		—
Total distributions		(0.45	)		(1.54	)		(0.22	)		—
Net asset value at end of period		17.80			15.78			14.16			11.81
Total return (%)		15.89			23.83			22.00			18.10	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.12			1.11			1.12			1.12	3
Gross operating expenses		1.14			1.23			1.46			1.58	3
Net investment income or loss		(0.21	)		0.09			(0.16	)		(0.36	)3
Portfolio turnover rate		82			90			118			39	2
Net assets, end of period ($ x 1,000,000)		276			80			18			14

 

¹   Commencement of operations.

²   Not annualized.

³   Annualized.

⁴   Per share amount was less than $0.01.

54    See financial notes.

Schwab Small-Cap Equity Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
97.7%	Common Stock	612,475	690,020
3.5%	Short-Term Investments	24,562	24,562
—%	U.S. Treasury Obligation	353	353
101.2%	Total Investments	637,390	714,935
10.9%	Collateral Invested for Securities on Loan	77,196	77,196
(12.1)%	Other Assets and Liabilities, Net		(85,589	)
100.0%	Total Net Assets		706,542

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   97.7% of net assets
Automobiles & Components 1.8%
ArvinMeritor, Inc. (a)		15,200		228
TRW Automotive Holdings Corp. *		232,600		5,966
Winnebago Industries, Inc.		204,200		6,798
				12,992
Banks 2.9%
Bancfirst Corp.		51,700		2,572
BancorpSouth, Inc.		183,200		4,681
Bank of Hawaii Corp. (b)		145,900		7,612
First Financial Holdings, Inc.		21,900		791
Hancock Holding Co.		18,600		954
Whitney Holding Corp.		117,000		3,821
				20,431
Capital Goods 13.9%
Acuity Brands, Inc.		229,800		11,384
American Woodmark Corp. (a)		221,100		8,179
Belden CDT, Inc.		64,300		2,328
Crane Co.		338,800		13,193
EMCOR Group, Inc. *		341,600		20,206
Orbital Sciences Corp. *		250,100		4,542
Robbins & Myers, Inc.		50,100		1,928
Teleflex, Inc.		334,800		20,825
Thomas & Betts Corp. (b)*		197,000		10,151
Valmont Industries, Inc.		100,600		5,613
				98,349
Commercial Services & Supplies 5.8%
Administaff, Inc.		101,350		3,492
AMREP Corp. (a)*		38,600		2,764
CBIZ, Inc. (a)*		622,100		4,380
Consolidated Graphics, Inc. *		194,950		12,120
Ennis, Inc.		61,100		1,403
Heidrick & Struggles International, Inc. *		211,200		8,632
IKON Office Solutions, Inc.		101,100		1,507
Labor Ready, Inc. *		127,900		2,240
Spherion Corp. *		362,600		2,629
Steelcase, Inc., Class A		45,100		747
The Standard Register Co.		101,800		1,377
				41,291
Consumer Durables & Apparel 4.6%
Blyth, Inc.		509,000		12,175
Kellwood Co. (a)		675,100		20,658
				32,833
Consumer Services 2.9%
Career Education Corp. *		150,000		3,342
CPI Corp. (a)		112,000		5,287
DeVry, Inc. *		73,700		1,795
IHOP Corp.		28,200		1,471
Jack in the Box, Inc. *		48,000		2,693
Papa John’s International, Inc. *		165,500		6,074
				20,662
Diversified Financials 1.5%
Investment Technology Group, Inc. (b)*		219,600		10,255
Energy 4.6%
Matrix Service Co. (a)*		51,800		744
Parker Drilling Co. *		679,300		5,564
Veritas DGC, Inc. *		363,700		26,190
				32,498
Health Care Equipment & Services 11.9%
Alliance Imaging, Inc. *		108,500		918
AMERIGROUP Corp. *		187,000		5,603
CorVel Corp. *		109,900		4,753
Magellan Health Services, Inc. *		486,300		21,222
MedCath Corp. *		302,400		8,011
Mentor Corp. (a)		392,400		18,364
Molina Healthcare, Inc. *		108,500		4,257
Sierra Health Services, Inc. (b)*		535,700		18,342
Zoll Medical Corp. *		61,200		2,368
				83,838
Household & Personal Products 1.1%
NBTY, Inc. *		270,400		7,523

See financial notes.    55

Schwab Small-Cap Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Insurance 7.7%
Alleghany Corp. *		12,954		3,961
American Financial Group, Inc.		132,200		6,327
American Physicians Capital, Inc. *		51,900		2,839
Argonaut Group, Inc. *		51,300		1,745
CNA Surety Corp. *		16,600		338
Crawford & Co., Class B		44,000		334
Delphi Financial Group, Inc., Class A (b)		127,225		4,993
FBL Financial Group, Inc., Class A		25,800		912
FPIC Insurance Group, Inc. *		40,200		1,437
Great American Financial Resources, Inc.		53,000		1,225
Harleysville Group, Inc.		130,600		4,712
LandAmerica Financial Group, Inc.		19,000		1,199
National Interstate Corp.		25,100		707
Nationwide Financial Services, Inc., Class A		74,200		3,778
Philadelphia Consolidated Holding Corp. *		102,600		4,014
ProAssurance Corp. *		11,000		536
Protective Life Corp.		28,700		1,270
Safety Insurance Group, Inc.		177,000		8,852
Selective Insurance Group, Inc.		36,500		2,016
StanCorp Financial Group, Inc.		21,800		996
State Auto Financial Corp.		42,100		1,353
Universal American Financial Corp. *		58,000		1,078
				54,622
Materials 9.5%
AK Steel Holding Corp. *		332,500		4,964
Albemarle Corp.		4,000		260
Carpenter Technology Corp.		32,100		3,434
FMC Corp.		25,000		1,714
Greif, Inc., Class A		217,000		20,335
H.B. Fuller Co.		438,000		10,858
Hercules, Inc. *		252,300		4,592
OM Group, Inc. *		90,000		5,130
Packaging Corp. of America		64,500		1,482
Silgan Holdings, Inc.		185,200		7,662
Spartech Corp.		239,800		6,570
				67,001
Media 0.2%
LodgeNet Entertainment Corp. *		40,600		934
Sinclair Broadcast Group, Inc., Class A		48,700		439
				1,373
Pharmaceuticals & Biotechnology 0.5%
Bruker BioSciences Corp. *		274,300		2,184
Maxygen, Inc. *		124,100		1,057
				3,241
Real Estate 0.1%
Essex Property Trust, Inc.		1,500		200
Kilroy Realty Corp.		2,000		151
New Century Financial Corp. (a)		3,000		118
				469
Retailing 4.8%
Audiovox Corp., Class A *		12,500		164
Blockbuster, Inc., Class A (a)*		205,900		807
Payless Shoesource, Inc. (b)*		338,100		9,044
The Cato Corp., Class A		14,450		331
The Gymboree Corp. *		65,200		3,029
The Men’s Wearhouse, Inc. (a)		455,600		18,156
Wetseal, Inc., Class A (a)*		421,800		2,632
				34,163
Semiconductors & Semiconductor Equipment 1.5%
Agere Systems, Inc. *		22,340		379
Asyst Technologies, Inc. *		246,300		1,830
Atmel Corp. *		67,000		385
Cirrus Logic, Inc. *		205,100		1,448
Fairchild Semiconductor International, Inc. *		202,200		3,258
MKS Instruments, Inc. *		134,500		2,912
ON Semiconductor Corp. *		5,800		36
Zoran Corp. *		19,900		277
				10,525
Software & Services 11.5%
Advent Software, Inc. *		19,000		703
Ariba, Inc. *		104,000		785
Aspen Technology Inc *		53,800		539
Covansys Corp. *		192,100		4,495
CSG Systems International, Inc. *		692,700		18,689
Forrester Research, Inc. *		228,200		7,172
Global Payments, Inc.		192,400		8,410
Hyperion Solutions Corp. *		28,900		1,081
i2 Technologies, Inc. (a)*		45,700		924
Informatica Corp. *		1,500		19
Interwoven, Inc. *		208,000		2,646
Lightbridge, Inc. (b)*		323,100		3,735
SonicWALL, Inc. *		312,700		3,283
SPSS, Inc. *		47,000		1,301
Sybase, Inc. *		444,400		10,821
Sykes Enterprises, Inc. *		579,200		11,752
Synopsys, Inc. *		185,500		4,176
Tyler Technologies, Inc. *		32,300		458
				80,989

56    See financial notes.

Schwab Small-Cap Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Technology Hardware & Equipment 7.6%
AVX Corp.		150,100		2,366
Brocade Communications Systems, Inc. (b)*		484,300		3,928
Carrier Access Corp. *		116,900		732
Coherent, Inc. *		338,100		10,897
Emulex Corp. *		51,000		959
Imation Corp.		149,200		6,829
Littelfuse, Inc. *		259,600		8,790
Photon Dynamics, Inc. *		25,200		299
Planar Systems, Inc. *		249,500		3,006
Rofin-Sinar Technologies, Inc. *		19,100		1,176
Staktek Holdings, Inc. (a)*		475,700		2,902
Tektronix, Inc.		41,000		1,245
UTStarcom, Inc. (a)*		950,000		10,231
				53,360
Telecommunication Services 1.2%
Broadwing Corp. *		361,900		5,421
CT Communications, Inc.		136,700		3,187
				8,608
Transportation 1.4%
AMR Corp. (a)*		111,700		3,166
Continental Airlines, Inc., Class B (a)*		126,800		4,676
Hub Group, Inc., Class A *		88,600		2,406
				10,248
Utilities 0.7%
Allete, Inc.		105,300		4,749

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investments   3.5% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		8,332		8,332
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		16,230		16,230
				24,562
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill
4.81%, 12/14/06		85		85
4.90%, 12/14/06		119		119
4.91%, 12/14/06		149		149
				353

 

End of Investments.

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   10.9% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		77,195,782		77,196

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $637,576 and the unrealized appreciation and depreciation were $90,497 and ($13,138), respectively, with a net unrealized appreciation of $77,359.

In addition to the above, the fund held the following at 10-31-06. All numbers are x1,000 except number of future contract.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
Russell 2000 Index, Long expires 12/31/06		120		9,252		499

 

* Non-income producing security.

(a) All or a portion of this security is on loan.

(b) All or a portion of this security is held as collateral for open futures contracts.

See financial notes.    57

Schwab Small-Cap Equity Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $73,950 (cost $637,390)	$	714,935
Collateral invested for securities on loan		77,196
Receivables:
Investments sold		6,476
Fund shares sold		6,601
Dividends		326
Income from securities on loan		19
Interest		3
Prepaid expenses	+	2
Total assets		805,558
Liabilities
Collateral for securities on loan		77,196
Payables:
Investments bought		21,100
Investment adviser and administrator fees		75
Transfer agent and shareholder service fees		11
Fund shares redeemed		530
Due to brokers for futures		31
Trustee fees		1
Accrued expenses	+	72
Total liabilities		99,016
Net Assets
Total assets		805,558
Total liabilities		–99,016
Net assets	$	706,542
Net Assets by Source
Capital received from investors		625,075
Net realized capital gains		3,423
Net unrealized capital gains		78,044

 

Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	431,020			24,331		$	17.72	*
Select Shares	$	275,522			15,475		$	17.80

 

*   Due to rounding, net assets divided by shares outstanding does not equal the net asset value per share.

58    See financial notes.

Schwab Small-Cap Equity Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	3,844
Interest		277
Securities on loan	+	104
Total investment income		4,225
Net Realized Gains and Losses
Net realized gains on investments		3,229
Net realized gains on futures contracts	+	77
Net realized gains		3,306
Net Unrealized Gains and Losses
Net unrealized gains on investments		56,893
Net unrealized gains on futures contracts	+	610
Net unrealized gains		57,503
Expenses
Investment adviser and administrator fees		4,509
Transfer agent and shareholder service fees:
Investor Shares		783
Select Shares		151
Registration fees		166
Portfolio accounting fees		49
Custodian fees		36
Professional fees		34
Shareholder reports		32
Trustees’ fees		9
Overdraft expense		6
Other expenses	+	11
Total expenses		5,786
Expense reduction by adviser and Schwab		–38
Net expenses		5,748
Increase in Net Assets from Operations
Total investment income		4,225
Net expenses		–5,748
Net investment loss		(1,523	)
Net realized gains		3,306
Net unrealized gains	+	57,503
Increase in net assets from operations	$	59,286

 

See financial notes.    59

Schwab Small-Cap Equity Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment income or loss	$	(1,523	)	$	135
Net realized gains		3,306			8,242
Net unrealized gains	+	57,503			13,859
Increase in net assets from operations		59,286			22,236
Distributions Paid
Dividends from net investment income
Investor Shares		27			—
Select Shares	+	109			—
Total dividends from net investment income		136			—
Distribution from net realized gains
Investor Shares		5,522			4,802
Select Shares	+	2,565			2,252
Total distribution from net realized gains		8,087			7,054
Total Distributions	$	8,223		$	7,054
Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		18,715		$	315,251			9,837		$	146,160
Select Shares	+	13,258			225,539			4,714			71,745
Total shares sold		31,973		$	540,790			14,551		$	217,905
Shares Reinvested
Investor Shares		308		$	4,978			313		$	4,324
Select Shares	+	142			2,297			118			1,635
Total shares reinvested		450		$	7,275			431		$	5,959
Shares Redeemed
Investor Shares		(5,534	)	$	(92,761	)		(1,902	)	$	(27,944	)
Select Shares	+	(3,006	)		(50,423	)		(1,055	)		(15,623	)
Total shares redeemed		(8,540	)	$	(143,184	)		(2,957	)	$	(43,567	)
Net transactions in fund shares		23,883		$	404,881			12,025		$	180,297
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		15,923	$	250,598		3,898	$	55,119
Total increase	+	23,883		455,944		12,025		195,479
End of period		39,806	$	706,542		15,923	$	250,598
Net investment income not yet distributed			$	—			$	135

 

60    See financial notes.

Schwab Hedged Equity Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			3/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		14.45			13.51
Income from investment operations:
Net investment income		0.06			0.03
Net realized and unrealized gains		1.74			0.91
Total income from investment operations		1.80			0.94
Less distributions:
Dividends from net investment income		(0.04	)		—
Distributions from net realized gains		(0.26	)		—
Total distributions		(0.30	)		—
Net asset value at end of period		15.95			14.45
Total return (%)		12.71			6.96	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses (including dividend expense on short sales)		2.11			2.32	3
Net operating expenses (excluding dividend expense on short sales)		1.99	4		2.05	3,4
Gross operating expenses		2.12			2.35	3
Net investment income		0.58			0.56	3
Portfolio turnover rate		100			87	2
Net assets, end of period ($ x 1,000,000)		207			33
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			9/30/021— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		14.46			13.01			11.53			9.84			10.00
Income or loss from investment operations:
Net investment income or losses		0.07			0.04			(0.09	)		(0.09	)		(0.01	)
Net realized and unrealized gains or losses		1.76			2.05			1.57			1.78			(0.15	)
Total income or loss from investment operations		1.83			2.09			1.48			1.69			(0.16	)
Less distributions:
Dividends from net investment income		(0.05	)		—			—			—			—
Distributions from net realized gains		(0.26	)		(0.64	)		—			—			—
Total distributions		(0.31	)		(0.64	)		—			—			—
Net asset value at end of period		15.98			14.46			13.01			11.53			9.84
Total return (%)		12.82			16.52			12.84			17.17			(1.60	)2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses (including dividend expenses on short sales)		1.90			2.26			2.43			2.37			2.39	3
Net operating expenses (excluding dividend expense on short sales)		1.77	5		1.92	5		2.10	5		2.00			2.00	3
Gross operating expenses		1.97			2.39			2.71			2.77			3.33	3
Net investment income or loss		0.77			0.55			(0.86	)		(0.90	)		(0.79	)3
Portfolio turnover rate		100			87			99			114			68	2
Net assets, end of period ($ x 1,000,000)		931			229			68			44			32

 

¹   Commencement of operations.

²   Not annualized.

³   Annualized.

⁴   The ratio of net operating expenses would have been 2.00% and 1.98% for the periods ended 10/31/05 and 10/31/06, respectively, if interest expense had not been included.

⁵   The ratio of net operating expenses would have been 2.00%, 1.82% and 1.76% for the periods ended 10/31/04, 10/31/05 and 10/31/06, respectively, if interest expense had not been included.

See financial notes.    61

Schwab Hedged Equity Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)		Value ($ x 1,000)
99.2 %	Common Stock	996,939		1,128,584
2.8%	Short-Term Investment	32,139		32,139
102.0%	Total Investments	1,029,078		1,160,723
(41.0)%	Short Sales	(455,082	)	(466,145	)
39.0%	Other Assets and Liabilities, Net			443,305
100.0%	Total Net Assets			1,137,883

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   99.2% of net assets
Automobiles & Components 1.0%
TRW Automotive Holdings Corp. (a)*		460,100		11,802
Banks 1.8%
BancorpSouth, Inc. (a)		9,300		238
Comerica, Inc. (a)		45,800		2,665
KeyCorp (a)		381,500		14,169
Radian Group, Inc. (a)		64,300		3,427
				20,499
Capital Goods 11.4%
Acuity Brands, Inc. (a)		86,700		4,295
Cooper Industries Ltd., Class A (a)		7,000		626
EMCOR Group, Inc. (a)*		419,400		24,808
Emerson Electric Co. (a)		45,700		3,857
Genlyte Group, Inc. (a)*		17,000		1,313
ITT Corp. (a)		141,500		7,696
Lockheed Martin Corp. (a)		235,600		20,481
Raytheon Co. (a)		446,600		22,308
Teleflex, Inc. (a)		96,500		6,002
The Boeing Co. (a)		300,400		23,990
Thomas & Betts Corp. (a)*		281,300		14,495
				129,871
Commercial Services & Supplies 0.9%
Consolidated Graphics, Inc. (a)*		58,400		3,631
Waste Management, Inc. (a)		173,600		6,506
				10,137
Consumer Durables & Apparel 5.3%
Blyth, Inc.		141,800		3,392
Hasbro, Inc.		468,700		12,149
Kellwood Co. (a)		124,500		3,810
Mattel, Inc. (a)		209,600		4,743
Newell Rubbermaid, Inc. (a)		862,400		24,820
Polo Ralph Lauren Corp. (a)		128,000		9,088
Snap-On, Inc.		43,600		2,050
				60,052
Consumer Services 1.8%
International Game Technology (a)		222,600		9,463
Jack in the Box, Inc. (a)*	��	20,700		1,161
Papa John’s International, Inc. (a)*		280,000		10,276
				20,900
Diversified Financials 4.6%
American Express Co. (a)		58,600		3,388
Ameriprise Financial, Inc. (a)		10,000		515
Bank of America Corp. (a)		247,000		13,306
Franklin Resources, Inc. (a)		147,200		16,775
Investment Technology Group, Inc. (a)*		142,900		6,673
JPMorgan Chase & Co. (a)		39,700		1,883
Mellon Financial Corp. (a)		151,300		5,870
Northern Trust Corp. (a)		64,300		3,776
				52,186
Energy 5.7%
Exxon Mobil Corp. (a)		405,800		28,982
Grant Prideco, Inc. (a)*		82,300		3,109
Pride International, Inc. (a)*		156,400		4,318
SEACOR Holdings, Inc. (a)*		43,700		3,910
Veritas DGC, Inc. (a)*		344,800		24,829
				65,148
Food, Beverage & Tobacco 5.4%
Anheuser-Busch Cos., Inc. (a)		94,800		4,495
ConAgra Foods, Inc.		1,079,400		28,226
General Mills, Inc. (a)		250,900		14,256
H.J. Heinz Co. (a)		79,500		3,352
Reynolds American, Inc.		16,300		1,030
The Coca-Cola Co. (a)		124,100		5,798
The J.M. Smucker Co. (a)		76,200		3,734
				60,891

62    See financial notes.

Schwab Hedged Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Health Care Equipment & Services 10.0%
Aetna, Inc. (a)		51,500		2,123
AMERIGROUP Corp. (a)*		14,100		422
AmerisourceBergen Corp. (a)		465,100		21,953
Baxter International, Inc. (a)		98,600		4,533
Becton Dickinson & Co. (a)		294,700		20,638
CIGNA Corp. (a)		19,900		2,328
Humana, Inc. (a)*		146,200		8,772
IMS Health, Inc. (a)		46,900		1,306
Magellan Health Services, Inc. (a)*		413,300		18,036
McKesson Corp. (a)		474,200		23,753
Mentor Corp. (a)		65,500		3,065
Sierra Health Services, Inc. (a)*		75,100		2,571
WellPoint, Inc. (a)*		52,445		4,003
				113,503
Insurance 8.7%
American Financial Group, Inc. (a)		52,500		2,513
AON Corp. (a)		537,900		18,713
Genworth Financial, Inc., Class A (a)		27,600		923
Harleysville Group, Inc. (a)		15,200		548
HCC Insurance Holdings, Inc. (a)		62,800		2,114
Hilb, Rogal & Hobbs Co.		15,000		599
Loews Corp. (a)		630,000		24,520
MetLife, Inc. (a)		74,700		4,268
Nationwide Financial Services, Inc., Class A (a)		105,800		5,387
Philadelphia Consolidated Holding Corp. (a)*		5,100		199
Principal Financial Group, Inc. (a)		515,100		29,098
Protective Life Corp. (a)		22,300		987
SAFECO Corp. (a)		1,700		99
The Chubb Corp. (a)		14,200		755
W. R. Berkley Corp. (a)		221,512		8,165
				98,888
Materials 6.2%
Greif, Inc., Class A (a)		109,500		10,261
H.B. Fuller Co. (a)		198,300		4,916
International Paper Co. (a)		251,800		8,398
Nucor Corp. (a)		285,200		16,659
Pactiv Corp. (a)*		324,000		9,992
PPG Industries, Inc. (a)		53,100		3,632
Rohm & Haas Co. (a)		238,500		12,359
Sonoco Products Co.		39,300		1,394
The Lubrizol Corp.		61,700		2,776
				70,387
Media 3.6%
CBS Corp., Class B		152,600		4,416
The DIRECTV Group, Inc. (a)*		501,300		11,169
The McGraw-Hill Cos., Inc. (a)		348,400		22,357
The Walt Disney Co. (a)		29,300		922
Warner Music Group Corp. (a)		101,400		2,629
				41,493
Pharmaceuticals & Biotechnology 5.1%
Applied Biosystems Group —Applera Corp. (a)		767,500		28,628
Biogen Idec, Inc. (a)*		32,900		1,566
Forest Laboratories, Inc. (a)*		30,200		1,478
King Pharmaceuticals, Inc. (a)*		798,500		13,359
Merck & Co., Inc. (a)		163,400		7,422
Pfizer, Inc. (a)		145,900		3,888
Watson Pharmaceuticals, Inc. (a)*		50,700		1,364
				57,705
Retailing 7.4%
American Eagle Outfitters, Inc. (a)		360,100		16,492
AnnTaylor Stores Corp. *		190,500		8,386
Big Lots, Inc. *		100,900		2,127
Blockbuster, Inc., Class A *		190,300		746
J.C. Penney Co., Inc. (a)		72,400		5,447
Office Depot, Inc. (a)*		362,900		15,238
OfficeMax, Inc.		14,600		695
Payless Shoesource, Inc. (a)*		804,400		21,518
Sears Holdings Corp. (a)*		79,700		13,905
				84,554
Semiconductors & Semiconductor Equipment 0.2%
Agere Systems, Inc. (a)*		16,570		281
Integrated Device Technology, Inc. *		128,800		2,042
Texas Instruments, Inc. (a)		9,900		299
				2,622
Software & Services 5.6%
BEA Systems, Inc. (a)*		24,000		390
BMC Software, Inc. (a)*		298,100		9,035
Cadence Design Systems, Inc. (a)*		335,700		5,996
Ceridian Corp. (a)*		35,300		832
Electronic Data Systems Corp. (a)		85,700		2,171
Global Payments, Inc. (a)		383,800		16,776
Intuit, Inc. *		21,200		748
McAfee, Inc. (a)*		322,600		9,333
Sybase, Inc. (a)*		127,300		3,100
Synopsys, Inc. (a)*		668,800		15,055
				63,436
Technology Hardware & Equipment 6.8%
Agilent Technologies, Inc. (a)*		33,100		1,178
AVX Corp. (a)		97,800		1,541
Coherent, Inc. (a)*		43,600		1,405
Hewlett-Packard Co. (a)		333,100		12,904
Imation Corp. (a)		111,000		5,081
Lexmark International, Inc., Class A (a)*		422,900		26,892
Littelfuse, Inc. *		10,300		349
Motorola, Inc. (a)		320,200		7,384
UTStarcom, Inc. (a)*		1,878,800		20,235
				76,969

See financial notes.    63

Schwab Hedged Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Telecommunication Services 1.5%
ALLTEL Corp.		12,000		640
CenturyTel, Inc. (a)		35,800		1,441
Citizens Communications Co. (a)		841,300		12,333
Qwest Communications International, Inc. (a)*		298,900		2,579
				16,993
Transportation 2.4%
Continental Airlines, Inc., Class B (a)*		288,200		10,629
US Airways Group, Inc. (a)*		341,800		17,042
				27,671
Utilities 3.8%
Allegheny Energy, Inc. (a)*		54,600		2,350
Alliant Energy Corp. (a)		93,800		3,597
Dynegy, Inc., Class A (a)*		659,400		4,009
FirstEnergy Corp. (a)		203,900		12,000
TXU Corp. (a)		331,400		20,921
				42,877

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   2.8% of net assets
Repurchase Agreement 2.8%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $32,143 (fully collateralized by Federal National Mortgage Association with a value of $33,182.) 4.80%, 11/01/06		32,139	32,139

 

End of Investments.

At 10-31-06 the tax basis cost of the fund’s investments was $1,029,082 and the unrealized appreciation and depreciation were $136,548 and ($4,907), respectively, with a net unrealized appreciation of $131,641.

* Non-income producing security.

(a) All or a portion of this security is held as collateral for short sales.

64    See financial notes.

Schwab Hedged Equity Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Short Sales   41.0% of net assets
Automobiles & Components 0.1%
American Axle & Manufacturing Holdings, Inc.		48,300		906
Capital Goods 2.9%
Briggs & Stratton Corp.		87,000		2,218
DRS Technologies, Inc.		16,300		721
Energy Conversion Devices, Inc. *		372,600		13,708
Hexcel Corp. *		922,700		14,938
Watsco, Inc.		19,100		951
				32,536
Commercial Services & Supplies 0.5%
Acco Brands Corp. *		241,400		5,866
Consumer Durables & Apparel 4.1%
Hovnanian Enterprises, Inc., Class A *		421,200		12,994
M.D.C. Holdings, Inc.		41,500		2,069
Meritage Homes Corp. *		60,200		2,756
Polaris Industries, Inc.		113,200		4,847
Pulte Homes, Inc.		114,200		3,539
Quiksilver, Inc. *		944,600		13,177
Standard Pacific Corp.		272,300		6,598
				45,980
Consumer Services 3.0%
OSI Restaurant Partners, Inc.		299,400		9,961
Red Robin Gourmet Burgers, Inc. *		4,700		227
Scientific Games Corp., Class A *		100,100		2,806
Station Casinos, Inc.		104,600		6,307
Texas Roadhouse, Inc., Class A *		238,900		3,452
Wynn Resorts Ltd. *		147,000		10,810
				33,563
Energy 2.9%
Alpha Natural Resources, Inc. *		494,600		7,869
ATP Oil & Gas Corp. *		77,900		3,349
CARBO Ceramics, Inc.		21,300		718
Crosstex Energy, Inc.		57,400		5,509
Delta Petroleum Corp. *		343,100		8,818
Evergreen Energy, Inc. *		61,500		790
Petrohawk Energy Corp. *		127,900		1,449
Quicksilver Resources, Inc. *		48,300		1,656
Rowan Cos., Inc.		18,200		607
Syntroleum Corp. *		91,400		360
TETRA Technologies, Inc. *		83,500		2,163
				33,288
Food & Staples Retailing 0.3%
United Natural Foods, Inc. *		108,622		3,791
Food, Beverage & Tobacco 1.8%
Hansen Natural Corp. *		309,000		9,811
Sanderson Farms, Inc.		15,900		422
Wm. Wrigley Jr. Co.		196,600		10,213
				20,446
Health Care Equipment & Services 3.7%
Brookdale Senior Living, Inc.		65,700		3,162
Conor Medsystems, Inc. *		612,700		15,048
Omnicare, Inc.		257,100		9,739
St. Jude Medical, Inc. *		28,600		982
The Cooper Cos., Inc.		230,600		13,289
				42,220
Household & Personal Products 0.2%
Central Garden & Pet Co. *		51,900		2,593
Insurance 0.3%
American Equity Investment Life Holding Co.		135,700		1,732
National Financial Partners Corp.		47,700		1,879
				3,611
Materials 1.9%
Century Aluminum Co. *		161,900		6,301
Coeur d’Alene Mines Corp. *		1,757,800		8,613
RTI International Metals, Inc. *		112,700		6,911
				21,825
Media 0.8%
Viacom, Inc., Class B *		244,600		9,520
Pharmaceuticals & Biotechnology 2.8%
Adams Respiratory Therapeutics, Inc. *		127,800		5,508
Affymetrix, Inc. *		615,900		15,706
Alexion Pharmaceuticals, Inc. *		53,000		1,980
Amylin Pharmaceuticals, Inc. *		79,100		3,477
MannKind Corp. *		3,900		79
Par Pharmaceutical Cos., Inc. *		270,700		5,276
				32,026

See financial notes.    65

Schwab Hedged Equity Fund

Portfolio Holdings continued

Security		Number of Shares		Value ($ x 1,000)
Real Estate 0.8%
The St. Joe Co.			66,200		3,560
Trammell Crow Co. *			110,500		5,387
					8,947
Retailing 5.7%
Borders Group, Inc.			171,600		3,533
Chico’s FAS, Inc. *			20,000		479
GameStop Corp., Class A *			270,400		13,807
GSI Commerce, Inc. *			421,800		7,605
Guitar Center, Inc. *			64,400		2,793
O’Reilly Automotive, Inc. *			57,900		1,869
Pacific Sunwear of California, Inc. *			862,600		15,199
Pier 1 Imports, Inc.			197,700		1,293
Tuesday Morning Corp.			7,800		129
Urban Outfitters, Inc. *			825,100		14,439
Zumiez, Inc. *			97,500		3,204
					64,350
Semiconductors & Semiconductor Equipment 0.1%
Tessera Technologies, Inc. *			38,400		1,341
Software & Services 3.4%
eFunds Corp. *			33,700		836
Equinix, Inc. *			290,600		19,877
Heartland Payment Systems, Inc.			12,700		339
Kanbay International, Inc. *			55,300		1,571
Opsware, Inc. *			1,003,600		9,123
Take-Two Interactive Software, Inc. *			331,100		4,632
Wright Express Corp. *			90,700		2,482
					38,860
Technology Hardware & Equipment 0.9%
Daktronics, Inc.			64,100		1,520
Multi-Fineline Electronix, Inc. *			57,900		1,398
Plantronics, Inc.			97,300		2,054
Powerwave Technologies, Inc. *	��		865,400		5,634
					10,606
Telecommunication Services 1.3%
NII Holdings, Inc. *			232,900		15,146
Transportation 1.2%
AirTran Holdings, Inc. *			316,000		3,150
Genesee & Wyoming, Inc. *			9,900		278
Werner Enterprises, Inc.			519,500		9,533
					12,961
Utilities 2.3%
Consolidated Edison, Inc.			237,200		11,469
Equitable Resources, Inc.			325,700		13,197
Piedmont Natural Gas Co., Inc.			34,200		924
South Jersey Industries, Inc.			5,600		173
					25,763

 

End of Short Sale Positions.

* Non-income producing security.

66    See financial notes.

Schwab Hedged Equity Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value (cost $1,029,078)	$	1,160,723
Deposits with broker for short sales		428,404
Receivables:
Investments sold		49,278
Fund shares sold		7,891
Dividends		818
Interest		59
Prepaid expenses	+	4
Total assets		1,647,177
Liabilities
Securities sold short, at value (proceeds $455,082)		466,145
Payables:
Investments bought		42,424
Investment adviser and administrator fees		142
Transfer agent and shareholder services fees		9
Fund shares redeemed		431
Dividends on short sales		84
Trustee fees		1
Accrued expenses	+	58
Total liabilities		509,294
Net Assets
Total assets		1,647,177
Total liabilities		–509,294
Net assets	$	1,137,883
Net Assets by Source
Capital received from investors		1,035,573
Net investment income not yet distributed		4,267
Net realized capital losses		(22,539	)
Net unrealized capital gains		120,582
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	207,174			12,985		$	15.95
Select Shares	$	930,709			58,228		$	15.98

 

See financial notes.    67

Schwab Hedged Equity Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	7,889
Interest	+	10,315
Total investment income		18,204
Net Realized Gains and Losses
Net realized losses on investments		(22,810	)
Net realized gains on futures contracts	+	336
Net realized losses		(22,474	)
Net Unrealized Gains and Losses
Net unrealized gains on investments		116,907
Net unrealized losses on short sales	+	(14,684	)
Net unrealized gains		102,223
Expenses
Investment adviser and administrator fees		11,335
Transfer agent and shareholder service fees:
Investor Shares		269
Select Shares		585
Registration fees		247
Custodian fees		89
Interest expense		60
Portfolio accounting fees		47
Professional fees		45
Overdraft expense		35
Shareholder reports		29
Trustees’ fees		10
Dividends on short sales	+	832
Other expenses	+	10
Total expenses		13,593
Expense reduction by adviser and Schwab		–355
Custody credit		–69
Net expenses		13,169
Increase in Net Assets from Operations
Total investment income		18,204
Net expenses		–13,169
Net investment income		5,035
Net realized losses		(22,474	)
Net unrealized gains	+	102,223
Increase in net assets from operations	$	84,784

 

68    See financial notes.

Schwab Hedged Equity Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment income	$	5,035		$	743
Net realized gains or losses		(22,474	)		7,920
Net unrealized gains	+	102,223			9,230
Increase in net assets from operations		84,784			17,893
Distributions Paid
Dividends from net investment income
Investor Shares		185			—
Select Shares	+	1,326			—
Total dividends from net investment income		1,511			—
Distributions from net realized gains
Investor Shares		1,058			—
Select Shares	+	6,701			3,789
Total distributions from net realized gains		7,759			3,789
Total distributions	$	9,270		$	3,789
Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		14,290		$	215,250			2,530		$	35,429
Select Shares	+	54,075			813,417			11,743			163,791
Total shares sold		68,365		$	1,028,667			14,273		$	199,220
Shares Reinvested
Investor Shares		75		$	1,100			—		$	—
Select Shares	+	475			6,957			255			3,389
Total shares reinvested		550		$	8,057			255		$	3,389
Shares Redeemed
Investor Shares		(3,696	)	$	(55,379	)		(214	)	$	(3,027	)
Select Shares	+	(12,150	)		(181,325	)		(1,421	)		(19,628	)
Total shares redeemed		(15,846	)	$	(236,704	)		(1,635	)	$	(22,655	)
Net transactions in fund shares		53,069		$	800,020			12,893		$	179,954
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		18,144	$	262,349		5,251	$	68,291
Total increase	+	53,069		875,534		12,893		194,058
End of period		71,213	$	1,137,883		18,144	$	262,349
Net investment income not yet distributed			$	4,267			$	743

 

See financial notes.    69

Schwab Financial Services Fund™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		14.42			13.12			11.77			9.44			9.75
Income or loss from investment operations:
Net investment income		0.10			0.12			0.08			0.11			0.12
Net realized and unrealized gains or losses		1.98			2.21			1.37			2.37			(0.28	)
Total income or loss from investment operations		2.08			2.33			1.45			2.48			(0.16	)
Less distributions:
Dividends from net investment income		(0.11	)		(0.09	)		(0.10	)		(0.15	)		(0.09	)
Distributions from net reallized gains		(0.64	)		(0.94	)		—			—			(0.06	)
Total distributions		(0.75	)		(1.03	)		(0.10	)		(0.15	)		(0.15	)
Net asset value at end of period		15.75			14.42			13.12			11.77			9.44
Total return (%)		14.85			18.62			12.39			26.68			(1.78	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.98			1.07			1.05			1.04	1		0.89
Gross operating expenses		0.98			1.15			1.25			1.49			1.32
Net investment income		0.87			1.01			0.62			1.05			1.20
Portfolio turnover rate		57			74			85			181			131
Net assets, end of period ($ x 1,000,000)		95			29			20			18			17

¹ The ratio of net operating expenses would have been 1.03% if interest expense had not been included.

70    See financial notes.

Schwab Financial Services Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.4%	Common Stock	84,964	94,722
0.9%	Short-Term Investment	835	835
0.1%	U.S. Government Security	90	90
100.4%	Total Investments	85,889	95,647
1.4%	Collateral Invested for Securities on Loan	1,323	1,323
(1.8)%	Other Assets and Liabilities, Net		(1,713	)
100.0%	Total Net Assets		95,257

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   99.4% of net assets
Banks 24.2%
1st Source Corp.		11,000		347
BancFirst Corp.		4,000		199
BancorpSouth, Inc.		9,400		240
Bank of Hawaii Corp.		52,300		2,729
Comerica, Inc.		77,100		4,487
Commerce Bancshares, Inc.		46,360		2,295
KeyCorp		93,900		3,487
PNC Financial Services Group, Inc.		48,700		3,411
Radian Group, Inc.		72,200		3,848
Regions Financial Corp. (a)		22,500		854
Whitney Holding Corp.		34,700		1,133
				23,030
Diversified Financials 44.9%
A.G. Edwards, Inc.		32,100		1,831
American Express Co.		81,500		4,711
AmeriCredit Corp. *		84,700		2,166
Ameriprise Financial, Inc.		55,400		2,853
Bank of America Corp.		86,200		4,644
CIT Group, Inc.		23,800		1,239
Franklin Resources, Inc.		42,900		4,889
Investment Technology Group, Inc. *		48,500		2,265
JPMorgan Chase & Co.		97,600		4,630
Mellon Financial Corp.		117,500		4,559
Merrill Lynch & Co., Inc.		21,500		1,879
Morgan Stanley		2,500		191
Northern Trust Corp.		72,900		4,281
State Street Corp.		40,900		2,627
				42,765
Insurance 28.5%
AFLAC, Inc.		13,600		611
American Financial Group, Inc.		14,500		694
American Physicians Capital, Inc. *		5,500		301
AON Corp. (a)		14,400		501
Assurant, Inc.		17,100		900
Genworth Financial, Inc., Class A		117,700		3,936
HCC Insurance Holdings, Inc.		9,100		306
Lincoln National Corp.		10,200		646
Loews Corp.		97,100		3,779
MetLife, Inc.		74,900		4,279
Nationwide Financial Services, Inc., Class A		41,000		2,088
Principal Financial Group, Inc.		67,000		3,785
Prudential Financial, Inc.		6,100		469
SAFECO Corp.		10,600		617
StanCorp Financial Group, Inc.		3,800		174
The Allstate Corp.		2,100		129
The Chubb Corp.		47,400		2,519
The Hartford Financial Services Group, Inc.		8,700		758
W. R. Berkley Corp.		19,125		705
				27,197
Real Estate 1.8%
CB Richard Ellis Group, Inc., Class A *		57,600		1,730

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   0.9% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		835		835
U.S. Government Security   0.1% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		90		90

 

End of Investments.

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   1.4% of net assets
Securities Lending Investments Fund, a series of the Brown Brothers Investment Trust		1,323,369		1,323

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $85,934 and the unrealized appreciation and depreciation were $10,683 and ($970), respectively, with a net unrealized appreciation of $9,713.

* Non-income producing security.

(a) All or a portion of this security is on loan.

See financial notes.    71

Schwab Financial Services Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $1,287 (cost $85,889)	$	95,647
Collateral invested for securities on loan		1,323
Receivables:
Investments sold		1,827
Fund shares sold		678
Dividends		48
Prepaid expenses	+	1
Total assets		99,524
Liabilities
Collateral for securities on loan		1,323
Payables:
Investments bought		2,886
Investment adviser and administrator fees		5
Transfer agent and shareholder services fees		2
Fund shares redeemed		22
Trustee fees		1
Accrued expenses	+	28
Total liabilities		4,267
Net Assets
Total assets		99,524
Total liabilities		–4,267
Net assets	$	95,257
Net Assets by Source
Capital received from investors		83,851
Net investment income not yet distributed		465
Net realized capital gains		1,183
Net unrealized capital gains		9,758
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$95,257			6,047		$	15.75

 

72    See financial notes.

Schwab Financial Services Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	1,131
Interest	+	56
Total Investment Income		1,187
Net Realized Gains and Losses
Net realized gains on investments		1,065
Net realized gains on futures contracts	+	123
Net realized gains		1,188
Net Unrealized Gains and Losses
Net unrealized gains on investments		5,742
Expenses
Investment adviser and administrator fees		346
Transfer agent and shareholder service fees		160
Registration fees		44
Portfolio accounting fees		29
Professional fees		27
Trustees’ fees		7
Custodian fees		6
Shareholder reports		4
Other expenses	+	7
Total expenses		630
Increase in Net Assets from Operations
Total investment income		1,187
Net expenses		–630
Net investment income		557
Net realized gains		1,188
Net unrealized gains	+	5,742
Increase in net assets from operations	$	7,487

 

See financial notes.    73

Schwab Financial Services Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06		11/1/04—10/31/05
Net investment income	$	557	$	224
Net realized gains		1,188		1,583
Net unrealized gains	+	5,742		1,980
Increase in net assets from operations		7,487		3,787
Distributions Paid
Dividends from net investment income		264		139
Distribution from net realized gains	+	1,580		1,403
Total dividends and distributions paid	$	1,844	$	1,542
Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		5,038		$	75,696			885		$	11,993
Shares Reinvested		114			1,645			103			1,356
Shares Redeemed	+	(1,089	)		(16,334	)		(495	)		(6,547	)
Net transactions in fund shares	$	4,063		$	61,007			493		$	6,802
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		1,984	$	28,607		1,491	$	19,560
Total increase	+	4,063		66,650		493		9,047
End of period		6,047	$	95,257		1,984	$	28,607
Net investment income not yet distributed			$	465			$	172

 

74    See financial notes.

Schwab Health Care Fund™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		14.03			10.78			8.43			7.12			9.00
Income or loss from investment operations:
Net investment income or loss		(0.01	)		(0.02	)		(0.06	)		0.01			0.03
Net realized and unrealized gains or losses		1.03			3.27			2.41			1.33			(1.90	)
Total income or loss from investment operations		1.02			3.25			2.35			1.34			(1.87	)
Less distributions:
Dividends from net investment income		—			—			—			(0.03	)		(0.01	)
Net asset value at end of period		15.05			14.03			10.78			8.43			7.12
Total return (%)		7.27			30.15			27.88			18.96			(20.84	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.84			0.89			1.04			1.04			0.89
Gross operating expenses		0.84			0.89			1.07			1.34			1.18
Net investment income or loss		(0.07	)		(0.28	)		(0.73	)		0.13			0.25
Portfolio turnover rate		76			42			105			200			99
Net assets, end of period ($ x 1,000,000)		611			397			54			25			21

 

See financial notes.    75

Schwab Health Care Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
98.2%	Common Stock	541,165	600,068
—%	Rights	—	—
1.5%	Short-Term Investment	9,533	9,533
0.1%	U.S. Treasury Obligation	308	308
99.8%	Total Investments	551,006	609,909
2.7%	Collateral Invested for Securities on Loan	16,729	16,729
(2.5)%	Other Assets and Liabilities, Net		(15,387	)
100.0%	Total Net Assets		611,251

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   98.2% of net assets
Health Care Equipment & Services 42.6%
Aetna, Inc.		400,000		16,488
Alliance Imaging, Inc. *		5,800		49
AmerisourceBergen Corp. (b)		553,800		26,139
Baxter International, Inc.		446,300		20,516
Becton Dickinson & Co. (b)		416,600		29,175
Caremark Rx, Inc.		100,000		4,923
Cerner Corp. (a)*		208,000		10,048
CIGNA Corp. (b)		180,000		21,056
CorVel Corp. *		8,800		381
Dade Behring Holdings, Inc.		240,000		8,743
Dentsply International, Inc.		302,400		9,459
Edwards Lifesciences Corp. *		50,000		2,147
Express Scripts, Inc. *		157,000		10,004
Humana, Inc. (a)*		124,300		7,458
IMS Health, Inc.		531,000		14,788
Laboratory Corp. of America Holdings *		43,200		2,959
Magellan Health Services, Inc. *		161,800		7,061
McKesson Corp.		498,200		24,955
MedCath Corp. *		42,300		1,121
Mentor Corp. (a)		100,000		4,680
PDI, Inc. *		15,000		155
Sierra Health Services, Inc. *		630,500		21,588
WellPoint, Inc. *		200,100		15,272
Zoll Medical Corp. *		35,000		1,355
				260,520
Pharmaceuticals & Biotechnology 55.6%
Accelrys, Inc. *		140,000		882
Allergan, Inc.		89,000		10,279
Alpharma, Inc., Class A		719,300		15,875
Amgen, Inc. *		125,000		9,489
Applied Biosystems Group — Applera Corp.		953,800		35,577
Barr Pharmaceuticals, Inc. *		269,600		14,119
Biogen Idec, Inc. (b)*		450,800		21,458
Bristol-Myers Squibb Co.		225,000		5,569
Bruker BioSciences Corp. *		150,000		1,194
Enzon Pharmaceuticals, Inc. (a)*		80,000		685
Forest Laboratories, Inc. *		303,900		14,873
Gilead Sciences, Inc. *		220,000		15,158
Johnson & Johnson (b)		442,200		29,804
King Pharmaceuticals, Inc. *		1,400,000		23,422
Maxygen, Inc. *		2,500		21
Merck & Co., Inc. (b)		741,100		33,661
Millennium Pharmaceuticals, Inc. *		525,000		6,143
PerkinElmer, Inc.		575,000		12,282
Pfizer, Inc.		1,120,000		29,848
Regeneron Pharmaceuticals, Inc. *		20,000		401
Schering-Plough Corp.		1,100,000		24,354
Waters Corp. *		78,000		3,884
Watson Pharmaceuticals, Inc. *		690,000		18,568
Wyeth		235,200		12,002
				339,548
Rights   0.0% of net assets
Pharmaceuticals & Biotechnology 0.0%
OSI Pharmaceuticals, Inc. *		458		—

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   1.5% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		9,533		9,533
U.S. Treasury Obligation   0.1% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		308		308

 

End of Investments.

76    See financial notes.

Schwab Health Care Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   2.7% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		16,729,401		16,729

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $551,398, and the unrealized appreciation and depreciation were $67,712 and ($9,201), respectively, with a net unrealized appreciation of $58,511.

In addition to the above, the fund held the following at 10-31-06. All numbers are x 1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contract
S&P 500 Index, e-mini, Long, expires 12/15/06		90		6,224		321

 

* Non-income producing security.

(a) All or a portion of this security is on loan.

(b) All or a portion of this security is held as collateral for open futures contracts.

See financial notes.    77

Schwab Health Care Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $16,264 (cost $551,006)	$	609,909
Collateral invested for securities on loan		16,729
Receivables:
Fund shares sold		1,909
Dividends		119
Interest		1
Income from securities on loan		1
Prepaid expenses	+	4
Total assets		628,672
Liabilities
Collateral for securities on loan		16,729
Payables:
Investment adviser and administrator fees		27
Transfer agent and shareholder services fees		13
Fund shares redeemed		581
Trustee fees		1
Accrued expenses	+	70
Total liabilities		17,421
Net Assets
Total assets		628,672
Total liabilities		–17,421
Net assets	$	611,251
Net Assets by Source
Capital received from investors		547,464
Net realized capital gains		4,563
Net unrealized capital gains		59,224
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$611,251			40,625		$	15.05

 

78    See financial notes.

Schwab Health Care Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	3,933
Interest		348
Securities on loan	+	35
Total Investment Income		4,316
Net Realized Gains and Losses
Net realized gains on investments		8,791
Net realized gains on futures contracts	+	166
Net realized gains		8,957
Net Unrealized Gains and Losses
Net unrealized gains on investments		18,727
Net unrealized gains on futures contracts	+	321
Net unrealized gains		19,048
Expenses
Investment adviser and administrator fees		3,020
Transfer agent and shareholder service fees		1,406
Registration fees		122
Portfolio accounting fees		45
Shareholder reports		42
Custodian fees		32
Professional fees		27
Trustees’ fees		10
Overdraft expense		5
Other expenses	+	11
Total expenses		4,720
Increase in Net Assets from Operations
Total investment income		4,316
Net expenses		–4,720
Net investment loss		(404	)
Net realized gains		8,957
Net unrealized gains	+	19,048
Increase in net assets from operations	$	27,601

 

See financial notes.    79

Schwab Health Care Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment loss	$	(404	)	$	(536	)
Net realized gains		8,957			317
Net unrealized gains	+	19,048			33,870
Increase in net assets from operations	$	27,601		$	33,651
Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		26,841		$	397,961			25,580		$	339,672
Shares Redeemed	+	(14,502	)		(211,167	)		(2,299	)		(30,399	)
Net transactions in fund shares		12,339		$	186,794			23,281		$	309,273
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		28,286	$	396,856		5,005	$	53,932
Total increase	+	12,339		214,395		23,281		342,924
End of period		40,625	$	611,251		28,286	$	396,856

 

80    See financial notes.

Schwab Technology Fund™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		4.88			4.42			4.32			2.90			3.86
Income or loss from investment operations:
Net investment loss		(0.03	)		(0.01	)		(0.04	)		(0.02	)		(0.02	)
Net realized and unrealized gains or losses		0.44			0.47			0.14			1.44			(0.94	)
Total income or loss from investment operations		0.41			0.46			0.10			1.42			(0.96	)
Net asset value at end of period		5.29			4.88			4.42			4.32			2.90
Total return (%)		8.40			10.41			2.31			48.97			(24.87	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.95			0.97			1.02	1		1.04			0.89
Gross operating expenses		0.95			0.97			1.02			1.25			1.15
Net investment income		(0.48	)		(0.23	)		(0.78	)		(0.65	)		(0.57	)
Portfolio turnover rate		86			89			109			165			117
Net assets, end of period ($ x 1,000,000)		71			53			49			43			26

 

¹   The ratio of net operating expenses would have been 1.01% if interest expense had not been included.

See financial notes.    81

Schwab Technology Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
98.2%	Common Stock	61,318	69,819
1.0 %	Short-Term Investment	693	693
0.1%	U.S. Treasury Obligation	40	40
99.3%	Total Investments	62,051	70,552
6.0 %	Collateral Invested for Securities on Loan	4,233	4,233
(5.3)%	Other Assets and Liabilities, Net		(3,735	)
100.0%	Total Net Assets		71,050

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   98.2% of net assets
Semiconductors & Semiconductor Equipment 13.5%
Applied Materials, Inc.		98,800		1,718
Atmel Corp. *		80,100		461
Fairchild Semiconductor International, Inc. *		39,100		630
Integrated Device Technology, Inc. *		29,400		466
Micron Technology, Inc. *		119,500		1,727
Novellus Systems, Inc. *		56,500		1,562
Texas Instruments, Inc.		100,000		3,018
				9,582
Software & Services 41.2%
Amdocs Ltd. *		32,300		1,252
Autodesk, Inc. *		31,600		1,161
BEA Systems, Inc. *		53,300		867
BMC Software, Inc. (a)*		114,500		3,470
Cadence Design Systems, Inc. *		110,400		1,972
Convergys Corp. *		14,000		297
Covansys Corp. *		21,900		512
CSG Systems International, Inc. *		72,100		1,945
Electronic Data Systems Corp.		121,900		3,088
FactSet Research Systems, Inc.		15,000		763
Forrester Research, Inc. *		29,300		921
Global Payments, Inc.		60,700		2,653
Hyperion Solutions Corp. *		27,900		1,043
Intuit, Inc. *		10,000		353
Lightbridge, Inc. *		80,300		928
MoneyGram International, Inc.		21,300		729
Oracle Corp. *		115,300		2,130
Red Hat, Inc. *		9,500		156
SonicWALL, Inc. *		61,200		643
Sybase, Inc. *		59,700		1,454
Sykes Enterprises, Inc. *		23,900		485
Synopsys, Inc. *		71,600		1,612
TIBCO Software, Inc. *		17,900		165
Total System Services, Inc.		30,300		730
				29,329
Technology Hardware & Equipment 43.5%
Agilent Technologies, Inc. *		28,400		1,011
Avaya, Inc. *		68,700		880
AVX Corp.		130,300		2,054
Cisco Systems, Inc. *		94,000		2,268
Coherent, Inc. *		31,500		1,015
Ditech Networks, Inc. *		5,500		44
Emulex Corp. *		5,700		107
Harris Corp.		18,600		792
Hewlett-Packard Co.		137,900		5,342
Imation Corp.		49,500		2,266
International Business Machines Corp.		42,000		3,878
Lexmark International, Inc., Class A *		39,100		2,486
Littelfuse, Inc. *		17,900		606
Motorola, Inc.		120,000		2,767
Packeteer, Inc. *		5,000		56
Planar Systems, Inc. *		40,000		482
Rofin-Sinar Technologies, Inc. *		14,600		899
Staktek Holdings, Inc. *		32,100		196
UTStarcom, Inc. (a)*		82,400		888
Xerox Corp. *		168,900		2,871
				30,908

 

82    See financial notes.

Schwab Technology Fund

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   1.0% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		693		693
U.S. Treasury Obligation   0.1% of net assets
U.S. Treasury Bill 4.82%, 12/14/06		40		40

 

End of Investments.

Security	Number of Shares		Value ($ x 1,000)
Collateral Invested for Securities on Loan   6.0% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		4,233,105		4,233

 

End of collateral invested for securities on loan.

At 10-31-06 the tax basis cost of the fund’s investments was $62,051, and the unrealized appreciation and depreciation were $9,779 and ($1,278), respectively, with a net unrealized appreciation of $8,501.

* Non-income producing security.

(a) All or a portion of this security is on loan.

See financial notes.    83

Schwab Technology Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value including securities on loan of $4,140 (cost $62,051)	$	70,552
Collateral invested for securities on loan		4,233
Receivables:
Investments sold		3,130
Fund shares sold		129
Dividends		5
Income from securities on loan	+	1
Total assets		78,050
Liabilities
Collateral for securities on loan		4,233
Payables:
Investments bought		2,614
Investment adviser and administrator fees		3
Transfer agent and shareholder services fees		1
Fund shares redeemed		119
Trustee fees		1
Accrued expenses	+	29
Total liabilities		7,000
Net Assets
Total assets		78,050
Total liabilities		–7,000
Net assets	$	71,050
Net Assets by Source
Capital received from investors		98,923
Net realized capital losses		(36,374	)
Net unrealized capital gains		8,501
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$71,050			13,429		$	5.29

 

84    See financial notes.

Schwab Technology Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	��	$	301
Interest			27
Securities on loan		+	3
Total Investment Income			331
Net Realized Gains and Losses
Net realized gains on investments			2,501
Net realized gains on futures contracts		+	2
Net realized gains			2,503
Net Unrealized Gains and Losses
Net unrealized gains on investments			1,658
Expenses
Investment adviser and administrator fees			382
Transfer agent and shareholder service fees			177
Portfolio accounting fees			31
Registration fees			30
Professional fees			25
Custodian fees			8
Trustees’ fees			7
Shareholder reports			4
Other expenses		+	6
Total expenses			670
Increase in Net Assets from Operations
Total investment income			331
Net expenses			–670
Net investment loss			(339	)
Net realized gains			2,503
Net unrealized gains		+	1,658
Increase in net assets from operations		$	3,822

 

See financial notes.    85

Schwab Technology Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment loss	$	(339	)	$	(111	)
Net realized gains		2,503			2,354
Net unrealized gains	+	1,658			2,534
Increase in net assets from operations	$	3,822		$	4,777
Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		7,995		$	41,697			3,726		$	17,658
Shares Redeemed	+	(5,489	)		(27,733	)		(3,904	)		(18,286	)
Net transactions in fund shares		2,506		$	13,964			(178	)	$	(628	)
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES			NET ASSETS
Beginning of period		10,923	$	53,264		11,101		$	49,115
Total increase or decrease	+	2,506		17,786		(178	)		4,149
End of period		13,429	$	71,050		10,923		$	53,264

 

86    See financial notes.

Schwab Active Equity Funds

Financial Notes

1.   Business Structure of the Funds

Each of the funds discussed in this report is a series of Schwab Capital Trust (trust), a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the funds discussed in this report, which are highlighted:

Schwab Capital Trust (organized May 7, 1993)
Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab S&P 500 Index Fund
Schwab Institutional Select® S&P 500 Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund® Schwab MartketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Laudus U.S. MarketMasters Fund™
Laudus Small-Cap MarketMasters Fund™
Laudus International MarketMasters Fund™
Schwab Viewpoints Fund™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

 

Schwab Premier Equity Fund, Schwab Dividend Equity Fund, Schwab Large-Cap Growth Fund, Schwab Small-Cap Equity Fund and Schwab Hedged Equity Fund offer two share classes: Investor Shares and Select Shares®. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums. Schwab Core Equity Fund, Schwab Financial Services Fund, Schwab Health Care Fund and Schwab Technology Fund each offer one share class.

Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

The Schwab Premier Equity Fund and the Schwab Large-Cap Growth Fund commenced operations on March 21, 2005 and October 3, 2005, respectively. The Schwab Hedged Equity Fund started offering Investor Shares on March 1, 2005 and the fund shares in existence prior to March 1, 2005 were designated as Select Shares.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies used in the preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America.

(a)   Security Valuation:

The funds value the securities in their portfolios every business day. The funds use the following policies to value various types of securities:

•   Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate.

•   Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the fund’s investment adviser using guidelines adopted by the fund’s Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security’s primary pricing source is not able or willing to provide a price.

    87

Schwab Active Equity Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

•   Futures and forwards: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day’s exchange rates (for forwards). When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly.

•   Short-term securities (60 days or less to maturity): valued at amortized cost.

•   Mutual funds: valued at their respective net asset values as determined by those funds in accordance with the 1940 Act for a given day.

(b)   Portfolio Investments:

Futures Contracts: The funds may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements.

One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts exceeds amounts recorded in the Statement of Assets and Liabilities.

Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “initial margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount.

Futures are traded publicly on exchanges, and their market value changes daily. A fund records the change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

Short Sale: Schwab Hedged Equity Fund may sell securities short (sell securities it does not own). When it does so, the fund also places assets worth at least 100% of the value of the short securities into a segregated account, as collateral. If the market value of the short securities subsequently falls, the fund can realize a gain by closing the position. However, if the value rises, the fund typically would have to add to its collateral or close out its short position at a loss. The potential for losses associated with short positions is much greater than the original value of the securities sold short and exceeds amounts recorded in the Statements of Assets and Liabilities.

Securities Lending: The funds may loan securities to certain brokers, dealers and other financial institutions that pay the funds negotiated fees. The funds receive cash, letters of credit or U.S. Government securities as collateral on these loans. All of the cash collateral received is reinvested in high quality, short-term investments. The value of the collateral must be at least 102% of the market value of the loaned securities as of the first day of the loan, and at least 100% each day thereafter. If the value of the collateral falls below 100%, it will be adjusted the following day.

Repurchase Agreement: The funds may enter into a repurchase agreement. In a repurchase agreement, a fund buys a security from another party (usually a financial institution) with the agreement that it be sold back in the future. The date, price and other conditions are all specified when the agreement is created.

The funds’ repurchase agreements will be fully collateralized by U.S. government securities. All collateral is held by the funds’ custodian (or, with tri-party agreements, the agent’s bank) and is monitored daily to ensure that its market value is at least equal to the repurchase price under the agreement.

(c)   Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.

If a fund sells securities short, it records the proceeds received as an asset and the obligation to buy back the securities as a liability. At the time a short sale is initiated, the asset and liability are of equal value and effectively cancel each other out. Subsequently, the fund values the liability side of the transaction according to the market price of the securities sold short,

88    

Schwab Active Equity Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

and values the asset side according to the value of the proceeds. When the fund closes out a short position (buys the security), it records the outcome as a realized gain or loss. Interest accrued on securities sold short is recorded as an expense on the fund’s records.

Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date.

(d)   Investment Income:

Interest income is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(e)   Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.

For funds offering multiple share classes, the net investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to its net assets.

(f)   Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year.

Each fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law.

(g)   Custody Credit:

Each fund has an arrangement with its custodian bank under which the fund receives a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts (if any) are disclosed in the statement of operations as a reduction to the fund’s operating expenses.

(h)   Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(i)   Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

(j)   Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

    89

Schwab Active Equity Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

(k)   New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Fund’s financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:
(All dollar amounts are × 1,000)

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

For its advisory and administrative services to each fund, the investment adviser is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

Average daily net assets	Premier Equity Fund			Core Equity Fund			Dividend Equity Fund			Large-Cap Growth Fund			Small-Cap Equity Fund			Hedged Equity Fund
First $500 million		0.91	%		0.54	%		0.775	%		0.87	%		0.975	%		1.675	%
Over $500 million		0.885	%		0.49	%		0.77	%		0.85	%		0.93	%		1.65	%
Over $1 billion		0.86	%		n/a			0.76	%		0.83	%		0.91	%		1.63	%
Over $2 billion		n/a			n/a			n/a			0.81	%		n/a			n/a
Average daily net assets	Financial Services Fund			Health Care Fund			Technology Fund
First $500 million		0.54	%		0.54	%		0.54	%
Over $500 million		0.515	%		0.515	%		0.515	%
Over $1 billion		0.49	%		0.49	%		0.49	%
Over $2 billion		n/a			n/a			n/a

 

90    

Schwab Active Equity Funds

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

For its transfer agent and shareholder services, Schwab is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

	Transfer Agent Fees			Shareholder Service Fees
Investor Shares		0.05	%		0.20	%
Select Shares*		0.05	%		0.05	%

 

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses through February 27, 2007, as follows:

	Premier Equity Fund			Core Equity Fund			Dividend Equity Fund			Large-Cap Growth Fund			Small-Cap Equity Fund			Hedged Equity Fund
Investor Shares		1.30	%		0.75	%		1.10	%		1.20	%		1.30	%		2.00	%**
Select Shares*		1.15	%		n/a			0.95	%		0.99	%		1.12	%		1.77	%**
	Financial Services Fund			Health Care Fund			Technology Fund
Investor Shares		1.10	%		1.10	%		1.10	%
Select Shares*		n/a			n/a			n/a

 

*   Select Shares are only offered by Premier Equity Fund, Dividend Equity Fund, Large-Cap Growth Fund, Small-Cap Equity Fund, and Hedged Equity Fund.

**   Excluding dividend and interest paid on securities sold short.

The Schwab Target Funds invest portions of their portfolios in certain Schwab Active Equity Funds. The table below reflects the percentage of each Active Equity Fund’s shares owned by the Target Funds as of October 31, 2006.

	Premier Equity Fund		Core Equity Fund			Dividend Equity Fund			Large-Cap Growth Fund		Small-Cap Equity Fund			Hedged Equity Fund
Schwab Target Funds:
Target 2010		—		1.2	%		0.3	%		—		0.6	%		—
Target 2020		—		1.8	%		0.5	%		—		0.9	%		—
Target 2030		—		1.3	%		0.3	%		—		0.8	%		—
Target 2040		—		0.8	%		0.2	%		—		0.5	%		—
Retirement Income		—		—			0.4	%		—		—			—
	Financial Services Fund		Health Care Fund			Technology Fund
Schwab Target Funds:
Target 2010		—		—			—
Target 2020		—		—			—
Target 2030		—		—			—
Target 2040		—		—			—
Retirement Income		—		—			—

 

    91

Schwab Active Equity Funds

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

The funds may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. As of October 31, 2006, each fund’s total security transactions with other Schwab Funds were as follows:

Premier Equity Fund	$	—
Core Equity Fund		—
Dividend Equity Fund		—
Large-Cap Growth Fund		—
Small-Cap Equity Fund		734
Hedged Equity Fund		—
Financial Services Fund		—
Health Care Fund		—
Technology Fund		—

 

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for any fund during the period.

Independent Trustees

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.

4.   Purchases and Sales of Investment Securities:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations and securities sold short) were as follows:

	Purchases of Securities		Sales/Maturities of Securities
Premier Equity Fund	$	1,489,603	$959,343
Core Equity Fund		763,634	334,906
Dividend Equity Fund		545,607	404,686
Large-Cap Growth Fund		151,875	51,009
Small-Cap Equity Fund		762,683	379,159
Hedged Equity Fund		1,052,146	427,062
Financial Services Fund		95,694	35,894
Health Care Fund		609,216	423,033
Technology Fund		74,187	61,459

 

92    

Schwab Active Equity Funds

Financial Notes (continued)

5.   Redemption Fee:
(All dollar amounts are × 1,000)

The funds may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. The funds charge a 2.00% redemption fee on shares held less than 30 days. Such amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
Premier Equity Fund
Investor Shares	$	38	$25
Select Shares		42	28
Core Equity Fund		66	17
Dividend Equity Fund
Investor Shares		19	15
Select Shares		20	19
Large-Cap Growth Fund
Investor Shares		5	3
Select Shares		2	—
Small-Cap Equity Fund
Investor Shares		34	14
Select Shares		16	16
Hedged Equity Fund
Investor Shares		32	3
Select Shares		29	40
Financial Services Fund		11	7
Health Care Fund		42	121
Technology Fund		5	10

 

6.   Borrowing:
(All dollar amounts are x 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The Schwab Funds have custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Fund	Amount Outstanding at 10/31/06		Average Borrowing*		Weighted Average Interest Rate*(%)
Premier Equity Fund	$	—	$	4,950		5.08
Core Equity Fund		—		404		5.70
Dividend Equity Fund		—		808		4.82
Large-Cap Growth Fund		—		—		—
Small-Cap Equity Fund		—		1,241		5.27
Hedged Equity Fund		—		2,597		5.44
Financial Services Fund		—		—		—
Health Care Fund		—		1,568		5.12
Technology Fund		—		262		5.34

 

*   Based on the number of days for which the borrowing is outstanding.

    93

Schwab Active Equity Funds

Financial Notes (continued)

7.   Federal Income Taxes:
(All dollar amounts are x 1,000)

As of October 31, 2006, the components of distributable earnings on a tax-basis were as follows:

	Premier Equity Fund			Core Equity Fund			Dividend Equity Fund			Large-Cap Growth Fund			Small-Cap Equity Fund			Hedged Equity Fund
Undistributed ordinary income	$	—		$	3,881		$	1,244		$	138		$	—		$	4,267
Undistributed long-term capital gains		—			21,463			30,177			—			3,609			—
Unrealized appreciation on investments		229,132			163,064			214,769			16,580			90,497			136,548
Unrealized depreciation on investments		(17,083	)		(8,901	)		(9,835	)		(1,784	)		(13,138	)		(4,907	)
Other unrealized appreciation/depreciation		—			—			—			—			499			(11,063	)
Net unrealized appreciation / (depreciation)	$	212,049		$	154,163		$	204,934		$	14,796		$	77,858		$	120,578
	Financial Services Fund			Health Care Fund			Technology Fund
Undistributed ordinary income	$	560		$	—		$	—
Undistributed long-term capital gains		1,133			5,276			—
Unrealized appreciation on investments		10,683			67,712			9,779
Unrealized depreciation on investments		(970	)		(9,201	)		(1,278	)
Net unrealized appreciation / (depreciation)	$	9,713		$	58,511		$	8,501

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2006, the following funds had capital loss carry forwards expiring in:

Expire	Premier Equity Fund		Core Equity Fund		Dividend Equity Fund		Large-Cap Growth Fund		Small-Cap Equity Fund		Hedged Equity Fund
2009		—		—		—		—		—		—
2010		—		—		—		—		—		—
2011		—		—		—		—		—		—
2012		—		—		—		—		—		—
2013	$	546		—		—	$	158		—		—	��
2014		25		—		—		2,674		—	$	22,535
Total	$	571		—		—	$	2,832		—	$	22,535
Expire	Financial Services Fund		Health Care Fund		Technology Fund
2009		—		—	$	11,530
2010		—		—		18,148
2011		—		—		6,697
2012		—		—		—
2013		—		—		—
2014		—		—		—
Total		—		—	$	36,375

 

94    

Schwab Active Equity Funds

Financial Notes (continued)

7.  Federal Income Taxes (continued):

For tax purposes, realized capital losses, occurring after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. As of October 31, 2006, the Funds had aggregate deferred realized capital losses as follows:

	Premier Equity Fund		Core Equity Fund		Dividend Equity Fund		Large-Cap Growth Fund		Small-Cap Equity Fund		Hedged Equity Fund
Deferred capital losses	$	—	$	—	$	—	$	—	$	—	$	—
Capital losses utilized		—	$	3,858		—		—		—		—
	Financial Services Fund		Health Care Fund		Technology Fund
Deferred capital losses	$	—	$	—	$	—
Capital losses utilized		—	$	4,254		—

 

The tax-basis components of distributions paid during the current and prior fiscal years were:

	Premier Equity Fund		Core Equity Fund		Dividend Equity Fund		Large-Cap Growth Fund		Small-Cap Equity Fund		Hedged Equity Fund
Current period distributions
Ordinary income	$	3,776	$	3,509	$	21,310	$	30	$	1,708	$	2,197
Long-term capital gains		—		—		13,306		—		6,515		7,073
Return of capital		—		—		—		—		—		—
Prior period distributions
Ordinary income		—		3,112		17,714		—		4,863		—
Long-term capital gains		—		—		9,224		—		2,191		3,789
Return of capital		—		—		—		—		—		—
	Financial Services Fund		Health Care Fund		Technology Fund
Current period distributions
Ordinary income	$	616		—		—
Long-term capital gains		1,228		—		—
Return of capital		—		—		—
Prior period distributions
Ordinary income		139		—		—
Long-term capital gains		1,403		—		—
Return of capital		—		—		—

 

    95

Schwab Active Equity Funds

Financial Notes (continued)

7.  Federal Income Taxes (continued):

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

	Premier Equity Fund			Core Equity Fund			Dividend Equity Fund			Large-Cap Growth Fund		Small-Cap Equity Fund			Hedged Equity Fund
Capital Shares		(266	)		1			—			—	$	(1,529	)		—
Undistributed net investment income		266			—			—			—		1,524			—
Net realized capital gains and losses					(1	)		—			—		5			—
	Financial Services Fund			Health Care Fund			Technology Fund
Capital Shares		—		$	(404	)	$	(339	)
Undistributed net investment income		—			404			339
Net realized capital gains and losses		—			—			—

 

Other Federal Tax Information (unaudited)
(All dollar amounts are x 1,000), unaudited:

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction:

	Percentage
Premier Equity Fund		100	%
Core Equity Fund		100	%
Dividend Equity Fund		99	%
Large-Cap Growth Fund		100	%
Small-Cap Equity Fund		69	%
Hedged Equity Fund		69	%
Financial Services Fund		92	%
Health Care Fund		—
Technology Fund		—

 

For the fiscal year ended October 31, 2006, the fund designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

Premier Equity Fund	$	3,776
Core Equity Fund		3,509
Dividend Equity Fund		21,310
Large-Cap Growth Fund		30
Small-Cap Equity Fund		1,708
Hedged Equity Fund		2,196
Financial Services Fund		616
Health Care Fund		—
Technology Fund		—

 

96    

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Schwab Premier Equity Fund
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Financial Services Fund
Schwab Health Care Fund
Schwab Technology Fund

In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab Premier Equity Fund, Schwab Core Equity Fund, Schwab Dividend Equity Fund, Schwab Large-Cap Growth Fund, Schwab Small-Cap Equity Fund, Schwab Hedged Equity Fund, Schwab Financial Services Fund, Schwab Health Care Fund, and Schwab Technology Fund (nine of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2006, the results of each of their operations for the year then ended, and the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

    97

Investment Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Capital Trust (the “Trust”) and CSIM (the “Agreement”) with respect to existing funds in the Trust, including the funds covered in this annual report, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement.

Fund Performance.  The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund’s performance relative to a peer group of other mutual funds

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and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement.

Fund Expenses.  With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement.

Profitability.  With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement.

Economies of Scale.  The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

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Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996-1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6—Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

 

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Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

 

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

 

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Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer—Fixed Income (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer—Equities (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

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Officers of the Trust (continued)
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

 

¹  Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²  In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³  The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

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Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

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Schwab Funds® offers you an extensive family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available Schwab Funds. Whether you’re an experienced investor or just starting out, Schwab Funds can help you achieve your financial goals. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any Schwab Fund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. Proxy Voting Policies, Procedures and Results A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/schwabfunds, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at www.sec.gov. The Schwab Funds Family® Stock Funds Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Institutional Select® S&P 500 Fund
Schwab S&P 500 Index Fund
Schwab 1000 Index® Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®
Asset Allocation Funds Schwab Viewpoints Fund™
Schwab MarketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund Bond Funds Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fund™
Schwab Total Bond Market Fund™
Schwab GNMA Fund™
Schwab Inflation Protected Fund™
Schwab Tax-Free YieldPlus Fund™
Schwab Short/Intermediate Tax-Free Bond Fund™
Schwab Long-Term Tax-Free Bond Fund™
Schwab California Tax-Free YieldPlus Fund™
Schwab California Short/Intermediate
    Tax-Free Bond Fund™
Schwab California Long-Term Tax-Free Bond Fund™ Schwab Money Funds Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.¹ Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments^®.

¹  Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money.

Investment Adviser

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

Funds

Schwab Funds®

P.O. Box 3812, Englewood, CO 80155—3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved.

Member SIPC

Printed on recycled paper.

MFR26298-03

Schwab Target Funds

Annual Report

October 31, 2006

Schwab Target 2010 Fund

Schwab Target 2020 Fund

Schwab Target 2030 Fund

Schwab Target 2040 Fund

Schwab Retirement Income Fund

A suite of five mutual funds to help keep your retirement investments properly allocated over your lifetime.

In this report

Performance at a Glance	1
From the Chairman	2
From the President	3
Investment Environment	4
Schwab Target 2010 Fund	6
Schwab Target 2020 Fund	8
Schwab Target 2030 Fund	10
Schwab Target 2040 Fund	12
Schwab Retirement Income Fund	14
Fund Expenses	16
Financial Statements	17
Financial Notes	42
Investment Advisory Agreement Approval	49
Trustees and Officers	51
Glossary	55

 
 

The industry/sector classification of the funds’ fund holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab).

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

	Total Return for the Report Period
Schwab Target 2010 Fund (Ticker Symbol: SWBRX)		13.39	%
Benchmark: Target 2010 Composite Index		14.00	%
Fund Category: Morningstar Target-Date 2000–2014		9.42	%
Performance Details		pages 6–7
Schwab Target 2020 Fund (Ticker Symbol: SWCRX)2		14.25	%
Benchmark: Target 2020 Composite Index		15.03	%
Fund Category: Morningstar Target-Date 2015–2029		13.52	%
Performance Details		pages 8–9
Schwab Target 2030 Fund (Ticker Symbol: SWDRX)		14.99	%
Benchmark: Target 2030 Composite Index		15.96	%
Fund Category: Morningstar Target-Date 2030+		15.46	%
Performance Details		pages 10–11
Schwab Target 2040 Fund (Ticker Symbol: SWERX)		16.06	%
Benchmark: Target 2040 Composite Index		17.00	%
Fund Category: Morningstar Target-Date 2030+		15.46	%
Performance Details		pages 12–13
Schwab Retirement Income Fund (Ticker Symbol: SWARX)		7.52	%
Benchmark: Target Income Composite Index		7.74	%
Fund Category: Morningstar Conservative Allocation		8.43	%
Performance Details		pages 14–15
Minimum Initial Investment1
($1,000 for custodial accounts)		$2,500

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the funds’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

The Target 2010 Composite Index is derived using the following portion allocations: 48% Dow Jones Wilshire 5000 Composite Index, 16% MSCI EAFE Index, 34% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

The Target 2020 Composite Index is derived using the following portion allocations: 53% Dow Jones Wilshire 5000 Composite Index, 18% MSCI EAFE Index, 27% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

The Target 2030 Composite Index is derived using the following portion allocations: 59% Dow Jones Wilshire 5000 Composite Index, 19% MSCI EAFE Index, 20% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

The Target 2040 Composite Index is derived using the following portion allocations: 64% Dow Jones Wilshire 5000 Composite Index, 21% MSCI EAFE Index, 13% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

The Target Income Composite Index is derived using the following portion allocations: 15% Dow Jones Wilshire 5000 Composite Index, 5% MSCI EAFE Index, 50% Lehman Brothers U.S. Aggregate Bond Index, and 30% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Source for category information: Morningstar, Inc.

¹Please see prospectus for further detail and eligibility requirements.

²One year return presented in the table differs from the return in the Financial Highlights. This is a result of the calculation of the Financial Highlights return adhering to GAAP presentation.

Schwab Target Funds    1

From the Chairman

Charles Schwab Chairman

Dear Shareholder, I founded Schwab over thirty years ago to be a home for serious investors. That mission continues to guide us today as we constantly strive to improve and innovate. By doing this, and providing some of the highest quality products and services — at a competitive price — we remain true to our heritage. I take particular pride in the Schwab Funds. Founded over 15 years ago, Schwab Funds now includes more than 50 funds with over $170 billion in assets. With a variety of investment strategies, Schwab Funds provides a range of innovative investment choices that can serve as a foundation for your asset allocation plan, including the Schwab Target Funds, contained within this book. The Schwab Target Funds are asset allocation funds that are actively managed to adjust over time as you approach retirement. Research has shown that asset allocation can be the most important factor in determining overall portfolio performance. The Schwab Target Funds offer investors a convenient way to allocate their investment across management strategies and asset classes to help balance risk while seeking to provide competitive returns. Schwab Funds are managed by Charles Schwab Investment Management, Inc., one of the largest mutual fund managers in the U.S. Our portfolio managers share a passion for market analysis and use some of the most sophisticated financial models in the country. I am proud of their depth of experience, which reflects an average of 14 years in the investment industry. Furthermore, I am impressed by the commitment that our managers bring to the stewardship of their funds, for you, their shareholders. In closing, I want to thank you for investing with us. We work every day to warrant the trust you have placed in us; that will never change. Sincerely,

2    Schwab Target Funds

From the President

Evelyn Dilsaver is President and CEO of Charles Schwab Investment Management, Inc. and of each of the funds covered in this report. She joined the firm in 1992 and has held a variety of executive positions at Schwab.

Dear Shareholder, I am pleased to present the annual report for the Schwab Target Funds for the period ended October 31, 2006. Schwab Target Funds are asset allocation funds designed for retirement investing. The four dated funds are actively managed to adjust over time as you approach retirement while one is designed to help produce income with additional growth potential for those in retirement. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the Funds’ ticker symbols and report period returns for the funds, their benchmarks and category averages. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.schwabfunds.com. This website contains regular updates about the Schwab Funds. I encourage you to visit the website to stay informed about your fund. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Schwab Funds. Sincerely,

Schwab Target Funds    3

The Investment Environment
 

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for
the overall management of the funds. As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Product (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth.

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
o  16.34%	S&P 500® Index: measures U.S. large-cap stocks.
o19.98%	Russell 2000® Index: measures U.S. small-cap stocks
o  27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
o  5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market
o  4.57%	Three-Month U.S. Treasury Bills (T-bills): measures short-term U.S. Treasury obligations

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data source: Charles Schwab & Co., Inc.

4    Schwab Target Funds

The Investment Environment  continued

In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of the end of the report period. In its statement, the Fed noted that the economy appeared to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only 2.2% in the third quarter of 2006.

Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico, as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds.

The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact.

Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth
will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

    

Schwab Target Funds    5

Schwab Target 2010 Fund

Jeffrey Mortimer (upper left) CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Kimon Daifotis (upper right) CFA, senior vice president and chief investment officer, fixed- income, is responsible for the overall management of the bond and cash portions of the fund. Caroline Lee (lower right) direc- tor and portfolio manager, is responsible for the day-to-day co-management of the fund. Tom Brown (lower left) associate portfolio manager, is responsible for the day-to-day co-management of the fund.

The Schwab Target Funds all share the same investment approach: each seeks to achieve its objective by investing in a combination of other Schwab Funds and Laudus Funds. The underlying funds include a combination of equity, fixed income and money market mutual funds to meet their various target asset allocations and investment styles. Performance of the Schwab Target Funds (the funds) reflects a blend of the results of their underlying funds. The portfolios of the funds with an earlier target date are more heavily allocated to fixed income, ultra-short fixed income and money market funds and represent a more conservative style of investment, while portfolios of the funds with later target dates have a higher percentage of assets allocated to equity funds. Schwab Target 2010 Fund (the fund) returned 13.39% for the one-year period, slightly underperforming its benchmark, the Target 2010 Composite Index, yet beating its fund category average. The fund has the shortest time horizon of the four dated funds and as such, has the lowest percentage of its assets allocated to equities. The fund’s primary target allocations are 63% of assets in equity securities and 35% in fixed-income securities. The fund’s allocation to equity securities positively contributed to performance, as equity markets, both domestic and international, rallied during the one-year period. Within the equity allocation, outstanding funds included those with an international equity focus such as the Laudus Rosenberg International Small-Cap Fund Institutional Shares and the Laudus International MarketMasters Fund Select Shares. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund and the Schwab YieldPlus Fund Select Shares contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	10
Weighted Average Market Cap ($ x 1,000,000)	39,901
Price/Earnings Ratio (P/E)	18.8
Price/Book Ratio (P/B)	2.8

 

Asset Class Weightings % of Investments
Equity Funds — Domestic	45.7	%
Fixed-Income Funds	34.1	%
Equity Funds — International	16.6	%
Short Term Investments	3.6	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Total Bond Market Fund	33.1	%
Schwab Core Equity Fund	22.0	%
Laudus International MarketMasters Fund, Select Shares	10.2	%
Schwab Small-Cap Equity Fund, Select Shares	6.7	%
Schwab Dividend Equity Fund, Select Shares	6.7	%
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares	6.4	%
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares	6.3	%
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares	3.7	%
Schwab YieldPlus Fund, Select Shares	0.9	%
Schwab Value Advantage Money Fund, Institutional Shares	0.9	%
Total	96.9	%

 

Portfolio holdings may have changed since the report date.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.

¹This list is not a recommendation of any security by the investment adviser.

6    Schwab Target Funds

Schwab Target 2010 Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

 

Performance of a Hypothetical
$10,000 Investment^1,3

 

 

Average Annual Total Returns1,2
	1 year			Since Inception
Fund: Schwab Target 2010 Fund (7/1/05)		13.39	%		11.80	%
Benchmark: Target 2010 Composite Index		14.00	%		11.67	%
Fund Category: Morningstar Target-Date 2000–2014		9.42	%		6.84	%

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³The Target 2010 Composite Index is derived using the following portion allocations: 48% Dow Jones Wilshire 5000 Composite Index, 16% MSCI EAFE Index, 34% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Schwab Target Funds    7

Schwab Target 2020 Fund

Jeffrey Mortimer (upper left) CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Kimon Daifotis (upper right) CFA, senior vice president and chief investment officer, fixed- income, is responsible for the overall management of the bond and cash portions of the fund. Caroline Lee (lower right) direc- tor and portfolio manager, is responsible for the day-to-day co-management of the fund. Tom Brown (lower left) associate portfolio manager, is responsible for the day-to-day co-management of the fund.

The Schwab Target Funds all share the same investment approach: each seeks to achieve its objective by investing in a combination of other Schwab Funds and Laudus Funds. The underlying funds include a combination of equity, fixed income and money market mutual funds to meet their various target asset allocations and investment styles. Performance of the Schwab Target Funds (the funds) reflects a blend of the results of their underlying funds. The portfolios of the funds with an earlier target date are more heavily allocated to fixed income, ultra-short fixed income and money market funds and represent a more conservative style of investment, while portfolios of the funds with later target dates have a higher percentage of assets allocated to equity funds. Schwab Target 2020 Fund (the fund) returned 14.25% for the report period, outperforming its category average yet slightly underperforming its benchmark, the Target 2020 Composite Index. The fund has the second shortest time horizon of the four dated funds and allocates its assets primarily to equity securities and fixed-income securities. The fund’s primary target allocations are 70% of assets in equity securities and 28% of its assets in fixed-income securities. The fund’s emphasis on equity securities positively contributed to performance, as equity markets, both domestic and international, rallied during the one-year period. Within the equity allocation, outstanding funds included those with an international equity focus such as the Laudus Rosenberg International Small-Cap Fund Institutional Shares and the Laudus International MarketMasters Fund Select Shares. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund and the Schwab YieldPlus Fund Select Shares contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	10
Weighted Average Market Cap ($ x 1,000,000)	39,697
Price/Earnings Ratio (P/E)	18.8
Price/Book Ratio (P/B)	2.8

 

Asset Class Weightings % of Investments
Equity Funds — Domestic	50.8	%
Fixed-Income Funds	27.2	%
Equity Funds — International	17.8	%
Short-Term Investments	4.2	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Total Bond Market Fund	26.1	%
Schwab Core Equity Fund	23.6	%
Laudus International MarketMasters Fund, Select Shares	9.8	%
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares	8.0	%
Schwab Dividend Equity Fund, Select Shares	7.9	%
Schwab Small-Cap Equity Fund, Select Shares	7.9	%
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares	7.5	%
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares	3.7	%
Schwab YieldPlus Fund, Select Shares	0.9	%
Schwab Value Advantage Money Fund, Institutional Shares	0.9	%
Total	96.3	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.

¹This list is not a recommendation of any security by the investment adviser.

8    Schwab Target Funds

Schwab Target 2020 Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

 

Performance of a Hypothetical
$10,000 Investment^1,3

 

 

Average Annual Total Returns1,2
	1 year			Since Inception
Fund: Schwab Target 2020 Fund (7/1/05)		14.25	%		12.83	%
Benchmark: Target 2020 Composite Index		15.03	%		12.71	%
Fund Category: Morningstar Target-Date 2015–2029		13.52	%		10.53	%

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³The Target 2020 Composite Index is derived using the following portion allocations: 53% Dow Jones Wilshire 5000 Composite Index, 18% MSCI EAFE Index, 27% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Schwab Target Funds    9

Schwab Target 2030 Fund

Jeffrey Mortimer (upper left) CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Kimon Daifotis (upper right) CFA, senior vice president and chief investment officer, fixed- income, is responsible for the overall management of the bond and cash portions of the fund. Caroline Lee (lower right) direc- tor and portfolio manager, is responsible for the day-to-day co-management of the fund. Tom Brown (lower left) associate portfolio manager, is responsible for the day-to-day co-management of the fund.

The Schwab Target Funds all share the same investment approach: each seeks to achieve its objective by investing in a combination of other Schwab Funds and Laudus Funds. The underlying funds include a combination of equity, fixed income and money market mutual funds to meet their various target asset allocations and investment styles. Performance of the Schwab Target Funds (the funds) reflects a blend of the results of their underlying funds. The portfolios of the funds with an earlier target date are more heavily allocated to fixed income, ultra-short fixed income and money market funds and represent a more conservative style of investment, while portfolios of the funds with later target dates have a higher percentage of assets allocated to equity funds. Schwab Target 2030 Fund (the fund) returned 14.99% for the one-year period, trailing its benchmark, Target 2030 Composite Index. The fund has the second farthest time horizon of the four dated funds and as such, has an even larger percentage of its assets allocated to equities as compared to its earlier dated counterparts. The fund’s primary asset allocation targets are 77% of its assets towards equity securities and 21% of its assets towards fixed-income securities. The fund’s emphasis on equity securities positively contributed to performance, as equity markets, both domestic and international, rallied during the one-year period. Within the equity allocation, outstanding funds included those with an international equity focus such as the Laudus Rosenberg International Small-Cap Fund Institutional Shares and the Laudus International MarketMasters Fund Select Shares. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund and Schwab YieldPlus Select Shares contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	10
Weighted Average Market Cap ($ x 1,000,000)	39,357
Price/Earnings Ratio (P/E)	19.0
Price/Book Ratio (P/B)	2.8

 

Asset Class Weightings % of Investments
Equity Funds — Domestic	56.4	%
Fixed-Income Funds	20.7	%
Equity Funds — International	18.7	%
Short-Term Investments	4.2	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Core Equity Fund	26.5	%
Schwab Total Bond Market Fund	19.7	%
Laudus International MarketMasters Fund, Select Shares	11.7	%
Schwab Small-Cap Equity Fund, Select Shares	9.6	%
Schwab Dividend Equity Fund, Select Shares	7.9	%
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares	7.6	%
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares	6.9	%
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares	4.7	%
Schwab YieldPlus Fund, Select Shares	1.0	%
Schwab Value Advantage Money Fund, Institutional Shares	0.9	%
Total	96.5	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.

¹This list is not a recommendation of any security by the investment adviser.

10    Schwab Target Funds

Schwab Target 2030 Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

 

Performance of a Hypothetical
$10,000 Investment^1,3

 

Average Annual Total Returns1,2
	1 year			Since Inception
Fund: Schwab Target 2030 Fund (7/1/05)		14.99	%		13.55	%
Benchmark: Target 2030 Composite Index		15.96	%		13.63	%
Fund Category: Morningstar Target-Date 2030+		15.46	%		13.55	%

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³The Target 2030 Composite Index is derived using the following portion allocations: 59% Dow Jones Wilshire 5000 Composite Index, 19% MSCI EAFE Index, 20% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Schwab Target Funds    11

Schwab Target 2040 Fund

Jeffrey Mortimer (upper left) CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Kimon Daifotis (upper right) CFA, senior vice president and chief investment officer, fixed- income, is responsible for the overall management of the bond and cash portions of the fund. Caroline Lee (lower right) direc- tor and portfolio manager, is responsible for the day-to-day co-management of the fund. Tom Brown (lower left) associate portfolio manager, is responsible for the day-to-day co-management of the fund.

The Schwab Target Funds all share the same investment approach: each seeks to achieve its objective by investing in a combination of other Schwab Funds and Laudus Funds. The underlying funds include a combination of equity, fixed income and money market mutual funds to meet their various target asset allocations and investment styles. Performance of the Schwab Target Funds (the funds) reflects a blend of the results of their underlying funds. The portfolios of the funds with an earlier target date are more heavily allocated to fixed income, ultra-short fixed income and money market funds and represent a more conservative style of investment, while portfolios of the funds with later target dates have a higher percentage of assets allocated to equity funds. Schwab Target 2040 Fund (the fund) returned 16.06% for the one-year period, outperforming its category average yet slightly trailing its benchmark, the Target 2040 Composite Index. The fund has the longest time horizon of the four dated funds and as such, has the largest percentage of assets allocated to equity securities. The fund’s primary target allocations are 84% of its assets to equity securities and 14% of its assets to fixed-income securities. The fund’s emphasis on equity securities positively contributed to performance, as equity markets, both domestic and international, rallied during the one-year period. Within the equity allocation, outstanding funds included those with an international equity focus such as the Laudus Rosenberg International Small-Cap Fund Institutional Shares and the Laudus International MarketMasters Fund Select Shares. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund and Schwab YieldPlus Fund Select Shares contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	10
Weighted Average Market Cap ($ x 1,000,000)	39,758
Price/Earnings Ratio (P/E)	19.0
Price/Book Ratio (P/B)	2.8

 

Asset Class Weightings % of Investments
Equity Funds — Domestic	60.7	%
Equity Funds — International	20.4	%
Fixed-Income Funds	14.0	%
Short-Term Investments	4.9	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Core Equity Fund	27.0	%
Schwab Total Bond Market Fund	13.0	%
Laudus International MarketMasters Fund, Select Shares	12.4	%
Schwab Small-Cap Equity Fund, Select Shares	10.3	%
Schwab Dividend Equity Fund, Select Shares	8.8	%
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares	8.4	%
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares	7.8	%
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares	5.5	%
Schwab YieldPlus Fund, Select Shares	0.9	%
Schwab Value Advantage Money Fund, Institutional Shares	0.9	%
Total	95.0	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.

¹This list is not a recommendation of any security by the investment adviser.

12    Schwab Target Funds

Schwab Target 2040 Fund

Performance Summaryas of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

 

Performance of a Hypothetical
$10,000 Investment^1,3

 

Average Annual Total Returns1,2
	1 year			Since Inception
Fund: Schwab Target 2040 Fund (7/1/05)		16.06	%		14.75	%
Benchmark: Target 2040 Composite Index		17.00	%		14.68	%
Fund Category: Morningstar Target-Date 2030+		15.46	%		13.55	%

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³The Target 2040 Composite Index is derived using the following portion allocations: 64% Dow Jones Wilshire 5000 Composite Index, 21% MSCI EAFE Index, 13% Lehman Brothers U.S. Aggregate Bond Index, and 2% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Schwab Target Funds    13

Schwab Retirement Income Fund

Jeffrey Mortimer (upper left) CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Kimon Daifotis (upper right) CFA, senior vice president and chief investment officer, fixed- income, is responsible for the overall management of the bond and cash portions of the fund. Caroline Lee (lower right) direc- tor and portfolio manager, is responsible for the day-to-day co-management of the fund. Tom Brown (lower left) associate portfolio manager, is responsible for the day-to-day co-management of the fund.

The Schwab Target Funds all share the same investment approach: each seeks to achieve its objective by investing in a combination of other Schwab Funds and Laudus Funds. The underlying funds include a combination of equity, fixed income and money market mutual funds to meet their various target asset allocations and investment styles. Performance of the Schwab Target Funds (the funds) reflects a blend of the results of their underlying funds. The portfolios of the funds with an earlier target date and the Schwab Retirement Income Fund are more heavily allocated to fixed income, ultra-short fixed income and money market funds and represent a more conservative style of investment, while portfolios of the funds with later target dates have a higher percentage of assets allocated to equity funds. Schwab Retirement Income Fund (the fund) returned 7.52% for the period, slightly underperforming its benchmark, the Target Income Composite Index. The fund is designed for investors currently in retirement, and as such, has a majority of its portfolio invested in fixed income, ultra-short fixed income and money market funds. In addition, it seeks to provide current income with equity growth potential. Since the fund invests up to 75% of its assets in fixed-income and ultra-short fixed-income securities, the performance of the bond market had a significant impact on the fund’s performance. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund and the Schwab YieldPlus Fund Select Shares contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight. The fund’s 20% target allocation to equity securities positively contributed to performance, as equity markets rallied during the one-year period.

As of 10/31/06:

Statistics
Number of Holdings	5
Weighted Average Market Cap ($ x 1,000,000)	49,039
Price/Earnings Ratio (P/E)	17.9
Price/Book Ratio (P/B)	2.7

 

Asset Class Weightings % of Investments
Fixed-Income Funds	72.8	%
Equity Funds — Domestic	15.7	%
Short-Term Investments	6.6	%
Equity Funds — International	4.9	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Total Bond Market Fund	48.2	%
Schwab YieldPlus Fund, Select Shares	24.2	%
Schwab Dividend Equity Fund, Select Shares	15.6	%
Laudus International MarketMasters Fund, Select Shares	4.9	%
Schwab Value Advantage Money Fund, Institutional Shares	4.6	%
Total	97.5	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.

¹This list is not a recommendation of any security by the investment adviser.

14    Schwab Target Funds

Schwab Retirement Income Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

 

Performance of a Hypothetical
$10,000 Investment^1,3

 

Average Annual Total Returns1,2
	1 year			Since Inception
Fund: Schwab Retirement Income Fund (7/1/05)		7.52	%		5.68	%
Benchmark: Target Income Composite Index		7.74	%		5.94	%
Fund Category: Morningstar Conservative Allocation		8.43	%		6.53	%

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³The Target Income Composite Index is derived using the following portion allocations: 15% Dow Jones Wilshire 5000 Composite Index, 5% MSCI EAFE Index, 50% Lehman Brothers U.S. Aggregate Bond Index, and 30% Lehman Brothers U.S. Treasury Bills: 1–3 Months.

Schwab Target Funds    15

Fund Expenses (unaudited)

Examples for a $1,000 Investment

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab 2010 Target Fund
Actual Return		0.06	%	$	1,000	$	1,034.40	$	0.31
Hypothetical 5% Return		0.06	%	$	1,000	$	1,024.90	$	0.31
Schwab 2020 Target Fund
Actual Return		0.04	%	$	1,000	$	1,034.00	$	0.21
Hypothetical 5% Return		0.04	%	$	1,000	$	1,025.00	$	0.20
Schwab 2030 Target Fund
Actual Return		0.03	%	$	1,000	$	1,032.70	$	0.15
Hypothetical 5% Return		0.03	%	$	1,000	$	1,025.05	$	0.15
Schwab 2040 Target Fund
Actual Return		0.01	%	$	1,000	$	1,031.40	$	0.05
Hypothetical 5% Return		0.01	%	$	1,000	$	1,025.16	$	0.05
Schwab Retirement Income Fund
Actual Return		0.10	%	$	1,000	$	1,039.90	$	0.51
Hypothetical 5% Return		0.10	%	$	1,000	$	1,024.70	$	0.51

¹Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights; does not include expenses of underlying funds in which the Target Funds invest.

²Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

16    Schwab Target Funds

Schwab Target 2010 Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			7/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.24			10.00
Income from investment operations:
Net investment income		0.22			0.04
Net realized and unrealized gains		1.13			0.20
Total income from investment operations		1.35			0.24
Less distributions:
Dividends from net investment income		(0.17	)		—
Net asset value at end of period		11.42			10.24
Total return (%)		13.39			2.40	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses3		0.06			0.06	4
Gross operating expenses3		0.27			0.37	4
Net investment income		2.12			1.51	4
Portfolio turnover rate		0	5		—
Net assets, end of period ($ x 1,000,000)		62			32

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.
The income received by the portfolio from underlying funds is reduced by those expenses.
 

⁴   Annualized.

⁵   Less than 1%

See financial notes.    17

Schwab Target 2010 Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
96.9%	Other Investment Companies	55,435	60,115
2.7%	Short-Term Investment	1,699	1,699
99.6%	Total Investments	57,134	61,814
0.4%	Other Assets and Liabilities, Net		222
100.0%	Total Net Assets		62,036

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   96.9% of net assets
Equity Funds 62.0%
Laudus International MarketMasters Fund, Select Shares (a)		306,147		6,358
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares (a)		178,133		3,912
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares (a)		121,214		2,302
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares (a)		420,814		3,964
Schwab Core Equity Fund (a)		742,979		13,671
Schwab Dividend Equity Fund, Select Shares (a)		283,748		4,143
Schwab Small-Cap Equity Fund, Select Shares (a)		233,285		4,152
				38,502
Fixed-Income Funds 34.0%
Schwab Total Bond Market Fund (a)		2,088,164		20,527
Schwab YieldPlus Fund, Select Shares (a)		56,292		545
				21,072
Money Funds 0.9%
Schwab Value Advantage Money Fund, Institutional Shares (a)		541,166		541

 

Security         Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   2.7% of net assets
Brown Brothers Harriman, Grand Cayman Time Deposit 4.71%, 11/01/06		79		79
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		1,620		1,620
				1,699

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $57,148 and the unrealized appreciation and depreciation were $4,848 and ($182), respectively, with a net unrealized appreciation of $4,666.

(a) Issuer is affiliated with the fund’s adviser.

18    See financial notes.

Schwab Target 2010 Fund

Statement of
Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $55,435)	$	60,115
Investments in unaffiliated issuers, at value (cost $1,699)		1,699
Total investments, at value (cost $57,134)		61,814
Receivables:
Fund shares sold		267
Dividends	+	86
Total assets		62,167
Liabilities
Payables:
Investments bought		85
Due to investment adviser		7
Fund shares redeemed		7
Trustee fees		1
Accrued expenses	+	31
Total liabilities		131
Net Assets
Total assets		62,167
Total liabilities		–131
Net assets	$	62,036
Net Assets by Source
Capital received from investors		56,602
Net investment income not yet distributed		603
Net realized capital gains		151
Net unrealized capital gains		4,680
Net Asset Value (NAV)

Net Assets	÷	Shares Outstanding		=	NAV
$62,036			5,432		$	11.42

See financial notes.    19

Schwab Target 2010 Fund

Statement of
Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	954
Interest	+	38
Total Investment Income		992
Net Realized Gains and Losses
Net realized gains received from affiliated underlying funds		260
Net realized losses on investments	+	(15	)
Net realized gains		245
Net Unrealized Gains and Losses
Net unrealized gains from affiliated underlying funds		4,325
Expenses
Registration fees		56
Professional fees		33
Portfolio accounting fees		10
Shareholder reports		9
Trustees’ fees		6
Custodian fees		4
Other expenses	+	6
Total expenses		124
Expense reduction by adviser and Schwab		–97
Net expenses		27
Increase in Net Assets from Operations
Total investment income		992
Net expenses		–27
Net investment income		965
Net realized gains		245
Net unrealized gains	+	4,325
Increase in net assets from operations	$	5,535

 

20    See financial notes.

Schwab Target 2010 Fund

Statements of
Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			7/1/05*–10/31/05
Net investment income		$	965		$	136
Net realized gains			245			—
Net unrealized gains		+	4,325			355
Increase in net assets from operations			5,535			491
Distributions Paid
Dividends from net investment income		$	592		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						7/1/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		3,028		$	32,857			3,174		$	32,017
Shares Reinvested		52			546			—			—
Shares Redeemed	+	(749	)		(8,074	)		(73	)		(744	)
Net transactions in fund shares		2,331		$	25,329			3,101		$	31,273
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				7/1/05*–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		3,101	$	31,764		—	$	—
Total increase	+	2,331		30,272		3,101		31,764
End of period		5,432	$	62,036		3,101	$	31,764
Net investment income not yet distributed			$	603			$	136

 

*  Commencement of operations

See financial notes.    21

Schwab Target 2020 Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			7/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.28			10.00
Income from investment operations:
Net investment income		0.21			0.04
Net realized and unrealized gains		1.25			0.24
Total income from investment operations		1.46			0.28
Less distributions:							��
Dividends from net investment income		(0.18	)		—
Net asset value at end of period		11.56			10.28
Total return (%)		14.36			2.80	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses3		0.04			0.04	4
Gross operating expenses3		0.22			0.36	4
Net investment income		1.84			1.29	4
Portfolio turnover rate		—			—
Net assets, end of period ($ x 1,000,000)		84			35

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.
The income received by the portfolio from underlying funds is reduced by those expenses.
 

⁴   Annualized.

22    See financial notes.

Schwab Target 2020 Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
96.3%	Other Investment Companies	74,274	80,582
3.3%	Short-Term Investment	2,725	2,725
99.6%	Total Investments	76,999	83,307
0.4%	Other Assets and Liabilities, Net		335
100.0%	Total Net Assets		83,642

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   96.3% of net assets
Equity Funds 68.3%
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares (a)		666,762		6,281
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares (a)		165,020		3,134
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares (a)		303,325		6,661
Laudus International MarketMasters Fund, Select Shares (a)		393,535		8,173
Schwab Dividend Equity Fund, Select Shares (a)		452,744		6,610
Schwab Small-Cap Equity Fund, Select Shares (a)		370,789		6,600
Schwab Core Equity Fund (a)		1,070,972		19,706
				57,165
Fixed-Income Funds 27.1%
Schwab Total Bond Market Fund (a)		2,225,012		21,872
Schwab YieldPlus Fund, Select Shares (a)		80,045		775
				22,647
Money Funds 0.9%
Schwab Value Advantage Money Fund, Institutional Shares (a)		769,641		770

 

Security         Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   3.3% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		575		575
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		2,150		2,150
				2,725

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $76,999 and the unrealized appreciation and depreciation were $6,430 and ($122), respectively, with a net unrealized appreciation of $6,308.

(a) Issuer is affiliated with the fund’s adviser.

See financial notes.    23

Schwab Target 2020 Fund

Statement of
Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $74,274)	$	80,582
Investments in unaffiliated issuers, at value (cost $2,725)		2,725
Total investments, at value (cost $76,999)		83,307
Receivables:
Fund shares sold		381
Dividends	+	93
Total assets		83,781
Liabilities
Payables:
Investments bought		91
Due to investment adviser		17
Fund shares redeemed		12
Trustee fees		1
Accrued expenses	+	18
Total liabilities		139
Net Assets
Total assets		83,781
Total liabilities		–139
Net assets	$	83,642
Net Assets by Source
Capital received from investors		76,486
Net investment income not yet distributed		617
Net realized capital gains		231
Net unrealized capital gains		6,308
Net Asset Value (NAV) by Shares Class

Net Assets	÷	Shares Outstanding		=	NAV
$83,642			7,236		$	11.56

24    See financial notes.

Schwab Target 2020 Fund

Statement of
Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	1,025
Interest	+	58
Total Investment Income		1,083
Net Realized Gains and Losses
Net realized gains received from affiliated underlying funds		353
Net Unrealized Gains and Losses
Net unrealized gains from affiliated underlying funds		5,874
Expenses
Registration fees		49
Professional fees		33
Shareholder reports		13
Portfolio accounting fees		10
Custodian fees		8
Trustees’ fees		6
Other expenses	+	6
Total expenses		125
Expense reduction by adviser and Schwab		–103
Net expenses		22
Increase in Net Assets from Operations
Total investment income		1,083
Net expenses		–22
Net investment income		1,061
Net realized gains		353
Net unrealized gains	+	5,874
Increase in net assets from operations	$	7,288

 

See financial notes.    25

Schwab Target 2020 Fund

Statements of
Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			7/01/05*–10/31/05
Net investment income		$	1,061		$	121
Net realized gains or losses			353			—
Net unrealized gains		+	5,874			434
Increase in net assets from operations			7,288			555
Distributions Paid
Dividends from net investment income		$	687		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						7/1/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		4,728		$	51,841			3,422		$	34,636
Shares Reinvested		64			672			—			—
Shares Redeemed	+	(933	)		(10,204	)		(45	)		(459	)
Net transactions in fund shares		3,859		$	42,309			3,377		$	34,177
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				7/1/05*–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		3,377	$	34,732		—	$	—
Total increase or decrease	+	3,859		48,910		3,377		34,732
End of period		7,236	$	83,642		3,377	$	34,732
Net investment income not yet distributed			$	617			$	121

 

* Commencement of operations.

26    See financial notes.

Schwab Target 2030 Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			7/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.31			10.00
Income from investment operations:
Net investment income		0.19			0.03
Net realized and unrealized gains		1.34			0.28
Total income from investment operations		1.53			0.31
Less distributions:
Distributions from net income		(0.17	)		—
Net asset value at end of period		11.67			10.31
Total return (%)		14.99			3.10	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses3		0.03			0.03	4
Gross operating expenses3		0.32			0.58	4
Net investment income		1.54			1.05	4
Portfolio turnover rate		—			—
Net assets, end of period ($ x 1,000,000)		56			19

 

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.
The income received by the portfolio from underlying funds is reduced by those expenses.
 

⁴   Annualized.

See financial notes.    27

Schwab Target 2030 Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
96.5%	Other Investment Companies	49,702	53,946
3.2%	Short-Term Investment	1,796	1,796
99.7%	Total Investments	51,498	55,742
0.3%	Other Assets and Liabilities, Net		178
100.0%	Total Net Assets		55,920

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   96.5% of net assets
Equity Funds 74.9%
Laudus International MarketMasters Fund, Select Shares (a)		315,461		6,552
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares (a)		176,415		3,874
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares (a)		138,401		2,628
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares (a)		448,858		4,229
Schwab Core Equity Fund (a)		804,632		14,805
Schwab Dividend Equity Fund, Select Shares (a)		303,714		4,434
Schwab Small-Cap Equity Fund, Select Shares (a)		300,759		5,354
				41,876
Fixed-Income Funds 20.7%
Schwab Total Bond Market Fund (a)		1,121,864		11,028
Schwab YieldPlus Fund, Select Shares (a)		54,012		523
				11,551
Money Funds 0.9%
Schwab Value Advantage Money Fund, Institutional Shares (a)		519,480		519

 

Security         Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   3.2% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		371		371
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		1,425		1,425
				1,796

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $51,498 and the unrealized gains and losses were $4,271 and ($27), respectively, with a net unrealized appreciation of $4,244.

(a) Issuer is affiliated with the fund’s adviser.

28    See financial notes.

Schwab Target 2030 Fund

Statement of
Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $49,702)	$	53,946
Investments in unaffiliated issuers, at value (cost $1,796)		1,796
Total investments, at value (cost $51,498)		55,742
Receivables:
Fund shares sold		210
Dividends		48
Due from investment adviser	+	3
Total assets		56,003
Liabilities
Payables:
Investments bought		47
Fund shares redeemed		4
Trustee fees		1
Accrued expenses	+	31
Total liabilities		83
Net Assets
Total assets		56,003
Total liabilities		–83
Net assets	$	55,920
Net Assets by Source
Capital received from investors		51,246
Net investment income not yet distributed		297
Net realized capital gains		133
Net unrealized capital gains		4,244

Net Asset Value (NAV)

Net Assets	÷	Shares Outstanding		=	NAV
$55,920			4,791		$	11.67

 

See financial notes.    29

Schwab Target 2030 Fund

Statement of
Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	518
Interest	+	40
Total Investment Income		558
Net Realized Gains and Losses
Net realized gains received from affiliated underlying funds		192
Net Unrealized Gains and Losses
Net unrealized gains from affiliated underlying funds		3,992
Expenses
Registration fees		45
Professional fees		33
Shareholder reports		10
Portfolio accounting fees		8
Custodian fees		7
Trustees’ fees		6
Other expenses	+	6
Total expenses		115
Expense reduction by adviser and Schwab		–104
Net expenses		11
Increase in Net Assets from Operations
Total investment income		558
Net expenses		–11
Net investment income		547
Net realized gains		192
Net unrealized gains	+	3,992
Increase in net assets from operations	$	4,731

 

30    See financial notes.

Schwab Target 2030 Fund

Statements of
Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			7/1/05*–10/31/05
Net investment income		$	547		$	51
Net realized gains			192			—
Net unrealized gains		+	3,992			252
Increase in net assets from operations			4,731			303
Distributions Paid
Dividends from net investment income		$	360		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						7/1/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		3,408		$	37,640			1,866		$	18,936
Shares Reinvested		33			346			—			—
Shares Redeemed	+	(497	)		(5,487	)		(19	)		(189	)
Net transactions in fund shares		2,944		$	32,499			1,847		$	18,747
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				7/1/05*–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		1,847	$	19,050		—	$	—
Total increase	+	2,944		36,870		1,847		19,050
End of period		4,791	$	55,920		1,847	$	19,050
Net investment income not yet distributed			$	297			$	51

 

* Commencement of operations

See financial notes.    31

Schwab Target 2040 Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			7/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		10.36			10.00
Income from investment operations:
Net investment income		0.19			0.02
Net realized and unrealized gains		1.45			0.34
Total income from investment operations		1.64			0.36
Less distributions:
Dividends from net investment income		(0.17	)		—
Net asset value at end of period		11.83			10.36
Total return (%)		16.06			3.60	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses3		0.01			0.01	4
Gross operating expenses3		0.48			1.10	4
Net investment income		1.26			0.80	4
Portfolio turnover rate		1			—
Net assets, end of period ($ x 1,000,000)		34			9

¹   Commencement of operations.

²   Not annualized.

³   The expense incurred by underlying funds in which the fund invests are not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those expenses.

⁴   Annualized.

32    See financial notes.

Schwab Target 2040 Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
95.0%	Other Investment Companies	29,569	32,008
3.9%	Short-Term Investment	1,328	1,328
98.9%	Total Investments	30,897	33,336
1.1%	Other Assets and Liabilities, Net		360
100.0%	Total Net Assets		33,696

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   95.0% of net assets
Equity Funds 80.2%
Laudus International MarketMasters Fund, Select Shares (a)		201,740		4,190
Laudus Rosenberg International Small Capitalization Fund, Institutional Shares (a)		118,789		2,609
Laudus Rosenberg U.S. Discovery Fund, Institutional Shares (a)		98,138		1,864
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Institutional Shares (a)		299,316		2,820
Schwab Core Equity Fund (a)		494,529		9,099
Schwab Dividend Equity Fund, Select Shares (a)		202,303		2,954
Schwab Small-Cap Equity Fund, Select Shares (a)		195,648		3,482
				27,018
Fixed-Income Funds 13.9%
Schwab Total Bond Market Fund (a)		444,695		4,371
Schwab YieldPlus Fund, Select Shares (a)		32,063		311
				4,682
Money Funds 0.9%
Schwab Value Advantage Money Fund, Institutional Shares (a)		308,415		308

 

Security         Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   3.9% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		496		496
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		832		832
				1,328

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $30,898, and the unrealized appreciation and depreciation were $2,438 and $0, respectively, with a net unrealized appreciation of $2,438.

(a) Issuer is affiliated with the fund’s adviser.

See financial notes.    33

Schwab Target 2040 Fund

Statement of
Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $29,569)	$	32,008
Investments in unaffiliated issuers, at value (cost $1,328)		1,328
Total investments, at value (cost $30,897)		33,336
Receivables:
Fund shares sold		396
Dividends		19
Due from investment adviser	+	6
Total assets		33,757
Liabilities
Payables:
Investments bought		19
Fund shares redeemed		12
Trustee fees		1
Accrued expenses	+	29
Total liabilities		61
Net Assets
Total assets		33,757
Total liabilities		–61
Net assets	$	33,696
Net Assets by Source
Capital received from investors		31,064
Net investment income not yet distributed		117
Net realized capital gains		76
Net unrealized capital gains		2,439

Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding		=	NAV
$33,696			2,849		$	11.83

 

34    See financial notes.

Schwab Target 2040 Fund

Statement of
Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	227
Interest	+	25
Total Investment Income		252
Net Realized Gains and Losses
Net realized gains received from affiliated underlying funds		108
Net Unrealized Gains and Losses
Net unrealized gains from affiliated underlying funds		2,315
Expenses
Professional fees		32
Registration fees		29
Portfolio accounting fees		8
Shareholder reports		7
Custodian fees		7
Trustees’ fees		6
Other expenses	+	6
Total expenses		95
Expense reduction by adviser and Schwab		–93
Net expenses		2
Increase in Net Assets from Operations
Total investment income		252
Net expenses		–2
Net investment income		250
Net realized gains		108
Net unrealized gains	+	2,315
Increase in net assets from operations	$	2,673

 

See financial notes.    35

Schwab Target 2040 Fund

Statements of
Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			7/1/05*–10/31/05
Net investment income		$	250		$	17
Net realized gains			108			—
Net unrealized gains		+	2,315			124
Increase in net assets from operations			2,673			141
Distributions Paid
Dividends from net investment income		$	182		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						7/1/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		2,218		$	24,869			894		$	9,127
Shares Reinvested		16			176			—			—
Shares Redeemed	+	(255	)		(2,853	)		(24	)		(255	)
Net transactions in fund shares		1,979		$	22,192			870		$	8,872
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				7/1/05*–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		870	$	9,013		—	$	—
Total increase	+	1,979		24,683		870		9,013
End of period		2,849	$	33,696		870	$	9,013
Net investment income not yet distributed			$	117			$	17

 

* Commencement of operations

36    See financial notes.

Schwab Retirement Income Fund

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			7/1/051— 10/31/05
Per-Share Data ($)
Net asset value at beginning of period		9.90			10.00
Income or loss from investment operations:
Net investment income		0.41			0.11
Net realized and unrealized gains or losses		0.32			(0.09	)
Total income or loss from investment operations		0.73			0.02
Less distributions:
Dividends from net investment income		(0.41	)		(0.12	)
Distributions from net realized gains		(0.03	)		—
Total distributions		(0.44	)		(0.12	)
Net asset value at end of period		10.19			9.90
Total return (%)		7.52			0.16	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses3		0.10			0.10	4
Gross operating expenses3		0.36			0.64	4
Net investment income		4.20			3.40	4
Portfolio turnover rate		1			—
Net assets, end of period ($ x 1,000,000)		36			14

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.
The income received by the portfolio from underlying funds is reduced by those expenses.
 

⁴   Annualized.

See financial notes.    37

Schwab Retirement Income Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
97.5%	Other Investment Companies	34,791	35,503
1.9%	Short-Term Investment	703	703
99.4%	Total Investments	35,494	36,206
0.6%	Other Assets and Liabilities, Net		216
100.0%	Total Net Assets		36,422

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   97.5% of net assets
Equity Funds 20.5%
Laudus International MarketMasters Fund, Select Shares (a)		85,531		1,776
Schwab Dividend Equity Fund, Select Shares (a)		390,464		5,701
				7,477
Fixed-Income Funds 72.4%
Schwab Total Bond Market Fund (a)		1,785,980		17,556
Schwab YieldPlus Fund, Select Shares (a)		908,911		8,798
				26,354
Money Funds 4.6%
Schwab Value Advantage Money Fund, Institutional Shares (a)		1,671,533		1,672

 

Security         Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   1.9% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		703		703

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $35,498, and the unrealized appreciation and depreciation were $817, and $(109), respectively, with a net unrealized appreciation of $708.

(a) Issuer is affiliated with the fund’s adviser.

38    See financial notes.

Schwab Retirement Income Fund

Statement of
Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $34,791)	$	35,503
Investments in unaffiliated issuers, at value (cost $703)		703
Total investments, at value (cost $35,494)		36,206
Receivables:
Fund shares sold		305
Dividends		114
Due from investment adviser	+	9
Total assets		36,634
Liabilities
Payables:
Investments bought		110
Fund shares redeemed		23
Accrued expenses	+	79
Total liabilities		212
Net Assets
Total assets		36,634
Total liabilities		–212
Net assets	$	36,422
Net Assets by Source
Capital received from investors		35,710
Net investment income not yet distributed		4
Net realized capital losses		(4	)
Net unrealized capital gains		712

Net Asset Value (NAV)

Net Assets	÷	Shares Outstanding		=	NAV
$36,422			3,573		$	10.19

See financial notes.    39

Schwab Retirement Income Fund

Statement of
Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	1,206
Interest	+	28
Total Investment Income		1,234
Net Realized Gains and Losses
Net realized gains received from affiliated underlying funds		65
Net Unrealized Gains and Losses
Net unrealized gains from affiliated underlying funds		829
Expenses
Registration fees		37
Professional fees		33
Portfolio accounting fees		9
Trustees’ fees		6
Shareholder reports		6
Custodian fees		5
Other expenses	+	6
Total expenses		102
Expense reduction by adviser and Schwab		–73
Net expenses		29
Increase in Net Assets from Operations
Total investment income		1,234
Net expenses		–29
Net investment income		1,205
Net realized gains		65
Net unrealized gains	+	829
Increase in net assets from operations	$	2,099

 

40    See financial notes.

Schwab Retirement Income Fund

Statements of
Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			7/1/05*–10/31/05
Net investment income		$	1,205		$	124
Net realized gains			65			—
Net unrealized gains or losses		+	829			(117	)
Increase in net assets from operations			2,099			7
Distributions Paid
Dividends from net investment income		$	1,205		$	138
Distributions from net realized gains			65			—
Total distributions		$	1,270		$	138

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						7/1/05*–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold		3,030		$	30,303			1,508		$	15,066
Shares reinvested		86			859			10			99
Shares redeemed	+	(953	)		(9,526	)		(108	)		(1,077	)
Net transactions in fund shares		2,163		$	21,636			1,410		$	14,088
Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				7/1/05–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		1,410	$	13,957		—	$	—
Total increase	+	2,163		22,465		1,410		13,957
End of period		3,573	$	36,422		1,410	$	13,957
Net investment income not yet distributed				4				—

 

* Commencement of operations.

See financial notes.    41

Schwab Target Funds

Financial Notes

1.   Business Structure of the Funds

Each of the funds discussed in this report is a series of Schwab Capital Trust (trust), a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the funds discussed in this report, which are highlighted:

Schwab Capital Trust (organized May 7, 1993)
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund
Schwab S&P 500 Index Fund
Schwab Institutional Select® S&P 500 Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®
Schwab MarketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Laudus U.S. MarketMasters Fund™
Laudus Small-Cap MarketMasters Fund™
Laudus International MarketMasters Fund™
Schwab Viewpoints Fund™
Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™

The funds offer one share class. Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies used in the preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America. For more information about the underlying funds operations and policies, please refer to those funds’ semiannual and annual reports.

(a)   Security Valuation:

The funds value the investments in underlying funds every business day. The funds use the following policies to value these investments:

Underlying funds: valued at their respective net asset values as determined by those funds, in accordance with the Investment Company Act of 1940 for a given day.

Short-term securities (60 days or less to maturity): valued at amortized cost.

(b)  Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.

(c)  Investment Income:

Interest income is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(d)  Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.

(e)  Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year, except for the Retirement Income Fund, which makes income distributions monthly.

42    

Schwab Target Funds

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

Each fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law.

(f)  Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(g)  Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

(h)  Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

(i)  New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Funds’ financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:
(All dollar amounts are × 1,000)

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser and administrator pursuant to an Investment Advisory and

Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

The underlying funds pay fees to the investment adviser for advisory and administrative services and to Schwab for transfer agent and shareholder services. The funds are not charged such fees directly. These fees are included in the net asset value of the underlying funds.

    43

Schwab Target Funds

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

CSIM and Schwab have made agreements with the funds to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses through February 28, 2007, as follows:

Target 2010 Fund	0.06	%
Target 2020 Fund	0.04	%
Target 2030 Fund	0.03	%
Target 2040 Fund	0.01	%
Retirement Income Fund	0.10	%

 

The funds may engage in certain transactions involving related parties. Pursuant to an exemptive order issued by the SEC, the funds may invest in other related funds. As of October 31, 2006, the percentages of the underlying funds’ shares of other related funds owned by each Target fund are:

	Target 2010 Fund			Target 2020 Fund			Target 2030 Fund			Target 2040 Fund			Retirement Income Fund
Schwab Active Equity Funds:
Core Equity Fund		1.2	%		1.8	%		1.3	%		0.8	%		—
Dividend Equity Fund		0.3	%		0.5	%		0.3	%		0.2	%		0.4	%
Small-Cap Equity Fund		0.6	%		0.9	%		0.8	%		0.5	%		—
Laudus MarketMasters Funds:
International MarketMasters Fund		0.3	%		0.4	%		0.3	%		0.2	%		0.1	%
Laudus Rosenberg Funds:
U.S. Large Capitalization Growth Fund		6.4	%		10.1	%		6.8	%		4.5	%		—
U.S. Discovery Fund		0.3	%		0.3	%		0.3	%		0.2	%		—
International Small Capitalization Fund		0.2	%		0.4	%		0.2	%		0.2	%		—
Schwab Bond Funds:
Total Bond Market Fund		1.6	%		1.7	%		0.9	%		0.3	%		1.4	%
YieldPlus Fund		—*			—*			—*			—*			0.1	%
Schwab Money Funds:
Value Advantage Money Fund		—*			—*			—*			—*			—*

 

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for any fund during the period.

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.

*   Less than 0.1%.

44    

Schwab Target Funds

Financial Notes (continued)

4. Purchases and Sales of Investment Securities:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:

	Purchases of Securities		Sales/Maturities of Securities
Target 2010 Fund	$	24,807	$	166
Target 2020 Fund		40,820		—
Target 2030 Fund		31,835		—
Target 2040 Fund		21,155		131
Retirement Income Fund		21,255		215

 

5. Redemption Fee:
(All dollar amounts are × 1,000)

The funds may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. The funds charge 2.00% of the transaction amount on shares redeemed or exchanged 30 days or less after the purchase. Such amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
Target 2010 Fund	$	1	$	1
Target 2020 Fund		11		1
Target 2030 Fund		4		1
Target 2040 Fund		5		—
Retirement Income Fund		—		—

 

6. Borrowing:
(All dollar amounts are × 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Fund	Amount Outstanding at 10/31/06		Average Borrowing*		Weighted Average Interest Rate*(%)
Target 2010 Fund	$	—	$	44		5.14
Target 2020 Fund		—		140		4.79
Target 2030 Fund		—		—**		5.50
Target 2040 Fund		—		31		4.77
Retirement Income Fund		—		135		4.76

 

*   Based on the number of days for which the borrowing is outstanding.

**   Amount is less than $1,000.

    45

Schwab Target Funds

Financial Notes (continued)

7. Federal Income Taxes:
(All dollar amounts are × 1,000)

As of October 31, 2006, the components of distributable earnings on a tax-basis were as follows:

	Target 2010 Fund			Target 2020 Fund			Target 2030 Fund			Target 2040 Fund		Retirement Income Fund
Undistributed ordinary income	$	603		$	617		$	297		$	118	$	4
Undistributed long-term capital gains		166			231			133			75		—
Unrealized appreciation		4,848			6,430			4,271			2,438		817
Unrealized depreciation		(182	)		(122	)		(27	)		—		(109	)
Net unrealized appreciation	$	4,666		$	6,308		$	4,244		$	2,438	$	708

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

The tax-basis components of distributions paid during the current and prior fiscal years were:

	Target 2010 Fund		Target 2020 Fund		Target 2030 Fund		Target 2040 Fund		Retirement Income Fund
Current period distributions
Ordinary income	$	592	$	687	$	360	$	182	$	1,227
Long-term capital gains		—		—		—		—		43
Return of capital		—		—		—		—		—
Prior period distributions
Ordinary income		—		—		—		—		138
Long-term capital gains
Return of capital		—		—		—		—		—

 

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

	Target 2010 Fund			Target 2020 Fund			Target 2030 Fund			Target 2040 Fund			Retirement Income Fund
Capital shares		—			—			—			—			—
Undistributed net investment income	$	94		$	122		$	59		$	32		$	4
Net realized capital gains and losses	$	(94	)	$	(122	)	$	(59	)	$	(32	)	$	(4	)

 

46    

Schwab Target Funds

Financial Notes (continued)

Other Federal Tax Information: (unaudited)
(All dollar amounts are × 1,000)

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction:

	Percentage
Target 2010 Fund	34.07	%
Target 2020 Fund	33.95	%
Target 2030 Fund	32.21	%
Target 2040 Fund	31.85	%
Retirement Income Fund	15.57	%

For the fiscal year ended October 31, 2006, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

Target 2010 Fund	$	226
Target 2020 Fund		379
Target 2030 Fund		177
Target 2040 Fund		104
Retirement Income Fund		99

 

    47

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab Target 2010 Fund, Schwab Target 2020 Fund, Schwab Target 2030 Fund, Schwab Target 2040 Fund and Schwab Retirement Income Fund (five of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2006, the results of each of their operations for the year then ended, and the changes in each of their net assets and the financial highlights for the year then ended and for the period July 1, 2005 (commencement of operations) through October 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

48    

Investment Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Capital Trust (the “Trust”) and CSIM (the “Agreement”) with respect to existing funds in the Trust, including the funds covered in this annual report, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement.

Fund Performance.  The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund’s performance relative to a peer group of other mutual funds

    49

and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement.

Fund Expenses.  With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement.

Profitability.  With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement.

Economies of Scale.  The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

50    

Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996–1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6���Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

    51

Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

52    

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer — Fixed Income (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer — Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer — Equities (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

    53

Officers of the Trust (continued)
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

¹Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

54    

Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

    55

Notes

Schwab Funds® offers you an extensive family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available Schwab Funds.

Whether you’re an experienced investor or just starting out, Schwab Funds can help you achieve your financial goals. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any Schwab Fund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.

Proxy Voting Policies, Procedures and Results

A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/schwabfunds, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.

Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at www.sec.gov.

The Schwab Funds Family®

Stock Funds

Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Institutional Select® S&P 500 Fund
Schwab S&P 500 Index Fund
Schwab 1000 Index® Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®

Asset Allocation Funds

Schwab Viewpoints Fund™
Schwab MarketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

Bond Funds

Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fund™
Schwab Total Bond Market Fund™
Schwab GNMA Fund™
Schwab Inflation Protected Fund™
Schwab Tax-Free YieldPlus Fund™

Schwab Short/Intermediate Tax-Free Bond Fund™
Schwab Long-Term Tax-Free Bond Fund™
Schwab California Tax-Free YieldPlus Fund™
Schwab California Short/Intermediate
    Tax-Free Bond Fund™
Schwab California Long-Term Tax-Free Bond Fund™

Schwab Money Funds

Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.¹ Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments^®.

¹Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money.

Investment Adviser
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104

Funds
Schwab Funds®
P.O. Box 3812, Englewood, CO 80155—3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved.

Member SIPC

Printed on recycled paper.

MFR33732-01

Schwab MarketTrack Portfolios®
	Annual Report October 31, 2006
	Schwab MarketTrack All Equity Portfolio™ Schwab MarketTrack Growth Portfolio™ Schwab MarketTrack Balanced Portfolio™ Schwab MarketTrack Conservative Portfolio™

Four portfolios that combine the power of indexing with the benefits of asset allocation

In this report

Performance at a Glance	1
From the Chairman	2
From the President	3
Investment Environment	4
Schwab MarketTrack All Equity Portfolio™	6
Schwab MarketTrack Growth Portfolio™	8
Schwab MarketTrack Balanced Portfolio™	10
Schwab MarketTrack Conservative Portfolio™	12
Fund Expenses	14
Financial Statements	15
Financial Notes	50
Investment Advisory Agreement Approval	58
Trustees and Officers	60
Glossary	64

 

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab).

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

	Total Return for the Report Period
Schwab MarketTrack All Equity Portfolio™ (Ticker Symbol: SWEGX)	19.31%
Benchmark: All Equity Composite Index	19.85%
Fund Category: Morningstar Large-Cap Blend	14.74%
Performance Details	pages 6–7
Schwab MarketTrack Growth Portfolio™
Investor Shares (Ticker Symbol: SWHGX)	15.83%
P Shares (Ticker Symbol: SWPGX)*	4.69%
Benchmark: Growth Composite Index	16.37%
Fund Category: Morningstar Large-Cap Blend	14.74%
Performance Details	pages 8–9
Schwab MarketTrack Balanced Portfolio™ (Ticker Symbol: SWBGX)	12.92%
Benchmark: Balanced Composite Index	13.50%
Fund Category: Morningstar Moderate Allocation	11.91%
Performance Details	pages 10–11
Schwab MarketTrack Conservative Portfolio™
Investor Shares (Ticker Symbol: SWCGX)	10.13%
P Shares (Ticker Symbol: SWCPX)*	4.22%
Benchmark: Conservative Composite Index	10.68%
Fund Category: Morningstar Conservative Allocation	8.43%
Performance Details	pages 12–13
Minimum Initial Investment1
Investor Shares
($500 for retirement, education and custodial accounts)	$1,000
P Shares	$100,000

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the portfolios’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or on the redemption of portfolio shares.

The All Equity Composite Index is composed of Morningstar category averages and is calculated using the following portion allocations: 45% large-cap stocks, 25% small-cap stocks and 30% foreign stocks. Source: Morningstar, Inc.

The Growth Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 40% large-cap stocks, 20% small-cap stocks, 20% foreign stocks, 15% bonds and 5% cash. Source: Morningstar, Inc.

The Balanced Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 30% large-cap stocks, 15% small-caps stocks, 15% foreign stocks, 35% bonds and 5% cash. Source: Morningstar, Inc.

The Conservative Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 20% large-cap stocks, 10% small-cap stocks, 10% foreign stocks, 55% bonds and 5% cash. Source: Morningstar. Inc.

Source of category information: Morningstar, Inc.

¹   Please see prospectus for further detail and eligibility requirements.

*   Return is for the period since inception (4/6/06) through 10/31/06. Not annualized.

Schwab MarketTrack Portfolios    1

Charles Schwab
Chairman From the Chairman Dear Shareholder, I founded Schwab over thirty years ago to be a home for serious investors. That mission continues to guide us today as we constantly strive to improve and innovate. By doing this, and providing some of the highest quality products and services — at a competitive price — we remain true to our heritage. I take particular pride in the Schwab Funds. Founded over 15 years ago, Schwab Funds now includes more than 50 funds with over $170 billion in assets. With a variety of investment strategies, Schwab Funds provides a range of innovative investment choices that can serve as a foundation for your asset allocation plan, including the Schwab MarketTrack Portfolios, contained within this book. The Schwab MarketTrack Portfolios are asset allocation funds. Research has shown that asset allocation can be the most important factor in determining overall portfolio performance. The Schwab MarketTrack Portfolios offer investors a convenient way to allocate their investment across management strategies and asset classes to help balance risk while seeking to provide competitive returns. Schwab Funds are managed by Charles Schwab Investment Management, Inc., one of the largest mutual fund managers in the U.S. Our portfolio managers share a passion for market analysis and use some of the most sophisticated financial models in the country. I am proud of their depth of experience, which reflects an average of 14 years in the investment industry. Furthermore, I am impressed by the commitment that our managers bring to the stewardship of their funds, for you, their shareholders. In closing, I want to thank you for investing with us. We work every day to warrant the trust you have placed in us; that will never change. Sincerely,
 

2    Schwab MarketTrack Portfolios

Evelyn Dilsaver is President and
CEO of Charles Schwab Investment
Management, Inc. and of each of
the funds covered in this report.
She joined the firm in 1992 and
has held a variety of executive
positions at Schwab. From the President Dear Shareholder, I am pleased to present the annual report for the Schwab MarketTrack Portfolios for the period ended October 31, 2006. Thanks to the support of investors like you, Schwab MarketTrack Portfolios assets were over $2 billion as of this report date. Schwab MarketTrack Portfolios offer the power of indexing plus asset allocation. Indexing offers the potential to keep pace with market performance while asset allocation can help you manage risk. Indexing can be a highly effective approach to stock investing. In fact, for the one-year report period, I’m pleased to note that all four of the Schwab MarketTrack Portfolios beat their respective fund category averages. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the funds’ ticker symbols and report period returns for the funds, their benchmarks and category averages. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.schwabfunds.com. This website contains regular updates about the Schwab Funds. I encourage you to visit the website to stay informed about your fund. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Schwab Funds. Sincerely,
  Past performance is no guarantee of future results.

Schwab MarketTrack Portfolios    3

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund.
The Investment Environment As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Product (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth. In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of the

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
n  16.34%	S&P 500® Index: measures U.S. large-cap stocks
n  19.98%	Russell 2000® Index: measures U.S. small-cap stocks
o  27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
n    5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market
n  4.57%	Three-Month U.S. Treasury Bills (T-Bills): measures short-term U.S. Treasury obligations

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data source: Charles Schwab & Co., Inc.

4    Schwab MarketTrack Portfolios

The Investment Environment  continued

Larry Mano, (right) vice president
and senior portfolio manager is
responsible for the day-to-day
co-management of the funds. Tom Brown, (left) associate portfolio
manager is responsible for the day-
to-day co-management of the fund. Matthew Hastings, CFA, vice presi
dent and senior portfolio manager,
has day-to-day co-management
responsibility for the bond and cash
portions of the funds. Andrew Tikofsky, PhD, director and
portfolio manager, has day-to-day
co-management responsibility for the
bond and cash portions of the funds.   Steven Hung, director and portfolio
manager, has day-to-day co-manage
ment responsibility for the bond and
cash portions of the funds.


end of the report period. In its statement, the Fed noted that the economy appeared to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only 2.2% in the third quarter of 2006. Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico, as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds. The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact. Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

Schwab MarketTrack Portfolios    5

Schwab MarketTrack All Equity Portfolio™

The Schwab MarketTrack Portfolios incorporate a mix of different asset classes. Accordingly, their returns over a given period will reflect a blend of returns of those asset classes, and will depend on their relative weightings within each portfolio. By spreading their exposure over various asset classes, the MarketTrack Portfolios are designed to provide more stable returns while seeking to reduce risk over various market cycles.

The Schwab MarketTrack All Equity Portfolio returned 19.31% for the one-year report period, closely tracking its benchmark, the All Equity Composite Index, which was up 19.85%. The portfolio invests in different segments of the stock market including large-cap, small-cap and international, so its performance reflects a blend of those segments’ returns. Unlike the other MarketTrack Portfolios, this fund does not have a defined allocation to fixed income. For the one-year period, the fund’s allocation to international and small-cap segments positively contributed to performance. Performance of those segments, as measured by the MSCI EAFE and Russell 2000 Index, which returned 27.52% and 19.98% respectively, outperformed that of large-cap domestic equities, as measured by the S&P 500 Index, which returned 16.34%.

As of 10/31/06:

Statistics
Number of Holdings	5
Weighted Average Market Cap ($ x 1,000,000)	64,220
Price/Earnings Ratio (P/E)	19.1
Price/Book Ratio (P/B)	2.6

 

Asset Class Weightings % of Investments
Large-Cap Stocks	44.6	%
International Stocks	30.1	%
Small-Cap Stocks	25.0	%
Short-Term Investments	0.3	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Institutional Select S&P 500 Fund	44.6	%
Schwab International Index Fund, Select Shares	30.1	%
Schwab Small-Cap Index Fund, Select Shares	25.0	%
Total	99.7	%

 

Portfolio holdings may have changed since the report date.

¹This list is not a recommendation of any security by the investment adviser.

6    Schwab MarketTrack Portfolios

Schwab MarketTrack All Equity Portfolio

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment¹

 

 

Average Annual Total Returns1,2
	1 year			5 years			Since Inception
Portfolio: Schwab MarketTrack All Equity Portfolio™ (5/19/98)		19.31	%		9.92	%		5.01	%
Benchmark: All Equity Composite Index		19.85	%		10.63	%		5.29	%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		3.98	%

 

Style Assessment³

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.

¹The All Equity Composite Index is composed of Morningstar category averages and is calculated using the following portion allocations: 45% large-cap stocks, 25% small-cap stocks and 30% foreign stocks. Source: Morningstar, Inc.

²Portfolio expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the portfolio based on a ten-factor model for value and growth characteristics. The portfolio’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the portfolio’s holdings as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab MarketTrack Portfolios    7

Schwab MarketTrack Growth Portfolio™

The Schwab MarketTrack Portfolios incorporate a mix of different asset classes. Accordingly, their returns over a given period will reflect a blend of returns of those asset classes, and will depend on their relative weightings within each portfolio. By spreading their exposure over various asset classes, the MarketTrack Portfolios are designed to provide more stable returns while seeking to reduce risk over various market cycles.

The Schwab MarketTrack Growth Portfolio Investor Shares was up 15.83%, compared to a gain of 16.37% by its benchmark, the Growth Composite Index, for the one year report period. The fund has an 80% target stock allocation that is divided among large-cap, small-cap, and international stocks. For the one-year report period, the target allocation to international stocks drove returns, as the international sector posted the strongest returns over the period. The fund is designed to allocate 20% to fixed income in order to reduce volatility and risk over the long term. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	508
Weighted Average Market Cap ($ x 1,000,000)	58,215
Price/Earnings Ratio (P/E)	19.5
Price/Book Ratio (P/B)	2.6

 

Asset Class Weightings % of Investments
Large-Cap Stocks	41.0	%
International Stocks	19.8	%
Small-Cap Stocks	19.7	%
Bonds	14.8	%
Short Term Investments	4.7	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Institutional Select S&P 500 Fund	23.8	%
Schwab International Index Fund, Select Shares	19.7	%
Schwab Small-Cap Index Fund, Select Shares	19.7	%
Schwab Total Bond Market Fund	14.8	%
Schwab Value Advantage Money Fund, Institutional Shares	4.5	%
Exxon Mobil Corp.	0.6	%
General Electric Co.	0.5	%
Bank of America Corp.	0.4	%
Microsoft Corp.	0.4	%
Citigroup, Inc.	0.4	%
Total	84.8	%

 

Portfolio holdings may have changed since the report date.

¹This list is not a recommendation of any security by the investment adviser.

8    Schwab MarketTrack Portfolios

Schwab MarketTrack Growth Portfolio

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $100,000 Investment in P Shares1

 

Average Annual Total Returns1,2
Portfolio Class and Inception Date	1 year			5 years			10 years			Since Inception
Investor Shares (11/20/95)		15.83	%		8.55	%		7.88	%	n/a
P Shares (4/6/06)	n/a			n/a			n/a			4.69%
Benchmark: Growth Composite Index		16.37	%		9.20	%		8.20	%		(4/6/06	) 5.14%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%		7.76	%		(4/6/06	) 4.10%

 

Style Assessment³

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.

¹The Growth Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 40% large-cap stocks, 20% small-cap stocks, 20% foreign stocks, 15% bonds and 5% cash. Source: Morningstar, Inc.

²Portfolio expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the portfolio based on a ten-factor model for value and growth characteristics. The portfolio’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the portfolio’s holdings as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance — past, present, or future.

Schwab MarketTrack Portfolios    9

Schwab MarketTrack Balanced Portfolio™

The Schwab MarketTrack Portfolios incorporate a mix of different asset classes. Accordingly, their returns over a given period will reflect a blend of returns of those asset classes, and will depend on their relative weightings within each portfolio. By spreading their exposure over various asset classes, the MarketTrack Portfolios are designed to provide more stable returns while seeking to reduce risk over various market cycles.

The Schwab MarketTrack Balanced Portfolio returned 12.92% for the one-year period compared to a 13.50% return for its benchmark, the Balanced Composite Index. The Balanced Portfolio’s allocation is weighted toward stock investments, with a 60% target allocation to equities. The fund also maintains a sizeable 40% allocation to fixed income investments, seeking to reduce volatility and add income. Although the equity market led in performance for the period, bonds also positively contributed to performance, as tracked by the Lehman Brothers U.S. Aggregate Bond Index, which returned 5.19% for the one-year period. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	507

 

Asset Class Weightings % of Investments
Bonds	34.5	%
Large-Cap Stocks	31.3	%
International Stocks	14.9	%
Small-Cap Stocks	14.8	%
Short-Term Investment	4.5	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Total Bond Market Fund	34.4	%
Schwab Institutional Select S&P 500 Fund	15.8	%
Schwab International Index Fund, Select Shares	15.0	%
Schwab Small-Cap Index Fund, Select Shares	14.8	%
Schwab Value Advantage Money Fund, Institutional Shares	4.3	%
Exxon Mobil Corp.	0.5	%
General Electric Co.	0.5	%
Citigroup, Inc.	0.3	%
Microsoft Corp.	0.3	%
Bank of America Corp.	0.3	%
Total	86.2	%

 

Portfolio holdings may have changed since the report date.

¹This list is not a recommendation of any security by the investment adviser.

10    Schwab MarketTrack Portfolios

Schwab MarketTrack Balanced Portfolio

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical
$10,000 Investment¹

 

 

Average Annual Total Returns1,2
	1 year			5 years			10 years
Portfolio: Schwab MarketTrack Balanced Portfolio™ (11/20/95)		12.92	%		7.47	%		7.41	%
Benchmark: Balanced Composite Index		13.50	%		8.11	%		7.84	%
Fund Category: Morningstar Moderate Allocation		11.91	%		6.62	%		7.21	%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.

¹The Balanced Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 30% large-cap stocks, 15% small-cap stocks, 15% foreign stocks, 35% bonds and 5% cash. Source: Morningstar, Inc.

²Portfolio expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.

Schwab MarketTrack Portfolios    11

Schwab MarketTrack Conservative Portfolio™

The Schwab MarketTrack Portfolios incorporate a mix of different asset classes. Accordingly, their returns over a given period will reflect a blend of returns of those asset classes, and will depend on their relative weightings within each portfolio. By spreading their exposure over various asset classes, the MarketTrack Portfolios are designed to provide more stable returns while seeking to reduce risk over various market cycles.

The Schwab MarketTrack Conservative Portfolio Investor shares returned 10.13% for the one-year period, compared to a 10.68% return for its benchmark, the Conservative Composite Index. This portfolio is designed to seek income with more growth potential than an all-bond portfolio. As such, the portfolio’s allocation is weighted toward bond investments, for which the target allocation is 55%. Seeking to obtain long-term growth, the portfolio has a substantial 40% target allocation to stocks. Although the equity market led in performance for the period, bonds also positively contributed to performance, as tracked by the Lehman Brothers U.S., Aggregate bond Index, which returned 5.19% for the one-year period. Within the fixed income allocation of the fund, the Schwab Total Bond Market Fund contributed to returns. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight.

As of 10/31/06:

Statistics
Number of Holdings	508

 

Asset Class Weightings % of Investments
Bonds	54.7	%
Large-Cap Stocks	20.6	%
International Stocks	10.0	%
Small-Cap Stocks	10.0	%
Short-Term Investments	4.7	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Schwab Total Bond Market Fund	54.7	%
Schwab S&P 500 Index Fund, Select Shares	13.8	%
Schwab International Index Fund, Select Shares	10.0	%
Schwab Small-Cap Index Fund, Select Shares	10.0	%
Schwab Value Advantage Money Fund, Institutional Shares	4.3	%
Schwab Institutional Select S&P 500 Fund	0.6	%
Exxon Mobil Corp.	0.3	%
General Electric Co.	0.2	%
Microsoft Corp.	0.1	%
Citigroup, Inc.	0.1	%
Total	94.1	%

 

Portfolio holdings may have changed since the report date.

¹This list is not a recommendation of any security by the investment adviser.

12    Schwab MarketTrack Portfolios

Schwab MarketTrack Conservative Portfolio

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $100,000 Investment in P Shares1

 

Average Annual Total Returns1,2
Portfolio Class and Inception Date	1 year			5 years			10 years			Since Inception
Investor Shares (11/20/95)		10.13	%		6.34	%		6.83	%	n/a
P Shares (4/6/06)	n/a			n/a			n/a			4.22%
Benchmark: Conservative Composite Index		10.68	%		6.95	%		7.38	%		(4/6/06	) 4.66%
Fund Category: Morningstar Large-Cap Blend		8.43	%		5.65	%		6.14	%		(4/6/06	) 3.65%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.

¹The Conservative Composite Index is composed of Morningstar category averages and cash equivalents as represented by the 90-day T-bill and is calculated using the following portfolio allocations: 20% large-cap stocks, 10% small-cap stocks, 10% foreign stocks, 55% bonds and 5% cash. Source: Morningstar, Inc.

²Portfolio expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.

Schwab MarketTrack Portfolios    13

Fund Expenses (Unaudited)

Examples for a $1,000 Investment

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Schwab MarketTrack All Equity Portfolio™
Actual Return		0.50	%	$	1,000	$	1,040.50	$	2.57
Hypothetical 5% Return		0.50	%	$	1,000	$	1,022.68	$	2.55
Schwab MarketTrack Growth Portfolio™
Investor Shares
Actual Return		0.50	%	$	1,000	$	1,041.30	$	2.57
Hypothetical 5% Return		0.50	%	$	1,000	$	1,022.68	$	2.55
P Shares
Actual Return		0.35	%	$	1,000	$	1,041.80	$	1.80
Hypothetical 5% Return		0.35	%	$	1,000	$	1,023.44	$	1.79
Schwab MarketTrack Balanced Portfolio™
Actual Return		0.50	%	$	1,000	$	1,040.90	$	2.57
Hypothetical 5% Return		0.50	%	$	1,000	$	1,022.68	$	2.55
Schwab MarketTrack Conservative Portfolio™
Investor Shares
Actual Return		0.50	%	$	1,000	$	1,041.30	$	2.57
Hypothetical 5% Return		0.50	%	$	1,000	$	1,022.68	$	2.55
P Shares
Actual Return		0.35	%	$	1,000	$	1,041.40	$	1.80
Hypothetical 5% Return		0.35	%	$	1,000	$	1,023.44	$	1.79

 

¹  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights; does not include expenses of underlying funds in which the portfolios invest.

²  Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

14    Schwab MarketTrack Portfolios

Schwab MarketTrack All Equity Portfolio™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		11.55			10.44			9.43			7.60			9.06
Income or loss from investment operations:
Net investment income		0.11			0.12			0.08			0.09			0.05
Net realized and unrealized gains or losses		2.10			1.11			1.02			1.85			(1.32	)
Total income or loss from investment operations		2.21			1.23			1.10			1.94			(1.27	)
Less distributions:
Dividends from net investment income		(0.13	)		(0.12	)		(0.09	)		(0.09	)		(0.05	)
Distributions from net realized gains		—			—			—			(0.02	)		(0.14	)
Total distributions		(0.13	)		(0.12	)		(0.09	)		(0.11	)		(0.19	)
Net asset value at end of period		13.63			11.55			10.44			9.43			7.60
Total return (%)		19.31			11.81			11.75			25.77			(14.40	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.50			0.50			0.50			0.50			0.50
Gross operating expenses1		0.74			0.75			0.76			0.76			0.77
Net investment income		0.89			1.07			0.83			1.10			0.58
Portfolio turnover rate		8			49			7			10			15
Net assets, end of period ($ x 1,000,000)		527			463			450			427			353

 

¹   The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those expenses.

See financial notes.    15

Schwab MarketTrack All Equity Portfolio

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
99.6%	Other Investment Companies	408,213	524,998
0.4%	Short-Term Investment	1,712	1,712
—%	U.S. Treasury Obligation	199	199
100.0%	Total Investments	410,124	526,909
0.0%	Other Assets and Liabilities, Net		(42	)
100.0%	Total Net Assets		526,867

 

Security	Number of Shares		Value ($ x 1,000)
Other Investment Companies   99.6% of net assets
Schwab Institutional Select S&P 500 Fund (a)(b)		21,360,977		234,757
Schwab International Index Fund, Select Shares (a)		7,492,879		158,399
Schwab Small-Cap Index Fund, Select Shares (a)		5,076,701		131,842
				524,998

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   0.4% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		1,712	1,712
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		200	199

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $423,318 and the unrealized appreciation and depreciation were $103,591 and ($0), respectively, with net unrealized appreciation of $103,591.

In addition to the above, the fund held the following at 10/31/2006. All numbers are x 1,000 except number of futures contracts.

	Number of Contracts	Contract Value	Unrealized Gains
Futures Contract

S&P 500 Index, e-mini, Long,
expires 12/15/06

             35          2,421         94   

(a)   Issuer is affiliated with the fund’s adviser.

(b)   All or a portion of this security is held as collateral for open futures contracts.

16    See financial notes.

Schwab MarketTrack All Equity Portfolio

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $408,213)	$	524,998
Investments in unaffiliated issuers, at value (cost $1,911)	+	1,911
Total investments, at value (cost $410,124)		526,909
Receivables:
Fund shares sold		481
Prepaid expenses	+	3
Total assets		527,393
Liabilities
Payables:
Investment adviser and administrator fees		9
Transfer agent and shareholder service fees		11
Fund shares redeemed		395
Accrued expenses	+	111
Total liabilities		526
Net Assets
Total assets		527,393
Total liabilities		–526
Net assets	$	526,867
Net Assets by Source
Capital received from investors		438,051
Distributions in excess of net investment income		(2,742	)
Net realized capital losses		(25,321	)
Net unrealized capital gains		116,879
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding	=	NAV
$526,867		38,659		$	13.63

 

See financial notes.    17

Schwab MarketTrack All Equity Portfolio

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	6,841
Interest	+	83
Total Investment Income		6,924
Net Realized Gains and Losses
Net realized gains on sales of affiliated underlying funds		11,963
Net realized gains received from affiliated underlying funds		749
Net realized gains on futures contracts	+	114
Net realized gains		12,826
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds		69,477
Net unrealized gains on futures contracts	+	94
Net unrealized gains		69,571
Expenses
Investment adviser and administrator fees		2,180
Transfer agent and shareholder service fees		1,240
Shareholder reports		116
Registration fees		39
Professional fees		33
Portfolio accounting fees		25
Custodian fees		23
Trustees’ fees		9
Overdraft expense		5
Other expense	+	12
Total expenses		3,682
Expense reduction by adviser and Schwab		–1,196
Net expenses		2,486
Increase in Net Assets from Operations
Total investment income		6,924
Net expenses		–2,486
Net investment income		4,438
Net realized gains		12,826
Net unrealized gains	+	69,571
Increase in net assets from operations	$	86,835

 

18    See financial notes.

Schwab MarketTrack All Equity Portfolio

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06		11/1/04—10/31/05
Net investment income	$	4,438	$	5,041
Net realized gains or losses		12,826		(104	)
Net unrealized gains	+	69,571		47,628
Increase in net assets from operations		86,835		52,565
Distributions Paid
Dividends from net investment income	$	5,267	$	5,060

 

Transactions in Fund Shares

 

	11/1/05—10/31/06						11/1/04—10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares sold		5,531		$	70,097			5,741		$	64,017
Shares reinvested		416			5,033			437			4,835
Shares redeemed	+	(7,352	)		(92,711	)		(9,253	)		(103,675	)
Net transactions in fund shares		(1,405	)	$	(17,581	)		(3,075	)	$	(34,823	)

 

Shares Outstanding and Net Assets

 

	11/1/05—10/31/06						11/1/04—10/31/05
	SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period		40,064		$	462,880			43,139		$	450,198
Total increase or decrease	+	(1,405	)		63,987			(3,075	)		12,682
End of period		38,659		$	526,867			40,064		$	462,880
Distribution in excess of net investment income				$	(2,742	)				$	(1,913	)

 

See financial notes.    19

Schwab MarketTrack Growth Portfolio™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		16.81			15.57			14.36			12.05			13.88
Income or loss from investment operations:
Net investment income		0.30			0.27			0.21			0.18			0.19
Net realized and unrealized gains or losses		2.33			1.20			1.21			2.33			(1.62	)
Total income or loss from investment operations		2.63			1.47			1.42			2.51			(1.43	)
Less distributions:
Dividends from net investment income		(0.28	)		(0.23	)		(0.21	)		(0.20	)		(0.24	)
Distributions from net realized gains		—			—			—			—			(0.16	)
Total distributions		(0.28	)		(0.23	)		(0.21	)		(0.20	)		(0.40	)
Net asset value at end of period		19.16			16.81			15.57			14.36			12.05
Total return (%)		15.83			9.48			9.94			21.18			(10.78	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.50			0.50			0.50			0.50			0.50
Gross operating expenses1		0.71			0.72			0.73			0.74			0.75
Net investment income		1.74			1.58			1.35			1.48			1.35
Portfolio turnover rate		7			33			9			9			21
Net assets, end of period ($ x 1,000,000)		602			657			614			578			510
P Shares	4/6/062— 10/31/06
Per-Share Data ($)
Net asset value at beginning of period		18.32
Income from investment operations:
Net investment income		0.10
Net realized and unrealized gains		0.76
Total income from investment operations		0.86
Net asset value at end of period		19.18
Total return (%)		4.69	3
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.35	4
Gross operating expenses1		0.56	4
Net investment income		0.95	4
Portfolio turnover rate		7	3
Net assets, end of period ($ x 1,000,000)		119

 

¹   The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those expenses.

²   Commencement of operations.

³   Not annualized.

⁴   Annualized

20    See financial notes.

Schwab MarketTrack Growth Portfolio

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
17.2%	Common Stock	70,477	123,699
82.5%	Other Investment Companies	455,095	594,832
0.2%	Short-Term Investment	1,500	1,500
99.9%	Total Investments	527,072	720,031
0.1%	Other Assets and Liabilities, Net		570
100.0%	Total Net Assets		720,601

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   17.2% of net assets
Automobiles & Components 0.1%
Ford Motor Co.		18,103		150
General Motors Corp.		5,425		189
Harley-Davidson, Inc.		3,000		206
Johnson Controls, Inc.		1,800		147
The Goodyear Tire & Rubber Co. *		1,600		25
				717
Banks 1.0%
AmSouth Bancorp		3,300		100
BB&T Corp.		5,300		231
Comerica, Inc.		1,700		99
Commerce Bancorp, Inc.		1,800		63
Compass Bancshares, Inc.		1,200		67
Countrywide Financial Corp.		5,298		202
Fannie Mae		9,400		557
Fifth Third Bancorp		5,369		214
First Horizon National Corp.		1,200		47
Freddie Mac		6,600		455
Huntington Bancshares, Inc.		2,262		55
KeyCorp		4,400		163
M&T Bank Corp.		998		122
Marshall & Ilsley Corp.		2,056		99
MGIC Investment Corp.		900		53
National City Corp.		6,100		227
North Fork Bancorp, Inc.		4,500		129
PNC Financial Services Group, Inc.		2,800		196
Regions Financial Corp.		4,542		172
Sovereign Bancorp, Inc.		3,885		93
SunTrust Banks, Inc.		3,500		276
Synovus Financial Corp.		2,750		81
U.S. Bancorp		17,972		608
Wachovia Corp.		18,552		1,030
Washington Mutual, Inc.		9,843		416
Wells Fargo & Co.		33,230		1,206
Zions Bancorp		900		72
				7,033
Capital Goods 1.5%
3M Co.		7,600		599
American Power Conversion Corp.		1,725		52
American Standard Cos., Inc.		2,100		93
Caterpillar, Inc.		6,600		401
Cooper Industries Ltd., Class A		900		81
Cummins, Inc.		400		51
Danaher Corp.		2,800		201
Deere & Co.		2,300		196
Dover Corp.		2,000		95
Eaton Corp.		1,400		101
Emerson Electric Co.		4,000		338
Fluor Corp.		800		63
General Dynamics Corp.		4,000		284
General Electric Co.		105,200		3,694
Goodrich Corp.		1,100		49
Honeywell International, Inc.		8,437		355
Illinois Tool Works, Inc.		4,200		201
Ingersoll-Rand Co., Ltd., Class A		3,300		121
ITT Corp.		1,800		98
L-3 Communications Holdings, Inc.		1,100		89
Lockheed Martin Corp.		3,900		339
Masco Corp.		4,500		124
Navistar International Corp. *		700		19
Northrop Grumman Corp.		3,592		238
PACCAR, Inc.		2,362		140
Pall Corp.		1,000		32
Parker Hannifin Corp.		1,150		96
Raytheon Co.		4,500		225
Rockwell Automation, Inc.		1,900		118
Rockwell Collins, Inc.		1,900		110
Textron, Inc.		1,500		136
The Boeing Co.		8,078		645
Tyco International Ltd.		19,803		583
United Technologies Corp.		10,000		657
W.W. Grainger, Inc.		900		66
				10,690
Commercial Services & Supplies 0.1%
Allied Waste Industries, Inc. *		3,100		38
Avery Dennison Corp.		1,200		76
Cintas Corp.		1,638		68
Equifax, Inc.		1,200		45
Monster Worldwide, Inc. *		954		39
Pitney Bowes, Inc.		2,300		107
R.R. Donnelley & Sons Co.		2,100		71
Robert Half International, Inc.		1,700		62
Waste Management, Inc.		5,517		207
				713
Consumer Durables & Apparel 0.2%
Brunswick Corp.		900		28
Centex Corp.		1,200		63

See financial notes.    21

Schwab MarketTrack Growth Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Coach, Inc. *		3,600		143
D.R. Horton, Inc.		2,660		62
Eastman Kodak Co.		3,100		76
Fortune Brands, Inc.		1,400		108
Harman International Industries, Inc.		700		72
Hasbro, Inc.		1,650		43
Jones Apparel Group, Inc.		1,200		40
KB Home		800		36
Leggett & Platt, Inc.		2,000		47
Lennar Corp., Class A		1,300		62
Liz Claiborne, Inc.		1,200		51
Mattel, Inc.		4,150		94
Newell Rubbermaid, Inc.		2,745		79
Nike, Inc., Class B		2,300		211
Pulte Homes, Inc.		2,400		74
Snap-On, Inc.		600		28
The Black & Decker Corp.		900		75
The Stanley Works		600		28
VF Corp.		1,200		91
Whirlpool Corp.		907		79
				1,590
Consumer Services 0.3%
Apollo Group, Inc., Class A *		1,700		63
Carnival Corp.		4,300		210
Darden Restaurants, Inc.		1,800		75
H&R Block, Inc.		3,400		74
Harrah’s Entertainment, Inc.		1,780		132
Hilton Hotels Corp.		3,600		104
International Game Technology		3,400		145
Marriott International, Inc., Class A		3,900		163
McDonald’s Corp.		12,400		520
Starbucks Corp. *		7,920		299
Starwood Hotels & Resorts Worldwide, Inc.		1,900		113
Wendy’s International, Inc.		1,000		35
Western Union Co. *		7,888		174
Wyndham Worldwide Corp. *		1,986		59
YUM! Brands, Inc.		3,120		185
				2,351
Diversified Financials 1.8%
American Express Co.		12,300		711
Ameriprise Financial, Inc.		2,300		118
Bank of America Corp.		46,110		2,484
Capital One Financial Corp.		2,900		230
Chicago Mercantile Exchange Holdings, Inc.		340		170
CIT Group, Inc.		2,000		104
Citigroup, Inc.		49,392		2,478
E*TRADE Financial Corp. *		3,500		81
Federated Investors, Inc., Class B		1,100		38
Franklin Resources, Inc.		1,500		171
Janus Capital Group, Inc.		2,200		44
JPMorgan Chase & Co.		34,915		1,656
Legg Mason, Inc.		1,200		108
Lehman Brothers Holdings, Inc.		5,200		405
Mellon Financial Corp.		4,100		159
Merrill Lynch & Co., Inc.		9,400		822
Moody’s Corp.		3,000		199
Morgan Stanley		10,900		833
Northern Trust Corp.		2,200		129
SLM Corp.		4,110		200
State Street Corp.		3,300		212
T. Rowe Price Group, Inc.		2,400		114
The Bank of New York Co., Inc.		7,300		251
The Bear Stearns Cos., Inc.		1,082		164
The Charles Schwab Corp.		11,242		205
The Goldman Sachs Group, Inc.		4,379		831
				12,917
Energy 1.6%
Anadarko Petroleum Corp.		4,836		225
Apache Corp.		3,308		216
Baker Hughes, Inc.		3,360		232
BJ Services Co.		3,000		91
Chesapeake Energy Corp.		3,600		117
ChevronTexaco Corp.		22,235		1,494
ConocoPhillips		16,440		990
CONSOL Energy, Inc.		1,800		64
Devon Energy Corp.		4,600		307
El Paso Corp.		6,306		86
EOG Resources, Inc.		2,256		150
Exxon Mobil Corp.		59,498		4,249
Halliburton Co.		9,916		321
Hess Corp.		2,520		107
Kinder Morgan, Inc.		1,107		116
Marathon Oil Corp.		3,589		310
Murphy Oil Corp.		1,600		75
Nabors Industries Ltd. *		2,800		86
National-Oilwell Varco, Inc. *		1,600		97
Noble Corp.		1,300		91
Occidental Petroleum Corp.		7,800		366
Rowan Cos., Inc.		1,100		37
Schlumberger Ltd.		11,400		719
Smith International, Inc.		1,900		75
Sunoco, Inc.		1,400		93
Transocean, Inc. *		2,945		214
Valero Energy Corp.		6,000		314
Weatherford International Ltd. *		2,720		112
Williams Cos., Inc.		5,000		122
XTO Energy, Inc.		3,333		156
				11,632
Food & Staples Retailing 0.4%
Costco Wholesale Corp.		4,400		235
CVS Corp.		7,800		245
Safeway, Inc.		4,200		123
Supervalu, Inc.		2,043		68
Sysco Corp.		6,200		217
The Kroger Co.		7,200		162
Wal-Mart Stores, Inc.		24,800		1,222
Walgreen Co.		9,900		433
Whole Foods Market, Inc.		1,000		64
Winn-Dixie Stores, Inc. *		1,500		—
				2,769

22    See financial notes.

Schwab MarketTrack Growth Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Food, Beverage & Tobacco 0.8%
Altria Group, Inc.		20,300		1,651
Anheuser-Busch Cos., Inc.		7,800		370
Archer-Daniels-Midland Co.		6,532		252
Brown-Forman Corp., Class B		904		65
Campbell Soup Co.		1,800		67
Coca-Cola Enterprises, Inc.		4,000		80
ConAgra Foods, Inc.		4,900		128
Constellation Brands, Inc., Class A *		1,920		53
Dean Foods Co. *		1,300		55
General Mills, Inc.		3,576		203
H.J. Heinz Co.		3,400		143
Kellogg Co.		2,500		126
McCormick & Co., Inc.		1,400		52
Molson Coors Brewing Co., Class B		800		57
PepsiCo, Inc.		16,460		1,044
Reynolds American, Inc.		2,284		144
Sara Lee Corp.		7,600		130
The Coca-Cola Co.		20,600		963
The Hershey Co.		2,400		127
The Pepsi Bottling Group, Inc.		1,932		61
Tyson Foods, Inc., Class A		2,500		36
UST, Inc.		1,600		86
Wm. Wrigley Jr. Co.		2,375		123
				6,016
Health Care Equipment & Services 0.7%
Aetna, Inc.		5,696		235
AmerisourceBergen Corp.		2,000		94
Bausch & Lomb, Inc.		600		32
Baxter International, Inc.		6,100		280
Becton Dickinson & Co.		2,600		182
Biomet, Inc.		2,475		94
Boston Scientific Corp. *		10,887		173
C.R. Bard, Inc.		1,000		82
Cardinal Health, Inc.		4,100		268
Caremark Rx, Inc.		4,470		220
CIGNA Corp.		1,400		164
Coventry Health Care, Inc. *		1,650		77
Express Scripts, Inc. *		1,600		102
HCA, Inc.		3,200		162
Health Management Associates, Inc., Class A		2,400		47
Hospira, Inc. *		1,530		56
Humana, Inc. *		1,400		84
IMS Health, Inc.		2,300		64
Laboratory Corp. of America Holdings *		1,300		89
Manor Care, Inc.		1,100		53
McKesson Corp.		2,654		133
Medco Health Solutions, Inc. *		2,641		141
Medtronic, Inc.		11,800		574
Patterson Cos., Inc. *		1,300		43
Quest Diagnostics, Inc.		1,802		90
St. Jude Medical, Inc. *		3,500		120
Stryker Corp.		2,884		151
Tenet Healthcare Corp. *		4,650		33
UnitedHealth Group, Inc.		12,600		615
WellPoint, Inc. *		5,902		450
Zimmer Holdings, Inc. *		2,300		166
				5,074
Household & Personal Products 0.4%
Alberto-Culver Co., Class B		900		46
Avon Products, Inc.		4,800		146
Clorox Co.		1,500		97
Colgate-Palmolive Co.		5,300		339
Kimberly-Clark Corp.		4,960		330
Procter & Gamble Co.		31,717		2,010
The Estee Lauder Cos., Inc., Class A		1,100		44
				3,012
Insurance 0.8%
ACE Ltd.		2,500		143
AFLAC, Inc.		5,200		234
Ambac Financial Group, Inc.		1,015		85
American International Group, Inc.		25,551		1,716
AON Corp.		2,625		91
Cincinnati Financial Corp.		1,984		90
Genworth Financial, Inc., Class A		3,700		124
Lincoln National Corp.		3,168		200
Loews Corp.		4,800		187
Marsh & McLennan Cos., Inc.		5,200		153
MBIA, Inc.		1,350		84
MetLife, Inc.		7,310		418
Principal Financial Group, Inc.		3,065		173
Prudential Financial, Inc.		5,200		400
SAFECO Corp.		1,100		64
The Allstate Corp.		6,700		411
The Chubb Corp.		3,800		202
The Hartford Financial Services Group, Inc.		2,900		253
The Progressive Corp.		8,400		203
The St. Paul Travelers Cos., Inc.		6,453		330
Torchmark Corp.		1,100		68
UnumProvident Corp.		2,349		46
XL Capital Ltd., Class A		1,300		92
				5,767
Materials 0.5%
Air Products & Chemicals, Inc.		2,300		160
Alcoa, Inc.		8,472		245
Allegheny Technologies, Inc.		735		58
Ashland, Inc.		800		47
Ball Corp.		800		33
Bemis Co.		1,000		34
E.I. du Pont de Nemours & Co.		9,592		439
Eastman Chemical Co.		800		49
Ecolab, Inc.		2,200		100
Freeport-McMoRan Copper & Gold, Inc., Class B		1,700		103
Hercules, Inc. *		900		16
International Flavors & Fragrances, Inc.		1,100		47
International Paper Co.		4,846		162
Louisiana-Pacific Corp.		600		12

See financial notes.    23

Schwab MarketTrack Growth Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
MeadWestvaco Corp.		1,970		54
Monsanto Co.		4,986		221
Newmont Mining Corp.		4,201		190
Nucor Corp.		3,600		210
Pactiv Corp. *		1,500		46
Phelps Dodge Corp.		1,820		183
PPG Industries, Inc.		1,700		116
Praxair, Inc.		3,200		193
Rohm & Haas Co.		2,205		114
Sealed Air Corp.		882		53
Sigma-Aldrich Corp.		600		45
Temple-Inland, Inc.		1,200		47
The Dow Chemical Co.		9,394		383
United States Steel Corp.		900		61
Vulcan Materials Co.		800		65
Weyerhaeuser Co.		2,300		146
				3,632
Media 0.6%
CBS Corp., Class B		7,905		229
Clear Channel Communications, Inc.		5,217		182
Comcast Corp., Class A *		21,843		888
Dow Jones & Co., Inc.		800		28
Gannett Co., Inc.		2,500		148
Meredith Corp.		500		26
News Corp., Class A		24,300		507
Omnicom Group, Inc.		1,800		183
The E.W. Scripps Co., Class A		800		39
The Interpublic Group of Cos., Inc. *		3,700		40
The McGraw-Hill Cos., Inc.		3,800		244
The New York Times Co., Class A		1,400		34
The Walt Disney Co.		20,119		633
Time Warner, Inc.		40,850		817
Tribune Co.		3,100		103
Univision Communications, Inc., Class A *		3,104		109
Viacom, Inc., Class B *		7,905		308
				4,518
Pharmaceuticals & Biotechnology 1.4%
Abbott Laboratories		15,300		727
Allergan, Inc.		1,300		150
Amgen, Inc. *		12,138		921
Applied Biosystems Group — Applera Corp.		2,000		75
Barr Pharmaceuticals, Inc. *		1,100		58
Biogen Idec, Inc. *		3,125		149
Bristol-Myers Squibb Co.		19,000		470
Eli Lilly & Co.		10,900		611
Fisher Scientific International, Inc. *		1,115		95
Forest Laboratories, Inc. *		3,400		166
Genzyme Corp. *		2,400		162
Gilead Sciences, Inc. *		4,300		296
Johnson & Johnson		29,254		1,972
King Pharmaceuticals, Inc. *		2,133		36
MedImmune, Inc. *		2,400		77
Merck & Co., Inc.		21,600		981
Millipore Corp. *		400		26
Mylan Laboratories, Inc.		2,600		53
PerkinElmer, Inc.		1,000		21
Pfizer, Inc.		73,476		1,958
Schering-Plough Corp.		14,100		312
Thermo Electron Corp. *		1,300		56
Waters Corp. *		1,300		65
Watson Pharmaceuticals, Inc. *		1,000		27
Wyeth		13,100		668
				10,132
Real Estate 0.2%
Apartment Investment & Management Co., Class A		900		52
Archstone-Smith Trust		1,900		114
Boston Properties, Inc.		800		85
Equity Office Properties Trust		3,900		166
Equity Residential		2,600		142
Kimco Realty Corp.		431		19
Plum Creek Timber Co., Inc.		1,700		61
ProLogis		1,700		108
Public Storage, Inc.		800		72
Realogy Corp. *		2,483		64
Simon Property Group, Inc.		2,200		214
Vornado Realty Trust		1,200		143
				1,240
Retailing 0.7%
Amazon.com, Inc. *		3,000		114
AutoNation, Inc. *		2,190		44
AutoZone, Inc. *		800		90
Bed, Bath & Beyond, Inc. *		2,800		113
Best Buy Co., Inc.		4,505		249
Big Lots, Inc. *		1,100		23
Circuit City Stores, Inc.		2,000		54
Dillard’s, Inc., Class A		500		15
Dollar General Corp.		3,303		46
eBay, Inc. *		11,036		355
Family Dollar Stores, Inc.		1,700		50
Federated Department Stores, Inc.		5,144		226
Genuine Parts Co.		1,800		82
Home Depot, Inc.		21,040		785
J.C. Penney Co., Inc.		2,800		211
Kohl’s Corp. *		3,200		226
Limited Brands, Inc.		3,738		110
Lowe’s Cos., Inc.		15,200		458
Nordstrom, Inc.		2,600		123
Office Depot, Inc. *		3,300		139
OfficeMax, Inc.		700		33
RadioShack Corp.		1,900		34
Sears Holdings Corp. *		1,000		174
Staples, Inc.		7,125		184
Target Corp.		8,800		521
The Gap, Inc.		7,200		151
The Sherwin-Williams Co.		1,200		71
The TJX Cos., Inc.		5,200		151
Tiffany & Co.		1,400		50
				4,882

24    See financial notes.

Schwab MarketTrack Growth Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Semiconductors & Semiconductor Equipment 0.5%
Advanced Micro Devices, Inc. *		3,840		82
Altera Corp. *		3,680		68
Analog Devices, Inc.		3,400		108
Applied Materials, Inc.		16,200		282
Broadcom Corp., Class A *		4,350		132
Freescale Semiconductor, Inc., Class B *		3,898		153
Intel Corp.		60,530		1,292
KLA-Tencor Corp.		1,800		88
Linear Technology Corp.		3,000		93
LSI Logic Corp. *		3,000		30
Maxim Integrated Products, Inc.		3,100		93
Micron Technology, Inc. *		5,400		78
National Semiconductor Corp.		3,400		82
Novellus Systems, Inc. *		1,325		37
NVIDIA Corp. *		2,800		98
PMC - Sierra, Inc. *		1,600		10
Teradyne, Inc. *		1,700		24
Texas Instruments, Inc.		16,800		507
Xilinx, Inc.		3,200		82
				3,339
Software & Services 0.9%
Adobe Systems, Inc. *		4,800		184
Affiliated Computer Services, Inc., Class A *		1,271		68
Autodesk, Inc. *		2,400		88
Automatic Data Processing, Inc.		5,700		282
BMC Software, Inc. *		2,400		73
CA, Inc.		5,625		139
Citrix Systems, Inc. *		1,800		53
Computer Sciences Corp. *		1,680		89
Compuware Corp. *		3,600		29
Convergys Corp. *		1,354		29
Electronic Arts, Inc. *		2,866		152
Electronic Data Systems Corp.		4,600		116
First Data Corp.		7,888		191
Fiserv, Inc. *		1,800		89
Google, Inc., Class A *		2,100		1,000
Intuit, Inc. *		3,944		139
Microsoft Corp.		86,420		2,481
Novell, Inc. *		3,200		19
Oracle Corp. *		38,295		707
Parametric Technology Corp. *		1,080		21
Paychex, Inc.		3,600		142
Sabre Holdings Corp., Class A		1,283		33
Symantec Corp. *		11,721		233
Unisys Corp. *		3,100		20
VeriSign, Inc. *		2,500		52
Yahoo! Inc. *		12,600		332
				6,761
Technology Hardware & Equipment 1.2%
ADC Telecommunications, Inc. *		857		12
Agilent Technologies, Inc. *		4,437		158
Apple Computer, Inc. *		8,000		649
Avaya, Inc. *		4,132		53
Ciena Corp. *		457		11
Cisco Systems, Inc. *		63,500		1,532
Comverse Technology, Inc. *		1,900		41
Corning, Inc. *		13,900		284
Dell, Inc. *		23,740		578
EMC Corp. *		23,186		284
Hewlett-Packard Co.		28,403		1,100
International Business Machines Corp.		15,820		1,461
Jabil Circuit, Inc.		1,998		57
JDS Uniphase Corp. *		1,573		23
Juniper Networks, Inc. *		4,200		72
Lexmark International, Inc., Class A *		1,300		83
Lucent Technologies, Inc. *		40,092		97
Molex, Inc.		1,875		65
Motorola, Inc.		24,131		557
NCR Corp. *		2,000		83
Network Appliance, Inc. *		3,400		124
QLogic Corp. *		1,738		36
QUALCOMM, Inc.		16,200		590
SanDisk Corp. *		1,800		87
Sanmina — SCI Corp. *		5,000		20
Solectron Corp. *		7,900		26
Sun Microsystems, Inc. *		30,800		167
Symbol Technologies, Inc.		2,031		30
Tektronix, Inc.		900		27
Tellabs, Inc. *		4,000		42
Xerox Corp. *		9,400		160
				8,509
Telecommunication Services 0.6%
ALLTEL Corp.		3,730		199
AT&T Corp.		38,070		1,304
BellSouth Corp.		17,800		803
CenturyTel, Inc.		1,350		54
Citizens Communications Co.		2,576		38
Embarq Corp.		1,428		69
Qwest Communications International, Inc. *		15,773		136
Sprint Nextel Corp.		28,569		534
Verizon Communications, Inc.		27,258		1,008
Windstream Corp.		3,856		53
				4,198
Transportation 0.3%
Burlington Northern Santa Fe Corp.		3,800		295
CSX Corp.		4,400		157
Delta Air Lines, Inc. *		1,300		1
FedEx Corp.		2,920		335
Norfolk Southern Corp.		3,600		189
Ryder System, Inc.		400		21
Southwest Airlines Co.		7,480		112
Union Pacific Corp.		2,500		227
United Parcel Service, Inc., Class B		10,818		815
				2,152

See financial notes.    25

Schwab MarketTrack Growth Portfolio

Portfolio Holdings continued

Security		Number of Shares		Value ($ x 1,000)
Utilities 0.6%
Allegheny Energy, Inc. *			1,070		46
Ameren Corp.			1,800		97
American Electric Power Co., Inc.			3,860		160
CenterPoint Energy, Inc.			2,949		46
CMS Energy Corp. *			1,000		15
Consolidated Edison, Inc.			2,100		101
Constellation Energy Group, Inc.			1,700		106
Dominion Resources, Inc.			3,378		274
DTE Energy Co.			1,700		77
Duke Energy Corp.			11,348		359
Dynegy, Inc., Class A *			3,100		19
Edison International			3,200		142
Entergy Corp.			2,100		180
Exelon Corp.			6,524		404
FirstEnergy Corp.			3,195		188
FPL Group, Inc.			3,800		194
KeySpan Corp.			1,300		53
Nicor, Inc.	��		500		23
NiSource, Inc.			2,646		62
Peoples Energy Corp.			200		9
PG&E Corp.			4,000		173
Pinnacle West Capital Corp.			800		38
PPL Corp.			3,600		124
Progress Energy, Inc.			2,475		114
Public Service Enterprise Group, Inc.			2,300		140
Sempra Energy			2,103		112
TECO Energy, Inc.			1,300		21
The AES Corp. *			6,000		132
The Southern Co.			7,200		262
TXU Corp.			4,734		299
Xcel Energy, Inc.			3,850		85
					4,055
Other Investment Companies   82.5% of net assets
Schwab Institutional Select S&P 500 Fund (a)			15,600,509		171,450
Schwab International Index Fund, Select Shares (a)			6,737,074		142,422
Schwab Small-Cap Index Fund, Select Shares (a)			5,457,443		141,730
Schwab Total Bond Market Fund (a)			10,824,169		106,402
Schwab Value Advantage Money Fund, Institutional Shares (a)			32,828,008		32,828
					594,832

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   0.2% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		1,500	1,500

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $532,134 and the unrealized appreciation and depreciation were $195,244 and ($7,347), respectively, with a net unrealized appreciation of $187,897.

* Non-income producing security.

(a) Issuer is affiliated with the fund’s adviser.

26    See financial notes.

Schwab MarketTrack Growth Portfolio

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $455,095)	$	594,832
Investments in unaffiliated issuers, at value (cost $71,977)	+	125,199
Total investments, at value (cost $527,072)		720,031
Receivables:
Fund shares sold		916
Dividends		604
Prepaid expenses	+	4
Total assets		721,555
Liabilities
Payables:
Investments bought		431
Investment adviser and administrator fees		13
Transfer agent and shareholder services fees		13
Fund shares redeemed		393
Trustee fees		1
Accrued expenses	+	103
Total liabilities		954
Net Assets
Total assets		721,555
Total liabilities		–954
Net assets	$	720,601
Net Assets by Source
Capital received from investors		522,452
Net investment income not yet distributed		3,726
Net realized capital gains		1,464
Net unrealized capital gains		192,959
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	601,864			31,415		$	19.16
P Shares	$	118,737			6,192		$	19.18

 

See financial notes.    27

Schwab MarketTrack Growth Portfolio

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	13,673
Dividends, including $1 from affiliated issuer		1,180
Interest	+	80
Total Investment Income		14,933
Net Realized Gains and Losses
Net realized gains on sales of affiliated underlying funds		7,628
Net realized gains received from affiliated underlying funds		1,135
Net realized gains on unaffiliated investments	+	2,915
Net realized gains		11,678
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds		63,298
Net unrealized gains on unaffiliated investments	+	15,394
Net unrealized gains		78,692
Expenses
Investment adviser and administrator fees		2,962
Transfer agent and shareholder service fees:
Investor Shares		1,569
P Shares		68
Shareholder reports		92
Portfolio accounting fees		43
Registration fees		41
Professional fees		34
Custodian fees		27
Trustees’ fees		10
Overdraft Expense		4
Other expenses	+	17
Total expenses		4,867
Expense reduction by adviser and Schwab		–1,487
Net expenses		3,380
Increase in Net Assets from Operations
Total investment income		14,933
Net expenses		–3,380
Net investment income		11,553
Net realized gains		11,678
Net unrealized gains	+	78,692
Increase in net assets from operations	$	101,923

 

28    See financial notes.

Schwab MarketTrack Growth Portfolio

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06		11/1/04—10/31/05
Net investment income	$	11,553	$	10,435
Net realized gains		11,678		14,721
Net unrealized gains	+	78,692		33,101
Increase in net assets from operations		101,923		58,257
Distributions Paid
Dividends from net investment income (Investor Shares)	$	10,988	$	9,037

 

Transactions in Fund Shares

 

	11/1/05—10/31/06						11/1/04—10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		4,979		$	88,820			6,796		$	111,249
P. Shares	+	7,185			131,591			—			—
Total shares sold		12,164		$	220,411			6,796		$	111,249
Shares Reinvested
Investor Shares		616		$	10,669			541		$	8,784
P. Shares	+	—			—			—			—
Total shares reinvested		616		$	10,669			541		$	8,784
Shares Redeemed
Investor Shares		(13,275	)	$	(240,466	)		(7,663	)	$	(125,960	)
P. Shares	+	(993	)		(18,069	)		—			—
Total shares redeemed		(14,268	)	$	(258,535	)		(7,663	)	$	(125,960	)
Net transactions in fund shares		(1,488	)	$	(27,455	)		(326	)	$	(5,927	)

 

Shares Outstanding and Net Assets

 

	11/1/05—10/31/06					11/1/04—10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		39,095		$	657,121		39,421		$	613,828
Total increase or decrease	+	(1,488	)		63,480		(326	)		43,293
End of period		37,607		$	720,601		39,095		$	657,121
Net investment income not yet distributed				$	3,726				$	2,892

 

See financial notes.    29

Schwab MarketTrack Balanced Portfolio™

Financial Statements

Financial Highlights

	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		15.46			14.66			13.78			12.05			13.47
Income or loss from investment operations:
Net investment income		0.38			0.34			0.29			0.25			0.32
Net realized and unrealized gains or losses		1.58			0.74			0.88			1.77			(1.22	)
Total income or loss from investment operations		1.96			1.08			1.17			2.02			(0.90	)
Less distributions:
Dividends from net investment income		(0.34	)		(0.28	)		(0.29	)		(0.29	)		(0.40	)
Distributions from net realized gains		(0.04	)		—			—			—			(0.12	)
Total distributions		(0.38	)		(0.28	)		(0.29	)		(0.29	)		(0.52	)
Net asset value at end of period		17.04			15.46			14.66			13.78			12.05
Total return (%)		12.92			7.41			8.61			17.12			(7.08	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.50			0.50			0.50			0.50			0.50
Gross operating expenses1		0.73			0.73			0.74			0.74			0.74
Net investment income		2.35			2.20			2.03			1.98			2.35
Portfolio turnover rate		8			25			11			17			31
Net assets, end of period ($ x 1,000,000)		534			519			541			516			462

 

¹   The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those expenses.

30    See financial notes.

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
15.5%	Common Stock	47,622	82,797
84.3%	Other Investment Companies	368,594	450,183
0.2%	Short-Term Investment	960	960
100.0%	Total Investments	417,176	533,940
0.0%	Other Assets and Liabilities, Net		155
100.0%	Total Net Assets		534,095

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   15.5% of net assets
Automobiles & Components 0.1%
Ford Motor Co.		12,185		101
General Motors Corp.		3,650		128
Harley-Davidson, Inc.		2,000		137
Johnson Controls, Inc.		1,200		98
The Goodyear Tire & Rubber Co. *		1,000		15
				479
Banks 0.9%
AmSouth Bancorp		2,600		79
BB&T Corp.		3,600		157
Comerica, Inc.		1,100		64
Commerce Bancorp, Inc.		1,200		42
Compass Bancshares, Inc.		800		45
Countrywide Financial Corp.		3,498		133
Fannie Mae		6,300		373
Fifth Third Bancorp		3,658		146
First Horizon National Corp.		800		31
Freddie Mac		4,500		310
Huntington Bancshares, Inc.		1,597		39
KeyCorp		2,600		97
M&T Bank Corp.		500		61
Marshall & Ilsley Corp.		1,344		64
MGIC Investment Corp.		700		41
National City Corp.		4,100		153
North Fork Bancorp, Inc.		3,000		86
PNC Financial Services Group, Inc.		1,900		133
Regions Financial Corp.		3,078		117
Sovereign Bancorp, Inc.		1,890		45
SunTrust Banks, Inc.		2,300		182
Synovus Financial Corp.		1,900		56
U.S. Bancorp		12,554		425
Wachovia Corp.		12,596		699
Washington Mutual, Inc.		6,634		281
Wells Fargo & Co.		22,470		815
Zions Bancorp		600		48
				4,722
Capital Goods 1.3%
3M Co.		5,000		394
American Power Conversion Corp.		1,175		36
American Standard Cos., Inc.		1,500		66
Caterpillar, Inc.		4,600		279
Cooper Industries Ltd., Class A		600		54
Cummins, Inc.		300		38
Danaher Corp.		2,000		144
Deere & Co.		1,500		128
Dover Corp.		1,400		66
Eaton Corp.		1,000		72
Emerson Electric Co.		2,800		236
Fluor Corp.		500		39
General Dynamics Corp.		2,600		185
General Electric Co.		70,660		2,481
Goodrich Corp.		700		31
Honeywell International, Inc.		5,700		240
Illinois Tool Works, Inc.		2,800		134
Ingersoll-Rand Co., Ltd., Class A		2,200		81
ITT Industries, Inc.		1,200		65
L-3 Communications Holdings, Inc.		700		56
Lockheed Martin Corp.		2,400		209
Masco Corp.		3,000		83
Navistar International Corp. *		400		11
Northrop Grumman Corp.		2,256		150
PACCAR, Inc.		1,575		93
Pall Corp.		800		25
Parker Hannifin Corp.		700		59
Raytheon Co.		2,600		130
Rockwell Automation, Inc.		1,200		74
Rockwell Collins, Inc.		1,200		70
Textron, Inc.		1,000		91
The Boeing Co.		5,484		438
Tyco International Ltd.		12,949		381
United Technologies Corp.		6,600		434
W.W. Grainger, Inc.		600		44
				7,117
Commercial Services & Supplies 0.1%
Allied Waste Industries, Inc. *		2,100		26
Avery Dennison Corp.		700		44
Cintas Corp.		1,102		46
Equifax, Inc.		900		34
Monster Worldwide, Inc. *		666		27
Pitney Bowes, Inc.		1,600		75
R.R. Donnelley & Sons Co.		1,400		47
Robert Half International, Inc.		1,200		44
Waste Management, Inc.		3,712		139
				482

See financial notes.    31

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Consumer Durables & Apparel 0.2%
Brunswick Corp.		600		19
Centex Corp.		800		42
Coach, Inc. *		2,400		95
D.R. Horton, Inc.		1,790		42
Eastman Kodak Co.		2,000		49
Fortune Brands, Inc.		1,000		77
Harman International Industries, Inc.		300		31
Hasbro, Inc.		1,275		33
Jones Apparel Group, Inc.		800		27
KB Home		600		27
Leggett & Platt, Inc.		1,300		30
Lennar Corp., Class A		900		43
Liz Claiborne, Inc.		800		34
Mattel, Inc.		2,825		64
Newell Rubbermaid, Inc.		1,872		54
Nike, Inc., Class B		1,300		119
Pulte Homes, Inc.		1,600		49
Snap-On, Inc.		350		16
The Black & Decker Corp.		600		50
The Stanley Works		600		28
VF Corp.		800		61
Whirlpool Corp.		571		50
				1,040
Consumer Services 0.3%
Apollo Group, Inc., Class A *		1,100		41
Carnival Corp.		2,870		140
Darden Restaurants, Inc.		1,350		57
H&R Block, Inc.		2,400		52
Harrah’s Entertainment, Inc.		1,200		89
Hilton Hotels Corp.		2,500		72
International Game Technology		2,100		89
Marriott International, Inc., Class A		2,200		92
McDonald’s Corp.		8,100		340
Starbucks Corp. *		4,880		184
Starwood Hotels & Resorts Worldwide, Inc.		1,200		72
Wendy’s International, Inc.		800		28
Wyndham Worldwide Corp. *		1,283		38
YUM! Brands, Inc.		2,060		122
				1,416
Diversified Financials 1.6%
American Express Co.		8,310		480
Ameriprise Financial, Inc.		1,542		79
Bank of America Corp.		30,427		1,639
Capital One Financial Corp.		1,900		151
Chicago Mercantile Exchange Holdings, Inc.		230		115
CIT Group, Inc.		1,300		68
Citigroup, Inc.		34,266		1,719
E*TRADE Financial Corp. *		2,400		56
Federated Investors, Inc., Class B		700		24
Franklin Resources, Inc.		1,010		115
Janus Capital Group, Inc.		1,400		28
JPMorgan Chase & Co.		23,413		1,111
Legg Mason, Inc.		800		72
Lehman Brothers Holdings, Inc.		3,600		280
Mellon Financial Corp.		2,800		109
Merrill Lynch & Co., Inc.		6,300		551
Moody’s Corp.		2,000		133
Morgan Stanley		7,010		536
Northern Trust Corp.		1,400		82
SLM Corp.		3,000		146
State Street Corp.		2,200		141
T. Rowe Price Group, Inc.		1,600		76
The Bank of New York Co., Inc.		4,900		169
The Bear Stearns Cos., Inc.		602		91
The Charles Schwab Corp. (a)		6,883		125
The Goldman Sachs Group, Inc.		3,079		584
				8,680
Energy 1.4%
Anadarko Petroleum Corp.		3,020		140
Apache Corp.		2,048		134
Baker Hughes, Inc.		2,250		155
BJ Services Co.		2,000		60
Chesapeake Energy Corp.		2,300		75
ChevronTexaco Corp.		14,727		990
ConocoPhillips		10,985		662
CONSOL Energy, Inc.		1,200		42
Devon Energy Corp.		3,000		201
El Paso Corp.		3,222		44
EOG Resources, Inc.		1,518		101
Exxon Mobil Corp.		40,010		2,858
Halliburton Co.		6,748		218
Hess Corp.		1,800		76
Kinder Morgan, Inc.		745		78
Marathon Oil Corp.		2,218		192
Murphy Oil Corp.		1,100		52
Nabors Industries Ltd. *		2,000		62
National-Oilwell Varco, Inc. *		1,130		68
Noble Corp.		900		63
Occidental Petroleum Corp.		5,400		253
Rowan Cos., Inc.		600		20
Schlumberger Ltd.		7,800		492
Smith International, Inc.		1,300		51
Sunoco, Inc.		900		60
Transocean, Inc. *		2,016		146
Valero Energy Corp.		4,000		209
Weatherford International Ltd. *		1,820		75
Williams Cos., Inc.		3,000		73
XTO Energy, Inc.		2,266		106
				7,756
Food & Staples Retailing 0.4%
Costco Wholesale Corp.		3,000		160
CVS Corp.		5,200		163
Safeway, Inc.		2,800		82
Supervalu, Inc.		1,386		47
Sysco Corp.		4,400		154
The Kroger Co.		5,300		119
Wal-Mart Stores, Inc.		16,640		820
Walgreen Co.		6,600		288

32    See financial notes.

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Whole Foods Market, Inc.		800		51
Winn-Dixie Stores, Inc. *		1,200		—
				1,884
Food, Beverage & Tobacco 0.7%
Altria Group, Inc.		13,640		1,109
Anheuser-Busch Cos., Inc.		5,200		247
Archer-Daniels-Midland Co.		4,446		171
Brown-Forman Corp., Class B		804		58
Campbell Soup Co.		1,200		45
Coca-Cola Enterprises, Inc.		2,700		54
ConAgra Foods, Inc.		3,300		86
Constellation Brands, Inc., Class A *		1,290		35
Dean Foods Co. *		800		33
General Mills, Inc.		2,392		136
H.J. Heinz Co.		2,300		97
Kellogg Co.		1,700		86
McCormick & Co., Inc.		900		34
Molson Coors Brewing Co., Class B		200		14
PepsiCo, Inc.		11,070		702
Reynolds American, Inc.		1,228		78
Sara Lee Corp.		5,100		87
The Coca-Cola Co.		13,810		645
The Hershey Co.		1,600		85
The Pepsi Bottling Group, Inc.		926		29
Tyson Foods, Inc., Class A		1,700		25
UST, Inc.		1,100		59
Wm. Wrigley Jr. Co.		1,500		78
				3,993
Health Care Equipment & Services 0.6%
Aetna, Inc.		4,136		170
AmerisourceBergen Corp.		1,400		66
Bausch & Lomb, Inc.		400		21
Baxter International, Inc.		3,800		175
Becton Dickinson & Co.		1,800		126
Biomet, Inc.		1,575		60
Boston Scientific Corp. *		7,307		116
C.R. Bard, Inc.		600		49
Cardinal Health, Inc.		2,775		182
Caremark Rx, Inc.		2,988		147
CIGNA Corp.		1,000		117
Coventry Health Care, Inc. *		1,050		49
Express Scripts, Inc. *		1,000		64
HCA, Inc. *		2,208		111
Health Management Associates, Inc., Class A		1,600		31
Hospira, Inc. *		1,020		37
Humana, Inc. *		800		48
IMS Health, Inc.		1,500		42
Laboratory Corp. of America Holdings *		900		62
Manor Care, Inc.		500		24
McKesson Corp.		1,773		89
Medco Health Solutions, Inc. *		1,784		95
Medtronic, Inc.		7,800		380
Patterson Cos., Inc. *		900		30
Quest Diagnostics, Inc.		1,470		73
St. Jude Medical, Inc. *		2,120		73
Stryker Corp.		1,946		102
Tenet Healthcare Corp. *		3,150		22
UnitedHealth Group, Inc.		8,400		410
WellPoint, Inc. *		3,852		294
Zimmer Holdings, Inc. *		1,500		108
				3,373
Household & Personal Products 0.4%
Alberto-Culver Co., Class B *		600		31
Avon Products, Inc.		3,000		91
Clorox Co.		1,300		84
Colgate-Palmolive Co.		3,600		230
Kimberly-Clark Corp.		3,380		225
Procter & Gamble Co.		21,832		1,384
The Estee Lauder Cos., Inc., Class A		700		28
				2,073
Insurance 0.7%
ACE Ltd.		1,700		97
AFLAC, Inc.		3,300		148
Ambac Financial Group, Inc.		684		57
American International Group, Inc.		17,342		1,165
AON Corp.		2,025		71
Cincinnati Financial Corp.		1,323		60
Genworth Financial, Inc., Class A		2,500		84
Lincoln National Corp.		2,243		142
Loews Corp.		2,700		105
Marsh & McLennan Cos., Inc.		3,600		106
MBIA, Inc.		1,050		65
MetLife, Inc.		4,986		285
Principal Financial Group, Inc.		2,329		132
Prudential Financial, Inc.		3,500		269
SAFECO Corp.		800		47
The Allstate Corp.		4,700		288
The Chubb Corp.		2,400		128
The Hartford Financial Services Group, Inc.		1,800		157
The Progressive Corp.		6,000		145
The St. Paul Travelers Cos., Inc.		4,241		217
Torchmark Corp.		800		49
UnumProvident Corp.		1,657		33
XL Capital Ltd., Class A		800		56
				3,906
Materials 0.5%
Air Products & Chemicals, Inc.		1,500		104
Alcoa, Inc.		5,648		163
Allegheny Technologies, Inc.		492		39
Ashland, Inc.		500		30
Ball Corp.		800		33
Bemis Co.		600		20
E.I. du Pont de Nemours & Co.		6,484		297
Eastman Chemical Co.		600		37
Ecolab, Inc.		1,200		54
Freeport-McMoRan Copper & Gold, Inc., Class B		1,100		66
Hercules, Inc. *		700		13

See financial notes.    33

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
International Flavors & Fragrances, Inc.		800		34
International Paper Co.		3,166		106
Louisiana-Pacific Corp.		700		14
MeadWestvaco Corp.		1,279		35
Monsanto Co.		3,454		153
Newmont Mining Corp.		2,754		125
Nucor Corp.		2,400		140
Pactiv Corp. *		1,000		31
Phelps Dodge Corp.		1,080		108
PPG Industries, Inc.		1,200		82
Praxair, Inc.		2,000		120
Rohm & Haas Co.		1,421		74
Sealed Air Corp.		621		37
Sigma-Aldrich Corp.		500		38
Temple-Inland, Inc.		800		32
The Dow Chemical Co.		6,049		247
United States Steel Corp.		700		47
Vulcan Materials Co.		700		57
Weyerhaeuser Co.		1,400		89
				2,425
Media 0.6%
CBS Corp., Class B		5,309		154
Clear Channel Communications, Inc.		4,080		142
Comcast Corp., Class A *		14,661		596
Dow Jones & Co., Inc.		600		21
Gannett Co., Inc.		1,700		100
Meredith Corp.		300		16
News Corp., Class A		16,300		340
Omnicom Group, Inc.		1,200		122
The E.W. Scripps Co., Class A		600		30
The Interpublic Group of Cos., Inc. *		2,500		27
The McGraw-Hill Cos., Inc.		2,400		154
The New York Times Co., Class A		1,100		26
The Walt Disney Co.		13,217		416
Time Warner, Inc.		27,870		558
Tribune Co.		2,100		70
Univision Communications, Inc., Class A *		2,048		72
Viacom, Inc., Class B *		5,309		206
				3,050
Pharmaceuticals & Biotechnology 1.3%
Abbott Laboratories		10,200		485
Allergan, Inc.		900		104
Amgen, Inc. *		8,340		633
Applera Corp.-Applied Biosystems Group		1,400		52
Barr Pharmaceuticals, Inc. *		600		31
Biogen Idec, Inc. *		2,150		102
Bristol-Myers Squibb Co.		12,800		317
Eli Lilly & Co.		7,400		415
Fisher Scientific International, Inc. *		720		62
Forest Laboratories, Inc. *		2,400		117
Genzyme Corp. *		1,700		115
Gilead Sciences, Inc. *		2,980		205
Johnson & Johnson		19,872		1,339
King Pharmaceuticals, Inc. *		1,388		23
MedImmune, Inc. *		1,400		45
Merck & Co., Inc.		14,500		659
Millipore Corp. *		200		13
Mylan Laboratories, Inc.		1,700		35
PerkinElmer, Inc.		600		13
Pfizer, Inc.		49,386		1,316
Schering-Plough Corp.		9,500		210
Thermo Electron Corp. *		900		39
Waters Corp. *		900		45
Watson Pharmaceuticals, Inc. *		600		16
Wyeth		8,800		449
				6,840
Real Estate 0.2%
Apartment Investment & Management Co., Class A		600		34
Archstone-Smith Trust		1,300		78
Boston Properties, Inc.		500		54
Equity Office Properties Trust		2,600		111
Equity Residential		1,700		93
Kimco Realty Corp.		301		13
Plum Creek Timber Co., Inc.		1,200		43
ProLogis		1,200		76
Public Storage, Inc.		600		54
Realogy Corp. *		1,603		41
Simon Property Group, Inc.		1,450		141
Vornado Realty Trust		800		95
				833
Retailing 0.6%
Amazon.com, Inc. *		2,000		76
AutoNation, Inc. *		2,000		40
AutoZone, Inc. *		500		56
Bed Bath & Beyond, Inc. *		1,800		73
Best Buy Co., Inc.		3,150		174
Big Lots, Inc. *		700		15
Circuit City Stores, Inc.		1,400		38
Dillard’s, Inc., Class A		700		21
Dollar General Corp.		2,202		31
eBay, Inc. *		7,416		238
Family Dollar Stores, Inc.		1,100		32
Federated Department Stores, Inc.		3,508		154
Genuine Parts Co.		1,150		52
Home Depot, Inc.		14,600		545
J.C. Penney Co., Inc.		1,700		128
Kohl’s Corp. *		2,200		155
Limited Brands, Inc.		2,991		88
Lowe’s Cos., Inc.		10,000		302
Nordstrom, Inc.		1,800		85
Office Depot, Inc. *		2,500		105
OfficeMax, Inc.		600		29
RadioShack Corp.		1,300		23
Sears Holdings Corp. *		673		118
Staples, Inc.		4,575		118
Target Corp.		5,800		343
The Gap, Inc.		3,862		81
The Sherwin-Williams Co.		1,100		65

34    See financial notes.

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
The TJX Cos., Inc.		3,600		104
Tiffany & Co.		950		34
				3,323
Semiconductors & Semiconductor Equipment 0.4%
Advanced Micro Devices, Inc. *		2,040		43
Altera Corp. *		2,546		47
Analog Devices, Inc.		2,300		73
Applied Materials, Inc.		10,900		190
Broadcom Corp., Class A *		3,000		91
Freescale Semiconductor, Inc., Class B *		2,650		104
Intel Corp.		40,660		868
KLA-Tencor Corp.		1,200		59
Linear Technology Corp.		2,000		62
LSI Logic Corp. *		2,000		20
Maxim Integrated Products, Inc.		2,100		63
Micron Technology, Inc. *		3,600		52
National Semiconductor Corp.		2,200		54
Novellus Systems, Inc. *		900		25
NVIDIA Corp. *		1,800		63
PMC — Sierra, Inc. *		1,100		7
Teradyne, Inc. *		1,100		15
Texas Instruments, Inc.		11,300		341
Xilinx, Inc.		2,100		54
				2,231
Software & Services 0.9%
Adobe Systems, Inc. *		3,200		122
Affiliated Computer Services, Inc., Class A *		465		25
Autodesk, Inc. *		1,600		59
Automatic Data Processing, Inc.		3,900		193
BMC Software, Inc. *		1,600		49
CA, Inc.		3,825		95
Citrix Systems, Inc. *		1,200		35
Computer Sciences Corp. *		1,090		58
Compuware Corp. *		2,400		19
Convergys Corp. *		869		18
Electronic Arts, Inc. *		1,792		95
Electronic Data Systems Corp.		3,100		79
First Data Corp.		5,704		138
Fiserv, Inc. *		1,200		59
Google, Inc., Class A *		1,400		667
Intuit, Inc. *		2,654		94
Microsoft Corp.		58,390		1,676
Novell, Inc. *		2,200		13
Oracle Corp. *		25,721		475
Parametric Technology Corp. *		720		14
Paychex, Inc.		2,475		98
Sabre Holdings Corp., Class A		922		23
Symantec Corp. *		8,018		159
Unisys Corp. *		2,100		14
VeriSign, Inc. *		1,600		33
Western Union Co. *		5,704		126
Yahoo! Inc. *		8,400		221
				4,657
Technology Hardware & Equipment 1.0%
ADC Telecommunications, Inc. *		714		10
Agilent Technologies, Inc. *		2,917		104
Apple Computer, Inc. *		5,430		440
Avaya, Inc. *		2,775		36
Ciena Corp. *		300		7
Cisco Systems, Inc. *		42,100		1,016
Comverse Technology, Inc. *		1,000		22
Corning, Inc. *		9,550		195
Dell, Inc. *		16,500		401
EMC Corp. *		15,562		191
Hewlett-Packard Co.		18,324		710
International Business Machines Corp.		10,200		942
Jabil Circuit, Inc.		1,341		39
JDS Uniphase Corp. *		1,058		15
Juniper Networks, Inc. *		3,000		52
Lexmark International, Inc., Class A *		800		51
Lucent Technologies, Inc. *		26,905		65
Molex, Inc.		1,250		44
Motorola, Inc.		16,150		372
NCR Corp. *		1,200		50
Network Appliance, Inc. *		2,000		73
QLogic Corp. *		1,170		24
QUALCOMM, Inc.		10,760		392
SanDisk Corp. *		1,200		58
Sanmina — SCI Corp. *		3,400		13
Solectron Corp. *		5,300		18
Sun Microsystems, Inc. *		20,800		113
Symbol Technologies, Inc.		1,366		20
Tektronix, Inc.		500		15
Tellabs, Inc. *		2,700		28
Xerox Corp. *		5,200		88
				5,604
Telecommunication Services 0.5%
Alltel Corp.		2,510		134
AT&T Corp.		25,639		878
BellSouth Corp.		11,900		537
CenturyTel, Inc.		900		36
Citizens Communications Co.		1,732		25
Embarq Corp.		943		45
Qwest Communications International, Inc. *		10,622		92
Sprint Nextel Corp.		18,876		353
Verizon Communications, Inc.		17,836		660
Windstream Corp.		2,595		36
				2,796
Transportation 0.3%
Burlington Northern Santa Fe Corp.		2,500		194
CSX Corp.		3,000		107
Delta Air Lines, Inc. *		900		1
FedEx Corp.		1,960		225
Norfolk Southern Corp.		2,500		131
Ryder System, Inc.		400		21
Southwest Airlines Co.		5,137		77

See financial notes.    35

Schwab MarketTrack Balanced Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Union Pacific Corp.		1,700		154
United Parcel Service, Inc., Class B		7,385		557
				1,467
Utilities 0.5%
Allegheny Energy, Inc. *		720		31
Ameren Corp.		1,200		65
American Electric Power Co., Inc.		2,580		107
CenterPoint Energy, Inc.		1,924		30
CMS Energy Corp. *		700		10
Consolidated Edison, Inc.		1,500		73
Constellation Energy Group, Inc.		1,000		62
Dominion Resources, Inc.		2,167		175
DTE Energy Co.		1,000		45
Duke Energy Corp.		7,512		238
Dynegy, Inc., Class A *		2,100		13
Edison International		2,200		98
Entergy Corp.		1,500		129
Exelon Corp.		4,324		268
FirstEnergy Corp.		2,030		119
FPL Group, Inc.		2,600		133
KeySpan Corp.		900		36
Nicor, Inc.		300		14
NiSource, Inc.		1,651		38
Peoples Energy Corp.		200		9
PG&E Corp.		2,700		116
Pinnacle West Capital Corp.		600		29
PPL Corp.		2,000		69
Progress Energy, Inc.		1,593		73
Public Service Enterprise Group, Inc.		1,500		92
Sempra Energy		1,360		72
TECO Energy, Inc.		900		15
The AES Corp. *		3,200		70
The Southern Co.		4,500		164
TXU Corp.		3,164		200
Xcel Energy, Inc.		2,585		57
				2,650
Other Investment Companies   84.3% of net assets
Schwab Institutional Select S&P 500 Fund (a)		7,662,656		84,213
Schwab International Index Fund, Select Shares (a)		3,778,134		79,870
Schwab Small-Cap Index Fund, Select Shares (a)		3,035,569		78,834
Schwab Total Bond Market Fund (a)		18,719,868		184,016
Schwab Value Advantage Money Fund, Institutional Shares (a)		23,250,213		23,250
				450,183

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   0.2% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		960	960

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $420,098, and the unrealized appreciation and depreciation were $118,917 and ($5,075), respectively, with net unrealized appreciation of $113,842.

*   Non-income producing security.

(a) Issuer is affiliated with the fund’s adviser.

36    See financial notes.

Schwab MarketTrack Balanced Portfolio

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $368,594)	$	450,183
Investments, in unaffiliated issuers at value (cost $48,582)	+	83,757
Total investments, at value (cost $417,176)		533,940
Receivables:
Fund shares sold		556
Dividends		863
Prepaid expenses	+	4
Total assets		535,363
Liabilities
Payables:
Investments bought		745
Investment adviser and administrator fees		10
Transfer agent and shareholder service fees		11
Fund shares redeemed		423
Trustee fees		1
Accrued expenses	+	78
Total liabilities		1,268
Net Assets
Total assets		535,363
Total liabilities		–1,268
Net assets	$	534,095
Net Assets by Source
Capital received from investors		404,200
Net investment income not yet distributed		7,026
Net realized capital gains		6,105
Net unrealized capital gains		116,764
Net Asset Value (NAV)

 

Net Assets	÷	Shares Outstanding	=	NAV
$534,095		31,346		$	17.04

 

See financial notes.    37

Schwab MarketTrack Balanced Portfolio

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from unaffiliated underlying funds	$	13,641
Dividends, including $1 from affiliated issuer		1,143
Interest	+	86
Total Investment Income		14,870
Net Realized Gains and Losses
Net realized gains on sales of affiliated underlying funds		8,216
Net realized gains received from affiliated underlying funds		1,008
Net realized gains on unaffiliated investments	+	33
Net realized gains		9,257
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds		31,859
Net unrealized gains on unaffiliated investments	+	10,341
Net unrealized gains		42,200
Expenses
Investment adviser and administrator fees		2,282
Transfer agent and shareholder service fees		1,303
Shareholder reports		53
Portfolio accounting fees		37
Registration fees		33
Professional fees		33
Custodian fees		19
Trustees’ fees		9
Overdraft expense		1
Other expenses	+	14
Total expenses		3,784
Expense reduction by adviser and Schwab		–1,178
Net expenses		2,606
Increase in Net Assets from Operations
Total investment income		14,870
Net expenses		–2,606
Net investment income		12,264
Net realized gains		9,257
Net unrealized gains	+	42,200
Increase in net assets from operations	$	63,721

 

38    See financial notes.

Schwab MarketTrack Balanced Portfolio

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06		11/1/04—10/31/05
Net investment income	$	12,264	$	11,810
Net realized gains		9,257		17,247
Net unrealized gains	+	42,200		10,119
Increase in net assets from operations		63,721		39,176
Distributions Paid
Dividends from net investment income		11,244		10,162
Distributions from net realized gains	+	1,491		—
Total distributions	$	12,735	$	10,162

 

Transactions in Fund Shares

 

	11/1/05—10/31/06						11/1/04—10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares sold		3,966		$	64,139			5,057		$	76,535
Shares reinvested		779			12,213			651			9,764
Shares redeemed	+	(6,981	)		(112,331	)		(9,036	)		(137,415	)
Net transactions in fund shares		(2,236	)	$	(35,979	)		(3,328	)	$	(51,116	)

 

Shares Outstanding and Net Assets

 

	11/1/05—10/31/06					11/1/04—10/31/05
	SHARES			NET ASSETS		SHARES			NET ASSETS
Beginning of period		33,582		$	519,088		36,910		$	541,190
Total increase or decrease	+	(2,236	)		15,007		(3,328	)		(22,102	)
End of period		31,346		$	534,095		33,582		$	519,088
Net investment income not yet distributed				$	7,026				$	5,501

 

See financial notes.    39

Schwab MarketTrack Conservative Portfolio™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		13.42			13.09			12.53			11.37			12.22
Income or loss from investment operations:
Net investment income		0.42			0.36			0.34			0.29			0.40
Net realized and unrealized gains or losses		0.92			0.32			0.57			1.16			(0.78	)
Total income or loss from investment operations		1.34			0.68			0.91			1.45			(0.38	)
Less distributions:
Dividends from net investment income		(0.42	)		(0.35	)		(0.35	)		(0.29	)		(0.41	)
Distributions from net realized gains		(0.01	)		—			—			—			(0.06	)
Total distributions		(0.43	)		(0.35	)		(0.35	)		(0.29	)		(0.47	)
Net asset value at end of period		14.33			13.42			13.09			12.53			11.37
Total return (%)		10.13			5.24			7.38			12.98			(3.29	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.50			0.50			0.50			0.50			0.50
Gross operating expenses1		0.74			0.75			0.75			0.75			0.76
Net investment income		3.12			2.67			2.70			2.44			3.17
Portfolio turnover rate		11			9			10			17			32
Net assets, end of period ($ x 1,000,000)		232			300			290			289			263
P Shares	4/06/062— 10/31/06
Per-Share Data ($)
Net asset value at beginning of period		13.93
Income from investment operations:
Net investment income		0.23
Net realized and unrealized gains		0.35
Total income or loss from investment operations		0.58
Less distributions:
Dividends from net investment income		(0.19	)
Net asset value at end of period		14.32
Total return (%)		4.22	3
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses1		0.35	4
Gross operating expenses1		0.60	4
Net investment income		2.81	4
Portfolio turnover rate		11	3
Net assets, end of period ($ x 1,000,000)		79

 

¹   The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those expenses.

²   Commencement of operations.

³   Not annualized.

⁴   Annualized.

40    See financial notes.

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
6.2%	Common Stock	12,294	19,430
93.4%	Other Investment Companies	249,898	290,264
0.4%	Short-Term Investment	1,153	1,153
100.0%	Total Investments	263,345	310,847
0.0%	Other Assets and Liabilities, Net		(48	)
100.0%	Total Net Assets		310,799

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   6.2% of net assets
Automobiles & Components 0.0%
Ford Motor Co.		2,921		24
General Motors Corp.		825		29
Harley-Davidson, Inc.		500		34
Johnson Controls, Inc.		300		24
The Goodyear Tire & Rubber Co. *		300		5
				116
Banks 0.4%
AmSouth Bancorp		600		18
BB&T Corp.		850		37
Comerica, Inc.		300		18
Commerce Bancorp, Inc.		200		7
Compass Bancshares, Inc.		190		11
Countrywide Financial Corp.		798		30
Fannie Mae		1,475		87
Fifth Third Bancorp		867		35
First Horizon National Corp.		200		8
Freddie Mac		1,000		69
Huntington Bancshares, Inc.		423		10
KeyCorp		700		26
M&T Bank Corp.		199		24
Marshall & Ilsley Corp.		322		15
MGIC Investment Corp.		150		9
National City Corp.		950		35
North Fork Bancorp, Inc.		750		21
PNC Financial Services Group, Inc.		400		28
Regions Financial Corp.		670		25
Sovereign Bancorp, Inc.		420		10
SunTrust Banks, Inc.		500		40
Synovus Financial Corp.		400		12
U.S. Bancorp		2,922		99
Wachovia Corp.		2,970		165
Washington Mutual, Inc.		1,491		63
Wells Fargo & Co.		5,120		186
Zions Bancorp		100		8
				1,096
Capital Goods 0.5%
3M Co.		1,200		95
American Power Conversion Corp.		225		7
American Standard Cos., Inc.		300		13
Caterpillar, Inc.		1,100		67
Cooper Industries Ltd., Class A		150		13
Cummins, Inc.		100		13
Danaher Corp.		500		36
Deere & Co.		400		34
Dover Corp.		300		14
Eaton Corp.		200		14
Emerson Electric Co. *		650		55
Fluor Corp.		100		8
General Dynamics Corp.		600		43
General Electric Co.		16,490		579
Goodrich Corp.		200		9
Honeywell International, Inc.		1,275		54
Illinois Tool Works, Inc.		700		34
Ingersoll-Rand Co., Ltd., Class A		500		18
ITT Corp.		300		16
L-3 Communications Holdings, Inc.		200		16
Lockheed Martin Corp.		700		61
Masco Corp.		700		19
Navistar International Corp. *		100		3
Northrop Grumman Corp.		514		34
PACCAR, Inc.		450		27
Pall Corp.		200		6
Parker Hannifin Corp.		150		13
Raytheon Co.		600		30
Rockwell Automation, Inc.		300		19
Rockwell Collins, Inc.		300		17
Textron, Inc.		200		18
The Boeing Co.		1,246		99
Tyco International Ltd.		3,013		89
United Technologies Corp.		1,600		105
W.W. Grainger, Inc.		100		7
				1,685
Commercial Services & Supplies 0.0%
Allied Waste Industries, Inc. *		500		6
Avery Dennison Corp.		200		13
Cintas Corp.		260		11
Equifax, Inc.		200		7
Monster Worldwide, Inc. *		191		8
Pitney Bowes, Inc.		400		19
R.R. Donnelley & Sons Co.		300		10
Robert Half International, Inc.		300		11
Waste Management, Inc.		907		34
				119

See financial notes.    41

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Consumer Durables & Apparel 0.1%
Brunswick Corp.		100		3
Centex Corp.		200		10
Coach, Inc. *		600		24
D.R. Horton, Inc.		420		10
Eastman Kodak Co.		500		12
Fortune Brands, Inc.		200		15
Harman International Industries, Inc.		100		10
Hasbro, Inc.		325		8
Jones Apparel Group, Inc.		200		7
KB Home		200		9
Leggett & Platt, Inc.		300		7
Lennar Corp., Class A		200		10
Liz Claiborne, Inc.		200		8
Mattel, Inc.		650		15
Newell Rubbermaid, Inc.		436		13
Nike, Inc., Class B		300		28
Pulte Homes, Inc.		400		12
Snap-On, Inc.		100		5
The Black & Decker Corp.		100		8
The Stanley Works		100		5
VF Corp.		200		15
Whirlpool Corp.		111		10
				244
Consumer Services 0.1%
Apollo Group, Inc., Class A *		250		9
Carnival Corp.		820		40
Darden Restaurants, Inc.		300		13
H&R Block, Inc.		600		13
Harrah’s Entertainment, Inc.		200		15
Hilton Hotels Corp.		600		17
International Game Technology		556		24
Marriott International, Inc., Class A		600		25
McDonald’s Corp.		2,000		84
Starbucks Corp. *		1,120		42
Starwood Hotels & Resorts Worldwide, Inc.		300		18
Wendy’s International, Inc.		200		7
Western Union Co. *		1,392		31
Wyndham Worldwide Corp. *		291		9
YUM! Brands, Inc.		480		28
				375
Diversified Financials 0.6%
American Express Co.		1,820		105
Ameriprise Financial, Inc.		364		19
Bank of America Corp.		7,142		385
Capital One Financial Corp.		450		36
Chicago Mercantile Exchange Holdings, Inc.		54		27
CIT Group, Inc.		300		16
Citigroup, Inc.		7,782		390
E*TRADE Financial Corp. *		600		14
Federated Investors, Inc., Class B		200		7
Franklin Resources, Inc.		200		23
Janus Capital Group, Inc.		400		8
JPMorgan Chase & Co.		5,352		254
Legg Mason, Inc.		190		17
Lehman Brothers Holdings, Inc.		800		62
Mellon Financial Corp.		700		27
Merrill Lynch & Co., Inc.		1,500		131
Moody’s Corp.		400		26
Morgan Stanley		1,630		124
Northern Trust Corp.		300		18
SLM Corp.		650		32
State Street Corp.		500		32
T. Rowe Price Group, Inc.		400		19
The Bank of New York Co., Inc.		1,200		41
The Bear Stearns Cos., Inc.		145		22
The Charles Schwab Corp.		2,125		39
The Goldman Sachs Group, Inc. *		728		138
				2,012
Energy 0.6%
Anadarko Petroleum Corp.		734		34
Apache Corp.		462		30
Baker Hughes, Inc.		470		33
BJ Services Co.		400		12
Chesapeake Energy Corp.		500		16
ChevronTexaco Corp.		3,520		237
ConocoPhillips		2,596		156
CONSOL Energy, Inc.		300		11
Devon Energy Corp.		700		47
El Paso Corp.		769		11
EOG Resources, Inc.		360		24
Exxon Mobil Corp.		9,518		680
Halliburton Co.		1,428		46
Hess Corp.		300		13
Kinder Morgan, Inc.		176		19
Marathon Oil Corp.		523		45
Murphy Oil Corp.		300		14
Nabors Industries Ltd. *		400		12
National-Oilwell Varco, Inc. *		270		16
Noble Corp.		200		14
Occidental Petroleum Corp.		1,200		56
Rowan Cos., Inc.		100		3
Schlumberger Ltd.		1,800		114
Smith International, Inc.		300		12
Sunoco, Inc.		200		13
Transocean, Inc. *		474		34
Valero Energy Corp.		1,000		52
Weatherford International Ltd. *		440		18
Williams Cos., Inc.		700		17
XTO Energy, Inc.		533		25
				1,814
Food & Staples Retailing 0.1%
Costco Wholesale Corp.		700		37
CVS Corp.		1,200		38
Safeway, Inc.		650		19
Supervalu, Inc.		318		11
Sysco Corp.		1,000		35
The Kroger Co.		1,200		27
Wal-Mart Stores, Inc.		3,900		192
Walgreen Co.		1,600		70

42    See financial notes.

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings continued

Security	Number of Shares			Value ($ x 1,000)
Whole Foods Market, Inc.		100			6
Winn-Dixie Stores, Inc. *		300			—
					435
Food, Beverage & Tobacco 0.3%
Altria Group, Inc.		3,220			262
Anheuser-Busch Cos., Inc.		1,200			57
Archer-Daniels-Midland Co.		1,014			39
Brown-Forman Corp., Class B		150			11
Campbell Soup Co.		300			11
Coca-Cola Enterprises, Inc.		700			14
ConAgra Foods, Inc.		800			21
Constellation Brands, Inc., Class A *		300			8
Dean Foods Co. *		200			8
General Mills, Inc.		582			33
H.J. Heinz Co.		600	��		25
Kellogg Co.		400			20
McCormick & Co., Inc.		200			8
Molson Coors Brewing Co., Class B		50			4
PepsiCo, Inc.		2,560			162
Reynolds American, Inc.		274			17
Sara Lee Corp.		1,200			21
The Coca-Cola Co.		3,220			150
The Hershey Co.		400			21
The Pepsi Bottling Group, Inc.		350			11
Tyson Foods, Inc., Class A		400			6
UST, Inc.		300			16
Wm. Wrigley Jr. Co.		375			20
					945
Health Care Equipment & Services 0.3%
Aetna, Inc.		888			37
AmerisourceBergen Corp.		400			19
Bausch & Lomb, Inc.		100			5
Baxter International, Inc.		900			41
Becton Dickinson & Co.		400			28
Biomet, Inc.		450			17
Boston Scientific Corp. *		2,107			33
C.R. Bard, Inc.		200			16
Cardinal Health, Inc.		650			42
Caremark Rx, Inc.		581			29
CIGNA Corp.		200			23
Coventry Health Care, Inc. *		300			14
Express Scripts, Inc. *		200			13
HCA, Inc.		600			30
Health Management Associates, Inc., Class A		400			8
Hospira, Inc. *		240			9
Humana, Inc. *		200			12
IMS Health, Inc.		350			10
Laboratory Corp. of America Holdings *		200			14
Manor Care, Inc.		100			5
McKesson Corp.		422			21
Medco Health Solutions, Inc. *		422			23
Medtronic, Inc.		1,800			88
Patterson Cos., Inc. *		200			7
Quest Diagnostics, Inc.		278			14
St. Jude Medical, Inc. *		500			17
Stryker Corp.		602			31
Tenet Healthcare Corp. *		750			5
UnitedHealth Group, Inc.		2,000			98
WellPoint, Inc. *		900			69
Zimmer Holdings, Inc. *		350			25
					803
Household & Personal Products 0.2%
Alberto-Culver Co., Class B		150			8
Avon Products, Inc.		700			21
Clorox Co.		300			20
Colgate-Palmolive Co.		800			51
Kimberly-Clark Corp.		756			50
Procter & Gamble Co.		5,062			321
The Estee Lauder Cos., Inc., Class A		100			4
					475
Insurance 0.3%
ACE Ltd.		400			23
AFLAC, Inc.		800			36
Ambac Financial Group, Inc.		162			14
American International Group, Inc.		3,979			267
AON Corp.		475			17
Cincinnati Financial Corp.		330			15
Genworth Financial, Inc., Class A		300			10
Lincoln National Corp.		501			32
Loews Corp.		900			35
Marsh & McLennan Cos., Inc.		800			24
MBIA, Inc.		200			12
MetLife, Inc.		1,178			67
Principal Financial Group, Inc.		550			31
Prudential Financial, Inc.		800			62
SAFECO Corp.		200			12
The Allstate Corp.		1,100			67
The Chubb Corp.		600			32
The Hartford Financial Services Group, Inc.		425			37
The Progressive Corp.		1,400			34
The St. Paul Travelers Cos., Inc.		1,006			51
Torchmark Corp.		200			12
UnumProvident Corp.		346			7
XL Capital Ltd., Class A		200			14
					911
Materials 0.2%
Air Products & Chemicals, Inc.		300			21
Alcoa, Inc.		1,312			38
Allegheny Technologies, Inc.		146			12
Ashland, Inc.		100			6
Ball Corp.		200			8
Bemis Co.		200			7
E.I. du Pont de Nemours & Co.		1,525			70
Eastman Chemical Co.		100			6
Ecolab, Inc.		400			18
Freeport-McMoRan Copper & Gold, Inc., Class B		300			18
Hercules, Inc. *		200			4

See financial notes.    43

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
International Flavors & Fragrances, Inc.		200		9
International Paper Co.		739		25
Louisiana-Pacific Corp.		100		2
MeadWestvaco Corp.		294		8
Monsanto Co.		664		29
Newmont Mining Corp.		643		29
Nucor Corp.		400		23
Pactiv Corp. *		300		9
Phelps Dodge Corp.		270		27
PPG Industries, Inc.		250		17
Praxair, Inc.		500		30
Rohm & Haas Co.		373		19
Sealed Air Corp.		153		9
Sigma-Aldrich Corp.		100		8
Temple-Inland, Inc.		200		8
The Dow Chemical Co.		1,372		56
United States Steel Corp.		100		7
Vulcan Materials Co.		200		16
Weyerhaeuser Co.		350		22
				561
Media 0.2%
CBS Corp., Class B		1,330		38
Clear Channel Communications, Inc.		967		34
Comcast Corp., Class A *		3,463		141
Dow Jones & Co., Inc.		100		3
Gannett Co., Inc.		400		24
Meredith Corp.		100		5
News Corp., Class A		3,880		81
Omnicom Group, Inc.		300		30
The E.W. Scripps Co., Class A		100		5
The Interpublic Group of Cos., Inc. *		600		7
The McGraw-Hill Cos., Inc.		600		38
The New York Times Co., Class A		200		5
The Walt Disney Co.		3,077		97
Time Warner, Inc.		6,380		128
Tribune Co.		500		17
Univision Communications, Inc., Class A *		519		18
Viacom, Inc., Class B *		1,330		52
				723
Pharmaceuticals & Biotechnology 0.5%
Abbott Laboratories		2,400		114
Allergan, Inc.		200		23
Amgen, Inc. *		1,952		148
Applied Biosystems Group —Applera Corp.		300		11
Barr Pharmaceuticals, Inc. *		200		11
Biogen Idec, Inc. *		480		23
Bristol-Myers Squibb Co.		3,000		74
Eli Lilly & Co.		1,725		97
Fisher Scientific International, Inc. *		163		14
Forest Laboratories, Inc. *		550		27
Genzyme Corp. *		325		22
Gilead Sciences, Inc. *		650		45
Johnson & Johnson		4,622		312
King Pharmaceuticals, Inc. *		366		6
MedImmune, Inc. *		400		13
Merck & Co., Inc.		3,400		154
Millipore Corp. *		100		6
Mylan Laboratories, Inc.		400		8
PerkinElmer, Inc.		200		4
Pfizer, Inc.		11,557		308
Schering-Plough Corp.		2,300		51
Thermo Electron Corp. *		200		9
Waters Corp. *		200		10
Watson Pharmaceuticals, Inc. *		200		5
Wyeth		2,000		102
				1,597
Real Estate 0.1%
Apartment Investment & Management Co., Class A		100		6
Archstone-Smith Trust		300		18
Boston Properties, Inc.		130		14
Equity Office Properties Trust		600		26
Equity Residential		400		22
Kimco Realty Corp.		168		7
Plum Creek Timber Co., Inc.		300		11
ProLogis		300		19
Public Storage, Inc.		100		9
Realogy Corp. *		364		9
Simon Property Group, Inc.		300		29
Vornado Realty Trust		200		24
				194
Retailing 0.3%
Amazon.com, Inc. *		300		12
AutoNation, Inc. *		500		10
AutoZone, Inc. *		150		17
Bed, Bath & Beyond, Inc. *		400		16
Best Buy Co., Inc.		675		37
Big Lots, Inc. *		200		4
Circuit City Stores, Inc.		300		8
Dillard’s, Inc., Class A		200		6
Dollar General Corp.		515		7
eBay, Inc. *		1,708		55
Family Dollar Stores, Inc.		300		9
Federated Department Stores, Inc.		910		40
Genuine Parts Co.		250		11
Home Depot, Inc.		3,450		129
J.C. Penney Co., Inc.		400		30
Kohl’s Corp. *		500		35
Limited Brands, Inc.		739		22
Lowe’s Cos., Inc.		2,400		72
Nordstrom, Inc.		400		19
Office Depot, Inc. *		600		25
OfficeMax, Inc.		100		5
RadioShack Corp.		300		5
Sears Holdings Corp. *		154		27
Staples, Inc.		1,125		29
Target Corp.		1,400		83
The Gap, Inc.		1,362		29
The Sherwin-Williams Co.		200		12

44    See financial notes.

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
The TJX Cos., Inc.		800		23
Tiffany & Co.		250		9
				786
Semiconductors & Semiconductor Equipment 0.2%
Advanced Micro Devices, Inc. *		560		12
Altera Corp. *		510		9
Analog Devices, Inc.		600		19
Applied Materials, Inc.		2,600		45
Broadcom Corp., Class A *		738		22
Freescale Semiconductor, Inc., Class B *		404		16
Intel Corp.		9,800		209
KLA-Tencor Corp.		300		15
Linear Technology Corp.		500		16
LSI Logic Corp. *		500		5
Maxim Integrated Products, Inc.		500		15
Micron Technology, Inc. *		900		13
National Semiconductor Corp.		600		15
Novellus Systems, Inc. *		250		7
NVIDIA Corp. *		400		14
PMC — Sierra, Inc. *		300		2
Teradyne, Inc. *		300		4
Texas Instruments, Inc.		2,700		81
Xilinx, Inc.		500		13
				532
Software & Services 0.3%
Adobe Systems, Inc. *		800		30
Affiliated Computer Services, Inc., Class A *		203		11
Autodesk, Inc. *		400		15
Automatic Data Processing, Inc.		900		44
BMC Software, Inc. *		400		12
CA, Inc.		850		21
Citrix Systems, Inc. *		300		9
Computer Sciences Corp. *		258		14
Compuware Corp. *		600		5
Convergys Corp. *		174		4
Electronic Arts, Inc. *		424		22
Electronic Data Systems Corp.		700		18
First Data Corp.		1,392		34
Fiserv, Inc. *		300		15
Google, Inc., Class A *		300		143
Intuit, Inc. *		626		22
Microsoft Corp.		13,620		391
Novell, Inc. *		500		3
Oracle Corp. *		5,988		110
Parametric Technology Corp. *		200		4
Paychex, Inc.		525		21
Sabre Holdings Corp., Class A		244		6
Symantec Corp. *		1,678		33
Unisys Corp. *		500		3
VeriSign, Inc. *		300		6
Yahoo! Inc. *		2,000		53
				1,049
Technology Hardware & Equipment 0.4%
ADC Telecommunications, Inc. *		142		2
Agilent Technologies, Inc. *		710		25
Apple Computer, Inc. *		1,200		97
Avaya, Inc. *		618		8
Ciena Corp. *		71		2
Cisco Systems, Inc. *		9,930		240
Comverse Technology, Inc. *		300		6
Corning, Inc. *		2,250		46
Dell, Inc. *		3,850		94
EMC Corp. *		3,650		45
Hewlett-Packard Co.		4,703		182
International Business Machines Corp.		2,500		231
Jabil Circuit, Inc.		322		9
JDS Uniphase Corp. *		251		4
Juniper Networks, Inc. *		600		10
Lexmark International, Inc., Class A *		200		13
Lucent Technologies, Inc. *		7,019		17
Molex, Inc.		250		9
Motorola, Inc.		3,666		85
NCR Corp. *		400		17
Network Appliance, Inc. *		500		18
QLogic Corp. *		276		6
QUALCOMM, Inc.		2,400		87
SanDisk Corp. *		285		14
Sanmina — SCI Corp. *		800		3
Solectron Corp. *		1,000		3
Sun Microsystems, Inc. *		5,000		27
Symbol Technologies, Inc.		322		5
Tektronix, Inc.		200		6
Tellabs, Inc. *		600		6
Xerox Corp. *		1,200		20
				1,337
Telecommunication Services 0.2%
ALLTEL Corp.		500		27
AT&T Corp.		5,945		203
BellSouth Corp.		2,750		124
CenturyTel, Inc.		250		10
Citizens Communications Co.		410		6
Embarq Corp.		222		11
Qwest Communications International, Inc. *		2,524		22
Sprint Nextel Corp.		4,454		83
Verizon Communications, Inc.		4,188		155
Windstream Corp.		516		7
				648
Transportation 0.1%
Burlington Northern Santa Fe Corp.		600		47
CSX Corp.		600		21
Delta Air Lines, Inc. *		200		—
FedEx Corp.		460		53
Norfolk Southern Corp.		600		32
Ryder System, Inc.		100		5
Southwest Airlines Co.		1,218		18

See financial notes.    45

Schwab MarketTrack Conservative Portfolio

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Union Pacific Corp.		400		36
United Parcel Service, Inc., Class B		1,712		129
				341
Utilities 0.2%
Allegheny Energy, Inc. *		170		7
Ameren Corp.		300		16
American Electric Power Co., Inc.		580		24
CenterPoint Energy, Inc.		474		7
CMS Energy Corp. *		200		3
Consolidated Edison, Inc.		300		15
Constellation Energy Group, Inc.		200		13
Dominion Resources, Inc.		515		42
DTE Energy Co.		200		9
Duke Energy Corp.		1,876		59
Dynegy, Inc., Class A *		500		3
Edison International		500		22
Entergy Corp.		350		30
Exelon Corp.		1,024		63
FirstEnergy Corp.		533		31
FPL Group, Inc.		600		31
KeySpan Corp.		200		8
Nicor, Inc.		100		5
NiSource, Inc.		376		9
Peoples Energy Corp.		100		4
PG&E Corp.		600		26
Pinnacle West Capital Corp.		100		5
PPL Corp.		600		21
Progress Energy, Inc.		354		16
Public Service Enterprise Group, Inc.		400		24
Sempra Energy		297		16
TECO Energy, Inc.		200		3
The AES Corp. *		800		18
The Southern Co.		1,100		40
TXU Corp.		800		51
Xcel Energy, Inc.		510		11
				632
Other Investment Companies   93.4% of net assets
Schwab Institutional Select S&P 500 Fund (a)		171,198		1,881
Schwab International Index Fund, Select Shares (a)		1,474,762		31,176
Schwab S&P 500 Index Fund, Select Shares (a)		1,980,547		42,701
Schwab Small-Cap Index Fund, Select Shares (a)		1,197,766		31,106
Schwab Total Bond Market Fund (a)		17,293,603		169,996
Schwab Value Advantage Money Fund, Institutional Shares (a)		13,403,662		13,404
				290,264

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)
Short-Term Investment   0.4% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		1,153	1,153

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $264,842 and the unrealized appreciation and depreciation were $48,162 and ($2,157), respectively, with net unrealized appreciation of $46,005.

*   Non-income producing security.

(a) Issuer is affiliated with the fund’s adviser.

46    See financial notes.

Schwab MarketTrack Conservative Portfolio

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments in affiliated underlying funds, at value (cost $249,898)	$	290,264
Investments, in unaffiliated issuers at value (cost $13,447)	+	20,583
Total investments, at value (cost $263,345)		310,847
Receivables:
Fund shares sold		215
Dividends		733
Prepaid expenses	+	2
Total assets		311,797
Liabilities
Payables:
Investments bought		693
Investment adviser and administrator fees		4
Transfer agent and shareholder service fees		5
Fund shares redeemed		237
Trustee fees		1
Accrued expenses	+	58
Total liabilities		998
Net Assets
Total assets		311,797
Total liabilities		–998
Net assets	$	310,799
Net Assets by Source
Capital received from investors		259,316
Net investment income not yet distributed		1,190
Net realized capital gains		2,791
Net unrealized capital gains		47,502
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	231,626			16,167		$	14.33
P Shares	$	79,173			5,527		$	14.32

 

See financial notes.    47

Schwab MarketTrack Conservative Portfolio

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends received from affiliated underlying funds	$	10,558
Dividends received from unaffiliated		313
Interest	+	92
Total Investment Income		10,963
Net Realized Gains and Losses
Net realized gains on sales of affiliated underlying funds		3,800
Net realized gains received from affiliated underlying funds		657
Net realized losses on unaffiliated investments	+	(72	)
Net realized gains		4,385
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds		26,872
Net unrealized losses on unaffiliated investments	+	(11,180	)
Net unrealized gains		15,692
Expenses
Investment adviser and administrator fees		1,360
Transfer agent and shareholder service fees:
Investor Shares		660
Select Shares		45
Registration fees		55
Professional fees		32
Portfolio accounting fees		31
Shareholder reports		21
Custodian fees		12
Trustees’ fees		8
Other expenses	+	11
Total expenses		2,235
Expense reduction by adviser and Schwab		–757
Net expenses		1,478
Increase in Net Assets from Operations
Total investment income		10,963
Net expenses		–1,478
Net investment income		9,485
Net realized gains		4,385
Net unrealized gains	+	15,692
Increase in net assets from operations	$	29,562

 

48    See financial notes.

Schwab MarketTrack Conservative Portfolio

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05—10/31/06		11/1/04—10/31/05
Net investment income	$	9,485	$	8,081
Net realized gains		4,385		2,298
Net unrealized gains	+	15,692		4,872
Increase in net assets from operations		29,562		15,251
Distributions Paid
Dividends from net investment income
Investor Shares		8,287		7,852
P Shares	+	1,074		—
Total dividends from net investment income		9,361		7,852
Distributions from net realized gains
Investor Shares		202		—
P Shares	+	—		—
Total distributions from net realized gains		202		—
Total distributions	$	9,563	$	7,852

 

Transactions in Fund Shares

 

	11/1/05—10/31/06						11/1/04—10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		3,757		$	51,692			4,139		$	55,417
P Shares	+	6,493			90,438			—			—
Total shares sold		10,250		$	142,130			4,139		$	55,417
Shares Reinvested
Investor Shares		587		$	8,073			560		$	7,474
P Shares	+	78			1,074			—			—
Total shares reinvested		665		$	9,147			560		$	7,474
Shares Redeemed
Investor Shares		(10,556	)	$	(146,482	)		(4,489	)	$	(60,077	)
P Shares	+	(1,044	)		(14,366	)		—			—
Total shares redeemed		(11,600	)	$	(160,848	)		(4,489	)	$	(60,077	)
Net transactions in fund shares		(685	)	$	(9,571	)		210		$	2,814

 

Shares Outstanding and Net Assets

 

	11/1/05—10/31/06					11/1/04—10/31/05
	SHARES			NET ASSETS		SHARES		NET ASSETS
Beginning of period		22,379		$	300,371		22,169	$	290,158
Total increase or decrease	+	(685	)		10,428		210		10,213
End of period		21,694		$	310,799		22,379	$	300,371
Net investment income not yet distributed				$	1,190			$	601

 

See financial notes.    49

Schwab MarketTrack Portfolios

Financial Notes

1.   Business Structure of the Funds

Each of the funds discussed in this report is a series of Schwab Capital Trust (Trust), a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the funds in this report, which are highlighted:

Schwab Capital Trust (organized May 7, 1993)
Schwab MartketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Schwab S&P 500 Index Fund
Schwab Institutional Select® S&P 500 Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®
Laudus U.S. MarketMasters Fund™
Laudus Small-Cap MarketMasters Fund™
Laudus International MarketMasters Fund™
Schwab Viewpoints Fund™ Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

 

Both Schwab MarketTrack Growth Portfolio and Schwab MarketTrack Conservative Portfolio offer two share classes: Investor Shares and P Shares. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums. Schwab MarketTrack All Equity Portfolio and Schwab MarketTrack Balanced Portfolio each offer one share class.

Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies used in the preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America.

(a)   Security Valuation:

The funds value the securities in their portfolios every business day. The funds use the following policies to value various types of securities:

•  Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate.

•  Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the fund’s investment adviser using guidelines adopted by the fund’s Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security’s primary pricing source is not able or willing to provide a price.

•  Futures and forwards: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day’s exchange rates (for forwards). When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly.

•  Underlying funds: valued at their respective net asset values as determined by those funds, in accordance with the Investment Company Act of 1940.

•  Short-term securities (60 days or less to maturity): valued at amortized cost.

50    

Schwab MarketTrack Portfolios

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

(b)   Portfolio Investments:

Futures Contracts: The funds may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements.

One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities.

Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “initial margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount.

Futures are traded publicly on exchanges, and their market value changes daily. A fund records the change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

(c)   Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.

Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date.

(d)   Investment Income:

Interest income is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(e)   Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.

For funds offering multiple share classes, the net investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to its net assets.

(f)   Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year.

Each fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law.

(g)   Custody Credit:

Each fund has an arrangement with its custodian bank under which the fund receives a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts (if any) are disclosed in the statement of operations as a reduction to the fund’s operating expenses.

    51

Schwab MarketTrack Portfolios

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

(h)   Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(i)   Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

(j)   Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

(k)   New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Fund’s financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:
(All dollar amounts are × 1,000)

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

For its advisory and administrative services to each fund, the investment adviser is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

Average daily net assets	MarketTrack All Equity Portfolio			MarketTrack Growth Portfolio			MarketTrack Balanced Portfolio			MarketTrack Conservative Portfolio
First $500 million		0.44	%		0.44	%		0.44	%		0.44	%
Over $500 million		0.39	%		0.39	%		0.39	%		0.39	%

 

52    

Schwab MarketTrack Portfolios

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

For its transfer agent and shareholder services, Schwab is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

	Transfer Agent Fees			Shareholder Service Fees
Investor Shares		0.05	%		0.20	%
P Shares*		0.05	%		0.05	%

 

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses through February 27, 2007, as follows:

	MarketTrack All Equity Portfolio			MarketTrack Growth Portfolio			MarketTrack Balanced Portfolio			MarketTrack Conservative Portfolio
Investor Shares		0.50	%		0.50	%		0.50	%		0.50	%
P Shares*		n/a			0.35	%		n/a			0.35	%

 

*   P Shares are only offered by MarketTrack Growth Portfolio and MarketTrack Conservative Portfolio.

Such expense reductions are disclosed in the statement of operations.

The funds may engage in certain transactions involving related parties. For instance, a fund may own shares of The Charles Schwab Corporation if that company is included in its index. Pursuant to an exemptive order issued by the SEC, the funds may invest in other related funds. As of October 31, 2006, the shares owned by each MarketTrack Portfolio as a percentage of the total shares of the underlying funds are:

Schwab Equity Index Funds:
S&P 500 Index Fund	—		—		—		0.5	%
Small-Cap Index Fund	7.9	%	8.5	%	4.8	%	1.9	%
International Index Fund	9.5	%	8.6	%	4.8	%	1.9	%
Schwab Bond Funds:
Total Bond Market Fund	—		8.4	%	14.5	%	13.4	%
Schwab Institutional Select Funds:
Institutional Select S&P 500 Index	11.3	%	8.2	%	4.0	%	0.1	%
Schwab Money Funds:
Value Advantage Money Fund	—		0.1	%	0.1	%	—**

 

**   Less than 0.1%

The funds may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. As of October 31, 2006, each fund’s total security transactions (including in-kind redemptions) with other Schwab Funds were as follows:

MarketTrack All Equity Portfolio	—
MarketTrack Growth Portfolio	—
MarketTrack Balanced Portfolio	—
MarketTrack Conservative Portfolio	—

 

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for any fund during the period.

    53

Schwab MarketTrack Portfolios

Financial Notes (continued)

3.  Affiliates and Affiliated Transactions (continued):

Independent Trustee

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.

4.   Purchases and Sales of Investment Securities:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:

	Purchases of Securities		Sales/Maturities of Securities
MarketTrack All Equity Portfolio	$	38,590	$	57,971
MarketTrack Growth Portfolio		50,620		77,224
MarketTrack Balanced Portfolio		43,593		77,421
MarketTrack Conservative Portfolio		33,095		41,302

 

5.   Redemption Fee:
(All dollar amounts are × 1,000)

The funds may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. For shares purchased after 4/29/05, the funds charge 2.00% redemption fees on shares (excluding P shares) held 30 days or less. Such amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
MarketTrack All Equity Portfolio	$	13	$	8
MarketTrack Growth Portfolio
Investor Shares		11		10
MarketTrack Balanced Portfolio		3		5
MarketTrack Conservative Portfolio
Investor Shares		16		3

 

6.   Borrowing:
(All dollar amounts are × 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation, and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Fund	Amount Outstanding at 10/31/06		Average Borrowing*	Weighted Average Interest Rate*(%)
MarketTrack All Equity Portfolio	$	—	$1,246	4.78
MarketTrack Growth Portfolio		—	987	5.02
MarketTrack Balanced Portfolio		—	509	5.13
MarketTrack Conservative Portfolio		—	471	5.14

 

*   Based on the number of days for which the borrowing is outstanding.

54    

Schwab MarketTrack Portfolios

Financial Notes (continued)

7.  Federal Income Taxes:
(All dollar amounts are × 1,000)

As of October 31, 2006, the components of distributable earnings on a tax-basis were as follows:

	MarketTrack All Equity Portfolio			MarketTrack Growth Portfolio			MarketTrack Balanced Portfolio			MarketTrack Conservative Portfolio
Undistributed ordinary income	$	2	*	$	3,726		$	7,085		$	1,190
Undistributed long-term capital gains		—			6,526			8,968			4,289
Unrealized appreciation		103,591			195,244			118,917			48,162
Unrealized depreciation		—			(7,347	)		(5,075	)		(2,157	)
Net unrealized appreciation / (depreciation)	$	103,591		$	187,897		$	113,842		$	46,005

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2006, the following funds had capital loss carry forwards expiring in:

Expire	MarketTrack All Equity Portfolio*		MarketTrack Growth Portfolio		MarketTrack Balanced Portfolio		MarketTrack Conservative Portfolio
2010	$	5,648	$	—	$	—	$	—
2011		13,010		—		—		—
2012		6,944		—		—		—
Total	$	25,602	$	—	$	—	$	—

 

For tax purposes, realized capital losses, occuring after October 31, may be deferred and treated as occuring on the first day of the following fiscal year. As of October 31, 2006, the funds had aggregate deferred realized capital losses as follows:

	MarketTrack All Equity Portfolio*		MarketTrack Growth Portfolio		MarketTrack Balanced Portfolio		MarketTrack Conservative Portfolio
Deferred capital losses	$	58	$	—	$	—	$	—
Capital losses utilized		5,410		5,181		—		—

 

The tax-basis components of distributions paid during the current and prior fiscal years were:

	MarketTrack All Equity Portfolio*		MarketTrack Growth Portfolio		MarketTrack Balanced Portfolio		MarketTrack Conservative Portfolio
Current period distributions
Ordinary income	$	5,267	$	10,988	$	11,244	$	9,361
Long-term capital gains		—		—		1,491		202
Return of capital		—		—		—		—
Prior period distributions
Ordinary income	$	5,060	$	9,037	$	10,162	$	7,852
Long-term capital gains		—		—		—		—
Return of capital		—		—		—		—

 

*   Tax information for Market Track All Equity Portfolio is as of December 31, 2005.

    55

Schwab MarketTrack Portfolios

Financial Notes (continued)

7.  Federal Income Taxes (continued):

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

	MarketTrack All Equity Portfolio*		MarketTrack Growth Portfolio			MarketTrack Balanced Portfolio			MarketTrack Conservative Portfolio
Capital shares	$	—	$	(1	)	$	(1	)	$	1
Undistributed net investment income		—		269			505			463
Net realized capital gains and losses		—		(268	)		(504	)		(464	)

 

Other Federal Tax Information (unaudited)
(All dollar amounts are × 1,000):

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction:

	Percentage
MarketTrack All Equity Portfolio		100.00	%
MarketTrack Growth Portfolio		51.01
MarketTrack Balanced Portfolio		35.65
MarketTrack Conservative Portfolio		20.87

 

For the fiscal year ended October 31, 2006, the fund’s designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

MarketTrack All Equity Portfolio	$	5,267
MarketTrack Growth Portfolio		7,510
MarketTrack Balanced Portfolio		4,860
MarketTrack Conservative Portfolio		2,546

 

*   Tax information for Market Track All Equity Portfolio is as of December 31, 2005.

56    

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio

In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab MarketTrack All Equity Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio and Schwab MarketTrack Conservative Portfolio (four of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

    57

Investment Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Capital Trust (the “Trust”) and CSIM (the “Agreement”) with respect to existing funds in the Trust, including the funds covered in this annual report, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement.

Fund Performance.  The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund’s performance relative to a peer group of other mutual funds

58    

and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement.

Fund Expenses.  With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement.

Profitability.  With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement.

Economies of Scale.  The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

    59

Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996-1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6—Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

 

60    

Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

 

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

 

    61

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer—Fixed Income (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer—Equities (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

62    

Officers of the Trust  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

 

¹  Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²  In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³  The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

    63

Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

64    

Schwab Funds® offers you an extensive family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available Schwab Funds. Whether you’re an experienced investor or just starting out, Schwab Funds can help you achieve your financial goals. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any Schwab Fund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. Proxy Voting Policies, Procedures and Results A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/schwabfunds, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at www.sec.gov.	The Schwab Funds Family® Stock Funds Schwab Premier Equity Fund® Schwab Core Equity Fund™ Schwab Dividend Equity Fund™ Schwab Large-Cap Growth Fund™ Schwab Small-Cap Equity Fund™ Schwab Hedged Equity Fund™ Schwab Financial Services Fund™ Schwab Health Care Fund™ Schwab Technology Fund™ Schwab Institutional Select® S&P 500 Fund Schwab S&P 500 Index Fund Schwab 1000 Index® Fund Schwab Small-Cap Index Fund® Schwab Total Stock Market Index Fund® Schwab International Index Fund® Asset Allocation Funds Schwab Viewpoints Fund™ Schwab MarketTrack All Equity Portfolio™ Schwab MarketTrack Growth Portfolio™ Schwab MarketTrack Balanced Portfolio™ Schwab MarketTrack Conservative Portfolio™ Schwab Target 2010 Fund Schwab Target 2020 Fund Schwab Target 2030 Fund Schwab Target 2040 Fund Schwab Retirement Income Fund Bond Funds Schwab YieldPlus Fund® Schwab Short-Term Bond Market Fund™ Schwab Total Bond Market Fund™ Schwab GNMA Fund™ Schwab Inflation Protected Fund™ Schwab Tax-Free YieldPlus Fund™ Schwab Short/Intermediate Tax-Free Bond Fund™ Schwab Long-Term Tax-Free Bond Fund™ Schwab California Tax-Free YieldPlus Fund™ Schwab California Short/Intermediate     Tax-Free Bond Fund™ Schwab California Long-Term Tax-Free Bond Fund™ Schwab Money Funds Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.1 Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments®.
	1	Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money.

Investment Adviser

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

Funds

Schwab Funds®

P.O. Box 3812, Englewood, CO 80155—3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved.

Member SIPC

Printed on recycled paper.

MFR13813-09

Annual Report October 31, 2006
	COMMAND PERFORMANCE™

Laudus MarketMasters Funds™

Laudus U.S. MarketMasters Fund™

Laudus Small-Cap MarketMasters Fund™

Laudus International MarketMasters Fund™

Three distinct Funds, each combining the expertise of leading investment managers with Schwab’s overall supervision.

In this report

Performance at a Glance	2
From the President	3
Investment Environment	4
Laudus U.S. MarketMasters Fund™	6
Laudus Small-Cap MarketMasters Fund™	8
Laudus International MarketMasters Fund™	10
Fund Expenses	12
Financial Statements and Portfolio Holdings	13
Financial Notes	43
Investment Advisory and Sub-Advisory Agreement Approval	51
Trustees and Officers	54
Glossary	58

 

Select Shares® are available for the MarketMasters Funds™

The Laudus MarketMasters Funds offer Select Shares, a share class that carries lower expenses than Investor Shares™ in exchange for higher investment minimums. Select Shares are available for initial purchases of $50,000 or more of a single fund in a single account and for shareholders who add to their existing Investor Share position, bringing the value to or above $50,000. We encourage shareholders to review their portfolio to see if they are eligible to exchange into Select Shares. If you believe you are eligible, you should contact Schwab or your financial intermediary to request a tax-free interclass exchange into Select Shares. Select Shares may not be available through financial intermediaries other than Charles Schwab & Co., Inc.

To learn more, please see the Funds’ prospectus at www.laudus.com. Or call 1.800.435.4000 to order a prospectus or to speak with a representative.

The Laudus Group of Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by ALPS Distributor, Inc., and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc. Charles Schwab & Co., Inc. (member SIPC) serves as dealer for the Laudus Funds.

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

	Total Return for the Report Period
Laudus U.S. MarketMasters Fund™
Investor Shares (Ticker Symbol: SWOGX)	14.71%
Select Shares (Ticker Symbol: SWMGX)	14.81%
Benchmark: S&P 500® Index	16.34%
Fund Category: Morningstar Large-Cap Blend	14.74%
Performance Details	pages 6–7
Laudus Small-Cap MarketMasters Fund™
Investor Shares (Ticker Symbol: SWOSX)	15.33%
Select Shares (Ticker Symbol: SWMSX)	15.61%
Benchmark: Russell 2000® Index	19.98%
Fund Category: Morningstar Small-Cap Blend	16.35%
Performance Details	pages 8–9
Laudus International MarketMasters Fund™
Investor Shares (Ticker Symbol: SWOIX)	24.66%
Select Shares (Ticker Symbol: SWMIX)	24.88%
Benchmark: MSCI-EAFE® Index	27.52%
Fund Category: Morningstar Foreign Large-Cap Growth	26.02%
Performance Details	pages 10–11
Minimum Initial Investment1
Investor Shares ($1,000 for retirement, education and custodial accounts)	$ 2,500
Select Shares	$50,000

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the funds’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk. These risks may be greater in emerging markets.

Source for category information: Morningstar, Inc.

¹Please see prospectus for further detail and eligibility requirements.

2    Laudus MarketMasters Funds

From the President

Evelyn Dilsaver is President and CEO of Charles Schwab Investment Management, Inc. and of each of the funds covered in this report. She joined the firm in 1992 and has held a variety of executive positions at Schwab.

Dear Shareholder, I am pleased to present the annual report for the Laudus MarketMasters Funds for the period ended October 31, 2006. At Laudus, our primary interests are to deliver strong performance and to protect the interests of our shareholders. Accordingly, as previously communicated to shareholders, we made several enhancements to the Laudus International MarketMasters Fund during this report period. We expect that these changes will expand the fund’s ability to execute its investment strategy and improve performance potential. First, we added two new sub-advisers, Mondrian Investment Partners Limited (Mondrian) and Wentworth, Hauser and Violich, Inc. Mondrian’s focus is on the international small-cap value sector, while Wentworth, Hauser and Violich, Inc. takes an opportunistic approach to the international large-cap growth sector. We also expanded current sub-adviser American Century Global Investment Management, Inc.’s small-cap mandate to include mid-cap growth. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the funds’ ticker symbols and report period returns for the funds, their benchmarks and category averages. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.laudus.com. This website contains regular updates about the Laudus Funds. I encourage you to visit the website to stay informed about your fund. With the support of investors like you, Laudus MarketMasters Funds assets exceed $2 billion as of this report date. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Laudus Funds. Sincerely,

Laudus MarketMasters Fund  3

The Investment Environment

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund. As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Product (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth. In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of the end of the report period. In its statement, the Fed noted that the economy appeared

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
n  16.34%	S&P® 500 Index: measures U.S. large-cap stocks
n  19.98%	Russell 2000® Index: measures U.S. small-cap stocks
n   27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
n   5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data source: Charles Schwab & Co., Inc.

4    Laudus MarketMasters Funds

The Investment Environment  continued

    

to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only 2.2% in the third quarter of 2006.

Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico, as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds.

The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact.

Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

    

Laudus MarketMasters Funds    5

Laudus U.S. MarketMasters Fund™

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund. Caroline Lee, director and portfolio
manager, co-manages the fund. The Laudus MarketMasters Funds use a multi-manager strategy. CSIM, the funds’ investment adviser, uses rigorous criteria to select investment managers with proven long-term track records to manage a portion of each fund’s assets. In addition to selecting the investment managers and allocating assets among them, CSIM is responsible for monitoring and coordinating the overall management of the funds. The Laudus U.S. MarketMasters Fund Investor Shares returned 14.71% for the one-year period, trailing its benchmark, the S&P 500 Index, which gained 16.34% for the same period. Thornburg Investment Management, Inc. had a positive impact on the fund and outperformed its benchmark, the S&P 500 Index, due to strong stock selection in the Consumer Discretionary and Telecommunication Services sectors; positions in companies such as Las Vegas Sands Corporation, DirecTV Group, Comcast, NII Holdings, Inc. and American Tower Corporation positively contributed to return. TCW Investment Management Company tracked its benchmark, the Russell Mid-Cap Value Index, as gains in stock selection were offset by weak industry group selection, particularly within the Information Technology sector; holdings in ASML Holdings, Avid Technology, Inc. and Analog Devices, Inc. detracted from performance. Harris Associates L.P., the fund’s mid/large-cap value manager, fell short of outperforming the Russell 1000 Value Index as a result of poor stock selection, particularly in the Consumer Discretionary and Information Technology sectors; positions in Dell, Inc., Tiffany & Co. and Lennar Corp. detracted from returns. Gardner Lewis Asset Management L.P., whose focus is growth, also underperformed its benchmark, the Russell 1000 Growth Index, as a result of weak stock selection and sector allocation, particularly within the Health Care sector; holdings in such companies as St. Jude Medical, Inc. and Boston Scientific Corp. detracted from performance. In order to reduce exposure to large-cap growth, we reduced the fund’s allocation to Gardner Lewis over this report period and brought the fund closer to neutrality.

As of 10/31/06:

Statistics
Number of Holdings	159
Weighted Average Market Cap ($ x 1,000,000)	50,990
Price/Earnings Ratio (P/E)	20.7
Price/Book Ratio (P/B)	2.8

 

Sector Weightings % of Investments
Information Technology	21.2	%
Consumer Discretionary	20.2	%
Financials	15.4	%
Health Care	14.2	%
Industrials	5.9	%
Energy	4.7	%
Telecommunication Services	3.9	%
Consumer Staples	3.6	%
Materials	3.1	%
Utilities	1.2	%
Other	6.6	%
Total	100.0	%

 

Top Holdings % of Net Assets1
Google, Inc., Class A	1.8	%
Comcast Corp.	1.7	%
Dell, Inc.	1.7	%
National Semiconductor Corp.	1.3	%
NII Holdings, Inc.	1.2	%
Hewlett-Packard Co.	1.2	%
Caremark Rx, Inc.	1.2	%
Exxon Mobil Corp.	1.2	%
Microsoft Corp.	1.1	%
YUM! Brands, Inc.	1.1	%
Total	13.5	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

6    Laudus MarketMasters Funds

Laudus U.S. MarketMasters Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			5 years			Since Inception
Investor Shares (11/18/96)		14.71	%		7.23	%	6.79%
Select Shares® (6/4/04)		14.81	%	n/a			9.51%
Benchmark: S&P 500® Index		16.34	%		7.25	%	(11/18/96) 8.18%
							(6/4/04) 11.08%
Fund Category: Morningstar Large-Cap Blend		14.74	%		6.82	%	(11/18/96) 7.47%
							(6/4/04) 10.46%

 

Style Assessment³

 

Investment Managers and Allocations
Investment Manager	Investment Style	% of Net Assets
Gardner Lewis Asset Management L.P.	Large-Cap Growth		23.0	%
Harris Associates L.P.	Mid/Large-Cap Value		19.7	%
TCW Investment Management Company	Small/Mid-Cap Blend		22.2	%
Thornburg Investment Management, Inc.	Large-Cap Blend		32.9	%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Because the Fund was originally an asset allocation Fund with a multi-fund strategy, its performance prior to June 3, 2002 does not reflect the current strategy and may have been different if it did.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance—past, present, or future.

Laudus MarketMasters Funds    7

Laudus Small-Cap MarketMasters Fund™

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund. Caroline Lee, director and portfolio
manager, co-manages the fund. The Laudus MarketMasters Funds use a multi-manager strategy. CSIM, the funds’ investment adviser, uses rigorous criteria to select investment managers with proven long-term track records to manage a portion of each fund’s assets. In addition to selecting the investment managers and llocating assets among them, CSIM is responsible for monitoring and coordinating the overall management of the funds. The Laudus Small-Cap MarketMasters Fund Investor Shares posted a positive return of 15.33% for the period, yet trailed its benchmark, the Russell 2000 Index, which was up 19.98%. A positive contributor to the fund’s returns was TAMRO Capital Partners, LLC, which beat its benchmark, the Russell 2000 Value Index, as a result of superior stock selection, particularly within the Financial and Industrials sectors; positions in First Marblehead Corp., Knight Capital Group, Inc., General Cable Corp. and Manitowoc Co., Inc. positively contributed to returns. Tocqueville Asset Management LP, whose focus is small-cap blend, also outperformed its benchmark, the Russell 2000 Index, primarily as a result of strong stock selection, particularly in the Energy and Information Technology sectors; holdings such as Aspen Technology, Inc., Oceaneering International, Inc. and TETRA Technologies, Inc. contributed to performance. TCW Investment Management Company tracked its benchmark, the Russell Mid-Cap Value Index, as gains in stock selection were offset by sector allocation. Veredus Asset Management LLC, whose focus is small-cap growth, underperformed its benchmark, the Russell 2000 Growth Index, mainly due to weak stock selection, particularly in Health Care and Consumer discretionary; positions in Foxhollow Technologies, Inc. and Syneron Medical, Ltd. detracted from returns. We have reduced the fund’s exposure to small-cap growth, as reflected by a reduction in Veredus’ allocation, and brought the fund closer to neutrality.

As of 10/31/06:

Statistics
Number of Holdings	200
Weighted Average Market Cap ($ x 1,000,000)	1,994
Price/Earnings Ratio (P/E)	35.7
Price/Book Ratio (P/B)	2.4

 

Sector Weightings % of Investments
Information Technology	31.0	%
Industrials	16.1	%
Health Care	13.8	%
Consumer Discretionary	12.6	%
Financials	9.1	%
Energy	4.9	%
Consumer Staples	4.6	%
Materials	2.8	%
Others	5.1	%
Total	100.0	%

 

Top Holdings % of Net Assets1
The Hain Celestial Group, Inc.	1.8	%
ManTech International Corp., Class A	1.4	%
Baldor Electric Co.	1.4	%
Packeteer, Inc.	1.3	%
Analogic Corp.	1.2	%
The Manitowoc Co., Inc.	1.1	%
Pharmion Corp.	1.1	%
Vignette Corp.	1.1	%
Lionbridge Technologies, Inc.	1.0	%
Thoratec Corp.	1.0	%
Total	12.4	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

Small-company stocks are subject to greater volatility than other asset categories.

¹This list is not a recommendation of any security by the investment adviser.

8    Laudus MarketMasters Funds

Laudus Small-Cap MarketMasters Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year			5 years			Since Inception
Investor Shares (9/16/97)		15.33	%		12.18	%	7.09%
Select Shares (6/9/04)		15.61	%		n/a		10.84%
Benchmark: Russell 2000® Index		19.98	%		13.75	%	(9/16/97) 7.59%
							(6/9/04) 13.83%
Fund Category: Morningstar Small-Cap Blend		16.35	%		13.54	%	(9/16/97) 8.37%
							(6/9/04) 13.90%

 

Style Assessment³

Investment Managers and Allocations
Investment Manager	Investment Style	% of Net Assets
TAMRO Capital Partners LLC	Small-Cap Value/Blend		34.0	%
TCW Investment Management Company	Small/Mid-Cap Blend		19.9	%
Tocqueville Asset Management L.P.	Small-Cap Blend		28.9	%
Veredus Asset Management LLC	Small-Cap Growth		15.4	%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Because the Fund was originally an asset allocation Fund with a multi-fund strategy, its performance prior to June 3, 2002 does not reflect the current strategy and may have been different if it did.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

³Source: Morningstar, Inc. This style assessment is the result of evaluating the fund based on a ten-factor model for value and growth characteristics. The fund’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the fund’s portfolio as of 10/31/06, which may have changed since then, and is not a precise indication of risk or performance—past, present, or future.

Laudus MarketMasters Funds    9

Laudus International MarketMasters Fund™

Jeffrey Mortimer, CFA, senior vice
president and chief investment
officer, equities, is responsible for the
overall management of the fund. Caroline Lee, director and portfolio
manager, co-manages the fund. The Laudus MarketMasters Funds use a multi-manager strategy. CSIM, the funds’ investment adviser, uses rigorous criteria to select investment managers with proven long-term track records to manage a portion of each fund’s assets. In addition to selecting the investment managers and allocating assets among them, CSIM is responsible for monitoring and coordinating the overall management of the funds. Laudus MarketMasters International Fund Investor Shares returned 24.66%, underperforming its benchmark, the MSCI EAFE Index, which was up 27.52% for the report period. This index is also the benchmark for each of the fund’s investment managers. Of the investment managers, Harris Associates L.P. was a positive contributor to returns, outperforming the benchmark. This was due to strong stock selection, primarily within the Financial sector, in which Willis Group Holdings Limited was a key contributor to performance. William Blair & Company, LLC, whose focus is growth, also outperformed the benchmark as a result of strong stock selection, particularly within the Financial and Industrials sectors; holdings in Bancolombia S.A. and UBS AG positively contributed to performance. Mondrian also outperformed the benchmark as a result of strong stock selection within the Industrials and Information Technology sectors; holdings in The Weir Group plc and TT Electronics plc added to performance. On the downside, American Century Global Investment Management, Inc. underperformed the benchmark, mainly due to poor sector allocation in the Financials and Information Technology; positions in Sierra Wireless, Inc. and Zoran Corp. detracted from performance. Wentworth, Hauser and Violich, Inc. underperformed the benchmark as a result of weak sector allocation. Within the Energy sector, holdings in such stocks as Nabors Industries Ltd. and Weatherford International Ltd. detracted from performance.  

As of 10/31/06:

Country Weightings % of Investments
United Kingdom	22.9	%	Italy	2.8	%
Japan	10.3	%	Netherlands	2.8	%
Switzerland	9.7	%	Singapore	2.8	%
Germany	7.9	%	Canada	2.6	%
France	6.7	%	Other Countries	24.8	%
Australia	2.8	%	Cash & Cash Equivalents	3.9	%
			Total	100.0	%

Statistics
Number of Holdings	528
Weighted Average Market Cap ($ x 1,000,000)	23,665
Price/Earnings Ratio (P/E)	20.0
Price/Book Ratio (P/B)	2.9

Sector Weightings % of Investments
Consumer Discretionary	22.3	%
Financials	19.3	%
Industrials	18.7	%
Information Technology	7.6	%
Health Care	7.0	%
Consumer Staples	6.9	%
Materials	5.1	%
Energy	4.7	%
Telecommunication Services	3.5	%
Utilities	0.9	%
Others	4.0	%
Total	100.0	%

 

Top Holdings % of Net Assets1
UBS AG	1.5	%
GlaxoSmithKline plc	1.4	%
DaimlerChrysler AG	1.4	%
British Sky Broadcasting Group plc	1.3	%
Signet Group plc	1.2	%
Novartis AG — Reg’d.	1.1	%
SK Telecom Co., Ltd.	1.0	%
Credit Suisse Group	1.0	%
Diageo plc	1.0	%
Adecco S.A.	1.0	%
Total	11.9	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

Foreign securities can involve risks such as political and economic instability and currency risk. These risks may be greater in emerging markets.

¹This list is not a recommendation of any security by the investment adviser.

10    Laudus MarketMasters Funds

Laudus International MarketMasters Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results.

Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 year		5 years			10 years			Since Inception
Investor Shares (10/16/96)	24.66	%		15.73	%		12.08	%	n/a
Select Shares® (4/2/04)	24.88	%		n/a			n/a		18.30%
Benchmark: MSCI-EAFE® Index	27.52	%		14.55	%		7.33	%	(4/2/04) 18.09%
Fund Category: Morningstar Foreign Large-Cap Growth	26.02	%		12.49	%		6.74	%	(4/2/04) 16.03%

 

Investment Managers and Allocations
Investment Manager	Investment Style	% of Net Assets
American Century Global Investment Management, Inc.	International Small/Mid-Cap		25.8	%
Wentworth, Hauser and Violich	International Growth		3.9	%
Harris Associates LP	International Value		33.2	%
William Blair & Company, LLC	International Growth		21.2	%
Mondrian Investment Partners Limited	International Small-Cap		14.6	%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

Because the Fund was originally an asset allocation Fund with a multi-fund strategy, its performance prior to June 3, 2002 does not reflect the current strategy and may have been different if it did.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

²Source for category information: Morningstar, Inc.

Laudus MarketMasters Funds    11

Fund Expenses (Unaudited)

Examples for a $1,000 Investment

 

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid During Period2 5/1/06–10/31/06
Laudus U.S. MarketMasters Fund™
Investor Shares
Actual Return		1.15	%	$	1,000	$	1,036.10	$	5.90
Hypothetical 5% Return		1.15	%	$	1,000	$	1,019.41	$	5.85
Select Shares®
Actual Return		0.92	%	$	1,000	$	1,036.90	$	4.72
Hypothetical 5% Return		0.92	%	$	1,000	$	1,020.57	$	4.69
Laudus Small-Cap MarketMasters Fund™
Investor Shares
Actual Return		1.40	%	$	1,000	$	969.30	$	6.95
Hypothetical 5% Return		1.40	%	$	1,000	$	1,018.15	$	7.12
Select Shares
Actual Return		1.11	%	$	1,000	$	970.10	$	5.51
Hypothetical 5% Return		1.11	%	$	1,000	$	1,019.61	$	5.65
Laudus International MarketMasters Fund™
Investor Shares
Actual Return		1.52	%	$	1,000	$	1,000.00	$	7.67
Hypothetical 5% Return		1.52	%	$	1,000	$	1,017.54	$	7.74
Select Shares
Actual Return		1.34	%	$	1,000	$	1,001.40	$	6.75
Hypothetical 5% Return		1.34	%	$	1,000	$	1,018.46	$	6.80

 

¹  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²  Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

12    Laudus MarketMasters Funds

Laudus U.S. MarketMasters Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05		11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		11.26			10.30		9.94			7.48			9.20
Income or loss from investment operations:
Net investment income or loss		0.03			0.02		(0.03	)		(0.01	)		0.06
Net realized and unrealized gains or losses		1.63			0.94		0.39			2.47			(1.68	)
Total income or loss from investment operations		1.66			0.96		0.36			2.46			(1.62	)
Less distributions:
Dividends from net investment income		(0.02	)		—		—			—			(0.10	)
Net asset value at end of period		12.90			11.26		10.30			9.94			7.48
Total return (%)		14.71			9.32		3.62			32.89			(17.92	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.20	1		1.25		1.25			1.25			0.83	2,3
Gross operating expenses		1.37			1.38		1.39			1.42			1.16	3
Net investment income or loss		0.18			0.14		(0.25	)		(0.12	)		0.50
Portfolio turnover rate		65			83		72			97			390
Net assets, end of period ($ x 1,000,000)		134			150		180			169			129
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05		6/4/044— 10/31/04
Per-Share Data ($)
Net asset value at beginning of period		11.30			10.32		10.42
Income or loss from investment operations:
Net investment income or loss		0.04			0.02		(0.00	)5
Net realized and unrealized gains or losses		1.63			0.96		(0.10	)
Total income or loss from investment operations		1.67			0.98		(0.10	)
Less distributions:
Dividends from net investment income		(0.04	)		—		—
Net asset value at end of period		12.93			11.30		10.32
Total return (%)		14.81			9.50		(0.96	)6
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.97	7		1.07		1.07	8
Gross operating expenses		1.33			1.33		1.37	8
Net investment income or loss		0.43			0.25		(0.08	)8
Portfolio turnover rate		65			83		72	6
Net assets, end of period ($ x 1,000,000)		8			2		1

 

¹   The ratio of net operating expenses would have been 1.25%, if custody credits had not been included.

²   The ratio of net operating expenses would have been 0.74% if certain non-routine expenses (proxy fees) had not been included.

³   Prior to the fund’s change in structure on June 3, 2002, the expenses incurred by underlying funds in which the fund invested were not included in this ratio.

⁴   Commencement of operations.

⁵   Per share amount was less than $0.01.

⁶   Not annualized.

⁷   The ratio of net operating expenses would have been 1.07%, if custody credits had not been included.

⁸   Annualized.

See financial notes.    13

Laudus U.S. MarketMasters Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
89.7%	Common Stock	102,945	126,959
4.6%	Foreign Common Stock	6,271	6,452
6.7%	Short-Term Investment	9,430	9,430
101.0%	Total Investments	118,646	142,841
(1.0)%	Other Assets and Liabilities		(1,400	)
100.0%	Net Assets		141,441

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   89.7% of net assets
Banks 3.2%
Commerce Bancorp, Inc.		8,660		302
Freddie Mac		16,926		1,168
Marshall & Ilsley Corp.		13,200		633
New York Community Bancorp, Inc.		8,757		143
People’s Bank		15,765		642
SVB Financial Group*		11,178		514
Washington Mutual, Inc.		25,000		1,058
				4,460
Capital Goods 4.3%
Alliant Techsystems, Inc.*		6,600		510
Danaher Corp.		9,800		703
Dover Corp.		11,200		532
General Electric Co.		37,800		1,327
Pentair, Inc.		21,100		695
SPX Corp.		9,890		569
Teleflex, Inc.		7,000		435
Tyco International Ltd.		46,000		1,354
				6,125
Commercial Services & Supplies 0.1%
SAIC, Inc*		10,600		212
Consumer Durables & Apparel 2.3%
Coach, Inc.*		8,400		333
Jones Apparel Group, Inc.		17,065		570
Leggett & Platt, Inc.		19,650		459
Lennar Corp., Class A		22,000		1,044
Nike, Inc., Class B		3,700		340
The Stanley Works		10,340		493
				3,239
Consumer Services 5.9%
Carnival Corp.		29,000		1,416
Las Vegas Sands Corp.*		16,900		1,288
McDonald’s Corp.		35,400		1,484
Regis Corp.		18,200		683
Starwood Hotels & Resorts Worldwide, Inc.		8,000		478
The Cheesecake Factory, Inc.*		25,400		717
Wynn Resorts Ltd. *		10,100		743
YUM! Brands, Inc.		26,600		1,582
				8,391
Diversified Financials 8.8%
American Capital Strategies Ltd.		15,700		678
American Express Co.		15,600		902
Capital One Financial Corp.		12,100		960
Chicago Mercantile Exchange Holdings, Inc.		1,463		733
Citigroup, Inc.		26,500		1,329
Federated Investors, Inc., Class B		19,900		682
JPMorgan Chase & Co.		28,000		1,328
Mellon Financial Corp.		32,100		1,246
Morgan Stanley		19,500		1,490
Nuveen Investments, Inc., Class A		18,000		888
NYSE Group, Inc.*		13,100		969
The Goldman Sachs Group, Inc.		6,350		1,205
				12,410
Energy 4.8%
Apache Corp.		17,800		1,163
Cameron International Corp.*		6,000		301
ChevronTexaco Corp.		22,175		1,490
ConocoPhillips		17,700		1,066
Exxon Mobil Corp.		23,800		1,700
Murphy Oil Corp.		6,400		302
Valero Energy Corp.		9,045		473
Weatherford International Ltd.*		6,100		250
				6,745
Food & Staples Retailing 1.9%
Costco Wholesale Corp.		8,200		438
CVS Corp.		27,300		857
Rite Aid Corp.*		196,900		921
Sysco Corp.		14,500		507
				2,723

14    See financial notes.

Laudus U.S. MarketMasters Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Food, Beverage & Tobacco 1.1%
Molson Coors Brewing Co., Class B		5,640		401
Pilgrim’s Pride Corp., Class B		18,000		450
The Hershey Co.		13,000		688
				1,539
Health Care Equipment & Services 9.4%
Alcon, Inc.		5,510		584
Bausch & Lomb, Inc.		13,400		717
Baxter International, Inc.		25,500		1,172
Beckman Coulter, Inc.		6,900		397
Boston Scientific Corp.*		51,603		821
Caremark Rx, Inc.		34,850		1,716
CIGNA Corp.		8,200		959
Cytyc Corp.*		10,900		288
Eclipsys Corp.*		42,350		897
Edwards Lifesciences Corp.*		8,400		361
HEALTHSOUTH Corp.*		20,000		485
Hillenbrand Industries, Inc.		9,400		552
Hospira, Inc.*		16,580		603
Humana, Inc.*		18,500		1,110
St. Jude Medical, Inc.*		11,800		405
Tenet Healthcare Corp.*		64,400		455
Triad Hospitals, Inc.*		11,800		437
WellPoint, Inc.*		16,900		1,290
				13,249
Household & Personal Products 0.6%
Procter & Gamble Co.		14,100		894
Insurance 2.5%
American International Group, Inc.		20,900		1,404
Arthur J. Gallagher & Co.		21,650		603
Assurant, Inc.		8,710		459
MetLife, Inc.		11,300		645
Old Republic International Corp.		21,375		482
				3,593
Materials 3.1%
Air Products & Chemicals, Inc.		15,600		1,087
Cytec Industries, Inc.		10,130		561
International Flavors & Fragrances, Inc.		16,000		680
Monsanto Co.		14,600		645
Southern Copper Corp.		27,000		1,387
				4,360
Media 6.1%
Cablevision Systems Corp., Class A*		30,000		834
Comcast Corp.*		59,450		2,407
Liberty Global, Inc., Class A*		6,448		169
Liberty Global, Inc., Class C*		46,539		1,183
Liberty Media Holding Corp. — Capital*		8,310		740
The DIRECTV Group, Inc.*		51,911		1,157
The Walt Disney Co.		20,200		635
Time Warner, Inc.		75,300		1,507
				8,632
Pharmaceuticals & Biotechnology 3.6%
Fisher Scientific International, Inc.*		15,200		1,301
Johnson & Johnson		14,845		1,001
Pfizer, Inc.		45,700		1,218
Thermo Electron Corp.*		18,300		784
Valeant Pharmaceuticals International*		11,232		210
Varian, Inc.*		12,120		568
				5,082
Retailing 5.0%
Abercrombie & Fitch Co., Class A		12,900		989
Bed Bath & Beyond, Inc.*		10,600		427
Best Buy Co., Inc.		16,400		906
Federated Department Stores, Inc.		16,896		742
J.C. Penney Co., Inc.		6,900		519
Target Corp.		22,900		1,355
The Gap, Inc.		38,700		814
Tiffany & Co.		36,000		1,286
				7,038
Semiconductors & Semiconductor Equipment 7.8%
Analog Devices, Inc.		27,900		888
Applied Materials, Inc.		33,700		586
Broadcom Corp., Class A*		22,050		667
Cypress Semiconductor Corp.*		21,300		357
Intel Corp.		71,600		1,528
International Rectifier Corp.*		13,200		475
KLA-Tencor Corp.		9,800		482
LSI Logic Corp.*		62,800		631
MEMC Electronic Materials, Inc.*		26,600		944
Microchip Technology, Inc.		18,000		593
Micron Technology, Inc.*		41,600		601
National Semiconductor Corp.		74,925		1,820
Novellus Systems, Inc.*		27,150		751
Teradyne, Inc.*		55,550		779
				11,102

See financial notes.    15

Laudus U.S. MarketMasters Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Software & Services 5.5%
Activision, Inc.*		27,845		429
Adobe Systems, Inc.*		17,200		658
BearingPoint, Inc.*		115,420		962
Google, Inc., Class A*		5,326		2,537
McAfee, Inc.*		15,300		443
Microsoft Corp.		55,100		1,582
Oracle Corp.*		61,300		1,132
				7,743
Technology Hardware & Equipment 7.8%
ADC Telecommunications, Inc.*		40,900		585
Apple Computer, Inc.*		11,600		941
Corning, Inc.*		35,400		723
Dell, Inc.*		96,100		2,338
Diebold, Inc.		13,580		593
Hewlett-Packard Co.		45,000		1,744
Motorola, Inc.		39,200		904
QUALCOMM, Inc.		19,000		692
Sun Microsystems, Inc.*		117,300		637
Tektronix, Inc.		15,220		462
Vishay Intertechnology, Inc.*		48,200		650
Xerox Corp.*		44,900		763
				11,032
Telecommunication Services 3.3%
American Tower Corp., Class A*		39,400		1,419
Leap Wireless International, Inc.*		8,570		475
Level 3 Communications, Inc.*		181,000		958
NII Holdings, Inc.*		27,100		1,762
				4,614
Transportation 1.4%
JetBlue Airways Corp.*		90,700		1,139
Union Pacific Corp.		10,000		906
				2,045
Utilities 1.2%
Entergy Corp.		10,900		936
TXU Corp.		12,600		795
				1,731
Foreign Common Stock   4.6% of net assets
France 1.1%
Automobiles & Components 0.6%
PSA Peugeot Citroen		15,700		902
Pharmaceuticals & Biotechnology 0.5%
Sanofi-Aventis (a)		15,000		640
				1,542
Hong Kong 0.6%
Banks 0.6%
HSBC Holdings plc		49,000		925
Israel 0.5%
Pharmaceuticals & Biotechnology 0.5%
Teva Pharmaceutical Industries Ltd. (a)		20,200		666
Japan 0.5%
Automobiles & Components 0.5%
Honda Motor Co., Ltd. (a)		18,400		650
Netherlands 0.3%
Semiconductors & Semiconductor Equipment 0.3%
ASML Holding N.V.*		19,900		455
Taiwan 0.7%
Telecommunication Services 0.7%
Chunghwa Telecom Co., Ltd. (a)		53,894		986
United Kingdom 0.9%
Insurance 0.5%
Willis Group Holdings Ltd.		16,900		642
Pharmaceuticals & Biotechnology 0.4%
GlaxoSmithKline plc (a)		11,000		586
				1,228

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   6.7% of net assets
Repurchase Agreements 6.7%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $9,431 (fully collateralized by Federal National Mortgage Association with a value of $9,764.)		9,430		9,430

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $119,527 and the unrealized appreciation and depreciation were $25,098 and ($1,784), respectively, with a net unrealized appreciation of $23,314.

*     Non-income producing security.

(a)     American Depository Receipt.

16    See financial notes.

Laudus U.S. MarketMasters Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers are x 1,000 except NAV.

Assets
Investments, at value (cost $118,646)	$	142,841
Cash		3
Receivables:
Investments sold		125
Fund shares sold		26
Interest		1
Dividends		71
Prepaid expenses	+	1
Total assets		143,068
Liabilities
Payables:
Investments bought		1,386
Investment adviser and administrator fees		76
Transfer agent and shareholder services fees		30
Fund shares redeemed		34
Trustee fees		1
Accrued expenses	+	100
Total liabilities		1,627
Net Assets
Total assets		143,068
Total liabilities		–1,627
Net assets	$	141,441
Net Assets by Source
Capital received from investors		138,855
Net investment income not yet distributed		273
Net realized capital losses		(21,882	)
Net unrealized capital gains		24,195
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	133,562			10,357		$12.90
Select Shares	$	7,879			609		$12.93

 

See financial notes.    17

Laudus U.S. MarketMasters Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers are x 1,000.

Investment Income
Dividends (net of $23 foreign withholding tax)	$	1,830
Interest	+	202
Total Investment Income		2,032
Net Realized Gains and Losses
Net realized gains on investments		11,252
Net realized losses on foreign currency transactions		(3	)
Net realized losses on futures contracts	+	(38	)
Net realized gains		11,211
Net Unrealized Gains and Losses
Net unrealized gains on investments		8,699
Expenses
Investment adviser and administrator fees		1,357
Transfer agent and shareholder service fees:
Investor Shares		375
Select Shares		7
Custodian fees		69
Registration fees		56
Portfolio accounting fees		51
Professional fees		42
Shareholder reports		40
Trustees’ fees		6
Other expenses	+	8
Total expenses		2,011
Custody credits		–73
Expense reduction by adviser and Schwab		–186
Net expenses		1,752
Increase in Net Assets from Operations
Total investment income		2,032
Net expenses		–1,752
Net investment income		280
Net realized gains		11,211
Net unrealized gains	+	8,699
Increase in net assets from operations	$	20,190

 

18    See financial notes.

Laudus U.S. MarketMasters Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers are x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	280	$	229
Net realized gains		11,211		20,508
Net unrealized gains or losses	+	8,699		(4,726	)
Increase in net assets from operations		20,190		16,011
Distributions Paid
Dividends from net investment income
Investor Shares		196		—
Select Shares	+	10		—
Total dividends from net investment income	$	206	$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		233		$	2,811			470		$	5,144
Select Shares	+	525			6,214			220			2,449
Total shares sold		758		$	9,025			690		$	7,593
Shares Reinvested
Investor Shares		16		$	188			—		$	—
Select Shares	+	1			9			—			—
Total shares reinvested		17		$	197			—		$	—
Shares Redeemed
Investor Shares		(3,245	)	$	(38,952	)		(4,578	)	$	(50,431	)
Select Shares	+	(135	)		(1,655	)		(119	)		(1,340	)
Total shares redeemed		(3,380	)	$	(40,607	)		(4,697	)	$	(51,771	)
Net transactions in fund shares		(2,605	)	$	(31,385	)		(4,007	)	$	(44,178	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period		13,571		$	152,842			17,578		$	181,009
Total increase or decrease	+	(2,605	)		(11,401	)		(4,007	)		(28,167	)
End of period		10,966		$	141,441			13,571		$	152,842
Net investment income not yet distributed				$	273					$	206

 

See financial notes.    19

Laudus Small-Cap MarketMasters Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		13.38			12.18			11.08			7.18			8.73
Income or loss from investment operations:
Net investment income or loss		(0.13	)		(0.14	)		(0.14	)		(0.09	)		0.04
Net realized and unrealized gains or losses		2.08			1.34			1.24			3.99			(1.54	)
Total income or loss from investment operations		1.95			1.20			1.10			3.90			(1.50	)
Less distributions:
Dividends from net investment income		—			—			—			(0.00	)1		(0.03	)
Distributions from net realized gains		(1.13	)		—			—			—			(0.02	)
Total distributions		(1.13	)		—			—			(0.00	)1		(0.05	)
Net asset value at end of period		14.20			13.38			12.18			11.08			7.18
Total return (%)		15.33			9.85			9.93			54.32			(17.34	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.48	2		1.55			1.55			1.55			0.93	3,4
Gross operating expenses		1.63		��	1.69			1.77			1.80			1.31	3
Net investment income		(0.82	)		(0.95	)		(1.08	)		(0.98	)		0.06
Portfolio turnover rate		105			94			140			94			324
Net assets, end of period ($ x 1,000,000)		95			108			129			115			81
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			6/9/045— 10/31/04
Per-Share Data ($)
Net asset value at beginning of period		13.41			12.19			12.11
Income or loss from investment operations:
Net investment loss		(0.02	)		(0.11	)		(0.03	)
Net realized and unrealized gains or losses		2.01			1.33			0.11
Total income from investment operations		1.99			1.22			0.08
Less distributions:
Distributions from net realized gains		(1.13	)		—			—
Net asset value at end of period		14.27			13.41			12.19
Total return (%)		15.61			10.01			0.66	6
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.16	7		1.37			1.37	8
Gross operating expenses		1.55			1.63			1.79	8
Net investment income		(0.43	)		(0.76	)		(0.91	)8
Portfolio turnover rate		105			94			140	6
Net assets, end of period ($ x 1,000,000)		7			1			0.32

 

¹ Per-share amount was less than $0.01.

² The ratio of net operating expenses would have been 1.55% for the period ended 10/31/06, if custody credits had not been included.

³ Prior to the fund’s change in structure on June 3, 2002, the expenses incurred by underlying funds in which the fund invested were not included in this ratio.

⁴ The ratio of net operating expenses would have been 0.84% if certain non-routine expenses (proxy fees) had not been included.

⁵ Commencement of operations.

⁶ Not annualized.

⁷ The ratio of net operating expenses would have been 1.36% for the period ended 10/31/06, if custody credits had not been included.

⁸ Annualized.

20    See financial notes.

Laudus Small-Cap MarketMasters Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
93.5%	Common Stock	79,586	95,158
1.6%	Foreign Common Stock	1,514	1,636
5.0%	Short-Term Investment	5,098	5,098
100.1%	Total Investments	86,198	101,892
(0.1)%	Other Assets and Liabilities		(100	)
100.0%	Net Assets		101,792

 

Security		Number of Shares		Value ($ x 1,000)
Common Stock   93.5% of net assets
Automobiles & Components 0.2%
Force Protection, Inc.*			20,600		154
Banks 1.4%
Commerce Bancorp, Inc.			6,120		214
Marshall & Ilsley Corp.			6,600		316
New York Community Bancorp, Inc.			5,719		94
People’s Bank			10,796		439
SVB Financial Group*			7,747		357
					1,420
Capital Goods 10.9%
Alliant Techsystems, Inc.*			4,600		355
American Railcar Industries, Inc.			6,425		198
Applied Signal Technology, Inc.			31,600		469
Astec Industries, Inc.*			11,000		351
Baldor Electric Co.			45,620		1,463
BE Aerospace, Inc.*			18,100		458
Dover Corp.			7,700		366
EMCOR Group, Inc.*			4,125		244
Encore Wire Corp.*			4,275		115
General Cable Corp.*			23,260		875
Granite Construction, Inc.			3,200		167
H&E Equipment Services, Inc.*			5,875		158
HEICO Corp.			3,450		125
Infrasource Services, Inc.*			14,100		276
Pentair, Inc.			14,700		484
Perini Corp.*			7,750		192
Quanta Services, Inc.*			20,225		370
SPX Corp.			6,960		400
Sterling Construction Co., Inc.*			2,475		52
Teleflex, Inc.			13,660		850
The Lamson & Sessions Co.*			9,300		203
The Manitowoc Co., Inc.			21,010		1,153
Trex Co., Inc.*			27,360		723
Trinity Industries, Inc.			6,300		227
URS Corp.*			12,925		522
Washington Group International, Inc.*			5,725		324
					11,120
Commercial Services & Supplies 3.2%
Acco Brands Corp.*			30,840		749
Corrections Corp. of America*			3,500		160
Mobile Mini, Inc.*			8,600		277
SAIC, Inc.*			6,900		138
Steelcase, Inc., Class A			48,040		796
TRC Cos., Inc.*	��		60,700		496
Watson Wyatt & Co., Holdings			15,100		682
					3,298
Consumer Durables & Apparel 2.8%
Crocs, Inc.*			5,775		229
Jones Apparel Group, Inc.			10,985		367
La-Z-Boy, Inc.			24,100		295
Leggett & Platt, Inc.			12,700		297
Steven Madden Ltd.			4,300		186
The Stanley Works			6,660		317
The Yankee Candle Co., Inc.			22,850		773
Under Armour, Inc.*			7,725		358
					2,822
Consumer Services 4.5%
Bob Evans Farms, Inc.			23,920		811
California Pizza Kitchen, Inc.*			22,710		733
Chipotle Mexican Grill, Inc. Class A*			9,475		568
Cosi, Inc.*			7,625		33
DeVry, Inc.*			39,800		969
Regis Corp.			12,800		481
Ruth’s Chris Steak House, Inc.*			10,875		214
The Cheesecake Factory, Inc.*			17,800		503
Vail Resorts, Inc.*			6,370		246
					4,558
Diversified Financials 3.6%
Federated Investors, Inc., Class B			13,900		477
GAMCO Investors, Inc., Class A			10,380		411
Knight Capital Group, Inc., Class A*			40,880		762
Lazard Ltd.			11,075		470
Raymond James Financial, Inc.			17,555		559
The First Marblehead Corp.			14,090		950
					3,629
Energy 4.9%
Cameron International Corp.*			4,300		215
CARBO Ceramics, Inc.			22,700		765
Helmerich & Payne, Inc.			22,900		549
Murphy Oil Corp.			4,050		191
Oceaneering International, Inc.*			25,100		903

See financial notes.    21

Laudus Small-Cap MarketMasters Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
PetroQuest Energy, Inc.*		6,000		68
TETRA Technologies, Inc.*		15,600		404
Tidewater, Inc.		10,000		497
Weatherford International Ltd.*		2,600		107
Whiting Petroleum Corp.*		16,950		756
Willbros Group, Inc.*		34,575		531
				4,986
Food & Staples Retailing 0.7%
Performance Food Group Co.*		25,220		733
Food, Beverage & Tobacco 2.3%
Molson Coors Brewing Co., Class B		3,920		279
Pilgrim’s Pride Corp., Class B		11,600		290
The Hain Celestial Group, Inc.*		63,850		1,802
				2,371
Health Care Equipment & Services 8.4%
Analogic Corp.		22,370		1,249
Bausch & Lomb, Inc.		9,400		503
Beckman Coulter, Inc.		4,800		276
Centene Corp.*		16,500		389
Dendrite International, Inc.*		64,100		670
Edwards Lifesciences Corp.*		5,900		253
HEALTHSOUTH Corp.*		14,160		343
Hillenbrand Industries, Inc.		6,500		382
Hologic, Inc.*		8,675		418
Hospira, Inc.*		11,580		421
Intuitive Surgical, Inc.*		3,875		384
Lifecell Corp.*		12,225		287
Omnicell, Inc.*		15,650		293
Rita Medical Systems, Inc.*		108,700		391
Thoratec Corp.*		64,500		1,016
Triad Hospitals, Inc.*		8,300		307
Wright Medical Group, Inc.*		38,800		959
				8,541
Household & Personal Products 0.8%
NBTY, Inc.*		28,610		796
Insurance 1.5%
Arthur J. Gallagher & Co.		15,100		421
Assurant, Inc.		5,610		295
KMG America Corp.*		67,550		513
Old Republic International Corp.		14,950		337
				1,566
Materials 2.8%
Bowater, Inc.		32,830		686
Cytec Industries, Inc.		6,550		363
Headwaters, Inc.*		23,740		588
International Flavors & Fragrances, Inc.		11,100		472
Symyx Technologies, Inc.*		30,040		737
				2,846
Pharmaceuticals & Biotechnology 5.5%
Adams Respiratory Therapeutics, Inc.*		12,975		559
Connetics Corp.*		55,600		947
PAREXEL International Corp.*		4,600		136
Perrigo Co.		39,870		713
Pharmaceutical Product Development, Inc. (PPD)		11,380		360
Pharmion Corp.*		44,500		1,088
Salix Pharmaceuticals Ltd.*		48,500		647
Thermo Electron Corp.*		12,700		544
Valeant Pharmaceuticals International*		7,850		147
Varian, Inc.*		8,520		400
				5,541
Real Estate 2.2%
FelCor Lodging Trust, Inc.		27,290		566
Innkeepers USA Trust		27,290		468
Post Properties, Inc.		6,710		329
Trammell Crow Co.*		7,200		351
Washington Real Estate Investment Trust		12,020		507
				2,221
Retailing 5.4%
1-800-FLOWERS.COM, Inc., Class A*		113,300		625
bebe stores, Inc.		11,525		286
Charlotte Russe Holding, Inc.*		4,125		114
Christopher & Banks Corp.		6,850		185
Coldwater Creek, Inc.*		7,775		237
Dick’s Sporting Goods, Inc.*		2,850		142
Federated Department Stores, Inc.		10,144		446
Fred’s, Inc.		56,070		733
Guess?, Inc.*		3,625		207
NetFlix, Inc.*		31,140		861
Sharper Image Corp.*		51,680		575
The Gap, Inc.		23,800		500
Wetseal, Inc., Class A*		49,200		307
Zumiez, Inc.*		7,725		254
				5,472
Semiconductors & Semiconductor Equipment 8.2%
Advanced Energy Industries, Inc.*		15,400		242
Amkor Technology, Inc.*		23,700		164
Brooks Automation, Inc.*		66,200		940
Cabot Microelectronics Corp.*		23,500		671
Cymer, Inc.*		7,400		343
Cypress Semiconductor Corp.*		14,900		250
FEI Co.*		13,400		306
Hittite Microwave Corp.*		6,350		218
International Rectifier Corp.*		9,300		334
Intevac, Inc.*		7,350		152
KLA-Tencor Corp.		6,300		310
Kopin Corp.*		198,500		709
LSI Logic Corp.*		43,900		441
Micron Technology, Inc.*		14,300		207
National Semiconductor Corp.		13,860		337
Netlogic Microsystems, Inc.*		10,575		210

22    See financial notes.

Laudus Small-Cap MarketMasters Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Novellus Systems, Inc.*		19,000		525
Teradyne, Inc.*		38,700		543
Trident Microsystems, Inc.*		28,350		599
TriQuint Semiconductor, Inc.*		28,025		126
Ultratech, Inc.*		53,200		760
				8,387
Software & Services 13.7%
Activision, Inc.*		19,370		299
Altiris, Inc.*		23,030		518
Ansys, Inc.*		8,975		413
aQuantive, Inc.*		16,875		459
Aspen Technology, Inc.*		91,578		918
Corillian Corp.*		45,700		136
Epicor Software Corp.*		71,100		997
Gevity HR, Inc.		36,000		813
Indus International, Inc.*		62,000		231
Informatica Corp.*		47,800		592
Interwoven, Inc.*		55,800		710
Lionbridge Technologies, Inc.*		150,100		1,016
ManTech International Corp., Class A*		43,130		1,469
McAfee, Inc.*		9,900		286
Mentor Graphics Corp.*		43,000		725
MoneyGram International, Inc.		4,825		165
Openwave Systems, Inc.*		76,200		658
Radiant Systems, Inc.*		12,700		140
RightNow Technologies, Inc.*		32,020		529
TIBCO Software, Inc.*		86,500		800
ValueClick, Inc.*		26,100		491
Vignette Corp.*		65,700		1,071
webMethods, Inc.*		67,900		511
				13,947
Technology Hardware & Equipment 8.6%
ADC Telecommunications, Inc.*		28,500		408
Andrew Corp.*		68,020		630
Avocent Corp.*		20,300		745
Diebold, Inc.		9,540		417
Emulex Corp.*		36,970		695
Itron, Inc.*		10,100		550
L-1 Identity Solutions, Inc.*		41,686		597
Packeteer, Inc.*		116,720		1,308
Polycom, Inc.*		26,220		718
Powerwave Technologies, Inc.*		120,200		783
Seachange International, Inc.*		54,400		456
Tekelec*		49,700		733
Tektronix, Inc.		9,785		297
Vishay Intertechnology, Inc.*		34,000		459
				8,796
Transportation 1.9%
AirTran Holdings, Inc.*		38,507		384
American Commercial Lines, Inc.*		5,575		357
ExpressJet Holdings, Inc.*		41,700		331
JetBlue Airways Corp.*		70,200		882
				1,954
Foreign Common Stock   1.6% of net assets
Canada 0.8%
Food, Beverage & Tobacco 0.8%
SunOpta, Inc.*		78,140		770
Netherlands 0.3%
Semiconductors & Semiconductor Equipment 0.3%
ASML Holding N.V.*		12,800		292
Singapore 0.1%
Semiconductors & Semiconductor Equipment 0.1%
ASE Test Ltd.*		14,150		125
United Kingdom 0.4%
Insurance 0.4%
Willis Group Holdings Ltd.		11,800		449

 

Security	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   5.0% of net assets
Repurchase Agreement 5.0%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $5,099 (fully collateralized by Federal National Mortgage Association with a value of $5,340.)		5,098		5,098

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $86,862, and the unrealized appreciation and depreciation were $17,298 and ($2,268), respectively, with a net appreciation of $15,030.

* Non-income producing security.

See financial notes.    23

Laudus Small-Cap MarketMasters Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value (cost $86,198)	$	101,892
Cash		2
Receivables:
Investments sold		399
Fund shares sold		25
Dividends		16
Interest		1
Prepaid expenses	+	1
Total assets		102,336
Liabilities
Payables:
Investments bought		187
Investment adviser and administrator fees		106
Transfer agent and shareholder services fees		21
Trustee fees		1
Fund shares redeemed		176
Accrued expenses	+	53
Total liabilities		544
Net Assets
Total assets		102,336
Total liabilities		–544
Net assets	$	101,792
Net Assets by Source
Capital received from investors		71,410
Net investment income not yet distributed		7
Net realized capital gains		14,681
Net unrealized capital gains		15,694
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	95,185			6,702		$	14.20
Select Shares	$	6,607			463		$	14.27

 

24    See financial notes.

Laudus Small-Cap MarketMasters Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends	$	537
Interest	+	175
Total Investment Income		712
Net Realized Gains and Losses
Net realized gains on investments		16,134
Net realized gains on futures contracts	+	18
Net realized gains		16,152
Net Unrealized Gains and Losses
Net unrealized gains on investments		165
Expenses
Investment adviser and administrator fees		1,258
Transfer agent and shareholder service fees:
Investor Shares		263
Select Shares		5
Custodian fees		73
Registration fees		47
Professional fees		42
Shareholder reports		23
Portfolio accounting fees		15
Trustees’ fees		6
Other expenses	+	19
Total expenses		1,751
Custody credits		–78
Expense reduction by adviser and Schwab		–92
Net expenses		1,581
Increase in Net Assets from Operations
Total investment income		712
Net expenses		–1,581
Net investment losses		(869	)
Net realized gains		16,152
Net unrealized gains	+	165
Increase in net assets from operations	$	15,448

 

See financial notes.    25

Laudus Small-Cap MarketMasters Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06			11/1/04–10/31/05
Net investment loss	$	(869	)	$	(1,159	)
Net realized gains		16,152			9,437
Net unrealized gains	+	165			3,833
Increase in net assets from operations		15,448			12,111
Distributions Paid
Distributions from net realized gains
Investor Shares		8,829			—
Select Shares	+	89			—
Total distributions from net realized gains	$	8,918		$	—

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		190		$	2,628			351		$	4,603
Select Shares	+	472			6,249			75			993
Total shares sold		662		$	8,877			426		$	5,596
Shares Reinvested
Investor Shares		623		$	8,135			—		$	—
Select Shares	+	5			66			—			—
Total shares reinvested		628		$	8,201			—		$	—
Shares Redeemed
Investor Shares		(2,205	)	$	(29,890	)		(2,867	)	$	(37,600	)
Select Shares	+	(75	)		(1,031	)		(40	)		(541	)
Total shares redeemed		(2,280	)	$	(30,921	)		(2,907	)	$	(38,141	)
Net transactions in fund shares		(990	)	$	(13,843	)		(2,481	)	$	(32,545	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period		8,155		$	109,105			10,636		$	129,539
Total decrease	+	(990	)		(7,313	)		(2,481	)		(20,434	)
End of period		7,165		$	101,792			8,155		$	109,105
Net investment income not yet distributed				$	7					$	11

 

26    See financial notes.

Laudus International MarketMasters Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		16.78			13.58			11.95			8.74			10.80
Income or loss from investment operations:
Net investment income		0.13			0.06			0.02			0.03			0.10
Net realized and unrealized gains or losses		3.98			3.16			1.65			3.18			(1.43	)
Total income or loss from investment operations		4.11			3.22			1.67			3.21			(1.33	)
Less distributions:
Dividends from net investment income		(0.16	)		(0.02	)		(0.04	)		(0.00	)1		(0.07	)
Distributions from net realized gains		—			—			—			—			(0.66	)
Total distributions		(0.16	)		(0.02	)		(0.04	)		(0.00	)1		(0.73	)
Net asset value at end of period		20.73			16.78			13.58			11.95			8.74
Total return (%)		24.66			23.75			13.98			36.74			(13.65	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.57	2		1.65			1.65			1.65			0.99	3,4
Gross operating expenses		1.64			1.74			1.89			1.92			1.32	4
Net investment income		0.52			0.37			0.15			0.33			0.60
Portfolio turnover rate		90			53			69			99			158
Net assets, end of period ($ x 1,000,000)		1,320			794			552			302			206
Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			4/2/045— 10/31/04
Per-Share Data ($)
Net asset value at beginning of period		16.81			13.61			13.64
Income or loss from investment operations:
Net investment income		0.19			0.08			0.02
Net realized and unrealized gains or losses		3.96			3.17			(0.05	)
Total income or loss from investment operations		4.15			3.25			(0.03	)
Less distributions:
Dividends from net investment income		(0.19	)		(0.05	)		—
Net asset value at end of period		20.77			16.81			13.61
Total return (%)		24.88			23.90			(0.22	)6
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.39	7		1.47			1.47	8
Gross operating expenses		1.60			1.68			1.86	8
Net investment income		0.72			0.59			0.37	8
Portfolio turnover rate		90			53			69	6
Net assets, end of period ($ x 1,000,000)		628			274			81

 

¹ Per share amount was less than $0.01.

² The ratio of net operating expenses would have been 1.64% if custody credits had not been included.

³ The ratio of net operating expenses would have been 0.93% if certain non-routine expenses (proxy fees) had not been included.

⁴ Prior to the fund’s change in structure on June 3, 2002, the expenses incurred by underlying funds in which the fund invested were not included in this ratio.

⁵   Commencement of operations.

⁶ Not annualized.

⁷ The ratio of net operating expenses would have been 1.47% if custody credits had not been included.

⁸ Annualized.

See financial notes.    27

Laudus International MarketMasters Fund 

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)	Value ($ x 1,000)
0.5%	Common Stock	8,305	9,658
94.5%	Foreign Common Stock	1,538,694	1,841,584
0.4%	Preferred Stock	5,017	8,258
0.2%	Rights	1,163	3,469
3.8%	Short-Term Investment	73,631	73,631
—%	U.S. Treasury Obligation	249	249
99.4%	Total Investments	1,627,059	1,936,849
0.6%	Other Assets and Liabilities		11,165
100.0%	Net Assets		1,948,014

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   0.5% of net assets
Energy 0.1%
Schlumberger Ltd.		55,000		3,469
Food & Staples Retailing 0.1%
Cencosud S.A. ADR, 144A (b)		57,500		2,462
Media 0.1%
CTC Media Inc*		55,200		1,340
Technology Hardware & Equipment 0.1%
NovAtel, Inc.*		26,564		991
Transportation 0.1%
DryShips, Inc.		100,843		1,396
Foreign Common Stock   94.5% of net assets
Australia 2.8%
Banks 0.5%
Australia and New Zealand Banking Group Ltd.		396,200		8,874
Capital Goods 0.2%
United Group Ltd.		431,337		4,876
Commercial Services & Supplies 0.1%
Transfield Services Ltd.		406,818		2,774
Diversified Financials 0.4%
Babcock & Brown Ltd.		187,500		3,160
Macquarie Bank Ltd.		71,200		4,104
				7,264
Energy 0.1%
WorleyParsons Ltd.		107,700		1,519
Materials 0.4%
BHP Billiton Ltd.		145,900		3,105
BHP Billiton Ltd. ADR		89,500		3,810
Perilya Ltd.		403,169		1,367
				8,282
Media 0.3%
Austar United Communications Ltd.*		2,379,061		2,196
Macquarie Communications Infrastructure Group		335,200		1,589
Seek Ltd.		281,000		1,158
				4,943
Pharmaceuticals & Biotechnology 0.3%
CSL Ltd.		142,800		6,194
Real Estate 0.5%
Commonwealth Property Office Fund		6,282,154		6,913
Lend Lease Corp., Ltd.		164,400		2,146
				9,059
Software & Services 0.0%
Computershare Ltd.		73,738		439
				54,224
Austria 0.4%
Banks 0.2%
Erste Bank der Oesterreichischen Sparkassen AG		32,344		2,200
Raiffeisen International Bank — Holding AG		21,800		2,492
				4,692
Energy 0.1%
C.A.T. oil AG*		37,200		815
Real Estate 0.1%
Meinl European Land Ltd.*		67,200		1,483
				6,990
Belgium 0.2%
Materials 0.1%
Umicore		17,900		2,775
Technology Hardware & Equipment 0.1%
EVS Broadcast Equipment SA		37,154		2,015
				4,790

28    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Bermuda 2.0%
Capital Goods 0.5%
Cooper Industries Ltd., Class A		22,500		2,013
Fong’s Industries Co., Ltd.		9,272,000		6,307
Ingersoll-Rand Co., Ltd., Class A		50,600		1,857
				10,177
Consumer Durables & Apparel 0.3%
Arts Optical International Holdings Ltd.		7,596,000		2,197
Hongguo International Holdings Ltd.*		6,334,000		3,329
				5,526
Energy 0.3%
Nabors Industries Ltd.*		105,700		3,264
Weatherford International Ltd.*		76,800		3,155
				6,419
Insurance 0.0%
IPC Holdings Ltd.		16,375		492
PartnerRe Ltd.		3,400		237
				729
Materials 0.2%
Aquarius Platinum Ltd.		162,644		3,024
Media 0.1%
Central European Media Enterprises, Ltd., Class A (a)*		12,600		930
Retailing 0.4%
Esprit Holdings Ltd.		406,500		3,933
Li & Fung Ltd.		1,536,400		4,011
				7,944
Technology Hardware & Equipment 0.1%
Vtech Holdings Ltd.		388,000		1,947
Transportation 0.1%
Cosco Pacific Ltd.		1,360,000		2,806
				39,502
Brazil 0.6%
Consumer Durables & Apparel 0.1%
Cyrela Brazil Realty S.A.		53,100		1,081
Household & Personal Products 0.1%
Natura Cosmeticos S.A.		88,400		1,218
Materials 0.1%
Aracruz Celulose S.A. ADR		7,500		412
Companhia Vale do Rio Doce ADR		64,900		1,651
				2,063
Retailing 0.1%
Lojas Renner S.A.		80,700		1,010
Submarino S.A.*		45,000		919
				1,929
Software & Services 0.0%
Totvs S.A.*		40,500		853
Transportation 0.2%
Companhia de Concessoes Rodoviarias		135,800		1,450
Gol Linhas Aereas International S.A.		44,200		1,377
Localiza Rent a Car S.A.		35,800		891
				3,718
				10,862
Canada 2.6%
Banks 0.1%
Canadian Western Bank		38,458		1,449
Capital Goods 0.1%
Flint Energy Services Ltd.*		35,890		1,838
Commercial Services & Supplies 0.1%
Ritchie Bros Auctioneers, Inc. (a)		21,200		1,156
Consumer Durables & Apparel 0.3%
Gildan Activewear, Inc.*		102,400		5,212
Energy 0.8%
Cameco Corp.		91,700		3,225
Canadian Natural Resources Ltd.		14,000		730
CHC Helicopter Corp., Class A		137,700		3,081
Ensign Energy Services, Inc.		35,500		576
Precision Drilling Trust		50,700		1,453
Suncor Energy, Inc		46,400		3,564
Suncor Energy, Inc.		18,800		1,441
Talisman Energy, Inc.		42,800		707
Trican Well Service Ltd.		2,200		39
				14,816
Food & Staples Retailing 0.1%
Alimentation Couche-Tard, Inc., Class B		49,200		1,166
Shoppers Drug Mart Corp.		28,000		1,140
				2,306
Insurance 0.2%
Manulife Financial Corp.		124,600		4,048
Materials 0.4%
Alcan, Inc.		41,000		1,932
IPSCO, Inc.		23,900		2,186
Potash Corp. of Saskatchewan, Inc.		17,800		2,223
Teck Cominco Ltd., Class B		26,100		1,923
				8,264
Real Estate 0.2%
Brookfield Asset Management, Inc.		17,700		788
Northern Property Real Estate Investment Trust		171,300		3,707
				4,495
Retailing 0.1%
The Forzani Group Ltd., Class A*		120,942		1,888

See financial notes.    29

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Transportation 0.2%
Canadian National Railway Co.		43,900		2,092
Canadian Pacific Railway Ltd.		37,500		2,118
				4,210
				49,682
Cayman Islands 2.0%
Automobiles & Components 0.0%
Norstar Founders Group Ltd.		1,858,000		732
Capital Goods 0.0%
Suntech Power Holdings Co., Ltd. ADR*		1,600		42
Consumer Durables & Apparel 0.1%
Li Ning Co., Ltd.		1,235,157		1,459
Consumer Services 0.1%
Ctrip.com International Ltd. ADR (a)		30,600		1,499
FU JI Food & Catering Services		457,000		802
				2,301
Energy 0.6%
GlobalSantaFe Corp.		71,500		3,711
Noble Corp.		55,100		3,863
Transocean, Inc.*		52,900		3,837
				11,411
Food, Beverage & Tobacco 0.1%
China Mengniu Dairy Co., Ltd.		1,021,000		1,854
Health Care Equipment & Services 0.1%
Mindray Medical International Ltd., ADR*		113,652		2,057
Household & Personal Products 0.1%
Hengan International Group Co., Ltd.		662,000		1,591
Materials 0.3%
Lee & Man Paper Manufacturing Ltd.		388,000		787
Vision Grande Group Holdings Ltd.		4,506,000		3,869
				4,656
Media 0.1%
Focus Media Holding Ltd. ADR (a)*		49,678		2,627
Real Estate 0.2%
Greentown China Holdings Ltd.*		2,152,205		2,955
Semiconductors & Semiconductor Equipment 0.1%
ASM Pacific Technology Ltd.		371,500		1,924
Himax Technologies, Inc. ADR (a)*		96,900		617
				2,541
Technology Hardware & Equipment 0.2%
AAC Acoustic Technology Holdings, Inc.*		1,996,000		2,313
Foxconn International Holdings Ltd.*		686,000		2,275
				4,588
				38,814
Chile 0.1%
Retailing 0.1%
S.A.C.I. Falabella, SA		524,600		1,691
Columbia 0.1%
Banks 0.1%
BanColombia S.A. ADR (a)		47,800		1,461
Denmark 0.9%
Capital Goods 0.3%
FLSmidth & Co. A/S		20,000		1,052
NKT Holding A/S		60,641		4,750
				5,802
Consumer Durables & Apparel 0.1%
Bang & Olufsen A/S, Class B		18,699		2,167
Health Care Equipment & Services 0.1%
Coloplast A/S		24,300		2,056
Insurance 0.2%
Alm. Brand A/S*		38,975		2,188
Topdanmark A/S*		12,500		1,766
				3,954
Pharmaceuticals & Biotechnology 0.2%
Alk-Abello A/S*		6,900		1,056
Genmab A/S*		64,477		2,878
				3,934
				17,913
Egypt 0.0%
Diversified Financials 0.0%
Egyptian Financial Group — Hermes Holding*		83,500		646
Finland 0.2%
Consumer Durables & Apparel 0.1%
Amer Sports Oyj		85,200		1,887
Transportation 0.1%
Finnlines Oyj		132,645		2,778
				4,665
France 6.7%
Automobiles & Components 0.4%
Compagnie Generale des Etablissements Michelin, Class B		107,600		8,770
Banks 0.5%
BNP Paribas		89,290		9,806

30    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Capital Goods 1.3%
Carbone Lorraine S.A.		100,614		5,598
Financiere Marc de Lacharriere SA		16,150		1,504
Latecoere		142,113		4,589
Nexans S.A.		128,175		11,503
Vinci S. A.		18,000		2,028
				25,222
Consumer Durables & Apparel 0.3%
LVMH Moet Hennessy Louis Vuitton S.A.		48,200		5,020
Diversified Financials 0.1%
Eurazeo		16,765		2,140
Food, Beverage & Tobacco 0.2%
Groupe Danone		47,600		3,875
Health Care Equipment & Services 0.2%
Essilor International S.A.		32,600		3,417
Orpea*		13,200		1,106
				4,523
Household & Personal Products 0.4%
L’Oreal S.A.		86,000		8,358
Insurance 0.3%
April Group		11,200		478
Axa		21,700		827
Euler Hermes S.A.		31,472		4,086
				5,391
Media 1.7%
Ipsos		18,437		704
Publicis Groupe S.A.		330,900		12,780
Societe Television Francaise 1		207,000		7,023
Vivendi Universal S.A.		333,500		12,635
				33,142
Pharmaceuticals & Biotechnology 0.2%
Boiron S.A.		64,213		1,455
Sanofi-Aventis		33,400		2,844
				4,299
Real Estate 0.1%
Klepierre		9,700		1,463
Retailing 0.1%
Etam		17,489		1,563
Software & Services 0.2%
Capgemini SA		53,500		3,035
Iliad S.A.		18,950		1,613
				4,648
Technology Hardware & Equipment 0.6%
Ingenico S.A.*		134,980		3,117
Neopost S.A.		64,743		7,904
				11,021
Transportation 0.1%
Norbert Dentressangle		15,770		1,308
				130,549
Germany 7.6%
Automobiles & Components 2.5%
Bayerische Motoren Werke (BMW) AG		280,200		16,119
Continental AG		9,200		1,031
DaimlerChrysler AG		476,500		27,243
ElringKlinger AG		85,840		4,565
				48,958
Capital Goods 0.9%
Bilfinger Berger AG		79,990		5,000
Hochtief AG		50,300		3,290
MTU Aero Engines Holding AG		121,467		4,994
Q-Cells AG*		34,840		1,382
Rheinmetall AG		24,200		1,742
Solarworld AG		15,480		835
				17,243
Commercial Services & Supplies 0.1%
Wirecard AG*		257,531		2,206
Consumer Durables & Apparel 0.3%
Bijou Brigitte Modische Accessoires AG		4,800		997
Rational AG		26,783		5,700
				6,697
Food & Staples Retailing 0.2%
Metro AG		67,800		4,035
Health Care Equipment & Services 0.1%
Celesio AG		43,340		2,237
Household & Personal Products 0.2%
Henkel KGaA		26,100		3,131
Insurance 0.8%
Hannover Rueckversicherung AG*		359,500		15,272
Materials 0.2%
BASF AG		19,300		1,698
GEA Group AG		136,800		2,462
				4,160
Media 0.1%
CTS Eventim AG		57,955		2,007
Pharmaceuticals & Biotechnology 0.4%
QIAGEN N.V.*		323,849		5,112
Schwarz Pharma AG		25,300		2,959
				8,071
Real Estate 0.3%
Deutsche Euroshop AG		35,335		2,438
IVG Immobilien AG		85,900		3,099
				5,537
Retailing 0.1%
Praktiker Bau — und Heimwerkermaerkte Holding AG		63,547		2,022
Semiconductors & Semiconductor Equipment 0.1%
Kontron AG		146,112		2,129

See financial notes.    31

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Software & Services 0.6%
SAP AG		21,200		4,220
Software AG		51,654		3,567
United Internet AG		195,300		3,014
				10,801
Technology Hardware & Equipment 0.5%
Wincor Nixdorf AG		66,633		9,286
Utilities 0.2%
E.ON AG		34,100		4,106
RWE AG		8,600		850
				4,956
				148,748
Greece 1.0%
Banks 0.5%
EFG Eurobank Ergasias		70,640		2,348
Greek Postal Savings Bank*		103,900		2,372
National Bank of Greece S.A.		56,180		2,547
Piraeus Bank S.A.		80,200		2,287
				9,554
Capital Goods 0.1%
Frigoglass S.A.		48,851		1,009
Diversified Financials 0.3%
Marfin Financial Group S.A.		124,597		6,275
Food, Beverage & Tobacco 0.1%
Coca Cola Hellenic Bottling Co., S.A.		59,500		1,947
				18,785
Hong Kong 1.2%
Capital Goods 0.1%
Melco International Development Ltd.		1,130,000		2,763
Consumer Durables & Apparel 0.2%
Fountain Set (Holdings) Ltd.		13,075,430		3,776
Ports Design Ltd.		474,500		823
				4,599
Consumer Services 0.1%
eSun Holdings Ltd.*		1,504,256		1,449
Food & Staples Retailing 0.0%
Wumart Stores, Inc.		954,800		890
Insurance 0.2%
China Life Insurance Co., Ltd.		1,444,000		3,045
Materials 0.2%
China National Building Material Co., Ltd.		3,764,000		2,089
Hung Hing Printing Group Ltd.		2,302,000		1,257
				3,346
Real Estate 0.1%
China Vanke Co., Ltd.		928,603		1,120
Hopson Development Holdings Ltd.		311,500		677
				1,797
Retailing 0.3%
Giordano International Ltd.		9,080,000		4,541
Parkson Retail Group Ltd		235,000		975
				5,516
Software & Services 0.0%
The9 Ltd. ADR*		24,741		584
				23,989
Hungary 0.2%
Pharmaceuticals & Biotechnology 0.2%
EGIS Nyrt.		23,924		3,122
India 1.3%
Automobiles & Components 0.1%
Maruti Udyog Ltd.		67,000		1,442
Banks 0.1%
HDFC Bank Ltd.		85,300		1,901
Housing Development Finance Corp., Ltd.		48,500		1,574
				3,475
Capital Goods 0.2%
Bharat Heavy Electricals Ltd.		45,900		2,456
Suzlon Energy Ltd.		49,600		1,439
				3,895
Diversified Financials 0.1%
Indiabulls Financial Services Ltd.		110,000		1,034
Household & Personal Products 0.1%
Dabur India Ltd.		512,900		1,743
Hindustan Lever Ltd.		194,000		1,016
				2,759
Materials 0.2%
India Cements Ltd.*		959,300		4,568
Software & Services 0.4%
Infosys Technologies Ltd.		85,000		3,947
Tech Mahindra Ltd.*		52,300		1,160
WNS Holdings Ltd.*		77,204		2,297
				7,404
Telecommunication Services 0.1%
Bharti Airtel Ltd.*		126,000		1,480
				26,057
Indonesia 0.1%
Banks 0.1%
PT Bank Mandiri		4,084,000		1,217
Pharmaceuticals & Biotechnology 0.0%
PT Kalbe Farma Tbk*		6,070,200		903
				2,120

32    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Ireland 2.3%
Banks 1.2%
Anglo Irish Bank Corp., plc		213,300		3,828
Bank of Ireland		951,600		19,053
				22,881
Capital Goods 0.3%
Kingspan Group plc		296,700		6,289
Food, Beverage & Tobacco 0.5%
C&C Group plc		278,574		4,628
Glanbia plc		1,325,333		5,007
				9,635
Health Care Equipment & Services 0.0%
United Drug plc		185,000		869
Media 0.2%
Independent News & Media plc		1,154,009		3,890
Transportation 0.1%
Ryanair Holdings plc ADR*		29,200		1,951
				45,515
Israel 0.2%
Capital Goods 0.2%
Ormat Industries Ltd.		281,947		2,924
Technology Hardware & Equipment 0.0%
Orbotech Ltd. (a)*		25,000		604
				3,528
Italy 2.7%
Automobiles & Components 0.1%
Brembo S.p.A		144,225		1,677
Banks 0.1%
Credito Emiliano S.p.A.		97,200		1,391
Capital Goods 0.1%
Astaldi S.p.A.		317,071		2,244
Consumer Durables & Apparel 0.7%
Geox S.p.A.		87,000		1,150
Luxottica Group S.p.A.		129,600		4,005
Safilo Group SpA*		375,693		2,031
Tod’s S.p.A.		50,994		4,423
Valentino Fashion Group S.p.A.		91,571		3,281
				14,890
Diversified Financials 0.4%
Azimut Holding S.p.A.		290,268		3,282
Banca Italease		107,200		5,975
				9,257
Energy 0.3%
Saipem S.p.A.		229,400		5,404
Food & Staples Retailing 0.1%
Marr SpA		121,634		1,017
Food, Beverage & Tobacco 0.1%
Davide Campari — Milano S.p.A.		115,100		1,053
Real Estate 0.1%
Pirelli & C. Real Estate S.p.A.		17,585		1,149
Technology Hardware & Equipment 0.2%
Digital Multimedia Technologies S.p.A.*		66,515		4,448
Transportation 0.4%
Autostrada Torino — Milano S.p.A.		199,526		4,238
Gemina S.p.A.*		927,101		3,432
				7,670
Utilities 0.1%
ASM S.p.A.		214,300		1,016
Hera S.p.A.		546,300		2,147
				3,163
				53,363
Japan 10.3%
Automobiles & Components 1.6%
Denso Corp.		212,200		8,090
F.C.C. Co., Ltd.		214,600		4,940
Honda Motor Co., Ltd.		358,800		12,664
Sumitomo Rubber Industries Ltd.		182,000		2,087
Toyoda Gosei Co., Ltd.		100,000		2,316
				30,097
Banks 0.4%
Mitsubishi UFJ Financial Group, Inc.		311		3,945
Suruga Bank Ltd.		217,000		2,699
The Nishi-Nippon City Bank Ltd.		296,000		1,404
The Senshu Bank Ltd.		170,000		465
				8,513
Capital Goods 1.2%
Chiyoda Corp.		81,000		1,466
JTEKT Corp.		103,900		2,161
Komatsu Ltd.		156,000		2,807
MISUMI Group, Inc.		59,300		1,036
NGK Insulators Ltd		118,000		1,602
Nichias Corp.		188,000		1,332
Ryobi Ltd.		365,000		2,910
Takeuchi Mfg. Co., Ltd.		60,800		2,578
The Japan Steel Works Ltd.		496,000		3,315
Ushio, Inc.		169,400		3,524
				22,731
Commercial Services & Supplies 0.6%
Asahi Pretec Corp.		43,800		1,059
Meitec Corp.		120,000		3,782
Park24 Co., Ltd.		90,400		1,314
Sohgo Security Services Co., Ltd.		54,500		968
Takara Printing Co., Ltd.		298,980		3,001
Tempstaff Co., Ltd.		870		1,359
				11,483
Consumer Durables & Apparel 0.9%
Asics Corp.		167,000		2,238
ES-Con Japan Ltd.		1,715		3,430
Goldcrest Co., Ltd.		31,200		1,707

See financial notes.    33

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Hitachi Koki Co., Ltd.		71,000		1,011
Sanei-International Co., Ltd.		44,400		1,271
Sharp Corp.		158,000		2,813
Shimano, Inc.		136,800		3,812
Tamron Co., Ltd.		102,100		1,859
				18,141
Diversified Financials 1.1%
Daiwa Securities Group, Inc.		1,163,500		13,155
ORIX Corp.		28,600		8,043
Sparx Asset Management Co., Ltd.		807		584
				21,782
Energy 0.1%
Shinko Plantech Co., Ltd.		262,000		1,969
Food, Beverage & Tobacco 0.0%
Ito En, Ltd.		19,600		621
Health Care Equipment & Services 0.1%
Nakanishi, Inc.		9,900		1,206
Household & Personal Products 0.4%
Milbon Co Ltd.		5,900		195
Uni-Charm Corp.		139,200		7,758
				7,953
Materials 0.6%
Air Water, Inc.		138,000		1,321
Kanto Denka Kogyo Co., Ltd.		407,000		2,791
NIFCO, Inc.		178,100		3,653
Showa Denko K.K.		515,000		2,241
Tokai Carbon Co., Ltd.		128,000		863
				10,869
Pharmaceuticals & Biotechnology 0.3%
Takeda Pharmaceutical Co., Ltd.		98,500		6,324
Real Estate 0.7%
Aeon Mall Co., Ltd.		35,600		1,879
Joint Corp.		145,600		5,724
K.K. DaVinci Advisors*		1,113		1,216
Kenedix, Inc.		210		1,177
Tokyo Tatemono Co., Ltd.		241,000		2,874
				12,870
Retailing 0.4%
DeNa Co., Ltd.*		322		935
Honeys Co., Ltd.		57,649		2,690
Nitori Co., Ltd.		28,660		1,162
Paris Miki, Inc.		92,800		1,529
Yamada Denki Co., Ltd.		22,000		2,186
				8,502
Semiconductors & Semiconductor Equipment 0.7%
Rohm Co., Ltd.		157,000		14,416
Software & Services 0.1%
KONAMI Corp.		82,200		2,263
Technology Hardware & Equipment 0.4%
Brother Industries Ltd.		138,000		1,736
Hitachi Kokusai Electric, Inc.		86,000		1,038
Hoya Corp.		52,500		2,029
Keyence Corp.		14,800		3,272
				8,075
Telecommunication Services 0.7%
NTT DoCoMo, Inc.		8,280		12,627
				200,442
Luxembourg 0.5%
Energy 0.2%
Acergy SA*		80,836		1,471
Tenaris S.A.		72,500		2,798
				4,269
Real Estate 0.0%
Gagfah SA*		8,400		244
Telecommunication Services 0.3%
Millicom International Cellular S.A.*		94,436		4,710
				9,223
Malaysia 0.1%
Banks 0.1%
Bumiputra-Commerce Holdings Berhad		1,001,700		1,891
Transportation 0.0%
Transmile Group Berhad		199,900		695
				2,586
Mexico 0.9%
Capital Goods 0.1%
Empresas ICA S.A. de C.V.*		555,323		1,903
Consumer Durables & Apparel 0.3%
Corporacion GEO, SA de CV, Series B*		483,300		2,216
Desarrolladora Homex SA de CV ADR (a)*		23,600		1,036
Urbi, Desarrollos Urbanos, SA de CV*		594,500		1,814
				5,066
Food & Staples Retailing 0.1%
Wal-Mart de Mexico Series V		872,900		3,035
Telecommunication Services 0.2%
America Movil SA de CV		1,451,500		3,112
Transportation 0.2%
Grupo Aeroportuario del Pacifico SA de CV, ADR (a)		93,300		3,521
				16,637
Netherlands 2.6%
Capital Goods 1.1%
Arcadis N.V.		64,818		3,167
Hagemeyer N.V.*		688,200		3,519
Imtech N.V.		55,900		3,107
Koninklijke BAM Groep N.V.		386,062		8,046

34    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Koninklijke Boskalis Westminster N.V.		50,757		3,702
				21,541
Commercial Services & Supplies 0.2%
USG People NV		76,600		3,127
Consumer Durables & Apparel 0.7%
Koninklijke (Royal) Philips Electronics N.V.		392,600		13,675
Diversified Financials 0.0%
ING Groep N.V. ADR		18,500		820
Energy 0.2%
Core Laboratories N.V.*		700		51
Fugro N.V.		83,393		3,612
				3,663
Retailing 0.1%
Macintosh Retail Group N.V.		48,405		1,582
Technology Hardware & Equipment 0.1%
TKH Group N.V.		10,004		705
TomTom N.V.*		46,800		1,970
				2,675
Transportation 0.2%
Koninklijke Vopak N.V.		71,082		2,725
Smit Internationale NV		23,916		1,149
				3,874
				50,957
New Zealand 0.5%
Consumer Services 0.1%
Sky City Entertainment Group Ltd.		424,598		1,464
Health Care Equipment & Services 0.2%
Fisher & Paykel Healthcare Corp., Ltd.		1,268,669		3,549
Retailing 0.1%
The Warehouse Group Ltd.		356,137		1,532
Transportation 0.1%
Auckland International Airport Ltd.		2,512,822		3,432
				9,977
Norway 1.4%
Consumer Durables & Apparel 0.2%
Ekornes ASA		161,200		3,491
Diversified Financials 0.1%
Acta Holding ASA		607,263		2,813
Energy 0.9%
Ability Group ASA (AGR)*		82,302		642
Deep Sea Supply ASA*		547,413		1,336
Farstad Shipping ASA		202,200		4,203
Olsen Energy ASA*		33,292		1,444
Petroleum Geo-Services ASA*		35,500		2,074
Seabird Exploration Ltd.*		190,331		1,168
SeaDrill Ltd.*		167,000		2,389
Songa Offshore ASA*		207,816		1,861
TGS Nopec Geophysical Co. ASA*		83,616		1,495
				16,612
Food, Beverage & Tobacco 0.1%
Cermaq ASA		87,397		1,077
Materials 0.0%
Yara International ASA		3,400		59
Software & Services 0.1%
Ementor ASA*		505,584		2,556
				26,608
Panama 0.1%
Transportation 0.1%
Copa Holdings S.A., Class A (a)		51,200		1,940
Papua New Guinea 0.1%
Materials 0.1%
Lihir Gold Ltd.*		969,500		2,086
Portugal 0.1%
Capital Goods 0.1%
Mota-Engil, SGPS, S.A.		384,905		2,388
Republic of Korea 2.0%
Banks 0.2%
Kookmin Bank		54,000		4,282
Capital Goods 0.2%
KCC Corp.		7,900		2,312
Samsung Techwin Co., Ltd.		33,300		1,312
				3,624
Food & Staples Retailing 0.1%
Shinsegae Co., Ltd.		3,100		1,786
Semiconductors & Semiconductor Equipment 0.2%
Samsung Electronics Co., Ltd.		5,490		3,555
Software & Services 0.1%
NHN Corp.*		22,440		2,223
Telecommunication Services 1.2%
LG Dacom Corp.		67,300		1,561
SK Telecom Co., Ltd.		96,900		20,986
SK Telecom Co., Ltd. ADR (a)		52,000		1,252
				23,799
				39,269
Russia 0.0%
Capital Goods 0.0%
OAO TMK GDR		22,328		564
Singapore 2.7%
Banks 0.3%
United Overseas Bank Ltd.		478,000		5,429

See financial notes.    35

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Capital Goods 0.5%
Hyflux Ltd.		3,228,000		5,455
Jaya Holdings Ltd.		1,264,000		1,154
SembCorp Marine Ltd.		1,924,000		4,224
				10,833
Consumer Services 0.1%
Raffles Education Corp., Ltd.		925,000		1,582
Diversified Financials 0.0%
Singapore Exchange Ltd.		57,000		164
Health Care Equipment & Services 0.2%
Parkway Holdings Ltd.		2,457,000		4,378
Household & Personal Products 0.1%
GP Batteries International Ltd.		1,682,000		1,470
Real Estate 0.3%
Capitaland Ltd.		1,872,300		6,556
Retailing 0.1%
Osim International Ltd.		1,002,120		1,087
Telecommunication Services 0.3%
MobileOne Ltd.		4,421,000		5,624
Transportation 0.8%
Cosco Corp.(Singapore) Ltd.		4,176,040		5,146
Goodpack Ltd.*		544,000		574
SIA Engineering Co.		940,000		2,261
Singapore Airport Ltd.		1,408,000		2,025
SMRT Corp., Ltd.		8,763,000		6,296
				16,302
				53,425
South Africa 0.2%
Diversified Financials 0.1%
JSE Ltd.		193,606		1,074
Energy 0.0%
Sasol		22,400		769
Media 0.1%
Naspers Ltd.		53,100		960
Pharmaceuticals & Biotechnology 0.0%
Aspen Pharmacare Holdings Ltd.*		111,500		507
				3,310
Spain 2.1%
Banks 0.1%
Banco Pastor SA		86,100		1,435
Capital Goods 0.2%
Mecalux, S.A.*		61,250		2,356
Tecnicas Reunidas S.A.*		59,862		2,058
				4,414
Commercial Services & Supplies 0.2%
Prosegur, Compania de Seguridad S.A.		116,381		3,483
Insurance 0.0%
Grupo Catalana Occidente, S.A.		24,700		813
Materials 0.1%
Tubacex, S.A.		263,243		1,576
Media 0.6%
Gestevision Telecinco S.A.		450,000		11,813
Pharmaceuticals & Biotechnology 0.3%
Grifols S.A.*		630,971		6,608
Retailing 0.3%
Industria de Diseno Textil SA		98,900		4,725
Utilities 0.3%
Enagas		183,800		4,454
Red Electrica de Espana		27,200		1,056
				5,510
				40,377
Sweden 0.9%
Capital Goods 0.2%
Hexagon AB		62,500		2,324
Munters AB		35,406		1,370
				3,694
Materials 0.2%
Billerud		263,900		4,108
Media 0.1%
Modern Times Group AB, Class B*		27,450		1,575
Retailing 0.2%
Hemtex AB		68,590		1,028
Lindex AB		108,055		1,437
Nobia AB		24,100		855
				3,320
Software & Services 0.0%
TradeDoubler AB*		30,500		664
Technology Hardware & Equipment 0.1%
Telefonaktiebolaget LM Ericsson, Class B		798,000		3,016
Telecommunication Services 0.1%
Tele2 AB, Class B		104,000		1,092
				17,469
Switzerland 9.6%
Capital Goods 1.0%
ABB Ltd.		451,300		6,712
Burckhardt Compression Holding AG*		14,686		1,594
Geberit AG		2,500		3,255
Georg Fischer AG — Reg’d.*		8,001		4,091
Kaba Holding AG*		7,645		2,231
Sulzer AG		2,800		2,460
				20,343
Commercial Services & Supplies 1.1%
Adecco S.A.		318,000		19,610
SGS SA		1,330		1,411
				21,021

36    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Consumer Durables & Apparel 0.6%
Advanced Digital Broadcast Holdings SA*		22,383		1,380
Forbo Holding AG*		3,309		1,158
Schulthess Group AG		2,408		1,403
Swatch Group AG		36,400		7,182
				11,123
Diversified Financials 3.1%
Bank Sarasin & Cie AG		615		1,772
Credit Suisse Group		341,100		20,562
EFG International*		55,300		1,811
Partners Group*		41,079		3,955
UBS AG		487,160		29,089
UBS AG, Reg’d		28,800		1,723
Verwaltungs — und Privat-Bank AG		4,679		1,179
				60,091
Food, Beverage & Tobacco 0.8%
Lindt & Spruengli AG		700		1,531
Nestle S.A.		38,800		13,259
Nestle S.A. ADR		23,200		1,989
				16,779
Health Care Equipment & Services 0.2%
Galenica Holding AG — Reg’d.		7,749		1,985
Nobel Biocare Holding AG		7,750		2,120
				4,105
Materials 0.8%
Givaudan S.A. — Reg’d.		9,600		7,952
Lonza Group AG		13,700		1,057
Syngenta AG*		44,000		7,100
				16,109
Pharmaceuticals & Biotechnology 1.7%
Actelion Ltd.*		11,600		1,948
Novartis AG — Reg’d.		339,900		20,632
Novartis AG ADR		27,500		1,670
Roche Holdings AG		47,500		8,317
				32,567
Software & Services 0.1%
Temenos Group AG*		149,976		1,993
Transportation 0.2%
Kuehne & Nagel International AG		46,200		3,167
				187,298
Taiwan 2.3%
Banks 1.0%
Chinatrust Financial Holding Co., Ltd.		26,421,123		19,149
Consumer Durables & Apparel 0.2%
Inventec Appliances Corp.		312,000		703
Largan Precision Co., Ltd.		58,050		1,153
Merry Electronics Co., Ltd.		608,000		1,864
				3,720
Materials 0.1%
Chung Hwa Pulp Corp.		5,770,000		2,557
Semiconductors & Semiconductor Equipment 0.2%
MediaTek, Inc.		171,440		1,669
Realtek Semiconductor Corp.		1,248,000		1,657
				3,326
Technology Hardware & Equipment 0.8%
Catcher Technology Co., Ltd.		321,419		2,770
High Tech Computer Corp.		188,800		4,674
Hon Hai Precision Industry Co., Ltd.		915,689		5,923
Inventec Co., Ltd.		873,000		629
Wistron Corp.		1,879,000		2,171
				16,167
				44,919
Turkey 0.1%
Media 0.1%
Dogan Yayin Holding A.S.*		287,400		1,089
United Kingdom 22.8%
Banks 1.6%
HBOS plc		409,300		8,480
Lloyds TSB Group plc		1,330,000		14,206
Northern Rock plc		237,800		5,429
Standard Chartered plc		139,000		3,910
				32,025
Capital Goods 2.4%
Alfred McAlpine plc		140,560		1,442
BAE Systems plc		8,100		263
Charter plc*		211,393		3,716
Chloride Group plc		1,110,202		2,929
Cobham plc		1,146,435		4,195
Morgan Crucible Co., plc		537,568		2,679
Punch Graphix plc		1,901,295		4,479
Rolls Royce Group, Class B*		37,760,630		72
Rolls-Royce Group plc*		958,300		8,578
Spirax-Sarco Engineering plc		158,966		2,821
The Weir Group plc		793,138		7,726
Ultra Electronics Holdings plc		157,369		3,349
Vt Group plc		511,053		4,679
				46,928
Commercial Services & Supplies 1.6%
WS Atkins plc		183,545		3,056
Babcock International Group plc		499,855		3,565
De La Rue plc		390,545		4,618
Homeserve plc		126,492		4,288
Michael Page Group plc		677,500		5,215
RPS Group plc		575,645		2,558
Serco Group plc		1,203,004		8,126
				31,426
Consumer Durables & Apparel 0.2%
Aga Foodservice Group plc		186,489		1,442
The Berkeley Group Holdings plc*		77,500		2,122
				3,564
Consumer Services 1.5%
Compass Group plc		3,190,000		17,046
Greene King plc		270,446		4,932
J.D. Wetherspoon plc		347,504		3,708

See financial notes.    37

Laudus International MarketMasters Fund 

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Punch Taverns plc		206,300		4,042
				29,728
Diversified Financials 1.1%
Cattles plc		1,006,089		7,214
IG Group Holdings plc		827,422		4,008
Man Group plc		483,400		4,492
Schroders plc		292,700		5,521
				21,235
Energy 0.9%
BG Group plc		429,700		5,702
Cairn Energy plc*		58,100		1,945
Expro International Group plc		355,660		5,171
Tullow Oil plc		617,190		4,589
				17,407
Food & Staples Retailing 0.4%
Tesco plc		1,112,500		8,346
Food, Beverage & Tobacco 2.2%
British American Tobacco plc		20,900		1,149
Cadbury Schweppes plc		1,557,000		15,674
Cadbury Schweppes plc ADR		37,500		1,522
Diageo plc		1,085,000		20,062
Diageo plc ADR		26,700		1,988
Northern Foods plc		849,935		1,438
				41,833
Health Care Equipment & Services 0.2%
Gyrus Group plc*		202,214		1,397
Southern Cross Healthcare Ltd.*		321,968		1,861
				3,258
Household & Personal Products 0.4%
Reckitt Benckiser plc		167,500		7,282
Insurance 0.8%
Admiral Group plc		95,700		1,694
Willis Group Holdings Ltd. (a)		341,000		12,968
				14,662
Materials 1.1%
Anglo American plc ADR		87,700		1,989
Croda International plc		425,546		4,243
Lonmin plc		18,300		1,010
Rexam plc		381,826		4,296
Rio Tinto plc		17,600		3,897
Victrex plc		385,711		5,291
				20,726
Media 2.7%
British Sky Broadcasting Group plc		2,489,000		25,807
Johnston Press plc		1,643,800		13,099
Trinity Mirror plc		1,449,000		13,500
				52,406
Pharmaceuticals & Biotechnology 1.8%
AstraZeneca plc		125,400		7,390
GlaxoSmithKline plc		1,039,500		27,703
				35,093
Real Estate 0.2%
Big Yellow Group plc		248,631		2,539
Unite Group plc		171,772		1,627
				4,166
Retailing 1.5%
Signet Group plc		10,100,000		23,149
The Carphone Warehouse plc		1,266,848		6,834
				29,983
Software & Services 0.0%
Detica Group plc		45,200		280
Technology Hardware & Equipment 1.1%
CSR plc*		54,500		787
Laird Group plc		383,720		2,632
Rotork plc		628,909		9,405
TT electronics plc		1,842,010		7,813
Wolfson Microelectronics plc*		94,178		517
				21,154
Telecommunication Services 0.8%
Vodafone Group plc		6,312,875		16,267
Transportation 0.1%
Air Berlin Plc*		107,088		2,069
Utilities 0.2%
International Power plc		331,400		2,115
Pennon Group plc		208,114		2,051
				4,166
				444,004
Preferred Stock   0.4% of net assets
Brazil 0.2%
Banks 0.1%
Banco Itau Holding Financeira S.A.		57,100		1,880
Energy 0.1%
Petroleo Brasileiro S.A.		91,300		1,833
				3,713
Germany 0.2%
Consumer Durables & Apparel 0.2%
Hugo Boss AG		97,487		4,545
Rights   0.2% of net assets
Sweden 0.2%
JM AB*		176,230		3,468
Taiwan 0.0%
Motech Industries, Inc.*		28,751		1

 

38    See financial notes.

Laudus International MarketMasters Fund 

Portfolio Holdings continued

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
Short-Term Investment   3.8% of net assets
Repurchase Agreement 3.8%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $73,641 (fully collateralized by Freddie Mac with a value of $75,441.)		73,631		73,631
U.S. Treasury Obligation   0.0% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		249		249

 

End of Investments.

At 10/31/06, the tax basis cost of the fund’s investments was $1,639,562, and the unrealized appreciation and depreciation were $312,946 and ($15,659), respectively, with a net unrealized appreciation of $297,287.

As of 10/31/06, the prices of certain foreign securities held by the fund aggregating $1,654,043 were adjusted from their closing market prices following the guidelines adopted by the fund’s Board of Trustees.

* Non-income producing security.

(a) All or a portion of this security is held as collateral for open futures contracts.

(b) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $2,462 or 0.1% of net assets.

ADR — American Depositary Receipt

GDR — Global Depositary Receipt

In addition to the above, the fund held the following at 10/31/2006. All numbers are x 1,000 except number of futures contracts.

	Number of Contracts		Contract Value		Unrealized Gains
Futures Contracts
Russell 2000 Index, Long expires 12/15/06		5		1,928		141
S&P 500 Index, Long, expires 12/14/06		2		692		36
						177

 

In addition to the above, the fund held the following at 10/31/06. All numbers x 1,000.

Expiration Date	Currency to be Received	Amount of Currency to be Received ($ x 1,000)	Currency to be Delivered	Amount of Currency to be Delivered ($ x 1,000)		Unrealized Losses ($ x 1,000)
Forward Foreign Currency Contracts
11/6/06	USD	15,189	GBP		15,035		(154	)
1/31/07	USD	172	JPY		171		(1	)
							(155	)

 

See financial notes.    39

Laudus International MarketMasters Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value (cost $1,627,059)	$	1,936,849
Cash		506
Foreign currency, at value (cost $8,346)		8,347
Receivables:
Investments sold		22,432
Fund shares sold		3,339
Dividends		2,039
Foreign tax reclaims		976
Interest		10
Transfer agent		25
Prepaid expenses	+	12
Total assets		1,974,535
Liabilities
Payables:
Investments bought		22,605
Investment adviser and administrator fees		2,110
Fund shares redeemed		1,389
Due to brokers for futures		6
Trustee fees		2
Unrealized depreciation on forward foreign currency contracts		155
Accrued expenses	+	254
Total liabilities		26,521
Net Assets
Total assets		1,974,535
Total liabilities		–26,521
Net assets	$	1,948,014
Net Assets by Source
Capital received from investors		1,482,954
Net investment income not yet distributed		8,883
Net realized capital gains		146,351
Net unrealized capital gains		309,826
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	1,319,876			63,677		$	20.73
Select Shares	$	628,138			30,248		$	20.77

 

40    See financial notes.

Laudus International MarketMasters Fund

Statement of 

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (net of foreign withholding taxes of $2,939)	$	32,499
Interest	+	1,912
Total Investment Income		34,411
Net Realized Gains and Losses
Net realized gains on investments		186,452
Net realized gains on foreign currency transactions		4,398
Net realized losses on futures contracts	+	(6,530	)
Net realized gains		184,320
Net Unrealized Gains and Losses
Net unrealized gains on investments		118,523
Net unrealized losses on foreign currency transactions		(5,557	)
Net unrealized gains on futures contracts	+	70
Net unrealized gains		113,036
Expenses
Investment adviser and administrator fees		20,797
Transfer agent and shareholder service fees:
Investor Shares		2,954
Select Shares		1,000
Custodian fees		1,278
Registration fees		248
Shareholder reports		179
Portfolio accounting fees		127
Professional fees		73
Trustees’ fees		16
Other expenses	+	26
Total expenses		26,698
Custody Credit		–1,205
Expense reduction by adviser and Schwab		–634
Net expenses		24,859
Increase in Net Assets from Operations
Total investment income		34,411
Net expenses		–24,859
Net investment income		9,552
Net realized gains		184,320
Net unrealized gains	+	113,036
Increase in net assets from operations	$	306,908

 

See financial notes.    41

Laudus International MarketMasters Fund

Statement of 

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	9,552	$	3,570
Net realized gains		184,320		56,947
Net unrealized gains	+	113,036		110,325
Increase in net assets from operations		306,908		170,842
Distributions Paid
Dividends from net investment income
Investor Shares		7,908		907
Select Shares	+	3,448		317
Total dividends from net investment income	$	11,356	$	1,224

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		36,898		$	713,186			17,457		$	271,992
Select Shares	+	20,443			394,541			11,835			185,351
Total shares sold		57,341		$	1,107,727			29,292		$	457,343
Shares Reinvested
Investor Shares		406		$	7,287			58		$	837
Select Shares	+	164			2,946			20			278
Total shares reinvested		570		$	10,233			78		$	1,115
Shares Redeemed
Investor Shares		(20,911	)	$	(404,207	)		(10,865	)	$	(169,365	)
Select Shares	+	(6,679	)		(129,171	)		(1,515	)		(24,118	)
Total shares redeemed		(27,590	)	$	(533,378	)		(12,380	)	$	(193,483	)
Net transactions in fund shares		30,321		$	584,582			16,990		$	264,975

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES		NET ASSETS
Beginning of period		63,604	$	1,067,880		46,614	$	633,287
Total increase	+	30,321		880,134		16,990		434,593
End of period		93,925	$	1,948,014		63,604	$	1,067,880
Net investment income not yet distributed			$	8,883			$	1,223

 

42    See financial notes.

Laudus MarketMasters Fund

Financial Notes

1.   Business Structure of the Funds

Each of the funds discussed in this report is a series of Schwab Capital Trust (Trust), a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the funds discussed in this report, which are highlighted:

Schwab Capital Trust (organized May 7, 1993)
Laudus U.S. MarketMasters Fund
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters Fund
Schwab S&P 500 Index Fund
Schwab Institutional Select S&P 500 Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
Schwab MartketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab Viewpoints Fund Schwab Premier Equity Fund
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Financial Services Fund
Schwab Health Care Fund
Schwab Technology Fund
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

 

Laudus MarketMasters Funds offer two share classes: Investor Shares and Select Shares®.  Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums.

Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

Prior to June 3, 2002, each fund invested in a mix of actively managed mutual funds. The transition to their multi-manager strategy began on June 3, 2002. Also, effective November 1, 2004, the Schwab MarketMasters Funds were renamed the Laudus MarketMasters Funds.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies in the preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America in the investment company industry.

(a)   Security Valuation:

The funds value the securities in their portfolios every business day. The funds use the following policies to value various types of securities:

•  Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate.

•  Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the fund’s investment adviser using guidelines adopted by the fund’s Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; the security’s primary pricing source is not able or willing to provide a price, or certain foreign securities closing market prices adjusted for changes in value that may occur between the close of foreign exchange and the time at which fund shares are priced. The Board of Trustees regularly reviews fair value determinations, made by the funds, pursuant to the procedures.

    43

Laudus MarketMasters Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

•  Bonds and notes: valued at halfway between the most recent bid and asked quotes or, if such quotes are unavailable, at prices for securities of comparable maturity, credit quality and type. Valuations for bonds and notes are provided by an independent bond-pricing service.

•  Futures and forwards: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day’s exchange rates (for forwards). When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly.

•  Short-term securities (60 days or less to maturity): valued at amortized cost.

•  Mutual funds: valued at their respective net asset values as determined by those funds in accordance with the 1940 Act for a given day.

(b)   Portfolio Investments:

Delayed-Delivery: The funds may buy securities on a delayed-delivery basis. In these transactions, the funds agree to buy a security for a stated price, with settlement generally occurring within two weeks. If the security’s value falls before settlement occurs, the funds could end up paying more for the security than its market value at the time of settlement. The funds have set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis.

Futures Contract: The funds may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements.

One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities.

Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “initial margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount.

Futures are traded publicly on exchanges, and their market value changes daily. A fund records the change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

Forward Currency Contract: Laudus International MarketMasters Fund may invest in forward currency contracts in connection with the purchase and sale of portfolio securities to minimize the uncertainty of changes in future exchange rates. “Forwards” as they are known, are contracts to buy and sell a currency at a set price on a future date. Forwards are similar to futures except that they are not publicly traded, but are agreements directly between two parties.

As with futures, forwards involve certain risks that are not fully reflected in the fund’s financials. If counter-parties to the contracts or if the value of the foreign currency changes unfavorably, the fund could sustain a loss.

Repurchase Agreement: The funds may enter into a repurchase agreement. In a repurchase agreement, a fund buys a security from another party (usually a financial institution) with the agreement that it be sold back in the future. The date, price and other conditions are all specified when the agreement is created.

The funds’ repurchase agreements will be fully collateralized by U.S. government securities. All collateral is held by the funds’ custodian (or, with tri-party agreements, the agent’s bank) and is monitored daily to ensure that its market value is at least equal to the repurchase price under the agreement.

(c)   Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.

44    

Laudus MarketMasters Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date.

(d)   Investment Income:

Interest income is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(e)   Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.

For funds offering multiple share classes, the net investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to its net assets.

(f)   Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year.

Each fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law.

(g)   Custody Credit:

Each fund has an arrangement with its custodian bank under which the fund receives a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts (if any) are disclosed in the statement of operations as a reduction to the fund’s operating expenses.

(h)   Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(i)   Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

(j)   Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

(k) New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements

    45

Laudus MarketMasters Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Fund’s financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:
(All dollar amounts are × 1,000)

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund’s investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

For its advisory and administrative services to each fund, the investment adviser is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

Average daily net assets	U.S. MarketMasters Fund			Small-Cap MarketMasters Fund			International MarketMasters Fund
First $500 million		0.925	%		1.17	%		1.290	%
Over $500 million		0.92	%		1.13	%		1.275	%
Over $1 billion		0.91	%		1.07	%		1.25	%

 

For its transfer agent and shareholder services, Schwab is entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:

	Transfer Agent Fees			Shareholder Service Fees
Investor Shares		0.05	%		0.20	%
Select Shares		0.05	%		0.15	%

 

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses through February 27, 2007, as follows:

	U.S. MarketMasters Fund			Small-Cap MarketMasters Fund			International MarketMasters Fund
Investor Shares		1.25	%		1.55	%		1.65	%
Select Shares		1.07	%		1.37	%		1.47	%

 

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for any fund during the period.

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.

46    

Laudus MarketMasters Fund

Financial Notes (continued)

4.   Purchases and Sales of Investment Securities:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:

	Purchases of Securities		Sales/Maturities of Securities
U.S. MarketMasters Fund	$	90,929	$	123,666
Small-Cap MarketMasters Fund		106,702		122,595
International MarketMasters Fund		1,922,153		1,386,494

 

5.   Redemption Fee:
(All dollar amounts are × 1,000)

The funds may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. For shares purchased on or prior to 4/29/05, the Laudus International MarketMasters Fund charged a redemption fee of 1.50% on shares held 180 days or less. For shares purchased after 4/29/05, the funds charge a redemption fee of 2.00% on shares held less than 30 days. Such amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
U.S. MarketMasters Fund
Investor Shares	$	5	$	1
Select Shares		—		—
Small-Cap MarketMasters Fund
Investor Shares	$	3	$	2
Select Shares		—		—
International MarketMasters Fund
Investor Shares	$	89	$	102
Select Shares	$	47	$	26

 

6.   Borrowing:
(All dollar amounts are × 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The Schwab Funds have custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Fund	Amount Outstanding at 10/31/06		Average Borrowing*		Weighted Average Interest Rate*(%)
U.S. MarketMasters Fund	$	—	$	50		7.25
Small-Cap MarketMasters Fund		—		74		5.18
International MarketMasters Fund		—		3,672		5.98

 

*   Based on the number of days for which the borrowing is outstanding.

    47

Laudus MarketMasters Fund

Financial Notes (continued)

7.   Federal Income Taxes:
(All dollar amounts are × 1,000)

As of October 31, 2006, the components of distributable earnings on a tax-basis were as follows:

	U.S. MarketMasters Fund			Small-Cap MarketMasters Fund	International MarketMasters Fund
Undistributed ordinary income	$	273		$2,643	$15,958
Undistributed long-term capital gains		—		12,710	151,792
Unrealized appreciation on investments		25,098		17,298	312,946
Unrealized depreciation on investments		(1,784	)	(2,268)	(15,659)
Other unrealized appreciation (depreciation)		—		—	23
Net unrealized appreciation/ (depreciation)	$	23,314		$15,030	$297,310

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2006, the following funds had capital loss carry forwards expiring in:

	U.S. MarketMasters Fund		Small-Cap MarketMasters Fund	International MarketMasters Fund
2010	$	20,397	$—	$—
2011		604	—	—
Total	$	21,001	$—	$—

 

For tax purposes, realized capital losses, occurring after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. As of October 31, 2006, the funds had aggregate deferred realized capital losses as follows:

	U.S. MarketMasters Fund		Small-Cap MarketMasters Fund	International MarketMasters Fund
Capital losses utilized	$	11,097	$—	$25,860

 

The tax-basis components of distributions paid during the current and prior fiscal years were:

	U.S. MarketMasters Fund		Small-Cap MarketMasters Fund	International MarketMasters Fund
Current period distributions
Ordinary income	$	206	$—	$11,356
Long-term capital gains		—	$8,918	—
Return of capital		—	—	—
Prior period distributions
Ordinary income		—	—	1,224
Long-term capital gains		—	—	—
Return of capital		—	—	—

 

48    

Laudus MarketMasters Fund

Financial Notes (continued)

7.  Federal Income Taxes (continued):

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

	U.S. MarketMasters Fund			Small-Cap MarketMasters Fund		International MarketMasters Fund
Capital shares	$	1		$2		$—
Undistributed net investment income		(7	)	865		9,464
Net realized capital gains and losses		6		(867	)	(9,464	)

 

Other Federal Tax Information (Unaudited)
(All dollar amounts are × 1,000)

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction:

	Percentage
U.S. MarketMasters Fund		100	%
Small-Cap MarketMasters Fund		0	%
International MarketMasters Fund		0	%

 

For the fiscal year ended October 31, 2006, the fund’s designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

U.S. MarketMasters Fund	$	206
Small-Cap MarketMasters Fund		—
International MarketMasters Fund		11,356

 

    49

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Laudus U.S. MarketMasters Fund
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters Fund

In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Laudus U.S. MarketMasters Fund, Laudus Small-Cap MarketMasters Fund and Laudus International MarketMasters Fund (three of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2006, the results of each of their operations for the year then ended, and the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

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Investment Advisory and Sub-Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreements must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreements or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreements. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreements between Schwab Capital Trust (the “Trust”) and CSIM with respect to the funds covered in this annual report, and the individual sub-advisory agreements between CSIM and Harris Associates L.P., TCW Investment Management Company, Thornburg Investment Management, Inc. and Gardner Lewis Asset Management L.P. relating to Laudus U.S. Market Masters Fund; CSIM and TAMRO Capital Partners, LLC, TCW Investment Management Company, Tocqueville Asset Management LP and Veredus Asset Management LLC relating to Laudus Small-Cap MarektMasters Fund; and CSIM and American Century Global Investment Management, Inc., Artisan Partners Limited Partnership, Harris Associates L.P. and William Blair & Company, LLC relating to the Laudus International MarketMasters Fund (collectively, the “Sub-Advisors”). Such investment advisory and sub-advisory agreements are collectively referred to herein as the “Agreements”. The trustees also reviewed certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM and the Sub-Advisors, including information about their affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM and the Sub-Advisors, as appropriate. The trustees also discuss with CSIM the funds’ operations and CSIM’s ability, consistent with the “manager of mangers” structure of each of the funds to (i) identify and recommend to the trustees sub-advisors for each fund, (ii) monitor and oversee the performance and investment capabilities of each sub-advisor, and (iii) recommend the replacement of a sub-advisor when appropriate.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreements at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreements for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreements was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreements, including the resources of CSIM and its affiliates, and the Sub-Advisors, dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds and other types of accounts;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates, as well as the profitability of the Sub-Advisors; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreements reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and

    51

quality of services provided by CSIM since the trustees had last considered approval of the Agreements. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. The Board also considered the nature, extent and quality of the sub-advisory services provided by the Sub-Advisors to the funds and the resources each dedicates to the funds. In this regard, the trustees evaluated, among other things, each Sub-Advisor’s personnel, experience and compliance program. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM and the Sub-Advisors to the funds and the resources of CSIM, and its affiliates, and the Sub-Advisors dedicated to the funds supported renewal of the Agreements.

Fund Performance. The Board considered fund performance in determining whether to renew the Agreements. Specifically, the trustees considered each fund’s performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the 68 performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. In addition, the trustees considered whether irrespective of relative performance, each Sub-Advisor’s absolute performance was consistent with expectations for such Sub-Advisor’s unique investment methodology. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreements.

Fund Expenses. With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreements, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM and the Sub-Advisors to other similarly managed mutual funds, and other types of accounts, such as separate accounts, pooled vehicles and wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreements.

Profitability. With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly and the compensation flowing to the Sub-Advisors, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM and the Sub-Advisors from their relationship with the funds, such as whether, by virtue of its management of the funds, CSIM or any Sub-Advisor obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreements and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and the Sub-Advisors and their respective affiliates. The Board also considered the profitability of the Sub-Advisors with respect to the sub-advisory services they provide to the funds, although, when doing so, the Board took into account the fact that the Sub-Advisors are compensated by CSIM, and not by the funds directly, and such compensation with respect to any Sub-Advisor reflects an arms-length negotiation between the Sub-Advisor and CSIM. In addition, the Board considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreements. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM and the Sub Advisors is reasonable and supported renewal of the Agreements.

Economies of Scale. The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have

52    

previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreements and concluded that the compensation under the Agreements is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

Artisan Partners Limited Partnership (“Artisan”) served as investment sub-adviser to the Laudus International MarketMasters Fund™ (the “Fund”) pursuant to a sub-advisory agreement between CSIM and Artisan (the “Current Sub-Advisory Agreement”). On May 24, 2006, the Board authorized the officers of the Trust, to terminate on behalf of the Fund, the Current Sub-Advisory Agreement, dated January 23, 2002, as amended, between CSIM and Artisan, effective June 25, 2006.

At a meeting of the Board of Trustees of the Trust held on May 24, 2006, CSIM recommended, and the Board, including a majority of the Independent Trustees, approved a new investment sub-advisory agreement between CSIM and Wentworth, Hauser and Violich, Inc. (“WHV”) (the “New Sub-Advisory Agreement”), to appoint WHV as sub-adviser to the Fund. The New Sub-Advisory Agreement to be effective on May 24, 2006, although WHV did not start managing a portion of the Fund until approximately June 25, 2006.

In addition, at that same meeting, CSIM recommended, and the Board, including a majority of the Independent Trustees, approved a new investment sub-advisory agreement between CSIM and Mondrian Investment Partners Limited (“Mondrian”) (the “Mondrian New Sub-Advisory Agreement”, together with WHV’s New Sub-Advisory Agreement, the “New Sub-Advisory Agreements”), to appoint Mondrian as sub-adviser to the Fund. The Mondrian New Sub-Advisory Agreement to be effective on May 24, 2006.

On May 24, 2006, the Board held a meeting to decide, among other things, whether to approve the new Sub-Advisory Agreements. Before the meeting and in preparation for it, the Board requested and received written materials from WHV and Mondrian about their (a) quality of investment management and other services; (b) investment management personnel; (c) operations and financial condition; (d) brokerage practices (including any soft dollar arrangements) and other investment strategies; (e) the level of the sub-advisory fees the Fund is charged, (f) WHV’s and Mondrian’s compliance systems; (g) WHV’s and Mondrian’s policies on and compliance procedures for personal securities transactions; (h) WHV’s and Mondrian’s reputation, expertise and resources in international financial markets; (i) WHV’s and Mondrian’s performance compared with similar advisers; and (j) WHV’s and Mondrian’s performance with respect to similar accounts managed by WHV and Mondrian, respectively. At the meeting, representatives from CSIM presented additional oral and written information to the Board to help the trustees evaluate WHV’s and Mondrian’s fees and other aspects of their agreements, including information about the Fund’s overall fees and operating expenses. When considering the fees to be paid to WHV and Mondrian, the Board took into account the fact that WHV and Mondrian will be compensated by CSIM, and not by the Fund directly, and that such compensation reflects an arms-length negotiation between CSIM and WHV and Mondrian, respectively. The Board then discussed the written materials that they received before the meeting and CSIM’s oral presentations and other information that the trustees received at the meeting, and deliberated on the approval of the New Sub-Advisory Agreements in light of this information. In their deliberations, the Board did not identify any single piece of information that was all-important or controlling. Based on the trustees’ deliberations and its evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously: (a) concluded that the terms of the New Sub-Advisory Agreements are fair and reasonable; and (b) concluded that WHV’s and Mondrian’s fees are reasonable in light of the services that they provide to the Fund. The required Notice to Shareholders was sent to existing shareholders on May 25, 2006.

    53

Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996-1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6—Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

 

54    

Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

 

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

 

    55

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer—Fixed Income (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer—Equities (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer—Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

56    

Officers of the Trust  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

 

¹  Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²  In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³  The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

    57

Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

58    

Notes

Notes

An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1.800.435.4000 for a prospectus and brochure. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. Proxy Voting Policies, Procedures and Results A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/marketmasters, the SEC’s website at http://www.sec.gov, or by contacting Schwab Funds at 1.800.435.4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at http://www.sec.gov. The Laudus Funds^TM Laudus MarketMasters Funds^TM Laudus U.S. MarketMasters Fund^TM
Laudus Small-Cap MarketMasters Fund^TM
Laudus International MarketMasters Fund^TM Laudus Rosenberg U.S. Equity Funds Laudus Rosenberg U.S. Large Capitalization Fund
Laudus Rosenberg U.S. Large Capitalization Growth Fund
Laudus Rosenberg U.S. Capitalization Value Fund
Laudus Rosenberg U.S. Discovery Fund
Laudus Rosenberg U.S. Small Capitalization Growth Fund Laudus Rosenberg Equity Funds Laudus Rosenberg International Equity Fund
Laudus Rosenberg International Discovery Fund
Laudus Rosenberg International Small Capitalization Fund
Laudus Rosenberg Long/Short Funds Laudus Rosenberg U.S. Large/Mid Capitalization
    Long/Short Equity Fund
Laudus Rosenberg Global Long/Short Equity Fund
Laudus Rosenberg Value Long/Short Equity Fund The Laudus Funds includes the Laudus Rosenberg Funds, which are part of the Laudus Trust and distributed by Laudus Distributor, Inc.; and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust, and distributed by Charles Schwab & Co., Inc.

For More Information about the Funds:

Investment Adviser
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104

Funds
Laudus MarketMasters Funds™
P.O. Box 3812, Englewood, CO 80155-3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. Printed on recycled paper. MFR13812-09

Schwab Viewpoints Fund™
(formerly Laudus Balanced MarketMasters Fund™)

Annual Report
October 31, 2006
 
 
 
 

Schwab Viewpoints Fund™:
Leveraging Schwab’s Advice Perspective.

In this report

Performance at a Glance	1
From the Chairman	2
From the President	3
Investment Environment	4
Schwab Viewpoints Fund™	6
Fund Expenses	8
Financial Statements	9
Financial Notes	25
Investment Advisory and Sub-Advisory Agreement Approval	34
Trustees and Officers	37
Glossary	41

 

Select Shares® are available on many Schwab Funds^®

Schwab Funds offers Select Shares, a shares class that carries lower expenses than Investor Shares™ in exchange for higher investment minimums on many of its funds. Select Shares are available for initial purchases of $50,000 or more of a single fund in a single account and for shareholders who add to their existing Investor Share position, bringing the value to or above $50,000. We encourage shareholders of Investor Shares to review their portfolio to see if they are eligible to exchange into Select Shares. If you believe you are eligible, you should contact Schwab or your financial intermediary to request a tax-free interclass exchange into Select Shares. Instructions for performing a tax-free interclass exchange can also be referenced on the Schwab Funds website at www.schwab.com/schwabfunds under Schwab Funds Investor Information. Select Shares may not be available through financial intermediaries other than Charles Schwab & Co., Inc.

Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab).

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Performance at a Glance

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

	Total Return for the Report Period
Schwab Viewpoints FundTM
Investor Shares (Ticker Symbol: SWOBX)		8.59	%
Select Shares (Ticker Symbol: SWMBX)		8.79	%
Benchmark: Balanced Blended Index		11.80	%
Fund Category: Morningstar Moderate Allocation		11.91	%
Minimum Initial Investment1
Investor Shares ($1,000 for retirement, education and custodial accounts)	$	2,500
Select Shares	$	50,000

 

All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly.

Performance results less than one year are not annualized.

Expenses may be partially absorbed by CSIM and Schwab. Without these reductions, the funds’ total returns would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.

Source for category information: Morningstar, Inc.

¹Please see prospectus for further detail and eligibility requirements.

Schwab Viewpoints Fund    1

From the Chairman

Charles Schwab Chairman

Dear Shareholder, I founded Schwab over thirty years ago to be a home for serious investors. That mission continues to guide us today as we constantly strive to improve and innovate. By doing this, and providing some of the highest quality products and services — at a competitive price — we remain true to our heritage. I take particular pride in the Schwab Funds. Founded over 15 years ago, Schwab Funds now includes more than 50 funds with over $170 billion in assets. With a variety of investment strategies, Schwab Funds provides a range of innovative investment choices that can serve as a foundation for your asset allocation plan. As part of its investment strategy, some components of the Schwab Viewpoints Fund leverage Schwab Equity Ratings and use the same stock-ranking expertise that has helped Schwab’s model equity portfolio achieve industry recognition in Barron’s annual stock-selection competitions. Schwab Equity Ratings are based upon a disciplined, systematic approach that evaluates approximately 3,000 U.S. stocks on the basis of a wide variety of investment criteria. Schwab Funds are managed by Charles Schwab Investment Management, Inc., one of the largest mutual fund managers in the U.S. Our portfolio managers share a passion for market analysis and use some of the most sophisticated financial models in the country. I am proud of their depth of experience, which reflects an average of 14 years in the investment industry. Furthermore, I am impressed by the commitment that our managers bring to the stewardship of their funds, for you, their shareholders. In closing, I want to thank you for investing with us. We work every day to warrant the trust you have placed in us; that will never change. Sincerely,   Charles Schwab Chairman Barron’s awarded Schwab the first-place rank for the five-year period from June 30, 2001 to June 30, 2006, and for the three year period from June 30, 2003 to June 30, 2006, for “best of” stock recommendation lists submitted by certain brokerage firms to Zacks Investment Research, Inc., an independent firm that analyzes broker research. Barron’s also awarded Schwab the first-place rank for the five-year periods from December 31, 2000 to December 31, 2005, and for the three year periods from December 31, 2001 to December 31, 2004, and the 2001 to 2003 for “best of” stock recommendation lists. Schwab’s model performance results are simulated model portfolio performance results, which do not represent actual investment performance or trading. The results of Schwab’s model performance are not an indicator of the returns a Schwab client would have realized or will realize in relying on Schwab Equity Ratings® or for mutual funds that use Schwab Equity Ratings as part of their methodology. For further information about Schwab Equity Ratings, see schwab.com.

2    Schwab Viewpoints Fund

From the President

Evelyn Dilsaver is President and CEO of Charles Schwab Investment Management, Inc. and the fund covered in this report. She joined the firm in 1992 and has held a variety of executive positions at Schwab.

Dear Shareholder, I am pleased to present the annual report for the Schwab Viewpoints Fund for the period ended October 31, 2006. As previously communicated to shareholders, we implemented several key enhancements to the fund during the report period. We changed the fund’s name to Schwab Viewpoints Fund, to more closely align the fund’s name with its current strategies, which include leveraging the views of Schwab’s Investment Strategy Council. We have also made several changes that we believe will enhance the fund’s ability to take advantage of additional investment opportunities. First, we added an international allocation, which is managed by Harris Associates L.P., in order to harness the performance potential and diversification benefits of international investing. Further, within the fund’s domestic stock allocation, we removed the mid-cap allocation and added large- and small-cap blend allocations. Both of these new allocations are managed by Charles Schwab Investment Management, Inc. (CSIM), the fund’s investment adviser. With this report, you will see that we have recently started an initiative to enhance the presentation of our shareholder reports to make it easier for you to find information about your fund. This book represents the first step in this process, with additional changes anticipated for future report cycles. You will notice, for example, that we have added a new lead page, Performance at a Glance, which includes the fund’s ticker symbols and report period returns for the fund, its benchmark and category average. For ease of reference, we have relocated the fund manager’s discussion to be in close proximity to the fund performance and portfolio statistics sections. At this time, I would like to highlight another valuable information resource for fund shareholders, namely, our website at www.schwabfunds.com. This website contains regular updates about the Schwab Funds. I encourage you to visit the website to stay informed about your fund. I’d like to emphasize that your trust is very important to us and I will do all I can to maintain that trust. Thank you for investing in Schwab Funds. Sincerely,

Schwab Viewpoints Fund    3

The Investment Environment

Jeffrey Mortimer, CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. As the U.S. economy transitioned to slower growth, equities markets rebounded, aided by higher corporate profitability, falling energy/commodity prices, and lower interest rates. The S&P 500 Index returned 16.34% and the Russell 2000 Index returned 19.98%, respectively, for the one-year report period ended October 31, 2006. Improving fundamentals and attractive valuations strengthened investor interest in emerging markets and the MSCI-EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index returned 27.52%. Performance in the bond markets has been mixed over the year, although the Lehman Brothers U.S. Aggregate Bond Index gained 5.19%. Several key issues continued to resonate with investors, including slowing economic growth, Federal Reserve (the Fed) policy, a sluggish real estate market, inflation concerns, and fluctuating energy prices. Economic growth has been anything but predictable over the past year. The last quarter of 2005 saw Gross Domestic Product (GDP) slow considerably as the economy adjusted to changes in inventories and higher energy prices. Although Hurricane Katrina remained a focal point in the news late in 2005, its economic impact was determined to be minimal as damage remained contained within the hurricane’s path. In the first quarter of 2006, GDP then rebounded, only to slow later in the year. Though falling existing home sales and lower motor vehicle production have done much to curtail growth in the eyes of the Fed, favorable labor market conditions, sustained increases in labor income, and lower energy prices continued to promote stable growth. The unemployment rate fell to a cyclical low of 4.4% in the third quarter of 2006 while consumer spending and business investment remained key contributors to GDP growth. In efforts to curb inflationary pressures, the Fed raised short-term interest rates six times during the period. August marked a key point in the year as Committee members decided to hold the Fed’s target rate at 5.25%, where it remained as of the end of the report period. In its statement, the Fed noted that the economy appeared

Asset Class Performance Comparison  % returns during the report period
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
n	16.34%	S&P 500® Index: measures U.S. large-cap stocks.
n	19.98%	Russell 2000® Index: measures U.S. small-cap stocks
o	27.52%	MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
n	5.19%	Lehman Brothers U.S. Aggregate Bond Index: measures the U.S. bond market

 

These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and you cannot invest in them directly. Remember that past performance is not an indication of future results.

Data Source: Charles Schwab & Co., Inc.

4    Schwab Viewpoints Fund

The Investment Environment  continued

to be growing at a more moderate rate as a result of prior rate increases, lagged effects of energy prices, and a cooling of the housing market. The Fed indicated they generally expected the economy to grow at a pace below its potential, which proved to be an accurate prediction. Consistent with the Fed’s report, GDP continued to decline, growing only in the third quarter of 2006.

Energy prices have been a key issue in the markets over the past year. Following Hurricane Katrina, oil prices peaked around $71 per barrel, with domestic gasoline prices passing $3.00 a gallon. Prices subsequently fell, but rebounded nearly 21% early in 2006, partly due to concerns that Iran might cut back exports in response to a dispute over their nuclear program. Prices declined throughout the report period due to a lack of hurricanes in the Gulf of Mexico as well as an increase in U.S. fuel inventories. More recently, abundant inventories, warmer weather, and skepticism regarding OPEC’s proposed production cuts contributed to a slip in oil prices. Crude oil has declined nearly 26% since July 2006’s record $78.40 per barrel, yet still remained around the $60–61 per barrel range at the end of the report period, as diminishing U.S. crude inventories and concern about global surplus lingered in investors’ minds.

The events of 2006 have also had a significant impact on the housing market. Housing starts fell considerably, down nearly 34% since the beginning of 2006. Existing home sales continued to decline as well, falling nearly 15% from their peak reached in 2005. Although sales have dropped, they remained strong by historical standards. Concerns remained as to whether the Fed’s actions, and the immediate effects on the housing market, would spill over into the rest of the economy. With regards to GDP, housing took off about one percent in the third quarter of 2006, although rebounds in income, consumer spending, and investments helped to offset the impact.

Despite a moderation in economic growth during the report period, economic fundamentals remained healthy as of the end of the period. The Fed’s task of balancing inflation pressures without significantly hindering economic growth will be thoroughly scrutinized in the coming months. The challenge is to bring this economy to a state of stable growth and achieve a soft landing.

Nothing in this report represents a recommendation of a security by the investment adviser.

Manager views and portfolio holdings may have changed since the report date.

Schwab Viewpoints Fund    5

Schwab Viewpoints Fund™

Jeffrey Mortimer, CFA, senior vice president and chief investment officer, equities, is responsible for the overall management of the fund. Schwab Viewpoints Fund Investor Shares (formerly the Laudus Balanced MarketMasters Fund) returned 8.59% for the one-year report period, underperforming its benchmark, the Balanced Blended Index, which was up 11.80%. To meet its goal of providing capital growth and income, the fund invests in a mix of equity and fixed income securities. Accordingly, its performance reflects a blend of the various asset classes’ returns. As previously communicated to shareholders, we implemented several key enhancements to the fund during the report period. We added an international allocation, which is managed by Harris Associates L.P., in order to take advantage of the performance potential and diversification benefits of international investing. Further, we removed the mid-cap allocation and added large- and small-cap blend allocations, both of which are managed by CSIM, the fund’s investment adviser. These changes became effective May 1, 2006. The fund was generally overweight in stocks during the report period, as we believed stocks would have potential for higher returns. On the domestic side, TCW Investment Management Company, with a large-cap value focus, outperformed its benchmark, the Russell 1000 Value Index. Gardner Lewis Asset Management L.P., whose focus is on large-cap growth stocks, underperformed relative to its benchmark, the Russell 1000 Growth Index. The fund’s underperformance can be attributed to weak stock selection, with holdings in Boston Scientific Corp. and St. Jude Medical, Inc. detracting from return. As noted above, the period was one of transition. Since May 1, 2006, CSIM’s large- and small-cap blend allocations have outperformed their respective S&P 500 and S&P 600 benchmarks. Additionally, Harris’ allocation to the international markets has outperformed its MSCI EAFE benchmark. During the report period, bond yields rose in line with Fed rate hikes and the yield curve became inverted. Towards the end of the period, economic news suggested inflation was receding and growth was slowing, causing bond yields to decline. With the exception of short term rates, the net change in yields throughout the period remained relatively slight. The fund’s fixed income allocation, which is managed by PIMCO (Pacific Investment Management Company LLC), outperformed its benchmark, the Lehman Brothers U.S. Aggregate Bond Index, for the report period.

As of 10/31/06.

Statistics
Number of Long Holdings	429
Number of Short Positions	8
Weighted Average Market Cap ($ x 1,000,000)	42,378
Price/Earnings Ratio (P/E)	21.7
Price/Book Ratio (P/B)	2.7

Sector Weightings % of Investments
Consumer Discretionary	21.7	%
Financials	18.0	%
Information Technology	14.7	%
Health Care	14.4	%
Consumer Staples	10.5	%
Industrials	7.9	%
Telecommunication Services	4.4	%
Materials	4.3	%
Energy	2.7	%
Utilities	1.4	%
Total	100.0	%
Top Holdings % of Net Assets1
Fannie Mae 5.50%, 09/01/34	2.7	%
Fannie Mae 5.00%, 02/01/36	1.9	%
U.S. Treasury Inflation Protected Security 3.38%, 01/15/07	1.7	%
Fannie Mae 5.50%, 11/01/34	1.6	%
Fannie Mae TBA 6.00%, 12/01/99	1.3	%
U.S. Treasury Note 4.00%, 06/15/09	1.3	%
Fannie Mae 5.50%, 04/01/35	1.1	%
Fannie Mae 5.50%, 02/01/35	1.1	%
American Express Co.	0.8	%
U.S. Treasury Note 5.13%, 06/30/11	0.7	%
Total	14.2	%

 

Portfolio holdings may have changed since the report date.

Source of Sector Classification: S&P and MSCI.

¹This list is not a recommendation of any security by the investment adviser.

6    Schwab Viewpoints Fund

Schwab Viewpoints Fund

Performance Summary as of 10/31/06

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.schwab.com/schwabfunds.

Performance of a Hypothetical $10,000 Investment in Investor Shares1	Performance of a Hypothetical $50,000 Investment in Select Shares1

 

Average Annual Total Returns1,2
Fund Class and Inception Date	1 Year	5 Years	Since Inception
Investor Shares (11/18/96)	8.59%	7.84%	7.54%
Select SharesT (6/3/04)	8.79%	n/a	8.57%
Benchmark: Balanced Blended Index	11.80%	6.42%	(11/18/96) 7.72% (6/3/04) 8.35%
Fund Category: Morningstar Moderate Allocation	11.91%	6.62%	(11/18/96) 6.86% (6/3/04) 9.34%

Investment Managers and Allocations
Investment Manager	Investment Style	% Net Assets
Charles Schwab Investment Management, Inc.	Large-Cap Blend		3.0	%
Gardner Lewis Asset Management L.P.	Large-Cap Growth		14.8	%
TCW Investment Management Company	Large-Cap Value		18.0	%
Charles Schwab Investment Management, Inc.	Small-Cap Blend		7.4	%
Harris Associates L.P.	International Value		16.1	%
Pacific Investment Management Company LLC	Fixed-Income Total Return		29.7	%
Charles Schwab Investment Management, Inc.	Overlay		4.8	%

 

All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.

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 current strategy and may have been different if it did.

¹Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Balanced Blended Index is composed of 60% S&P 500® Index and 40% Lehman Brothers U.S. Aggregate Bond Index.

²Source for category information: Morningstar, Inc.

Schwab Viewpoints Fund    7

Fund Expenses (Unaudited)

Examples for a $1,000 Investment

 

As a fund shareholder, you incur two types of costs: transaction costs, such as redemption fees; and, ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six-months beginning May 1, 2006 and held through October 31, 2006.

Actual Return lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ÷ $1,000 = 8.6), then multiply the result by the number given for your fund or share class under the heading entitled “Expenses Paid During Period.”

Hypothetical Return lines in the table below provide information about hypothetical account values and hypothetical expenses based on a fund’s or share class’ actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only, and do not reflect any transactional costs, such as redemption fees. If these transactional costs were included, your costs would have been higher.

	Expense Ratio1 (Annualized)			Beginning Account Value at 5/1/06		Ending Account Value (Net of Expenses) at 10/31/06		Expenses Paid2 During Period 5/1/06–10/31/06
Schwab Viewpoints Fund™
Investor Shares
Actual Return		0.96	%	$	1,000	$	1,009.00	$	4.86
Hypothetical 5% Return		0.96	%	$	1,000	$	1,020.37	$	4.89
Select Shares®
Actual Return		0.74	%	$	1,000	$	1,010.60	$	3.75
Hypothetical 5% Return		0.74	%	$	1,000	$	1,021.48	$	3.77

 

¹  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.

²  Expenses for the share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

8    Schwab Viewpoints Fund

Schwab Viewpoints Fund™

Financial Statements

Financial Highlights

Investor Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			11/1/03— 10/31/04			11/1/02— 10/31/03			11/1/01— 10/31/02
Per-Share Data ($)
Net asset value at beginning of period		12.85			11.88			11.07			9.35			10.12
Income or loss from investment operations:
Net investment income		0.25	4		0.15			0.08			0.12			0.20
Net realized and unrealized gains or losses		0.83	4		0.91			0.86			1.75			(0.73	)
Total income or loss from investment operations		1.08			1.06			0.94			1.87			(0.53	)
Less distributions:
Dividends from net investment income		(0.16	)		(0.09	)		(0.13	)		(0.15	)		(0.24	)
Distributions from net realized gains		(0.38	)		—			—			—			—
Total distributions		(0.54	)		(0.09	)		(0.13	)		(0.15	)		(0.24	)
Net asset value at end of period		13.39			12.85			11.88			11.07			9.35
Total return (%)		8.59			8.92			8.59			20.25			(5.55	)
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		1.03	3		1.10			1.10			1.10			0.76	1,2
Gross operating expenses		1.26			1.27			1.32			1.33			1.10	2
Net investment income		1.90			1.14			0.68			1.13			1.89
Portfolio turnover rate		244			283			242			256			380
Net assets, end of period ($ x 1,000,000)		122			130			130			109			97

 

¹   The ratio of net operating expenses would have been 0.72% if certain non-routine expenses (proxy fees) had not been included.

²   Prior to the fund’s change in structure of June 3, 2002, the expenses incurred by underlying funds in which the fund invested were not included in this ratio.

³   The ratio of net operating expenses would have been 1.10% if custody credits or dividend and interest expenses on short sales had not been included.

⁴   Calculated based on the average shares outstanding during the period.

See financial notes.    9

Schwab Viewpoints Fund

Financial Highlights continued

Select Shares	11/1/05— 10/31/06			11/1/04— 10/31/05			6/3/041— 10/31/04
Per-Share Data ($)
Net asset value at beginning of period		12.87			11.89			11.57
Income from investment operations:
Net investment income		0.29	5		0.15			0.02
Net realized and unrealized gains		0.82	5		0.93			0.30
Total income from investment operations		1.11			1.08			0.32
Less distributions:
Dividends from net investment income		(0.19	)		(0.10	)		—
Distributions from net realized gains		(0.38	)		—			—
Total distributions		(0.57	)		(0.10	)		—
Net asset value at end of period		13.41			12.87			11.89
Total return (%)		8.79			9.11			2.77	2
Ratios/Supplemental Data (%)
Ratios to average net assets:
Net operating expenses		0.81	4		0.95			0.95	3
Gross operating expenses		1.24			1.22			1.29	3
Net investment income		2.21			1.32			0.73	3
Portfolio turnover rate		244			283			242	2
Net assets, end of period ($ x 1,000,000)		28			9			2

 

¹   Commencement of operations.

²   Not annualized.

³   Annualized.

⁴   The ratio of net operating expenses would have been 0.95% if custody credits or dividend and interest expenses on short sales had not been included.

⁵   Calculated based on the average shares outstanding during the period.

10    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

Holdings by Category		Cost ($ x 1,000)		Value ($ x 1,000)
43.5%	Common Stock	56,469		65,311
15.5%	Foreign Common Stock	22,625		23,310
8.6%	U.S. Treasury Obligations	12,846		12,862
0.5%	Foreign Government Securities	616		704
1.5%	Corporate Bonds	2,146		2,159
0.6%	Municipal Bonds	705		814
0.5%	Asset-Backed Obligations	800		800
18.0%	Mortgage-Backed Securities	27,190		26,985
0.6%	Non-Agency Mortgage-Backed Securities	855		851
9.7%	Short-Term Investment	14,582		14,582
4.1%	Other Investments	6,028		6,225
0.1%	Options	180		201
103.2%	Total Investments	145,042		154,804
(11.9)%	Short Sales	(17,041	)	(17,780	)
—%	Options Written	(44	)	(73	)
8.7%	Other Assets and Liabilities			13,095
100.0%	Net Assets			150,046

 

Security	Number of Shares		Value ($ x 1,000)
Common Stock   43.5% of net assets
Automobiles & Components 0.6%
ArvinMeritor, Inc. (a)		230		3
General Motors Corp. (a)		5,800		203
Honda Motor Co., Ltd. (a)		12,600		445
TRW Automotive Holdings Corp. (a)*		4,260		109
Winnebago Industries, Inc.		2,970		99
				859
Banks 0.8%
BancFirst Corp.		280		14
BancorpSouth, Inc. (a)		480		12
Bank of Hawaii Corp. (a)		3,270		171
Comerica, Inc. (a)		810		47
Fannie Mae (a)		11,600		687
KeyCorp (a)		810		30
Radian Group, Inc. (a)		2,170		116
Whitney Holding Corp. (a)		1,690		55
				1,132
Capital Goods 2.4%
Acuity Brands, Inc. (a)		3,310		164
American Woodmark Corp. (a)		3,390		125
Belden CDT, Inc.		510		19
Crane Co. (a)		6,280		245
Danaher Corp. (a)		6,600		474
EMCOR Group, Inc. (a)*		5,870		347
Emerson Electric Co. (a)		335		28
General Dynamics Corp. (a)		185		13
Honeywell International, Inc. (a)		12,200		514
Lockheed Martin Corp. (a)		2,210		192
Orbital Sciences Corp. (a)*		2,900		53
Raytheon Co. (a)		2,470		123
Robbins & Myers, Inc.		510		20
Teleflex, Inc. (a)		5,130		319
The Boeing Co. (a)		5,000		399
Thomas & Betts Corp. (a)*		3,690		190
Tyco International Ltd. (a)		7,800		230
Valmont Industries, Inc. (a)		1,740		97
				3,552
Commercial Services & Supplies 0.6%
Administaff, Inc. (a)		1,790		62
AMREP Corp. (a)*		500		36
CBIZ, Inc. (a)*		10,410		73
Consolidated Graphics, Inc. (a)*		2,940		183
Equifax, Inc. (a)		80		3
Heidrick & Struggles International, Inc. (a)*		2,960		121
IKON Office Solutions, Inc.		150		2
Labor Ready, Inc. (a)*		2,280		40
Spherion Corp. (a)*		4,790		35
Steelcase, Inc., Class A (a)		1,030		17
The Standard Register Co. (a)		1,570		21
Waste Management, Inc. (a)		8,500		318
				911
Consumer Durables & Apparel 1.4%
Blyth, Inc. (a)		7,730		185
Coach, Inc.*		5,700		226
Hasbro, Inc.		700		18
Kellwood Co. (a)		10,470		320
Mattel, Inc. (a)		22,900		518
Newell Rubbermaid, Inc. (a)		2,280		66
Nike, Inc., Class B (a)		2,500		230
Sony Corp. (a)		14,000		574
				2,137
Consumer Services 0.8%
Career Education Corp. (a)*		2,040		45
CPI Corp. (a)		1,580		75
DeVry, Inc.*		840		20
IHOP Corp. (a)		540		28
Jack in the Box, Inc. (a)*		940		53
Papa John’s International, Inc. (a)*		3,120		115
Starwood Hotels & Resorts Worldwide, Inc. (a)		5,500		329
Wynn Resorts Ltd. (a)*		6,900		507
				1,172

See financial notes.    11

Schwab Viewpoints Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Diversified Financials 4.2%
American Capital Strategies Ltd. (a)		10,800		466
American Express Co. (a)		19,630		1,134
AmeriCredit Corp. (a)*		260		7
Capital One Financial Corp. (a)		13,300		1,055
Chicago Mercantile Exchange Holdings, Inc. (a)		1,011		506
Franklin Resources, Inc. (a)		1,450		165
Investment Technology Group, Inc. (a)*		3,930		184
JPMorgan Chase & Co. (a)		21,230		1,007
Mellon Financial Corp. (a)		200		8
Merrill Lynch & Co., Inc. (a)		10,300		900
Moody’s Corp. (a)		110		7
Northern Trust Corp. (a)		150		9
The Goldman Sachs Group, Inc. (a)		4,350		826
				6,274
Energy 1.6%
ChevronTexaco Corp. (a)		10,200		685
ConocoPhillips (a)		9,900		596
Exxon Mobil Corp. (a)		2,920		209
Parker Drilling Co. (a)*		9,560		78
Pride International, Inc.*		780		22
Valero Energy Corp. (a)		6,205		325
Veritas DGC, Inc. (a)*		7,220		520
				2,435
Food & Staples Retailing 0.8%
Costco Wholesale Corp.		5,600		299
CVS Corp. (a)		18,700		587
Sysco Corp. (a)		10,000		350
				1,236
Food, Beverage & Tobacco 1.6%
Campbell Soup Co. (a)		27,000		1,009
ConAgra Foods, Inc. (a)		2,890		75
General Mills, Inc. (a)		170		10
Kraft Foods, Inc., Class A (a)		20,200		695
Reynolds American, Inc. (a)		620		39
The Coca-Cola Co. (a)		2,270		106
The Hershey Co. (a)		8,900		471
				2,405
Health Care Equipment & Services 4.6%
Aetna, Inc. (a)		13,215		545
Alcon, Inc. (a)		3,800		403
Alliance Imaging, Inc. (a)*		1,060		9
AMERIGROUP Corp. (a)*		3,150		94
AmerisourceBergen Corp. (a)		1,185		56
Baxter International, Inc. (a)		7,200		331
Becton Dickinson & Co. (a)		590		41
Boston Scientific Corp. (a)*		51,102		813
Caremark Rx, Inc. (a)		7,900		389
CIGNA Corp. (a)		6,200		725
CorVel Corp. (a)*		1,610		70
Humana, Inc. (a)*		12,835		770
Magellan Health Services, Inc. (a)*		7,500		327
McKesson Corp. (a)		1,560		78
MedCath Corp. (a)*		4,750		126
Medco Health Solutions, Inc. (a)*		7,600		407
Mentor Corp. (a)		6,270		293
Molina Healthcare, Inc. (a)*		1,840		72
Sierra Health Services, Inc. (a)*		8,380		287
St. Jude Medical, Inc. (a)*		8,200		282
Tenet Healthcare Corp. (a)*		110,630		781
WellPoint, Inc. (a)*		260		20
Zoll Medical Corp. (a)*		720		28
				6,947
Household & Personal Products 1.8%
Avon Products, Inc. (a)		15,600		474
Kimberly-Clark Corp. (a)		8,600		572
NBTY, Inc. (a)*		38,130		1,061
Procter & Gamble Co. (a)		9,600		609
				2,716
Insurance 2.4%
Alleghany Corp. (a)*		240		73
American Financial Group, Inc. (a)		3,320		159
American International Group, Inc. (a)		7,300		490
American Physicians Capital, Inc. (a)*		790		43
AON Corp. (a)		100		4
Argonaut Group, Inc.*		240		8
CNA Surety Corp. (a)*		120		2
Delphi Financial Group, Inc., Class A (a)		1,200		47
FBL Financial Group, Inc., Class A (a)		1,020		36
FPIC Insurance Group, Inc.*		100		4
Great American Financial Resources, Inc. (a)		280		6
Harleysville Group, Inc. (a)		1,380		50
LandAmerica Financial Group, Inc. (a)		610		39
Loews Corp. (a)		1,330		52
MetLife, Inc. (a)		11,180		639
Nationwide Financial Services, Inc., Class A (a)		1,930		98
Philadelphia Consolidated Holding Corp. (a)*		1,590		62
Principal Financial Group, Inc. (a)		2,080		118
Protective Life Corp. (a)		330		15
Safety Insurance Group, Inc. (a)		3,260		163
Selective Insurance Group, Inc. (a)		840		46
StanCorp Financial Group, Inc. (a)		620		28
State Auto Financial Corp. (a)		900		29
The Chubb Corp. (a)		11,950		635
The St. Paul Travelers Cos., Inc. (a)		13,500		690
Universal American Financial Corp.*		360		7
W. R. Berkley Corp. (a)		710		26
				3,569

12    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Materials 1.7%
AK Steel Holding Corp. (a)*		5,350		80
Carpenter Technology Corp. (a)		440		47
Crown Holdings, Inc. (a)*		540		10
FMC Corp. (a)		420		29
Greif, Inc., Class A (a)		3,710		348
H.B. Fuller Co. (a)		7,530		187
Hercules, Inc. (a)*		4,550		83
International Paper Co. (a)		1,225		41
MeadWestvaco Corp. (a)		18,100		498
Monsanto Co. (a)		10,000		442
Nucor Corp. (a)		900		53
OM Group, Inc.*		1,480		84
Packaging Corp. of America (a)		480		11
Pactiv Corp.*		1,220		38
Phelps Dodge Corp.		130		13
Rohm & Haas Co. (a)		1,585		82
Silgan Holdings, Inc. (a)		3,150		130
Spartech Corp. (a)		3,150		86
Temple-Inland, Inc. (a)		340		13
The Lubrizol Corp. (a)		380		17
United States Steel Corp. (a)		4,200		284
				2,576
Media 2.4%
CBS Corp., Class B (a)		260		8
Clear Channel Communications, Inc. (a)		16,300		568
Comcast Corp. (a)*		21,300		862
Comcast Corp., Class A (a)*		10,500		427
LodgeNet Entertainment Corp.*		100		2
Omnicom Group, Inc. (a)		885		90
Readers Digest Association, Inc., Class A (a)		22,000		316
The Interpublic Group of Cos., Inc. (a)*		12,800		140
The McGraw-Hill Cos., Inc. (a)		1,010		65
The Walt Disney Co. (a)		13,800		434
Time Warner, Inc. (a)		31,990		640
				3,552
Pharmaceuticals & Biotechnology 2.5%
Applied Biosystems Group-Applera Corp. (a)		2,180		81
Biogen Idec, Inc. (a)*		200		10
Bruker BioSciences Corp. (a)*		4,280		34
GlaxoSmithKline plc (a)		7,600		405
King Pharmaceuticals, Inc. (a)*		2,660		44
Maxygen, Inc. (a)*		1,460		12
Merck & Co., Inc. (a)		3,380		154
Millennium Pharmaceuticals, Inc. (a)*		40,500		474
Pfizer, Inc. (a)		25,820		688
Sanofi-Aventis		10,300		440
Teva Pharmaceutical Industries Ltd. (a)		13,800		455
Watson Pharmaceuticals, Inc. (a)*		14,000		377
Wyeth (a)		12,215		623
				3,797
Retailing 1.8%
American Eagle Outfitters, Inc. (a)		700		32
Bed, Bath & Beyond, Inc. (a)*		7,300		294
Best Buy Co., Inc. (a)		11,200		619
Blockbuster, Inc., Class A (a)*		3,300		13
Federated Department Stores, Inc. (a)		7,400		325
J.C. Penney Co., Inc. (a)		5,560		418
Office Depot, Inc. (a)*		10,970		461
Payless Shoesource, Inc. (a)*		5,740		153
The Cato Corp., Class A (a)		110		2
The Gymboree Corp. (a)*		1,050		49
The Men’s Wearhouse, Inc. (a)		7,500		299
Wetseal, Inc., Class A (a)*		7,800		49
				2,714
Semiconductors & Semiconductor Equipment 2.1%
Agere Systems, Inc. (a)*		160		3
Applied Materials, Inc. (a)		26,120		454
Asyst Technologies, Inc. (a)*		5,310		39
Broadcom Corp., Class A (a)*		15,150		459
Cirrus Logic, Inc. (a)*		3,030		21
Fairchild Semiconductor International, Inc. (a)*		3,780		61
Intel Corp. (a)		34,500		736
Intersil Corp., Class A (a)		10,700		251
MEMC Electronic Materials, Inc. (a)*		18,300		650
Microchip Technology, Inc. (a)		12,300		405
Micron Technology, Inc. (a)*		410		6
MKS Instruments, Inc. (a)*		2,090		45
Texas Instruments, Inc. (a)		1,370		41
Zoran Corp. (a)*		350		5
				3,176
Software & Services 2.3%
Adobe Systems, Inc. (a)*		11,800		451
Advent Software, Inc. (a)*		160		6
Ariba, Inc.*		740		6
Aspen Technology, Inc. (a)*		1,040		10
Autodesk, Inc. (a)*		680		25
BMC Software, Inc. (a)*		1,260		38
Covansys Corp. (a)*		2,680		63
CSG Systems International, Inc. (a)*		10,210		276
Electronic Data Systems Corp. (a)		20,490		519
Forrester Research, Inc. (a)*		3,730		117
Global Payments, Inc. (a)		4,220		185
Google, Inc., Class A (a)*		2,186		1,041
Hyperion Solutions Corp. (a)*		740		28
i2 Technologies, Inc. (a)*		510		10
Interwoven, Inc. (a)*		2,330		30
Intuit, Inc. (a)*		690		24
Lightbridge, Inc. (a)*		6,130		71
McAfee, Inc.*		730		21
SonicWALL, Inc. (a)*		5,090		53
SPSS, Inc. (a)*		950		26
Sybase, Inc. (a)*		6,550		160
Sykes Enterprises, Inc. (a)*		9,950		202
Synopsys, Inc. (a)*		4,850		109
Tyler Technologies, Inc. (a)*		210		3
				3,474

See financial notes.    13

Schwab Viewpoints Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Technology Hardware & Equipment 3.9%
AVX Corp. (a)		3,400		54
Brocade Communications Systems, Inc. (a)*		9,210		75
Carrier Access Corp. (a)*		1,630		10
Coherent, Inc. (a)*		5,580		180
Corning, Inc. (a)*		24,200		494
Emulex Corp. (a)*		1,270		24
Hewlett-Packard Co. (a)		27,500		1,065
Imation Corp. (a)		2,820		129
International Business Machines Corp. (a)		8,830		815
Lexmark International, Inc., Class A (a)*		180		11
Littelfuse, Inc. (a)*		4,430		150
Lucent Technologies, Inc. (a)*		191,400		465
Motorola, Inc. (a)		1,320		30
NCR Corp. (a)*		445		19
Photon Dynamics, Inc. (a)*		420		5
Planar Systems, Inc. (a)*		4,330		52
QUALCOMM, Inc. (a)		13,100		477
Rofin-Sinar Technologies, Inc. (a)*		430		27
Solectron Corp. (a)*		101,540		339
Staktek Holdings, Inc. (a)*		8,160		50
Sun Microsystems, Inc. (a)*		121,100		658
UTStarcom, Inc. (a)*		15,680		169
Xerox Corp. (a)*		33,080		562
				5,860
Telecommunication Services 1.4%
AT&T Corp. (a)		22,700		777
Broadwing Corp. (a)*		5,810		87
Citizens Communications Co. (a)		5,385		79
CT Communications, Inc. (a)		2,260		53
Qwest Communications International, Inc. (a)*		116,180		1,003
Verizon Communications, Inc.		390		14
				2,013
Transportation 1.0%
AMR Corp. (a)*		1,980		56
Con-way, Inc. (a)		6,300		297
Continental Airlines, Inc., Class B (a)*		2,170		80
CSX Corp. (a)		30,170		1,076
Hub Group, Inc., Class A (a)*		1,740		48
				1,557
Utilities 0.8%
Allete, Inc. (a)		1,990		90
American Electric Power Co., Inc. (a)		12,400		514
Edison International (a)		680		30
FirstEnergy Corp. (a)		500		30
The AES Corp. (a)*		790		17
TXU Corp. (a)		8,970		566
				1,247
Foreign Common Stock   15.5% of net assets
Australia 0.2%
Banks 0.2%
Australia and New Zealand Banking Group Ltd.		13,900		311
France 1.4%
Automobiles & Components 0.3%
Compagnie Generale des Etablissements Michelin, Class B		4,800		391
Banks 0.1%
BNP Paribas		1,900		209
Media 0.9%
Publicis Groupe S.A.		11,000		425
Vivendi Universal S.A.		12,600		477
Societe Television Francaise 1		13,900		472
				1,374
Pharmaceuticals & Biotechnology 0.1%
Sanofi-Aventis		2,400		204
				2,178
Germany 1.9%
Automobiles & Components 1.0%
DaimlerChrysler AG		16,800		961
Bayerische Motoren Werke (BMW) AG		10,500		604
				1,565
Food & Staples Retailing 0.2%
Metro AG		4,500		268
Household & Personal Products 0.2%
Henkel KGaA		2,500		300
Insurance 0.5%
Hannover Rueckversicherung AG*		18,600		790
				2,923
Hong Kong 0.1%
Retailing 0.1%
Giordano International Ltd.		330,000		165
Ireland 0.4%
Banks 0.4%
Bank of Ireland		30,200		605

14    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings continued

Security	Number of Shares		Value ($ x 1,000)
Japan 1.6%
Automobiles & Components 0.2%
Honda Motor Co., Ltd.		6,600		233
Diversified Financials 0.3%
Daiwa Securities Group, Inc.		39,000		441
Household & Personal Products 0.3%
Kao Corp.		8,000		210
Uni-Charm Corp.		4,900		273
				483
Pharmaceuticals & Biotechnology 0.1%
Takeda Pharmaceutical Co., Ltd.		3,400		218
Semiconductors & Semiconductor Equipment 0.4%
Rohm Co., Ltd.		5,900		542
Telecommunication Services 0.3%
NTT DoCoMo, Inc.		290		442
				2,359
Mexico 0.1%
Media 0.1%
Grupo Televisa SA de CV, ADR (a)		7,000		173
Netherlands 0.4%
Consumer Durables & Apparel 0.3%
Koninklijke (Royal) Philips Electronics N.V.		15,000		522
Materials 0.1%
Akzo Nobel N.V.		2,900		163
				685
Republic of Korea 0.6%
Telecommunication Services 0.6%
SK Telecom Co., Ltd.		3,900		845
Singapore 0.2%
Banks 0.2%
United Overseas Bank Ltd.		22,300		253
Spain 0.4%
Media 0.4%
Gestevision Telecinco S.A.		22,500		591
Switzerland 3.3%
Commercial Services & Supplies 0.5%
Adecco S.A.		11,200		691
Consumer Durables & Apparel 0.3%
Swatch Group AG		1,900		375
Diversified Financials 1.0%
Credit Suisse Group		11,300		681
UBS AG		13,700		818
				1,499
Food, Beverage & Tobacco 0.4%
Nestle S.A.		1,720		588
Materials 0.7%
Syngenta AG*		3,300		532
Givaudan S.A. — Reg’d.		410		340
Lonza Group AG		2,700		208
				1,080
Pharmaceuticals & Biotechnology 0.4%
Novartis AG — Reg’d.		11,000		668
				4,901
United Kingdom 4.9%
Banks 0.4%
Lloyds TSB Group plc		50,000		534
Capital Goods 0.1%
Enodis plc		59,000		209
Commercial Services & Supplies 0.0%
Michael Page Group plc		7,600		58
Consumer Services 0.4%
Compass Group plc		96,800		517
Diversified Financials 0.1%
Schroders plc		10,100		191
Food, Beverage & Tobacco 0.9%
Diageo plc		41,800		773
Cadbury Schweppes plc		52,200		525
				1,298
Insurance 0.1%
Willis Group Holdings Ltd. (a)		3,300		126
Media 1.3%
British Sky Broadcasting Group plc		96,000		995
Johnston Press plc		71,300		568
Trinity Mirror plc		35,800		334
				1,897
Pharmaceuticals & Biotechnology 0.6%
GlaxoSmithKline plc		34,700		925
Retailing 0.6%
Signet Group plc		416,400		954
Telecommunication Services 0.4%
Vodafone Group plc		237,400		612
				7,321

 

See financial notes.    15

Schwab Viewpoints Fund

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
U.S. Treasury Obligations   8.6% of net assets
U.S. Treasury Bond
4.50%, 11/15/15 (a)		100		99
6.88%, 08/15/25 (a)		250		313
8.13%, 08/15/19 (a)		100		132
9.13%, 05/15/18 (a)		100		139
U.S. Treasury Inflation Protected Security
2.00%, 01/15/26 (a)		308		295
2.38%, 04/15/11 (a)		205		204
3.38%, 01/15/07 (a)		2,561		2,532
3.63%, 01/15/08 (a)		379		379
U.S. Treasury Note
3.25%, 01/15/09 (a)		100		97
3.63%, 01/15/10 (a)		100		97
3.75%, 05/15/08 (a)		400		394
3.88%, 09/15/10 (a)		900		878
4.00%, 06/15/09 (a)		2,000		1,970
4.00%, 02/15/15 (a)		500		480
4.50%, 11/15/10 (a)		1,000		998
4.75%, 03/31/11 (a)		600		604
4.88%, 04/30/11 (a)		1,100		1,113
4.88%, 07/31/11 (a)		1,000		1,013
5.13%, 06/30/11 (a)		1,100		1,125
				12,862
Foreign Government Securities   0.5% of net assets
Government of United Kingdom
4.25%, 03/07/11		200		373
Panama Government International Bond
6.70%, 01/26/36 (a)		326		331
				704
Corporate Bonds   1.5% of net assets
Fixed-Rate Obligations 0.4%
Caesars Entertainment, Inc.
9.38%, 02/15/07 (a)		200		202
DaimlerChrysler NA Holding Corp
5.75%, 09/08/11 (a)		100		100
El Paso Corp.
7.80%, 08/01/31 (a)		100		105
Verizon Communications, Inc.
5.55%, 02/15/16 (a)		100		100
				507
Variable-Rate Obligations 1.1%
BellSouth Corp
5.58%, 08/15/08 (a)(b)		200		200
ConocoPhillips Australia Funding Co.
5.47%, 04/09/09 (a)(b)		600		601
DaimlerChrysler NA Holding Corp.
5.64%, 03/07/07 (a)(b)		400		400
HSBC Bank USA
5.46%, 09/21/07 (a)(b)		250		251
Transocean, Inc.
5.59%, 09/05/08 (a)(b)		200		200
				1,652
Municipal Bonds   0.6% of net assets
Revenue Bonds 0.6%
Golden State, California Securitization Corp. Revenue Bond, Series 2003-A-1
6.25%, 06/01/33 (a)		250		279
Tobacco Settlement Financing Corp. of Rhode Island Revenue Bond, Series 2002A
6.25%, 06/01/42 (a)		500		535
				814
Asset-Backed Obligations   0.5% of net assets
Honda Auto Receivables Owner Trust, Series 2006-1 Class A2
5.10%, 09/18/08 (a)		400		400
Nissan Auto Receivables Owner Trust, Series 2001-B Class A2
5.18%, 08/15/08 (a)		400		400
				800
Mortgage-Backed Securities   18.0% of net assets
Collateralized Mortgage Obligations 0.4%
Variable-Rate Obligations 0.4%
Freddie Mac Structured Series T-61 Class 1A1
5.96%, 07/25/44 (b)		608		618
U.S. Government Agency Mortgages 17.6%
Fannie Mae
4.00%, 07/01/18 (a)		771		733
4.00%, 11/01/18 (a)		821		780
4.00%, 01/01/19 (a)		18		17
4.00%, 04/01/19 (a)		18		17
4.00%, 06/01/19 (a)		132		126
4.00%, 06/01/19 (a)		136		129
4.00%, 02/01/20 (a)		470		445
4.00%, 03/01/20 (a)		162		154
4.50%, 08/01/33 (a)		207		195
4.50%, 05/01/35 (a)		453		427
4.50%, 09/01/35 (a)		939		881
4.50%, 09/01/35 (a)		988		928
4.50%, 10/01/35 (a)		96		90
5.00%, 02/01/36 (a)		3,017		2,914
5.50%, 02/01/34 (a)		690		684
5.50%, 04/01/34 (a)		304		301
5.50%, 09/01/34 (a)		4,159		4,118
5.50%, 11/01/34 (a)		2,402		2,379
5.50%, 02/01/35 (a)		1,664		1,647
5.50%, 02/01/35 (a)		795		787
5.50%, 02/01/35 (a)		349		346

16    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings continued

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
5.50%, 04/01/35 (a)		1,742		1,723
5.50%, 05/01/35 (a)		646		639
5.50%, 06/01/35 (a)		92		91
5.50%, 09/01/35 (a)		439		434
5.50%, 04/01/36 (a)		989		978
5.50%, 07/01/36 (a)		991		980
6.00%, 04/01/16 (a)		26		26
6.00%, 03/01/18 (a)		18		18
6.86%, 09/01/31 (b)		18		19
Fannie Mae TBA
6.00%, 12/01/99		2,000		2,013
Freddie Mac
6.00%, 09/01/22 (a)		171		173
Freddie Mac ARM
4.40%, 09/01/35 (b)		163		161
Ginnie Mae TBA
6.00%, 12/01/99		1,000		1,014
				26,367
Non-Agency Mortgage-Backed Securities    0.6% of net assets
Fixed-Rate Obligations 0.1%
Bank of America Mortgage Securities Series 2004-2 Class 5A1
6.50%, 10/25/31 (a)		92		94
Residential Funding Mortgage Security I Series-S9 Class A1
6.50%, 03/25/32 (a)		51		52
				146
Variable-Rate Obligations 0.5%
Bear Stearns Adjustable Rate Mortgage Trust Series 2002-11 Class 1A1
5.62%, 02/25/33 (a)(b)		65		65
Bear Stearns Adjustable Rate Mortgage Trust Series 2005-4 Class 23A2
5.40%, 05/25/35 (a)(b)		127		127
Quest Trust, 144A Series 2004-X2 Class A1
5.88%, 06/25/34 (c)(b)		22		22
Washington Mutual Series 2003-R1 Class A1
5.59%, 12/25/27 (a)(b)		491		491
				705
Short-Term Investment   9.7% of net assets
Commercial Paper & Other Obligations 0.2%
Time Warner, Inc.
5.39%, 01/25/07		300		296
Repurchase Agreement 9.1%
Fixed Income Clearing Corp. dated 10/31/06, due 11/01/06 at 4.8%, with a maturity value of $13,726 (fully collateralized by Federal Home Loan Bank and Federal National Mortgage Association with a value of $1,279 and $13,064 respectively.)		13,724		13,724
U.S. Treasury Obligations 0.4%
U.S. Treasury Bill
4.73%, 12/14/06 (a)		30		30
4.83%, 12/14/06 (a)		110		109
4.87%, 12/14/06 (a)		30		30
4.90%, 12/14/06 (a)		60		59
4.89%, 12/14/06 (a)		25		25
4.93%, 12/14/06 (a)		80		80
4.94%, 12/14/06 (a)		170		169
5.03%, 12/14/06 (a)		30		30
5.04%, 12/14/06 (a)		30		30
				562

 

Security and Number of Shares		Value ($ x 1,000)
Other Investments   4.1% of net assets
iShares Lehman Aggregate Bond Fund (a)	43,000	4,318
iShares Russell 1000 Value Index Fund (a)	24,000	1,907
		6,225

 

Security	Notional Amount ($ x 1,000)		Value ($ x 1,000)
Purchased Options  0.1% of net assets
Swaptions 0.1%
3 Month LIBOR Swap Call, Strike Price 4.50, Expires 01/22/07		2,000		—
3 Month LIBOR Swap Call, Strike Price 5.00, Expires 03/08/07		2,100		7
3 Month LIBOR Swap Call, Strike Price 5.04, Expires 09/17/07		800		5
3 Month LIBOR Swap Call, Strike Price 5.25, Expires 06/07/07		2,000		16
3 Month LIBOR Swap Call, Strike Price 5.37, Expires 07/02/07		1,600		16
3 Month LIBOR Swap Call, Strike Price 5.50, Expires 06/30/07		2,000		24

See financial notes.    17

Schwab Viewpoints Fund

Portfolio Holdings continued

Security	Notional Amount ($ x 1,000)		Value ($ x 1,000)
3 Month LIBOR Swap Call, Strike Price 5.31 Expires 10/19/10		2,000		66
3 Month LIBOR Swap Put, Strike Price 5.31 Expires 10/19/10		2,000		66
				200

 

Security	Number of Contracts		Value ($ x 1,000)
Put Options 0.0%
90 Day Euro Dollar Futures, Strike Price 91.25, Expires 12/17/07		25		—
90 Day Euro Dollar Futures, Strike Price 91.75, Expires 12/18/06		50		1
90 Day Euro Dollar Futures, Strike Price 92.00, Expires 03/19/07		50		—
90 Day Euro Dollar Futures, Strike Price 92.50, Expires 12/18/06		3		—
90 Day Euro Dollar Futures, Strike Price 92.75, Expires 12/18/06		4		—
				1

 

End of Investments.

At 10/31/06 the tax basis cost of the fund’s investments was $145,777, and the unrealized appreciation and depreciation were $11,484 and ($2,457), respectively, with a net appreciation of $9,027.

As of 10/31/06, the prices of certain foreign securities held by the fund aggregating $22,945 were adjusted from their closing market prices following the guidelines adopted by the fund’s Board of Trustees.

* Non-income producing security.

(a) All or a portion of this security is held as collateral for future contract, short sale, swap agreements, delayed-delivery security and options written

(b) Variable-rate security.

(c) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $22 or 0.01% of net assets.

ADR — American Depositary Receipt

Security and Number of Shares		Value ($ x 1,000)
Short Sales   (11.9)% of net assets
Other Investment Companies (7.1)%
Consumer Discretionary Select Sector SPDR Fund	165,000	6,140
iShares MSCI EAFE Index Fund	64,000	4,499
		10,639

 

Security Rate, Maturity Date	Face Amount ($ x 1,000)		Value ($ x 1,000)
U.S. Government Agency Mortgages (2.0)%
Fannie Mae
5.50%, 12/01/99		2,950		2,916
U.S. Government Agency Securities (2.8)%
U.S. Treasury Note
4.38%, 05/15/07		500		498
U.S. Treasury Note
3.63%, 05/15/13		700		663
U.S. Treasury Note
0.01%, 05/15/14		900		909
U.S. Treasury Note
4.13%, 05/15/15		1,800		1,741
U.S. Treasury Note
6.00%, 08/15/09		400		414
				4,225

 

Security	Notional Amount ($ x 1,000)		Value ($ x 1,000)
Options Written   0.0% of net assets
Swaptions 0.0%
3 Month LIBOR Swap Call Strike Price 4.56, Expires 01/22/07		900		—
3 Month LIBOR Swap Call Strike Price 5.04, Expires 03/08/07		900		7
3 Month LIBOR Swap Call Strike Price 5.34, Expires 06/07/07		1,000		19
3 Month LIBOR Swap Call Strike Price 5.50, Expires 07/02/07		500		15
3 Month LIBOR Swap Call Strike Price 5.60, Expires 06/30/07		900		25
				66
Straddle Option  0.0%
USD/JPY Forward Straddle Exercise Price $0.00 Expires 03/20/07		2,100		7

 

End of short sales and options written.

In addition to the above, the fund held the following at 10/31/06. All numbers x 1000 except number of futures contracts.

18    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings continued

	Notional Amount (Foreign/USD)		Unrealized Gains/(Losses) (USD)
Swap Agreements   0.1% of net assets
Interest Rate Swaps 0.1%
British Pounds 0.0%
Receive fixed rate payments of 5.00%, Pay variable rate payments of 6 month LIBOR, expires 6/15/09, Barclays Bank plc		200		—
Receive fixed rate payments of 5.00%, Pay variable rate payments of 6 month LIBOR, expires 9/15/10, Barclays Bank plc		700		(19	)
				(19	)
Japanese Yen 0.0%
Receive variable rate payments of 6 month LIBOR, Pay fixed rate payments of 2.00%, expires 12/15/15, Barclays Bank plc		10,000		(2	)
Receive variable rate payments of 6 month LIBOR, Pay fixed rate payments of 2.00%, expires 12/15/15, Merrill Lynch		20,000		(4	)
				(6	)
U.S. Dollars 0.1%
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 12/20/11, Lehman Brothers		1,200		21
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 12/20/11, Merrill Lynch		3,300		88
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 12/20/11, Morgan Stanley		1,000		18
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 6/18/09, UBS AG		4,000		14
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 12/20/36, Morgan Stanley		700		45
Receive fixed rate payments of 5.00%, Pay variable rate payments of 3 month LIBOR, expires 12/20/36, Royal Bank Scotland		100		6

 

	Notional Amount (USD)		Unrealized Gains/(Losses) (USD)
Receive variable rate payments of 3 month LIBOR, Pay fixed rate payments of 5.00%, expires 12/20/16, Goldman Sachs		1,500		(48	)
Receive variable rate payments of 3 month LIBOR, Pay fixed rate payments of 6.00%, expires 12/15/24, UBS AG		200		4
				148
Net Realized Gain — Interest Rate Swaps				123
Credit Default Swaps 0.0%
U.S. Dollars 0.0%
Allstate Corp. Rate 0.26%, expires 12/20/08, Morgan Stanley		100		—
Autozone, Inc. Rate 0.35%, expires 12/20/08, UBS AG		200		(1	)
DaimlerChrysler NA Holding Corp. Rate 0.58%, expires 09/20/11, Barclays Bank plc		100		—
Eaton Corp. Rate 0.28%, expires 12/20/08, Citibank N.A.		100		—
Eli Lilly & Co. Rate 0.16%, expires 12/20/08, Barclays Bank plc		100		—
Emerson Electric Co. Rate 0.21%, expires 12/20/08, Morgan Stanley		100		—
Fedex Corp. Rate 0.29%, expires 12/20/08, Citibank N.A.		100		(1	)
GMAC Rate 2.00%, expires 12/20/06, UBS, AG		200		—
Home Depot, Inc. Rate 0.12%, expires 12/20/08, Lehman Brothers, Inc.		100		—
Ingersoll-Rand Co. Ltd. Rate 0.32%, expires 12/20/08, Merrill Lynch		100		(1	)
Johnson & Johnson, Inc. Rate 0.11%, expires 12/20/08, Lehman Brothers, Inc.		100		—
Masco Corp. Rate 0.30%, expires 12/20/08, Lehman Brothers, Inc.		100		—
People of Republic of China Rate 0.40%, expires 6/20/09, Lehman Brothers, Inc.		200		(2	)
Radioshack Corp. Rate 0.35%, expires 12/20/08, Lehman Brothers, Inc.		200		1
Republic of Hungary Rate 0.535%, expires 05/20/16 Morgan Stanley		300		(1	)

 

See financial notes.    19

Schwab Viewpoints Fund

Portfolio Holdings continued

	Notional Amount (Foreign/USD)		Unrealized Gains/(Losses) (USD)
Republic of Hungary Rate 0.54%, expires 05/20/16 JPMorgan Chase & Co.		100		(1	)
Republic of Hungary Rate 0.545%, expires 05/20/16 Deutche Bank		200		(1	)
Turkey Rate 2.70%, expires 9/20/10, Morgan Stanley		100		(4	)
XL Capital Ltd. Rate 0.205%, expires 03/20/12, Barclays Bank plc		100		—
Wal-Mart Stores, Inc. Rate 0.14%, expires 12/20/08, Citibank N.A.		200		(1	)
Whirpool Corp. Rate 0.29%, expires 12/20/08, Lehman Brothers, Inc.		100		—
Net Realized Gains — Credit Default Swaps				(12	)
Total unrealized gain on swap agreements				111
Net premiums received/paid				(176	)
Swap Agreements, at fair value				(65	)

 

	Number of Contracts			Contract Value			Unrealized Gains/(Losses)
\\nFutures Contracts
10 Years, Short, U.S. Treasury Note, expires 12/19/06		(11	)		(1,190	)		1
5 Years, Long, U.S. Treasury Note, expires 12/29/06		31			3,272			21
90 Day Eurodollar, Long expires 12/17/07		40			9,525			18
90 Day Eurodollar, Long expires 06/18/07		24			5,697			13
90 Day Eurodollar, Long expires 03/17/08		15			3,573			21
90 Day Eurodollar, Long expires 09/17/07		90			21,403			40
LIBOR, Long expires 09/19/07		17			3,837			(4	)
LIBOR, Long expires 06/20/07		7			1,579			(2	)
U. S. Treasury Bond, Long, expires 12/19/06		6			676			14
UK Gilt, Long expires 12/28/06		1			210			1
UK Treasury Bond, Long expires 12/31/07		13			2,935			0
								123

 

20    See financial notes.

Schwab Viewpoints Fund

Portfolio Holdings continued

Expiration Date	Currency to be Received	Amount of Currency to be Received ($ x 1,000)	Currency to be Delivered	Amount of Currency to be Delivered ($ x 1,000)		Unrealized Gains/Losses ($ x 1,000)
\\nForward Foreign Currency Contracts
12/13/06	BRL	54	USD		24		1
11/08/06	CLP	17,000	USD		31		1
12/18/06	CLP	1,900	USD		4		—
03/20/07	INR	1,366	USD		29		1
11/15/06	JPY	130,281	USD		1,145		(29	)
11/15/06	USD	109	JPY		12,559		1
12/26/06	KRW	35,300	USD		37		—
02/26/07	KRW	10,559	USD		11		—
03/21/07	KRW	10,769	USD		11		—
12/04/06	MXN	180	USD		16		—
01/16/07	MXN	101	USD		9		—
11/24/06	PLN	67	USD		22		1
11/30/06	USD	481	GBP		257		(9	)
01/17/07	RUB	78	USD		3		—
03/15/07	RUB	276	USD		10		—
12/13/06	RUB	179	USD		7		—
03/21/07	SGD	16	USD		10		—
11/27/06	SGD	45	USD		28		1
02/26/07	TWN	301	USD		9		—
11/24/06	TWN	301	USD		9		—
05/09/07	CNY	2,994	USD		390		(4	)
08/16/07	CNY	3,721	USD		482		3
							(33	)

 

See financial notes.    21

Schwab Viewpoints Fund

Statement of 

Assets and Liabilities

As of October 31, 2006. All numbers x 1,000 except NAV.

Assets
Investments, at value (cost $145,042)	$	154,804
Cash		3
Deposit with broker for short sales		9,547
Foreign currency (cost $120)		122
Receivables:
Investments sold		16,236
Investments sold short		7,170
Interest		323
Fund shares sold		99
Dividends		73
Due from brokers for futures		51
Foreign tax reclaims		9
Unrealized gains on forward foreign currency contracts		9
Prepaid expenses	+	1
Total assets		188,447
Liabilities
Securities sold short, at value (proceeds $17,041)		17,780
Options written , at value (proceeds $44)		73
Swap agreements, at fair value (cost $176)		65
Payables:
Investments bought		19,680
Investment advisers and administrator fees		15
Transfer agent and shareholder services fees		30
Covered short sales		562
Fund shares redeemed		13
Due to brokers for futures		5
Trustee fees		1
Unrealized losses on forward foreign currency contracts		42
Accrued expenses	+	135
Total liabilities		38,401
Net Assets
Total assets		188,447
Total liabilities		–38,401
Net assets	$	150,046
Net Assets by Source
Capital received from investors		132,865
Net investment income not yet distributed		2,194
Net realized capital gains		5,790
Net unrealized capital gains		9,197
Net Asset Value (NAV) by Shares Class

 

Share Class	Net Assets		÷	Shares Outstanding		=	NAV
Investor Shares	$	121,811			9,100		$	13.39
Select Shares	$	28,235			2,106		$	13.41

 

22    See financial notes.

Schwab Viewpoints Fund

Statement of

Operations

For November 1, 2005 through October 31, 2006. All numbers x 1,000.

Investment Income
Dividends (net of foreign withholding taxes of $20)	$	1,559
Interest	+	2,649
Total Investment Income		4,208
Net Realized Gains and Losses
Net realized gains on investments		6,880
Net realized losses on short sales		(939	)
Net realized gains on foreign currency transactions		46
Net realized gains on written option contracts		29
Net realized losses on futures contracts		(78	)
Net realized gains on swap agreements	+	26
Net realized gains		5,964
Net Unrealized Gains and Losses
Net unrealized gains on investments		3,568
Net unrealized losses on short sales		(805	)
Net unrealized gains on foreign currency transactions		9
Net unrealized losses on option contracts		(37	)
Net unrealized gains on futures contracts		251
Net unrealized gains on swap agreements	+	199
Net unrealized gains		3,185
Expenses
Investment adviser and administrator fees		1,108
Transfer agent and shareholder service fees:
Investor Shares		325
Select Shares		25
Custodian fees		116
Registration fees		64
Portfolio accounting fees		57
Professional fees		45
Shareholder reports		29
Trustees’ fees		6
Dividend and interest on short sales		13
Other expenses	+	11
Total expenses		1,799
Expense reduction by adviser and Schwab		–238
Custodian credits		–122
Net expenses		1,439
Increase in Net Assets from Operations
Total investment income		4,208
Net expenses		–1,439
Net investment income		2,769
Net realized gains		5,964
Net unrealized gains	+	3,185
Increase in net assets from operations	$	11,918

 

See financial notes.    23

Schwab Viewpoints Fund

Statements of

Changes in Net Assets

For the current and prior report periods. All numbers x 1,000.

Operations

 

	11/1/05–10/31/06		11/1/04–10/31/05
Net investment income	$	2,769	$	1,588
Net realized gains		5,964		14,477
Net unrealized gains or losses	+	3,185		(4,356	)
Increase in net assets from operations		11,918		11,709
Distributions Paid
Dividends from net investment income
Investor Shares		1,595		947
Select Shares	+	137		21
Total dividends from net investment income		1,732		968
Distributions from net realized gains
Investor Shares		3,736		—
Select Shares	+	277		—
Total distributions from net realized gains		4,013		—
Total distributions	$	5,745	$	968

 

Transactions in Fund Shares

 

	11/1/05–10/31/06						11/1/04–10/31/05
	SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares		1,613		$	20,830			1,399		$	17,588
Select Shares	+	1,710			21,953			679			8,627
Total shares sold		3,323		$	42,783			2,078		$	26,215
Shares Reinvested
Investor Shares		395		$	5,034			71		$	883
Select Shares	+	30			387			2			20
Total shares reinvested		425		$	5,421			73		$	903
Shares Redeemed
Investor Shares		(3,008	)	$	(38,807	)		(2,354	)	$	(29,691	)
Select Shares	+	(349	)		(4,516	)		(105	)		(1,307	)
Total shares redeemed		(3,357	)	$	(43,323	)		(2,459	)	$	(30,998	)
Net transactions in fund shares		391		$	4,881			(308	)	$	(3,880	)

 

Shares Outstanding and Net Assets

 

	11/1/05–10/31/06				11/1/04–10/31/05
	SHARES		NET ASSETS		SHARES			NET ASSETS
Beginning of period		10,815	$	138,992		11,123		$	132,131
Total increase or decrease	+	391		11,054		(308	)		6,861
End of period		11,206	$	150,046		10,815		$	138,992
Net investment income not yet distributed			$	2,194				$	1,187

 

24    See financial notes.

Schwab Viewpoints Fund

Financial Notes

1.   Business Structure of the Funds

Schwab Viewpoints Fund is a series of Schwab Capital Trust (“Trust”), a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the fund discussed in this report, which is highlighted:

Schwab Capital Trust (organized May 7, 1993)
Schwab Viewpoints Fund™
Schwab S&P 500 Index Fund
Schwab Institutional Select® S&P 500 Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®
Schwab MartketTrack All Equity™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Laudus U.S. MarketMasters Fund™
Laudus Small-Cap MarketMasters Fund™
Laudus International MarketMasters Fund™ Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

Schwab Viewpoints Fund offers two share classes: Investor Shares and Select Shares®. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums.

Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary.

Prior to June 3, 2002, the fund invested in a mix of actively managed mutual funds. The transition to its multi-manager strategy began on June 3, 2002. Also, effective May 1, 2006, the Laudus Balanced MarketMasters Fund was renamed the Schwab Viewpoints Fund.

2.   Significant Accounting Policies:

The following is a summary of the significant accounting policies in the preparation of its financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America.

(a)   Security Valuation:

The fund values the securities in its portfolio every business day. The fund uses the following policies to value various types of securities:

•  Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate.

•  Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the fund’s investment adviser using guidelines adopted by the fund’s Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security’s primary pricing source is not able or willing to provide a price, or certain foreign securities’ closing market prices adjusted for changes in value that may occur between the close of foreign exchange and the time at which fund shares are priced. The Board of Trustees regularly reviews fair value determinations made by the Funds pursuant to the procedures.

•  Bonds and notes: valued at halfway between the most recent bid and asked quotes or, if such quotes are unavailable, at prices for securities of comparable maturity, credit quality and type. Valuations for bonds and notes are provided by an independent bond-pricing service.

    25

Schwab Viewpoints Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

•  Futures and forwards: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day’s exchange rates (for forwards). When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end and records a realized gain or loss accordingly.

•  Swap and Swaption (option on Swap) agreements: are valued based on a model that utilizes market data, including swap yield curves, to calculate prices or are based on dealer quotes.

•  Options: open contracts are valued at their last quoted sale price.

•  Short-term securities (60 days or less to maturity): valued at amortized cost.

•  Mutual funds: valued at their respective net asset values as determined by those funds in accordance with the 1940 Act for a given day.

(b)  Portfolio Investments:

Delayed-Delivery: The fund may buy securities on a delayed-delivery basis. In these transactions, the fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security’s value falls before settlement occurs, the fund could end up paying more for the security than its market value at the time of settlement. The fund has set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis.

Futures Contract: The funds may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements.

One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities.

Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “initial margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount.

Futures are traded publicly on exchanges, and their market value changes daily. A fund records the change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

Forward Currency Contract: The Schwab Viewpoints Fund may invest in forward currency contracts in connection with the purchase and sale of portfolio securities to minimize the uncertainty of changes in future exchange rates. “Forwards” as they are known, are contracts to buy and sell a currency at a set price on a future date. Forwards are similar to futures except that they are not publicly traded, but are agreements directly between two parties.

As with futures, forwards involve certain risks that are not fully reflected in the fund’s financials. If counter-parties to the contracts or if the value of the foreign currency changes unfavorably, the fund could sustain a loss.

Short Sale: The fund may sell securities short (sell securities it does not own). When it does so, the fund also places assets worth at least 100% of the value of the short securities into a segregated account as collateral. If the market value of the short securities subsequently falls, the fund can realize a gain by closing the position. However, if the value rises, the fund typically would have to add to its collateral or close out its short position at a loss. The potential for losses associated with short positions is much greater than the original value of the securities sold short and exceeds amounts recorded in the Statements of Assets and Liabilities.

Repurchase Agreements: The fund may enter into repurchase agreements. In a repurchase agreement, the fund buys a security from another party (usually a financial institution) with the agreement that it be sold back in the future. The date, price and other conditions are all specified when the agreement is created.

The fund’s repurchase agreements will be fully collateralized by U.S. government securities. All collateral is held by the fund’s custodian (or, with tri-party agreements, the agent’s bank) and is monitored daily to ensure that is market value is at least equal to the repurchase price under the agreement.

26    

Schwab Viewpoints Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

Swap Agreements: The fund may enter into swap agreements. In an interest rate swap, a fund and a counterparty agree to swap payments that are based on two different rates. The counterparty is typically a large financial institution, and the terms of the swap are specified in advance. For example, a fund may agree that for six months it will pay the counterparty the equivalent of the interest on a given amount invested in LIBOR (the London Interbank Offered Rate). In exchange, the counterparty might agree to pay a fund the equivalent of the same amount invested in a certain bond index during this same six month period.

Swap agreements carry certain risks. Because the net gains or losses stemming from a swap agreement depend on movements of one rate relative to another, a fund could experience unanticipated losses if one or both rates failed to behave as expected. A fund also could lose money if a counterparty failed to honor the terms of the swap agreement.

The Credit Swap or Credit Default Swap is a bilateral financial contract in which one counterparty (the Protection Buyer) pays a periodic fee, typically expressed in basis points on the notional amount, in return for a Contingent Payment by the Protection Seller following a Credit Event of a Reference Entity. The definitions of a Credit Event and the settlement mechanism used to determine the Contingent Payment are flexible and determined by negotiation between the counterparties at the inception of the transaction.

Options: The fund is authorized to write options and purchase put and call options. The risk in writing a call option is that the fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in purchasing an option is that a fund pays a premium whether or not the option is exercised. The fund also has the additional risk of being unable to enter into a closing transaction at an acceptable price if a liquid secondary market does not exist.

TBA: The fund may enter into “TBA” (to be announced) purchase commitments to purchase securities for a fixed price at a future date, typically not exceeding 45 days. TBAs may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to settlement date. This risk is in addition to the risk of decline in the fund’s other assets.

(c)   Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset backed securities are recorded as adjustments to interest income.

If the fund sells securities short, it records the proceeds received as an asset and the obligation to buy back the securities as a liability. At the time a short sale is initiated, the asset and liability are of equal value and effectively cancel each other out. Subsequently, the fund values the liability side of the transaction according to the market price of the securities sold short, and values the asset side according to the value of the proceeds. When the fund closes out a short position (buys the security), it records the outcome as a realized gain or loss. Interest and dividends accrued on securities sold short is recorded as an expense on the fund’s records.

Options purchased are recorded as assets and written options are recorded as liabilities to the extent of premiums paid or received. The fund will realize a gain or loss when the option transaction expires or closes. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of the premium received or paid.

Swap premiums paid are recorded as assets and premiums received are recorded as liabilities. The fund begins recording gains and losses on swaps based on the effective date and terms of the swap agreement. Realized gains and losses are recognized on interest rate swaps at the termination or closing of the agreement. Credit Default swaps record gains or losses when a credit event occurs involving the underlying entity.

(d)   Investment Income:

Interest Income is recorded as it accrues. If the fund buys a debt security at a discount (that is, for less than face value) or a premium (more than face value), it amortizes the discount or premium from the current date to maturity using the effective interest rate method. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity

    27

Schwab Viewpoints Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

date), then the fund amortizes the premium to the security’s call date and price, rather than the maturity date and price. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date.

(e)   Expenses:

Expenses that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.

The net investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to its net assets.

(f)   Foreign Currency Translations:

Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date.

(g)   Distributions to Shareholders:

The funds pay dividends from net investment income and make distributions from net realized capital gains once a year.

The fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund also keeps certain assets in segregated accounts, as may be required by securities law.

(h)   Custody Credit:

Each fund has an arrangement with its custodian bank under which the fund receives a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts (if any) are disclosed in the statement of operations as a reduction to the fund’s operating expenses.

(i)   Accounting Estimates:

The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It’s possible that once the results are known, they may turn out to be different from these estimates.

(j)   Federal Income Taxes:

The funds intend to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax.

(k)   Indemnification:

Under the funds’ organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote.

(l)   New Accounting Standards:

Financial Accounting Standards Board Interpretation (FIN) No. 48 — Accounting for Uncertainty in Tax Positions — An Interpretation of SFAS No. 109, was issued in July 2006 and is effective for fiscal years beginning after December 15, 2006. This Interpretation provides new requirements for the recognition, measurement, and disclosure in the financial statements

28    

Schwab Viewpoints Fund

Financial Notes (continued)

2.  Significant Accounting Policies (continued):

of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. We have not yet completed our evaluation of the impact, if any, of adopting FIN 48 on the Fund’s financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Fund’s financial statement disclosures.

3.   Affiliates and Affiliated Transactions:

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund’s investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s shareholder services agent and transfer agent.

For its advisory and administrative services to the fund, the investment adviser is entitled to receive an annual fee payable monthly based on the fund’s average daily net assets described as follows:

Average daily net assets
First $500 million	0.775%
Over $500 million	0.75%
Over $1 billion	0.725%

 

For its transfer agent and shareholder services, Schwab is entitled to receive an annual fee payable monthly based on the fund’s average daily net assets described as follows:

	Transfer Agent Fees			Shareholder Service Fees
Investor Shares		0.05	%		0.20	%
Select Shares		0.05	%		0.15	%

 

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses through February 27, 2007, as follows:

Investor Shares	1.10	%
Select Shares	0.95	%

 

Pursuant to an exemptive order issued by the SEC, the fund may enter into interfund borrowing and lending transactions within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for the fund during the period.

Independent Trustees’

Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in the fund’s Statement of Operations.

    29

Schwab Viewpoints Fund

Financial Notes (continued)

4.   Purchases and Sales of Investment Securities:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, purchases and sales of securities (excluding short-term obligations, government securities and securities sold short) were as follows:

Purchases of Securities		Sales/Maturities of Securities
$	117,203	$	121,868

 

For the fiscal year ended October 31, 2006, purchases and sales of long-term government security transactions were as follows:

Purchases of Securities		Sales/Maturities of Securities
$	192,486	$	188,611

 

5.   Options Written:
(All dollar amounts are × 1,000)

For the fiscal year ended October 31, 2006, the fund’s swaptions and straddle option activity was as follows:

Options Written	Number of Contracts			Premiums
Beginning of Period		3		$	23
Options Written		11			50
Options Closed		(1	)		3
Options Expired		(7	)		26
Options Exercised		—			—
End of Period		6		$	44

 

6.   Redemption Fee:
(All dollar amounts are × 1,000)

The fund may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. For shares purchased after 4/29/05, the fund charges a redemption fee of 2.00% on shares held 30 days or less. Such amounts are net of the redemption fee proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior fiscal years were:

	Current Period		Prior Period
Investor Shares	$	4	$	1
Select Shares	$	—	$	0	*

 

*   Amount is not rounded to $1,000.

30    

Schwab Viewpoints Fund

Financial Notes (continued)

7.   Borrowing:
(All dollar amounts are × 1,000)

The funds may borrow money from banks and custodians. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with State Street Corporation, and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically.

Amount Outstanding at 10/31/06	Average Borrowing*		Weighted Average Interest Rate*(%)
$16	$	464		5.37	%

 

*   Based on the number of days for which the borrowing is outstanding.

8.   Federal Income Taxes:
(All dollar amounts are × 1,000)

As of October 31, 2006, the components of distributable earnings on a tax-basis were as follows:

Undistributed ordinary income	$	2,142
Undistributed long-term capital gains		6,685
Unrealized appreciation on investments		11,484
Unrealized depreciation on investments		(2,457	)
Other net unrealized appreciation/(depreciation)		(674	)
Net unrealized appreciation/(depreciation)		8,353

 

The primary difference between book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2006, the fund had no capital loss carry forwards.

The tax-basis components of distributions paid during the current and prior fiscal years were:

Current period distributions
Ordinary income	$	1,732
Long-term capital gains		4,013
Return of capital		—
Prior period distributions
Ordinary income		968
Long-term capital gains		—
Return of capital		—

 

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2006, the funds made the following reclassifications:

Capital Shares	$	(1	)
Undistributed net investment income	$	(30	)
Net realized capital gains and losses	$	31

 

    31

Schwab Viewpoints Fund

Financial Notes (continued)

Other Federal Tax Information: (Unaudited)
(All dollar amounts are × 1,000)

For corporate shareholders, 84.82% percentage of the fund’s dividend distributions paid during the fiscal year ended October 31, 2006, qualify for the corporate dividends received deduction.

For the fiscal year ended October 31, 2006, the fund designates $1,316 the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2007 via IRS form 1099 of the amounts for use in preparing their 2006 income tax return.

32    

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Schwab Viewpoints Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab Viewpoints Fund (one of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Fund”) at October 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 14, 2006

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Investment Advisory and Sub-Advisory Agreement Approval

The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreements must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreements or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreements. In addition, the Securities and Exchange Commission (the “SEC”) takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement.

Consistent with these responsibilities, the Board of Trustees (the “Board”) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreements between Schwab Capital Trust (the “Trust”) and CSIM, with respect to the fund covered in this annual report, and the individual sub-advisory agreements between CSIM and Harris Associates L.P., TCW Investment Management Company, Gardner Lewis Asset Management L.P. and Pacific Investment Management Company LLC (collectively, the “Sub-Advisors”). Such investment advisory and sub-advisory agreements are collectively referred to herein as the “Agreements”. The trustees also reviewed certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM and the Sub-Advisors, including information about their affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM and the Sub-Advisors, as appropriate. The trustees also discuss with CSIM the funds’ operations and CSIM’s ability, consistent with the “manager of mangers” structure of each of the funds to (i) identify and recommend to the trustees sub-advisors for each fund, (ii) monitor and oversee the performance and investment capabilities of each sub-advisor, and (iii) recommend the replacement of a sub-advisor when appropriate.

The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreements at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreements for an additional one year term at the meeting held on June 12, 2006. The Board’s approval of the Agreements was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:

1.  the nature, extent and quality of the services provided to the funds under the Agreements, including the resources of CSIM and its affiliates, and the Sub-Advisors, dedicated to the funds;

2.  each fund’s investment performance and how it compared to that of certain other comparable mutual funds;

3.  each fund’s expenses and how those expenses compared to those of certain other comparable mutual funds and other types of accounts;

4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates, as well as the profitability of the Sub-Advisors; and

5.  the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreements reflect those economies of scale for the benefit of fund investors.

Nature, Extent and Quality of Services.  The Board considered the nature, extent and quality of the services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds. In this regard, the trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreements. The trustees also considered the fact that Schwab’s extensive branch network, Internet access, investment and research tools, telephone services, and array of account features benefit the funds and their shareholders. The trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the trustees

34    

considered that the vast majority of the funds’ shareholders are also brokerage clients of Schwab, and that CSIM and its affiliates are uniquely positioned to provide services and support to the funds and such shareholders. The Board also considered the nature, extent and quality of the sub-advisory services provided by the Sub-Advisors to the funds and the resources each dedicates to the funds. In this regard, the trustees evaluated, among other things, each Sub-Advisor’s personnel, experience and compliance program. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM and the Sub-Advisors to the funds and the resources of CSIM, and its affiliates, and the Sub-Advisors dedicated to the funds supported renewal of the Agreements.

Fund Performance.  The Board considered fund performance in determining whether to renew the Agreements. Specifically, the trustees considered each fund’s performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the 68 performance of each fund, the trustees considered both market risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. In addition, the trustees considered whether irrespective of relative performance, each Sub-Advisor’s absolute performance was consistent with expectations for such Sub-Advisor’s unique investment methodology. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreements.

Fund Expenses.  With respect to the funds’ expenses, the trustees considered the rate of compensation called for by the Agreements, and each fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM and the Sub-Advisors to other similarly managed mutual funds, and other types of accounts, such as separate accounts, pooled vehicles and wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreements.

Profitability.  With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly and the compensation flowing to the Sub-Advisors, directly or indirectly. In this connection, the trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM and the Sub-Advisors from their relationship with the funds, such as whether, by virtue of its management of the funds, CSIM or any Sub-Advisor obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreements and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and the Sub-Advisors and their respective affiliates. The Board also considered the profitability of the Sub-Advisors with respect to the sub-advisory services they provide to the funds, although, when doing so, the Board took into account the fact that the Sub-Advisors are compensated by CSIM, and not by the funds directly, and such compensation with respect to any Sub-Advisor reflects an arms-length negotiation between the Sub-Advisor and CSIM. In addition, the Board considered information relating to changes to CSIM’s cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM’s profitability under the Agreements. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM and the Sub Advisors is reasonable and supported renewal of the Agreements.

Economies of Scale.  The trustees considered the existence of any economies of scale and whether those are passed along to a fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also

    35

considered CSIM’s agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab’s commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale.

In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreements and concluded that the compensation under the Agreements is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment.

36    

Trustees and Officers

The tables below gives information about the trustees and officers for The Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of October 31, 2006, the Fund Complex included 96 funds.

The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000.

Independent Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC. From 1996 to 2001, Vice President for Business Affairs and Chief Financial Officer of Stanford University, and in 2001, Special Advisor to the President of Stanford University.	96	Board 1—Director, Redwood Trust, Inc. Board 2—Director, PMI Group, Inc.
Donald F. Dorward 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chief Executive Officer, Dorward & Associates (corporate management, marketing and communications consulting firm). From 1996–1999, Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising.	57	None.
William A. Hasler 1941 Trustee (Trustee of Schwab Capital Trust since 2000.)	Retired. Dean Emeritus, Haas School of Business, University of California, Berkeley. Until February 2004, Co-Chief Executive Officer, Aphton Corp. (bio-pharmaceuticals). Prior to August 1998, Dean of the Haas School of Business, University of California, Berkeley (higher education).	96	Board 1—Director, Aphton Corp. Board 2—Director, Mission West Properties Board 3—Director, TOUSA Board 4—Director, Stratex Networks Board 5—Director, Genitope Corp. Board 6—Director & Non-Executive Chairman, Solectron Corp. Board 7—Director, Ditech Communications Corp.
Robert G. Holmes 1931 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, Semloh Financial, Inc. (international financial services and investment advisory firm).	57	None.
Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman and Chief Executive Officer and founder of Smith Graham & Co. (investment advisors).	57	Board 1—Board of Cooper Industries Board 2—Chairman of the Audit Committee of Northern Border Partners, M.L.P.

 

    37

Independent Trustees  continued
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D.R. Stephens & Company (investments). Prior to 1996, Chairman and Chief Executive Officer of North American Trust (real estate investment trust).	57	None.
Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	57	None.

 

Interested Trustees
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served1)	Principal Occupations During the Past Five Years	Number of Portfolios in Fund Complex Overseen by the Trustee	Other Directorships
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer and Director, The Charles Schwab Corporation, Charles Schwab & Co., Inc.; Chairman and Director, Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation.	57	None.
Randall W. Merk2 1954 Trustee (Trustee of Schwab Capital Trust since 2005.)	Executive Vice President and President, Schwab Financial Products, Charles Schwab & Co., Inc.; Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.	96	None.

 

38    

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Evelyn Dilsaver 1955 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2004.)	President, Chief Executive Officer, and Director, Charles Schwab Investment Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Trust; Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
Kimon Daifotis 1959 Senior Vice President and Chief Investment Officer — Fixed Income (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer — Fixed Income, Charles Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer — Equities (Officer of Schwab Capital Trust since 2004.)	Senior Vice President and Chief Investment Officer — Equities, Charles Schwab Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
Randall Fillmore 1960 Chief Compliance Officer and AML Officer (Officer of Schwab Capital Trust since 2002.)	Senior Vice President and Chief Compliance Officer, Charles Schwab Investment Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc.
Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Capital Trust since 1998.)	Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Variable Insurance Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.

 

    39

Officers of the Trust
Name, Year of Birth, and Position(s) with the Trust; (Term of Office, and Length of Time Served3)	Principal Occupations During the Past Five Years
Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005)	Vice President, Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Variable Insurance Trust. Until 2004, Vice President, Client, Sales & Services Controls, Charles Schwab & Co., Inc.
Michael Haydel 1972 Vice President (Officer of Schwab Capital Trust since 2006)	Vice President, Asset Management Client Services, Charles Schwab & Co., Inc.; Vice President and AML Officer, Laudus Trust and Laudus Variable Insurance Trust. Until March 2004, Director Charles Schwab & Co., Inc.

 

¹Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010.

²In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser.

³The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board.

40    

Glossary

asset allocation  The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage.

asset class  A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes.

beta  A historical measure of an investment’s volatility relative to a market index (usually the S&P 500^®). The index is defined as having a beta of 1.00. Investments with a beta higher than 1.00 have been more volatile than the index; those with a beta of less than 1.00 have been less volatile.

bond  A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the “coupon rate”) until a specified date (the “maturity date”), at which time the issuer returns the money borrowed (“principal” or “face value”) to the bondholder. Because of their structure, bonds are sometimes called “fixed income securities” or “debt securities.”

An individual bond is subject to the credit risk of the issuer. Changes in interest rates can affect a bond’s market value prior to call or maturity. There is no guarantee that a bond’s yield to call or maturity will provide a positive return over the rate of inflation.

bond fund  A bond fund is subject to the same credit, interest rate, and inflation risks as bonds. In addition, a bond fund incurs ongoing fees and expenses. A bond fund’s net asset value will fluctuate with the price of the underlying bonds and the portfolio turnover activity; return of principal is not guaranteed.

cap, capitalization  See “market cap.”

capital gain, capital loss  The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still “on paper” and is considered unrealized.

earnings growth rate  For a mutual fund, the average yearly rate at which the earnings of the companies in the fund’s portfolio have grown, measured over the past five years.

earnings per share (EPS)  A company’s earnings, or net income, for the past 12 months, divided by the number of shares outstanding.

expense ratio  The amount that is taken from a mutual fund’s assets each year to cover the fund’s operating expenses. An expense ratio of 0.50% means that a fund’s expenses amount to half of one percent of its average net assets a year.

market cap, market capitalization  The value of a company as determined by the total value of all shares of its stock outstanding.

median market cap  The midpoint of the range of market caps of the stocks held by a fund. There are different ways of calculating median market cap. With a simple median, half of the stocks in the fund’s portfolio would be larger than the median, and half would be smaller. With a weighted median (the type that is calculated for these funds), half of the fund’s assets are invested in stocks that are larger than the median market cap, and half in stocks that are smaller.

net asset value (NAV)  The value of one share of a mutual fund. NAV is calculated by taking the fund’s total assets, subtracting liabilities, and dividing by the number of shares outstanding.

outstanding shares, shares outstanding  When speaking of a company or mutual fund, indicates all shares currently held by investors.

price-to-book ratio (P/B)  The market price of a company’s stock compared with its “book value.” A mutual fund’s P/B is the weighted average of the P/B of all stocks in the fund’s portfolio.

price-to-earnings ratio (P/E)  The market price of a company’s stock compared with earnings over the past year. A mutual fund’s P/E is the weighted average of the P/E of all stocks in the fund’s portfolio.

return on equity (ROE)  The average yearly rate of return for each dollar of investors’ money, measured over the past five years.

stock  A share of ownership, or equity, in the issuing company.

total return  The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested.

weighted average  For mutual funds, an average that gives the same weight to each security as the security represents in the fund’s portfolio.

yield  The income paid out by an investment, expressed as a percentage of the investment’s market value.

The industry/sector classification of the funds’ portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

    41

Notes

Notes

Notes

Schwab Funds® offers you an extensive family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available Schwab Funds.

Whether you’re an experienced investor or just starting out, Schwab Funds can help you achieve your financial goals. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any Schwab Fund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.

Proxy Voting Policies, Procedures and Results

A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab’s website at www.schwab.com/schwabfunds, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.

Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.schwab.com/schwabfunds or the SEC’s website at www.sec.gov.

The Schwab Funds Family®

Stock Funds

Schwab Premier Equity Fund®
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Financial Services Fund™
Schwab Health Care Fund™
Schwab Technology Fund™
Schwab Institutional Select® S&P 500 Fund
Schwab S&P 500 Index Fund
Schwab 1000 Index® Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market Index Fund®
Schwab International Index Fund®

Asset Allocation Funds

Schwab Viewpoints Fund™
Schwab MarketTrack All Equity Portfolio™
Schwab MarketTrack Growth Portfolio™
Schwab MarketTrack Balanced Portfolio™
Schwab MarketTrack Conservative Portfolio™
Schwab Target 2010 Fund
Schwab Target 2020 Fund
Schwab Target 2030 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund

Bond Funds

Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fund™
Schwab Total Bond Market Fund™
Schwab GNMA Fund™
Schwab Inflation Protected Fund™
Schwab Tax-Free YieldPlus Fund™

Schwab Short/Intermediate Tax-Free Bond Fund™
Schwab Long-Term Tax-Free Bond Fund™
Schwab California Tax-Free YieldPlus Fund™
Schwab California Short/Intermediate
    Tax-Free Bond Fund™
Schwab California Long-Term Tax-Free Bond Fund™

Schwab Money Funds

Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.¹ Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments^®.

¹Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money.

Investment Adviser

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

Funds
Schwab Funds®
P.O. Box 3812, Englewood, CO 80155—3812

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus.

© 2006 Charles Schwab & Co., Inc. All rights reserved.

Member SIPC

Printed on recycled paper.

MFR36112-00

Item 2: Code of Ethics.

(a)	Registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer, and any other persons who perform a similar function, regardless of whether these individuals are employed by Registrant or a third party.
(c)	During the period covered by the report, no amendments were made to the provisions of this code of ethics.
(d)	During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of this code of ethics.
(f)(1)	Registrant has filed this code of ethics as an exhibit pursuant to Item 12(a)(1) of Form N-CSR.

Item 3: Audit Committee Financial Expert.

Registrant’s Board of Trustees has determined that William Hasler, Mariann Byerwalter and Donald Stephens, currently serving on its audit committee, are “audit committee financial experts,” as such term is defined in Item 3 of Form N-CSR. Each of these members of Registrant’s audit committee is “independent” under the standards set forth in Item 3 of Form N-CSR.

The designation of each of Messrs. Hasler and Stephens and Ms. Byerwalter as an “audit committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such individual any duties, obligations, or liability that are greater than the duties, obligations and liability imposed upon such individual as a member of Registrant’s audit committee or Board of Trustees in the absence of such designation; and (ii) affect the duties, obligations or liability of any other member of Registrant’s audit committee or Board of Trustees.

Item 4: Principal Accountant Fees and Services.

(a) Below are the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of Registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.

Audit Fees

2006: $816,200                     2005: $691,777

(b) Below are the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of Registrant’s financial statements and are not reported under paragraph (a) above.

Audit-Related Fees

For services rendered to Registrant:

2006: $51,331                     2005: $52,814

Nature of these services: tax provision review and procedures performed related to Registrant’s service provider conversion.

     In each of the last two fiscal years there were no “Audit-Related Fees” required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.

(c) Below are the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.

Tax Fees

For services rendered to Registrant:

2006: $66,642                     2005: $79,220

Nature of these services: preparation and review of tax returns.

     In each of the last two fiscal years there were no “Tax Fees” required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.

(d) Below are the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) above.

All Other Fees

For services rendered to Registrant:

2006: $12,054                     2005: $12,054

     Nature of these services:   review of the methodology of allocation of Charles Schwab & Co., Inc. (“Schwab”) expenses for purposes
 of Section 15(c) of the Investment Company Act of 1940.

    In each of the last two fiscal years there were no “All Other Fees” required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.

(e)(1) Registrant’s audit committee does not have pre-approval policies and procedures as described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

(2) The percentage of services described in paragraph (c) of this Item that were approved by the audit committee in 2005 pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was 10.6% and the dollar amount was $10,901. This $10,901 equals 1.2% of the total fees paid by Registrant to its principal accountant in 2005. None of the services described in paragraphs (b) and (d) of this Item were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Not applicable.

(g) Below are the aggregate non-audit fees billed in each of the last two fiscal years by Registrant’s principal accountant for services rendered to Registrant, to Registrant’s investment adviser, and to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant.

     2006: $282,520                     2005: $307,941

Although not required to be included in the amounts disclosed under this paragraph (g) or any other paragraph of this Item 4, below are the aggregate fees billed in each of the last two fiscal years by Registrant’s principal accountant for tax compliance services rendered to U.S. Trust, an entity under common control with Registrant’s investment adviser that does not provide services to Registrant.

     2006: $4,176,023                     2005: $4,058,364

(h) During the past fiscal year, all non-audit services provided by Registrant’s principal accountant to either Registrant’s investment adviser or to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant were pre-approved. Included in the audit committee’s pre-approval was the review and consideration as to whether the provision of these non-audit services is compatible with maintaining the principal accountant’s independence.

Item 5: Audit Committee of Listed Registrants.

Not applicable.

Item 6: Schedule of Investments.

Except as noted below, the schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form. The schedules of investments for the Schwab S&P 500 Index Fund, Schwab Institutional Select ^® S&P 500 Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and Schwab International Index Fund are filed under this Item.

Schwab S&P 500 Index Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

			Cost		Value
Holdings by Category			($ x 1,000)		($ x 1,000)
99.9	%	Common Stock		5,588,418		7,950,692
0.1	%	Short-Term Investment		8,212		8,212
—	%	U.S. Treasury Obligation		2,983		2,983
100.0	%	Total Investments		5,599,613		7,961,887
1.6	%	Collateral Invested for Securities on Loan		128,448		128,448
(1.6)	%	Other Assets and Liabilities, Net				(125,539	)
100.0	%	Net Assets				7,964,796

	Number of		Value
Security	Shares		($ x 1,000)
Common Stock 99.9% of net assets
Automobiles & Components 0.6%
Ford Motor Co.		1,201,277		9,946
General Motors Corp. (a)		364,825		12,740
Harley-Davidson, Inc.		171,945		11,800
Johnson Controls, Inc.		124,684		10,167
The Goodyear Tire & Rubber Co. (a)*		107,696		1,651
				46,304
Banks 5.7%
AmSouth Bancorp		220,977		6,678
BB&T Corp.		352,216		15,328
Comerica, Inc.		113,108		6,582
Commerce Bancorp, Inc. (a)		98,200		3,429
Compass Bancshares, Inc.		83,451		4,695
Countrywide Financial Corp.		388,015		14,791
Fannie Mae		619,831		36,731
Fifth Third Bancorp		356,325		14,200
First Horizon National Corp.		73,806		2,902
Freddie Mac		442,564		30,532
Huntington Bancshares, Inc. (a)		153,126		3,738
KeyCorp		268,955		9,989
M&T Bank Corp.		50,455		6,146
Marshall & Ilsley Corp.		144,183		6,912
MGIC Investment Corp.		50,120		2,945
National City Corp.		367,523		13,690
North Fork Bancorp, Inc.		294,378		8,413
PNC Financial Services Group, Inc.		196,711		13,776
Regions Financial Corp.		308,124		11,693
Sovereign Bancorp, Inc.		233,282		5,566
SunTrust Banks, Inc.		232,836		18,392
Synovus Financial Corp.		202,697		5,955
U.S. Bancorp		1,139,832		38,572
Wachovia Corp.		1,202,870		66,759
Washington Mutual, Inc.		615,199		26,023
Wells Fargo & Co.		2,151,676		78,084
Zions Bancorp		64,162		5,159
				457,680
Capital Goods 8.5%
3M Co.		482,761		38,061
American Power Conversion Corp.		96,248		2,910
American Standard Cos., Inc.		109,817		4,864
Caterpillar, Inc.		428,787		26,032
Cooper Industries Ltd., Class A		66,011		5,905
Cummins, Inc. (a)		30,977		3,933
Danaher Corp.		151,019		10,839
Deere & Co.		146,984		12,513
Dover Corp.		140,023		6,651
Eaton Corp.		96,095		6,960
Emerson Electric Co.		262,819		22,182
Fluor Corp.		52,999		4,157
General Dynamics Corp.		258,472		18,377
General Electric Co. (b)		6,641,667		233,189
Goodrich Corp.		75,218		3,316
Honeywell International, Inc.		530,120		22,329
Illinois Tool Works, Inc.		282,770		13,553
Ingersoll-Rand Co., Ltd., Class A		210,710		7,735
ITT Corp.		124,260		6,758
L-3 Communications Holdings, Inc.		74,495		5,998
Lockheed Martin Corp.		236,352		20,546
Masco Corp. (a)		250,581		6,929
Navistar International Corp. *		32,355		897
Northrop Grumman Corp.		220,121		14,614
PACCAR, Inc.		158,847		9,405
Pall Corp.		72,422		2,310
Parker Hannifin Corp.		77,004		6,440
Raytheon Co.		302,439		15,107
Rockwell Automation, Inc.		113,641		7,046
Rockwell Collins, Inc.		109,024		6,332
Textron, Inc.		83,313		7,576
The Boeing Co.		512,990		40,967
Tyco International Ltd.		1,304,215		38,383
United Technologies Corp.		647,334		42,543
W.W. Grainger, Inc.		43,299		3,151
				678,508

See financial notes.     1

Schwab S&P 500 Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Commercial Services & Supplies 0.6%
Allied Waste Industries, Inc. *		104,886		1,274
Avery Dennison Corp.		69,457		4,385
Cintas Corp.		82,791		3,428
Equifax, Inc.		82,320		3,131
Monster Worldwide, Inc. *		82,126		3,327
Pitney Bowes, Inc.		139,254		6,505
R.R. Donnelley & Sons Co.		133,447		4,518
Robert Half International, Inc.		108,073		3,950
Waste Management, Inc.		372,965		13,979
				44,497
Consumer Durables & Apparel 1.2%
Brunswick Corp.		56,303		1,774
Centex Corp.		73,429		3,840
Coach, Inc. *		246,216		9,760
D.R. Horton, Inc.		166,456		3,900
Eastman Kodak Co. (a)		172,361		4,206
Fortune Brands, Inc.		93,149		7,168
Harman International Industries, Inc.		40,600		4,155
Hasbro, Inc.		113,895		2,952
Jones Apparel Group, Inc.		75,784		2,531
KB Home		39,275		1,765
Leggett & Platt, Inc.		113,803		2,657
Lennar Corp., Class A		80,382		3,817
Liz Claiborne, Inc.		63,619		2,683
Mattel, Inc.		246,667		5,582
Newell Rubbermaid, Inc.		198,018		5,699
Nike, Inc., Class B		120,871		11,106
Pulte Homes, Inc.		124,686		3,864
Snap-On, Inc.		36,954		1,738
The Black & Decker Corp.		48,650		4,081
The Stanley Works		37,174		1,771
VF Corp.		56,207		4,272
Whirlpool Corp.		49,291		4,285
				93,606
Consumer Services 1.8%
Apollo Group, Inc., Class A *		88,210		3,260
Carnival Corp.		278,107		13,577
Darden Restaurants, Inc.		79,330		3,324
H&R Block, Inc.		204,694		4,475
Harrah’s Entertainment, Inc.		113,304		8,422
Hilton Hotels Corp.		207,414		5,998
International Game Technology (a)		217,069		9,228
Marriott International, Inc., Class A		201,734		8,426
McDonald’s Corp.		797,901		33,448
Starbucks Corp. (a)*		478,610		18,068
Starwood Hotels & Resorts Worldwide, Inc.		137,073		8,189
Wendy’s International, Inc.		66,758		2,310
Western Union Co. *		490,262		10,810
Wyndham Worldwide Corp. *		126,343		3,727
YUM! Brands, Inc.		174,233		10,360
				143,622
Diversified Financials 10.4%
American Express Co.		795,834		46,007
Ameriprise Financial, Inc.		168,361		8,671
Bank of America Corp.		2,926,732		157,663
Capital One Financial Corp.		193,989		15,389
Chicago Mercantile Exchange Holdings, Inc.		22,100		11,072
CIT Group, Inc.		126,238		6,571
Citigroup, Inc.		3,183,543		159,686
E*TRADE Financial Corp. *		264,098		6,148
Federated Investors, Inc., Class B		46,211		1,584
Franklin Resources, Inc.		105,536		12,027
Goldman Sachs Group, Inc. (a)		276,667		52,509
Janus Capital Group, Inc.		135,451		2,720
JPMorgan Chase & Co.		2,236,116		106,081
Legg Mason, Inc.		81,700		7,355
Lehman Brothers Holdings, Inc.		342,806		26,684
Mellon Financial Corp.		286,141		11,102
Merrill Lynch & Co., Inc.		570,290		49,855
Moody’s Corp.		156,391		10,369
Morgan Stanley		685,848		52,419
Northern Trust Corp.		131,834		7,741
SLM Corp.		263,062		12,806
State Street Corp.		225,728		14,498
T. Rowe Price Group, Inc.		170,026		8,044
The Bank of New York Co., Inc.		494,230		16,987
The Bear Stearns Cos., Inc.		77,223		11,688
The Charles Schwab Corp. (c)		660,696		12,038
				827,714
Energy 9.4%
Anadarko Petroleum Corp.		298,432		13,853
Apache Corp.		211,349		13,805
Baker Hughes, Inc.		218,141		15,063
BJ Services Co.		191,575		5,778
Chesapeake Energy Corp. (a)		242,500		7,867
ChevronTexaco Corp.		1,409,919		94,747
ConocoPhillips		1,057,004		63,674
CONSOL Energy, Inc.		98,100		3,472
Devon Energy Corp.		281,673		18,827
El Paso Corp.		412,734		5,654
EOG Resources, Inc.		155,607		10,353
Exxon Mobil Corp. (b)		3,823,631		273,084
Halliburton Co.		670,456		21,689
Hess Corp.		142,902		6,059
Kinder Morgan, Inc.		63,146		6,637
Marathon Oil Corp.		232,061		20,050
Murphy Oil Corp.		98,027		4,623
Nabors Industries Ltd. *		198,396		6,126
National-Oilwell Varco, Inc. *		111,805		6,753
Noble Corp.		82,091		5,755

2     See financial notes.

Schwab S&P 500 Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Occidental Petroleum Corp.		548,444		25,744
Rowan Cos., Inc.		64,341		2,148
Schlumberger Ltd.		755,559		47,661
Smith International, Inc.		60,000		2,369
Sunoco, Inc.		86,111		5,694
Transocean, Inc. (a)*		201,088		14,587
Valero Energy Corp.		394,085		20,622
Weatherford International Ltd. *		208,531		8,566
Williams Cos., Inc.		369,702		9,032
XTO Energy, Inc.		233,187		10,880
				751,172
Food & Staples Retailing 2.3%
Costco Wholesale Corp.		301,071		16,071
CVS Corp.		524,061		16,445
Safeway, Inc.		288,235		8,463
Supervalu, Inc.		126,724		4,233
Sysco Corp.		388,495		13,590
The Kroger Co.		481,646		10,832
Wal-Mart Stores, Inc.		1,582,493		77,985
Walgreen Co.		646,799		28,252
Whole Foods Market, Inc. (a)		89,700		5,726
				181,597
Food, Beverage & Tobacco 4.8%
Altria Group, Inc.		1,343,189		109,242
Anheuser-Busch Cos., Inc.		511,708		24,265
Archer-Daniels-Midland Co.		419,069		16,134
Brown-Forman Corp., Class B		53,249		3,844
Campbell Soup Co.		122,713		4,587
Coca-Cola Enterprises, Inc.		201,467		4,035
ConAgra Foods, Inc. (a)		331,155		8,660
Constellation Brands, Inc., Class A *		121,205		3,332
Dean Foods Co. *		76,000		3,184
General Mills, Inc.		233,863		13,288
H.J. Heinz Co.		216,951		9,147
Kellogg Co.		156,085		7,853
McCormick & Co., Inc.		88,073		3,294
Molson Coors Brewing Co., Class B		29,275		2,084
PepsiCo, Inc.		1,058,158		67,129
Reynolds American, Inc. (a)		113,578		7,174
Sara Lee Corp.		486,730		8,323
The Coca-Cola Co.		1,312,447		61,317
The Hershey Co.		109,392		5,788
The Pepsi Bottling Group, Inc.		102,711		3,248
Tyson Foods, Inc., Class A		138,602		2,003
UST, Inc.		103,296		5,532
Wm. Wrigley Jr. Co.		138,234		7,181
				380,644
Health Care Equipment & Services 4.2%
Aetna, Inc.		363,072		14,966
AmerisourceBergen Corp.		148,482		7,008
Bausch & Lomb, Inc.		31,704		1,697
Baxter International, Inc.		430,311		19,781
Becton Dickinson & Co.		169,994		11,905
Biomet, Inc.		147,924		5,597
Boston Scientific Corp. *		766,050		12,188
C.R. Bard, Inc.		64,512		5,287
Cardinal Health, Inc.		260,880		17,075
Caremark Rx, Inc.		288,859		14,221
CIGNA Corp.		73,970		8,653
Coventry Health Care, Inc. *		102,747		4,824
Express Scripts, Inc. *		88,127		5,616
HCA, Inc.		262,330		13,253
Health Management Associates, Inc., Class A		136,902		2,697
Hospira, Inc. *		98,468		3,579
Humana, Inc. *		108,589		6,515
IMS Health, Inc.		127,883		3,562
Laboratory Corp. of America Holdings *		79,844		5,469
Manor Care, Inc.		45,374		2,178
McKesson Corp.		209,666		10,502
Medco Health Solutions, Inc. *		195,438		10,456
Medtronic, Inc.		721,996		35,147
Patterson Cos., Inc. (a)*		77,344		2,541
Quest Diagnostics, Inc.		104,042		5,175
St. Jude Medical, Inc. *		223,259		7,669
Stryker Corp.		187,442		9,801
Tenet Healthcare Corp. *		254,877		1,799
UnitedHealth Group, Inc.		872,408		42,556
WellPoint, Inc. *		409,099		31,222
Zimmer Holdings, Inc. *		158,169		11,390
				334,329
Household & Personal Products 2.4%
Alberto-Culver Co., Class B		45,240		2,298
Avon Products, Inc.		288,320		8,768
Clorox Co.		96,612		6,237
Colgate-Palmolive Co.		329,557		21,082
Kimberly-Clark Corp.		294,411		19,584
Procter & Gamble Co. (b)		2,042,670		129,485
The Estee Lauder Cos., Inc., Class A		63,300		2,557
				190,011
Insurance 4.8%
ACE Ltd.		209,995		12,022
AFLAC, Inc.		330,768		14,858
Ambac Financial Group, Inc.		70,084		5,851
American International Group, Inc.		1,663,332		111,726
AON Corp.		226,315		7,874
Cincinnati Financial Corp.		107,986		4,930
Genworth Financial, Inc., Class A		292,738		9,789
Lincoln National Corp.		184,170		11,660

See financial notes.     3

Schwab S&P 500 Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Loews Corp.		280,987		10,936
Marsh & McLennan Cos., Inc.		345,584		10,174
MBIA, Inc.		83,124		5,155
MetLife, Inc.		500,311		28,583
Principal Financial Group, Inc.		187,912		10,615
Prudential Financial, Inc.		314,981		24,231
SAFECO Corp.		90,032		5,239
The Allstate Corp.		415,282		25,482
The Chubb Corp.		279,460		14,853
The Hartford Financial Services Group, Inc.		203,517		17,741
The Progressive Corp.		501,028		12,110
The St. Paul Travelers Cos., Inc.		445,852		22,796
Torchmark Corp.		64,261		3,964
UnumProvident Corp.		196,938		3,895
XL Capital Ltd., Class A		110,199		7,775
				382,259
Materials 3.0%
Air Products & Chemicals, Inc.		142,154		9,904
Alcoa, Inc.		557,137		16,107
Allegheny Technologies, Inc.		54,355		4,279
Ashland, Inc.		42,227		2,496
Ball Corp.		60,522		2,517
Bemis Co.		60,050		2,019
E.I. du Pont de Nemours & Co.		589,978		27,021
Eastman Chemical Co.		46,991		2,863
Ecolab, Inc.		115,995		5,260
Freeport-McMoRan Copper & Gold, Inc., Class B		120,472		7,286
Hercules, Inc. *		77,522		1,411
International Flavors & Fragrances, Inc.		48,667		2,067
International Paper Co.		315,603		10,525
Louisiana-Pacific Corp.		61,194		1,211
MeadWestvaco Corp.		117,577		3,236
Monsanto Co.		346,476		15,321
Newmont Mining Corp.		287,412		13,011
Nucor Corp.		214,604		12,535
Pactiv Corp. *		106,495		3,284
Phelps Dodge Corp.		131,977		13,248
PPG Industries, Inc.		115,861		7,925
Praxair, Inc.		206,880		12,465
Rohm & Haas Co.		93,042		4,822
Sealed Air Corp.		54,055		3,217
Sigma-Aldrich Corp.		39,413		2,960
Temple-Inland, Inc.		80,959		3,193
The Dow Chemical Co.		615,793		25,118
United States Steel Corp.		81,248		5,492
Vulcan Materials Co.		61,904		5,044
Weyerhaeuser Co.		156,533		9,954
				235,791
Media 3.5%
CBS Corp., Class B		504,311		14,595
Clear Channel Communications, Inc.		318,500		11,100
Comcast Corp., Class A *		1,353,032		55,028
Dow Jones & Co., Inc. (a)		28,392		996
Gannett Co., Inc.		145,039		8,578
Meredith Corp.		17,454		916
News Corp., Class A		1,514,811		31,584
Omnicom Group, Inc.		114,691		11,635
The E.W. Scripps Co., Class A		39,225		1,940
The Interpublic Group of Cos., Inc. *		260,619		2,843
The McGraw-Hill Cos., Inc.		242,211		15,543
The New York Times Co., Class A (a)		82,087		1,984
The Walt Disney Co.		1,370,176		43,106
Time Warner, Inc.		2,604,429		52,115
Tribune Co.		122,626		4,087
Univision Communications, Inc., Class A *		134,435		4,713
Viacom, Inc., Class B *		457,203		17,794
				278,557
Pharmaceuticals & Biotechnology 8.2%
Abbott Laboratories		977,375		46,435
Allergan, Inc.		97,761		11,291
Amgen, Inc. *		755,118		57,321
Applied Biosystems Group-Applera Corp.		125,342		4,675
Barr Pharmaceuticals, Inc. *		66,437		3,479
Biogen Idec, Inc. *		228,461		10,875
Bristol-Myers Squibb Co.		1,259,128		31,164
Eli Lilly & Co.		632,625		35,433
Fisher Scientific International, Inc. *		77,676		6,651
Forest Laboratories, Inc. *		209,623		10,259
Genzyme Corp. *		165,507		11,173
Gilead Sciences, Inc. *		291,372		20,076
Johnson & Johnson		1,896,195		127,804
King Pharmaceuticals, Inc. *		172,292		2,883
MedImmune, Inc. *		153,659		4,923
Merck & Co., Inc.		1,417,127		64,366
Millipore Corp. *		28,708		1,853
Mylan Laboratories, Inc.		126,349		2,590
PerkinElmer, Inc.		71,880		1,535
Pfizer, Inc.		4,721,357		125,824
Schering-Plough Corp.		969,526		21,465
Thermo Electron Corp. *		100,447		4,306
Waters Corp. *		60,968		3,036
Watson Pharmaceuticals, Inc. *		76,811		2,067
Wyeth		861,882		43,982
				655,466

4     See financial notes.

Schwab S&P 500 Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Real Estate 1.1%
Apartment Investment & Management Co., Class A		57,401		3,290
Archstone-Smith Trust		134,930		8,124
Boston Properties, Inc.		65,900		7,040
Equity Office Properties Trust (a)		237,008		10,073
Equity Residential		186,292		10,174
Kimco Realty Corp.		135,000		5,998
Plum Creek Timber Co., Inc.		113,050		4,063
ProLogis		155,206		9,820
Public Storage, Inc.		68,725		6,165
Realogy Corp. *		157,928		4,071
Simon Property Group, Inc.		133,510		12,964
Vornado Realty Trust		73,127		8,721
				90,503
Retailing 3.7%
Amazon.com, Inc. (a)*		184,888		7,042
AutoNation, Inc. (a)*		81,366		1,631
AutoZone, Inc. *		29,807		3,338
Bed, Bath & Beyond, Inc. *		179,765		7,243
Best Buy Co., Inc.		252,741		13,964
Big Lots, Inc. *		47,209		995
Circuit City Stores, Inc.		93,008		2,509
Dillard’s, Inc., Class A		33,811		1,020
Dollar General Corp.		170,282		2,389
eBay, Inc. *		740,406		23,789
Family Dollar Stores, Inc.		90,192		2,656
Federated Department Stores, Inc.		359,290		15,777
Genuine Parts Co.		109,453		4,982
Home Depot, Inc.		1,311,913		48,974
J.C. Penney Co., Inc.		155,684		11,712
Kohl’s Corp. *		217,951		15,387
Limited Brands, Inc.		214,787		6,330
Lowe’s Cos., Inc.		981,720		29,589
Nordstrom, Inc.		142,282		6,737
Office Depot, Inc. *		197,483		8,292
OfficeMax, Inc.		47,067		2,240
RadioShack Corp. (a)		79,867		1,425
Sears Holdings Corp. *		58,475		10,202
Staples, Inc.		461,497		11,902
Target Corp.		544,939		32,250
The Gap, Inc.		352,174		7,403
The Sherwin-Williams Co.		67,751		4,013
The TJX Cos., Inc.		292,939		8,481
Tiffany & Co.		87,308		3,119
				295,391
Semiconductors & Semiconductor Equipment 2.7%
Advanced Micro Devices, Inc. (a)*		306,171		6,512
Altera Corp. *		224,794		4,145
Analog Devices, Inc.		227,622		7,243
Applied Materials, Inc.		938,249		16,316
Broadcom Corp., Class A *		290,501		8,794
Freescale Semiconductor, Inc., Class B *		264,873		10,417
Intel Corp.		3,704,566		79,055
KLA-Tencor Corp.		123,967		6,095
Linear Technology Corp.		194,138		6,042
LSI Logic Corp. *		254,038		2,553
Maxim Integrated Products, Inc.		203,642		6,111
Micron Technology, Inc. *		479,913		6,935
National Semiconductor Corp.		191,430		4,650
Novellus Systems, Inc. *		95,774		2,648
NVIDIA Corp. *		220,100		7,675
PMC - Sierra, Inc. (a)*		96,604		641
Teradyne, Inc. *		131,483		1,843
Texas Instruments, Inc.		1,013,840		30,598
Xilinx, Inc.		214,068		5,461
				213,734
Software & Services 5.5%
Adobe Systems, Inc. *		366,422		14,016
Affiliated Computer Services, Inc., Class A *		63,172		3,378
Autodesk, Inc. *		150,146		5,518
Automatic Data Processing, Inc.		369,060		18,246
BMC Software, Inc. *		160,701		4,871
CA, Inc.		292,295		7,237
Citrix Systems, Inc. *		114,845		3,391
Computer Sciences Corp. *		109,953		5,811
Compuware Corp. *		182,117		1,464
Convergys Corp. *		92,806		1,968
Electronic Arts, Inc. *		196,319		10,383
Electronic Data Systems Corp.		365,088		9,248
First Data Corp.		490,262		11,889
Fiserv, Inc. *		131,097		6,476
Google, Inc., Class A *		135,170		64,394
Intuit, Inc. *		218,776		7,723
Microsoft Corp. (b)		5,556,763		159,535
Novell, Inc. *		224,287		1,346
Oracle Corp. *		2,550,731		47,112
Parametric Technology Corp. *		59,491		1,162
Paychex, Inc.		210,830		8,324
Sabre Holdings Corp., Class A (a)		72,922		1,854
Symantec Corp. *		662,834		13,151
Unisys Corp. *		184,292		1,205
VeriSign, Inc. *		148,800		3,077
Yahoo! Inc. *		800,491		21,085
				433,864
Technology Hardware & Equipment 6.8%
ADC Telecommunications, Inc. *		59,641		853
Agilent Technologies, Inc. *		272,667		9,707
Apple Computer, Inc. *		544,625		44,158
Avaya, Inc. *		263,155		3,371
Ciena Corp. *		47,966		1,128
Cisco Systems, Inc. *		3,909,298		94,331
Comverse Technology, Inc. *		122,392		2,664
Corning, Inc. *		997,429		20,377

See financial notes.     5

Schwab S&P 500 Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Dell, Inc. *		1,436,194		34,943
EMC Corp. *		1,503,326		18,416
Hewlett-Packard Co.		1,764,558		68,359
International Business Machines Corp.		978,747		90,368
Jabil Circuit, Inc.		110,485		3,172
JDS Uniphase Corp. *		127,689		1,855
Juniper Networks, Inc. *		310,000		5,338
Lexmark International, Inc., Class A *		73,116		4,649
Lucent Technologies, Inc. *		2,873,749		6,983
Molex, Inc.		90,848		3,171
Motorola, Inc.		1,602,800		36,961
NCR Corp. *		116,524		4,838
Network Appliance, Inc. *		231,263		8,441
QLogic Corp. *		107,172		2,206
QUALCOMM, Inc.		1,062,758		38,674
SanDisk Corp. *		111,600		5,368
Sanmina — SCI Corp. *		288,702		1,140
Solectron Corp. *		530,136		1,771
Sun Microsystems, Inc. *		2,221,752		12,064
Symbol Technologies, Inc.		109,217		1,631
Tektronix, Inc.		55,351		1,681
Tellabs, Inc. *		270,557		2,852
Xerox Corp. *		630,296		10,715
				542,185
Telecommunication Services 3.5%
ALLTEL Corp.		249,106		13,280
AT&T Corp.		2,489,859		85,278
BellSouth Corp.		1,158,380		52,243
CenturyTel, Inc.		84,217		3,389
Citizens Communications Co.		239,863		3,516
Embarq Corp.		97,893		4,733
Qwest Communications International, Inc. *		1,095,523		9,454
Sprint Nextel Corp.		1,907,677		35,654
Verizon Communications, Inc.		1,868,151		69,122
Windstream Corp.		266,345		3,654
				280,323
Transportation 1.8%
Burlington Northern Santa Fe Corp.		233,319		18,089
CSX Corp.		283,726		10,120
FedEx Corp.		195,349		22,375
Norfolk Southern Corp.		265,504		13,958
Ryder System, Inc.		35,093		1,848
Southwest Airlines Co.		470,201		7,067
Union Pacific Corp.		172,213		15,608
United Parcel Service, Inc., Class B		688,790		51,900
				140,965
Utilities 3.4%
Allegheny Energy, Inc. *		104,525		4,498
Ameren Corp. (a)		125,730		6,802
American Electric Power Co., Inc.		252,535		10,463
CenterPoint Energy, Inc. (a)		174,137		2,696
CMS Energy Corp. *		117,771		1,754
Consolidated Edison, Inc.		150,869		7,294
Constellation Energy Group, Inc.		114,391		7,138
Dominion Resources, Inc.		217,358		17,604
DTE Energy Co. (a)		110,514		5,021
Duke Energy Corp.		790,869		25,023
Dynegy, Inc., Class A *		244,620		1,487
Edison International		208,567		9,269
Entergy Corp.		132,173		11,344
Exelon Corp.		428,054		26,531
FirstEnergy Corp.		211,163		12,427
FPL Group, Inc. (a)		260,750		13,298
KeySpan Corp.		110,330		4,477
Nicor, Inc.		21,182		973
NiSource, Inc.		163,456		3,804
Peoples Energy Corp.		15,854		693
PG&E Corp.		222,156		9,584
Pinnacle West Capital Corp.		51,945		2,483
PPL Corp.		236,742		8,172
Progress Energy, Inc. (a)		159,892		7,355
Public Service Enterprise Group, Inc.		162,087		9,895
Sempra Energy		165,517		8,779
TECO Energy, Inc.		115,104		1,898
The AES Corp. *		421,510		9,269
The Southern Co.		474,309		17,265
TXU Corp.		303,846		19,182
Xcel Energy, Inc.		248,854		5,492
				271,970

Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)
Short-Term Investment 0.1% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		8,212		8,212
U.S. Treasury Obligation 0.0% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		3,000		2,983
End of Investments.

6     See financial notes.

Schwab S&P 500 Index Fund

	Number of		Value
Security	Shares		($ x 1,000)
Collateral Invested for Securities on Loan 1.6% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		128,448,347		128,448
End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $5,647,753, and the unrealized appreciation and depreciation were $2,828,797 and ($514,663), respectively, with a net unrealized appreciation of $2,314,134.

In addition to the above, the fund held the following at October 31, 2006. All numbers are x1,000 except numbers of futures contracts.

	Number of		Contract		Unrealized
	Contracts		Value		Gains
Futures Contract 0.1% of net assets
S&P 500 Index, e-mini,
Long, expires 12/15/06		105		7,262		389

*	Non-income producing security.
(a)	All or a portion of this security is on loan.
(b)	All or a portion of this security is held as collateral for open futures contracts.
(c)	Issuer is affiliated with the fund’s adviser.

See financial notes.     7

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

			Cost		Value
Holdings by Category				($ x 1,000)		($ x 1,000)
98.9	%	Common Stock		1,812,825		2,057,718
0.6	%	Short-Term Investment		11,977		11,977
0.2	%	U.S. Treasury Obligations		3,282		3,282
—	%	Warrants		—		2
99.7	%	Total Investments		1,828,084		2,072,979
7.8	%	Collateral Invested for Securities on Loan		162,875		162,875
(7.5	)%	Other Assets and Liabilities, Net				(155,474	)
100.0	%	Total Net Assets				2,080,380

	Number of		Value
Security	Shares		($ x 1,000)
Common Stock 98.9% of net assets
Automobiles & Components 0.6%
Ford Motor Co.		314,445		2,603
General Motors Corp. (a)		93,871		3,278
Harley-Davidson, Inc. (a)		43,491		2,985
Johnson Controls, Inc.		32,115		2,619
The Goodyear Tire & Rubber Co. (a)*		27,545		422
				11,907
Banks 5.7%
AmSouth Bancorp		56,795		1,716
BB&T Corp.		89,140		3,880
Comerica, Inc.		27,799		1,618
Commerce Bancorp, Inc. (a)		30,963		1,081
Compass Bancshares, Inc.		20,781		1,169
Countrywide Financial Corp.		100,736		3,840
Fannie Mae		160,637		9,519
Fifth Third Bancorp		92,641		3,692
First Horizon National Corp.		19,921		783
Freddie Mac		114,649		7,910
Huntington Bancshares, Inc. (a)		38,064		929
KeyCorp		67,373		2,502
M&T Bank Corp. (a)		13,417		1,634
Marshall & Ilsley Corp.		42,183		2,022
MGIC Investment Corp.		13,771		809
National City Corp.		100,413		3,741
North Fork Bancorp, Inc.		77,276		2,209
PNC Financial Services Group, Inc.		48,647		3,407
Regions Financial Corp. (a)		75,732		2,874
Sovereign Bancorp, Inc.		55,442		1,323
SunTrust Banks, Inc.		60,529		4,781
Synovus Financial Corp.		53,744		1,579
U.S. Bancorp		294,951		9,981
Wachovia Corp.		317,754		17,635
Washington Mutual, Inc.		159,937		6,765
Wells Fargo & Co.		558,874		20,282
Zions Bancorp		17,115		1,376
				119,057
Capital Goods 8.4%
3M Co.		125,029		9,857
American Power Conversion Corp.		22,385		677
American Standard Cos., Inc.		27,164		1,203
Caterpillar, Inc.		108,835		6,607
Cooper Industries Ltd., Class A		17,176		1,536
Cummins, Inc. (a)		9,374		1,190
Danaher Corp.		38,677		2,776
Deere & Co.		37,194		3,166
Dover Corp.		34,792		1,653
Eaton Corp.		24,246		1,756
Emerson Electric Co.		67,624		5,707
Fluor Corp.		14,194		1,113
General Dynamics Corp.		66,920		4,758
General Electric Co. (b)		1,713,315		60,155
Goodrich Corp.		20,038		884
Honeywell International, Inc.		135,940		5,726
Illinois Tool Works, Inc.		69,698		3,341
Ingersoll-Rand Co., Ltd. Class A		53,387		1,960
ITT Corp.		33,775		1,837
L-3 Communications Holdings, Inc.		20,457		1,647
Lockheed Martin Corp.		59,516		5,174
Masco Corp. (a)		63,518		1,756
Navistar International Corp. *		8,854		246
Northrop Grumman Corp. (a)		56,776		3,769
PACCAR, Inc.		41,345		2,448
Pall Corp.		20,034		639
Parker Hannifin Corp.		19,631		1,642
Raytheon Co.		76,221		3,807
Rockwell Automation, Inc.		29,202		1,811
Rockwell Collins, Inc.		28,412		1,650
Textron, Inc.		21,300		1,937
The Boeing Co.		132,934		10,616
Tyco International Ltd.		334,344		9,840
United Technologies Corp.		167,820		11,029

See financial notes.  1

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
W.W. Grainger, Inc.		12,522		911
				174,824
Commercial Services & Supplies 0.6%
Allied Waste Industries, Inc. *		40,740		495
Avery Dennison Corp.		16,899		1,067
Cintas Corp.		22,679		939
Equifax, Inc.		22,649		861
Monster Worldwide, Inc. *		23,336		945
Pitney Bowes, Inc.		36,772		1,718
R.R. Donnelley & Sons Co. (a)		34,666		1,174
Robert Half International, Inc.		28,427		1,039
Waste Management, Inc.		91,276		3,421
				11,659
Consumer Durables & Apparel 1.2%
Brunswick Corp.		15,437		486
Centex Corp.		17,149		897
Coach, Inc. *		60,719		2,407
D.R. Horton, Inc.		35,407		830
Eastman Kodak Co. (a)		47,687		1,164
Fortune Brands, Inc.		23,659		1,821
Harman International Industries, Inc.		11,014		1,127
Hasbro, Inc.		35,442		919
Jones Apparel Group, Inc.		20,500		685
KB Home		10,385		467
Leggett & Platt, Inc.		31,978		747
Lennar Corp., Class A		22,340		1,061
Liz Claiborne, Inc.		16,562		698
Mattel, Inc.		64,010		1,448
Newell Rubbermaid, Inc.		51,474		1,481
Nike, Inc., Class B		31,794		2,921
Pulte Homes, Inc.		27,600		855
Snap-On, Inc.		13,922		655
The Black & Decker Corp.		11,801		990
The Stanley Works (a)		12,936		616
VF Corp.		14,199		1,079
Whirlpool Corp.		12,945		1,125
				24,479
Consumer Services 1.8%
Apollo Group, Inc., Class A *		22,493		831
Carnival Corp. (a)		73,861		3,606
Darden Restaurants, Inc.		24,250		1,016
H&R Block, Inc.		48,200		1,054
Harrah’s Entertainment, Inc.		28,144		2,092
Hilton Hotels Corp.		62,971		1,821
International Game Technology (a)		56,282		2,393
Marriott International, Inc., Class A		57,034		2,382
McDonald’s Corp.		202,859		8,504
Starbucks Corp. (a)*		124,731		4,709
Starwood Hotels & Resorts Worldwide, Inc.		36,190		2,162
Wendy’s International, Inc.		19,491		674
Western Union Co. *		126,987		2,800
Wyndham Worldwide Corp. *		33,237		980
YUM! Brands, Inc.		44,886		2,669
				37,693
Diversified Financials 10.3%
American Express Co.		203,021		11,737
Ameriprise Financial, Inc.		41,225		2,123
Bank of America Corp. (b)		752,276		40,525
Capital One Financial Corp.		50,828		4,032
Chicago Mercantile Exchange Holdings, Inc.		5,900		2,956
CIT Group, Inc.		32,984		1,717
Citigroup, Inc. (b)		820,551		41,159
E*TRADE Financial Corp. *		70,919		1,651
Federated Investors, Inc., Class B		14,533		498
Franklin Resources, Inc.		28,675		3,268
Janus Capital Group, Inc.		34,780		698
JPMorgan Chase & Co.		577,849		27,413
Legg Mason, Inc.		20,596		1,854
Lehman Brothers Holdings, Inc. (a)		89,137		6,939
Mellon Financial Corp. (a)		71,165		2,761
Merrill Lynch & Co., Inc.		147,141		12,863
Moody’s Corp.		39,101		2,592
Morgan Stanley		177,941		13,600
Northern Trust Corp.		33,541		1,970
SLM Corp.		68,033		3,312
State Street Corp.		55,941		3,593
T. Rowe Price Group, Inc.		43,478		2,057
The Bank of New York Co., Inc. (b)		126,627		4,352
The Bear Stearns Cos., Inc.		20,021		3,030
The Charles Schwab Corp. (c)		171,623		3,127
The Goldman Sachs Group, Inc. (a)		71,694		13,607
				213,434
Energy 9.3%
Anadarko Petroleum Corp.		76,268		3,540
Apache Corp.		52,409		3,423
Baker Hughes, Inc.		54,571		3,768
BJ Services Co.		49,173		1,483
Chesapeake Energy Corp. (a)		59,545		1,932
ChevronTexaco Corp.		363,287		24,413
ConocoPhillips		271,861		16,377
CONSOL Energy, Inc.		25,256		894
Devon Energy Corp.		73,184		4,892
El Paso Corp.		115,494		1,582
EOG Resources, Inc.		40,250		2,678
Exxon Mobil Corp. (b)		986,722		70,472
Halliburton Co.		171,096		5,535
Hess Corp. (a)		36,258		1,537
Kinder Morgan, Inc.		17,763		1,867

2  See financial notes.

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Marathon Oil Corp.		59,467		5,138
Murphy Oil Corp.		29,054		1,370
Nabors Industries Ltd. (a)*		52,428		1,619
National-Oilwell Varco, Inc. *		28,093		1,697
Noble Corp.		21,286		1,492
Occidental Petroleum Corp.		142,958		6,710
Rowan Cos., Inc.		14,575		487
Schlumberger Ltd. (a)		196,488		12,394
Smith International, Inc. (a)		32,500		1,283
Sunoco, Inc.		22,658		1,498
Transocean, Inc. (a)*		51,828		3,760
Valero Energy Corp.		101,137		5,292
Weatherford International Ltd. *		54,909		2,256
Williams Cos., Inc. (a)		97,635		2,385
XTO Energy, Inc.		60,042		2,802
				194,576
Food & Staples Retailing 2.2%
Costco Wholesale Corp.		75,817		4,047
CVS Corp.		136,308		4,277
Safeway, Inc.		73,824		2,168
Supervalu, Inc.		34,258		1,144
Sysco Corp.		101,740		3,559
The Kroger Co.		119,939		2,698
Wal-Mart Stores, Inc. (b)		405,276		19,972
Walgreen Co.		167,266		7,306
Whole Foods Market, Inc. (a)		22,969		1,466
				46,637
Food, Beverage & Tobacco 4.7%
Altria Group, Inc. (b)		347,476		28,260
Anheuser-Busch Cos., Inc.		127,602		6,051
Archer-Daniels-Midland Co.		108,783		4,188
Brown-Forman Corp., Class B		13,755		993
Campbell Soup Co.		38,256		1,430
Coca-Cola Enterprises, Inc.		47,834		958
ConAgra Foods, Inc. (a)		86,269		2,256
Constellation Brands, Inc., Class A *		31,450		865
Dean Foods Co. *		21,419		897
General Mills, Inc.		59,601		3,386
H.J. Heinz Co.		57,960		2,444
Kellogg Co.		41,491		2,087
McCormick & Co., Inc.		26,561		993
Molson Coors Brewing Co., Class B		7,976		568
PepsiCo, Inc.		273,595		17,357
Reynolds American, Inc. (a)		28,068		1,773
Sara Lee Corp.		128,493		2,197
The Coca-Cola Co.		338,214		15,801
The Hershey Co.		27,457		1,453
The Pepsi Bottling Group, Inc.		25,101		794
Tyson Foods, Inc., Class A		34,240		495
UST, Inc.		25,814		1,383
Wm. Wrigley Jr. Co.		34,509		1,793
				98,422
Health Care Equipment & Services 4.1%
Aetna, Inc.		90,887		3,746
AmerisourceBergen Corp.		34,072		1,608
Bausch & Lomb, Inc.		8,111		434
Baxter International, Inc.		109,114		5,016
Becton Dickinson & Co.		40,679		2,849
Biomet, Inc.		39,764		1,505
Boston Scientific Corp. *		189,355		3,013
C.R. Bard, Inc.		17,207		1,410
Cardinal Health, Inc.		67,281		4,404
Caremark Rx, Inc.		72,089		3,549
CIGNA Corp.		19,931		2,332
Coventry Health Care, Inc. *		25,531		1,199
Express Scripts, Inc. *		23,540		1,500
HCA, Inc.		70,318		3,552
Health Management Associates, Inc., Class A		38,440		757
Hospira, Inc. *		26,061		947
Humana, Inc. (a)*		29,548		1,773
IMS Health, Inc.		36,124		1,006
Laboratory Corp. of America Holdings *		20,053		1,373
Manor Care, Inc. (a)		12,055		578
McKesson Corp.		51,782		2,594
Medco Health Solutions, Inc. *		48,311		2,585
Medtronic, Inc.		188,732		9,187
Patterson Cos., Inc. (a)*		20,090		660
Quest Diagnostics, Inc.		25,974		1,292
St. Jude Medical, Inc. *		54,201		1,862
Stryker Corp. (a)		49,227		2,574
Tenet Healthcare Corp. *		75,592		534
UnitedHealth Group, Inc.		223,590		10,907
WellPoint, Inc. *		103,611		7,908
Zimmer Holdings, Inc. *		40,290		2,901
				85,555
Household & Personal Products 2.4%
Alberto-Culver Co., Class B		12,491		635
Avon Products, Inc.		74,254		2,258
Clorox Co.		25,064		1,618
Colgate-Palmolive Co.		85,666		5,480
Kimberly-Clark Corp.		76,078		5,061
Procter & Gamble Co.		526,953		33,403
The Estee Lauder Cos., Inc., Class A		20,720		837
				49,292
Insurance 4.7%
ACE Ltd.		53,926		3,087
AFLAC, Inc. (b)		83,698		3,760
Ambac Financial Group, Inc.		19,390		1,619

See financial notes.  3

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
American International Group, Inc.		431,354		28,974
AON Corp. (a)		56,402		1,962
Cincinnati Financial Corp.		28,186		1,287
Genworth Financial, Inc., Class A		78,747		2,633
Lincoln National Corp.		49,296		3,121
Loews Corp.		78,613		3,060
Marsh & McLennan Cos., Inc.		87,889		2,587
MBIA, Inc.		22,374		1,388
MetLife, Inc. (b)		127,375		7,277
Principal Financial Group, Inc.		46,983		2,654
Prudential Financial, Inc.		80,511		6,194
SAFECO Corp.		22,171		1,290
The Allstate Corp. (b)		104,498		6,412
The Chubb Corp.		69,803		3,710
The Hartford Financial Services Group, Inc.		51,141		4,458
The Progressive Corp.		128,123		3,097
The St. Paul Travelers Cos., Inc.		115,894		5,926
Torchmark Corp.		15,882		979
UnumProvident Corp.		60,158		1,190
XL Capital Ltd., Class A		29,925		2,111
				98,776
Materials 3.0%
Air Products & Chemicals, Inc.		36,577		2,548
Alcoa, Inc.		140,238		4,054
Allegheny Technologies, Inc.		16,321		1,285
Ashland, Inc.		10,893		644
Ball Corp.		14,212		591
Bemis Co. (b)		16,797		565
E.I. du Pont de Nemours & Co.		152,959		7,006
Eastman Chemical Co.		13,231		806
Ecolab, Inc.		29,632		1,344
Freeport-McMoRan Copper & Gold, Inc., Class B		33,654		2,035
Hercules, Inc. *		31,113		566
International Flavors & Fragrances, Inc.		12,182		517
International Paper Co.		78,841		2,629
Louisiana-Pacific Corp.		17,044		337
MeadWestvaco Corp.		30,043		827
Monsanto Co.		90,070		3,983
Newmont Mining Corp.		73,909		3,346
Nucor Corp.		53,731		3,138
Pactiv Corp. *		29,340		905
Phelps Dodge Corp. (a)		35,145		3,528
PPG Industries, Inc.		29,563		2,022
Praxair, Inc.		53,526		3,225
Rohm & Haas Co.		26,168		1,356
Sealed Air Corp.		14,221		846
Sigma-Aldrich Corp.		10,659		801
Temple-Inland, Inc.		22,480		887
The Dow Chemical Co.		159,246		6,496
United States Steel Corp.		23,309		1,576
Vulcan Materials Co.		14,728		1,200
Weyerhaeuser Co.		40,395		2,569
				61,632
Media 3.4%
CBS Corp., Class B		132,327		3,829
Clear Channel Communications, Inc.		82,382		2,871
Comcast Corp., Class A (a)(b)*		347,379		14,128
Dow Jones & Co., Inc. (a)		7,406		260
Gannett Co., Inc.		38,727		2,290
Meredith Corp.		5,921		311
News Corp., Class A		387,773		8,085
Omnicom Group, Inc.		29,778		3,021
The E.W. Scripps Co., Class A		13,410		663
The Interpublic Group of Cos., Inc. *		70,334		767
The McGraw-Hill Cos., Inc.		59,981		3,849
The New York Times Co., Class A (a)		18,809		455
The Walt Disney Co.		348,799		10,973
Time Warner, Inc. (a)		675,004		13,507
Tribune Co.		30,780		1,026
Univision Communications, Inc., Class A *		40,296		1,413
Viacom, Inc., Class B *		115,108		4,480
				71,928
Pharmaceuticals & Biotechnology 8.1%
Abbott Laboratories (b)		253,614		12,049
Allergan, Inc.		25,069		2,896
Amgen, Inc. (b)*		194,310		14,750
Applied Biosystems Group-Applera Corp.		35,411		1,321
Barr Pharmaceuticals, Inc. *		17,025		892
Biogen Idec, Inc. *		59,638		2,839
Bristol-Myers Squibb Co.		326,348		8,077
Eli Lilly & Co.		163,239		9,143
Fisher Scientific International, Inc. (a)*		20,662		1,769
Forest Laboratories, Inc. *		55,026		2,693
Genzyme Corp. *		43,396		2,930
Gilead Sciences, Inc. (a)*		75,859		5,227
Johnson & Johnson		486,334		32,779
King Pharmaceuticals, Inc. *		42,753		715
MedImmune, Inc. *		35,581		1,140
Merck & Co., Inc.		362,967		16,486
Millipore Corp. *		8,013		517
Mylan Laboratories, Inc.		33,623		689
PerkinElmer, Inc.		20,053		428
Pfizer, Inc. (b)		1,212,987		32,326
Schering-Plough Corp.		248,515		5,502
Thermo Electron Corp. (a)*		25,269		1,083
Waters Corp. *		16,190		806
Watson Pharmaceuticals, Inc. *		18,801		506

4   See financial notes.  

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Wyeth		223,309		11,395
				168,958
Real Estate 1.2%
Apartment Investment & Management Co., Class A		15,668		898
Archstone-Smith Trust		35,530		2,139
Boston Properties, Inc.		18,973		2,027
Equity Office Properties Trust (a)		58,146		2,471
Equity Residential		48,308		2,638
Kimco Realty Corp.		35,990		1,599
Plum Creek Timber Co., Inc.		28,718		1,032
ProLogis		40,701		2,575
Public Storage, Inc.		20,173		1,810
Realogy Corp. *		38,471		992
Simon Property Group, Inc.		36,729		3,566
Vornado Realty Trust		20,199		2,409
				24,156
Retailing 3.7%
Amazon.com, Inc. (a)*		47,538		1,811
AutoNation, Inc. (a)*		24,053		482
AutoZone, Inc. *		7,574		848
Bed, Bath & Beyond, Inc. *		44,297		1,785
Best Buy Co., Inc.		66,978		3,701
Big Lots, Inc. *		17,478		368
Circuit City Stores, Inc.		22,320		602
Dillard’s, Inc., Class A		9,678		292
Dollar General Corp.		36,223		508
eBay, Inc. *		194,945		6,264
Family Dollar Stores, Inc.		27,134		799
Federated Department Stores, Inc.		91,554		4,020
Genuine Parts Co.		27,744		1,263
Home Depot, Inc.		337,022		12,581
J.C. Penney Co., Inc.		38,956		2,931
Kohl’s Corp. *		54,297		3,833
Limited Brands, Inc.		55,379		1,632
Lowe’s Cos., Inc.		250,377		7,546
Nordstrom, Inc.		41,414		1,961
Office Depot, Inc. *		48,892		2,053
OfficeMax, Inc.		14,397		685
RadioShack Corp. (a)		20,945		374
Sears Holdings Corp. (a)*		14,653		2,556
Staples, Inc.		119,463		3,081
Target Corp.		142,520		8,434
The Gap, Inc.		87,628		1,842
The Sherwin-Williams Co.		18,044		1,069
The TJX Cos., Inc.		74,587		2,159
Tiffany & Co.		19,192		686
				76,166
Semiconductors & Semiconductor Equipment 2.6%
Advanced Micro Devices, Inc. (a)*		80,599		1,714
Altera Corp. *		59,626		1,100
Analog Devices, Inc.		58,510		1,862
Applied Materials, Inc.		247,962		4,312
Broadcom Corp., Class A (a)*		74,246		2,247
Freescale Semiconductor, Inc., Class B *		66,356		2,610
Intel Corp. (b)		957,272		20,428
KLA-Tencor Corp.		32,996		1,622
Linear Technology Corp.		49,950		1,554
LSI Logic Corp. *		69,172		695
Maxim Integrated Products, Inc.		49,704		1,492
Micron Technology, Inc. *		128,614		1,859
National Semiconductor Corp.		47,796		1,161
Novellus Systems, Inc. *		27,114		750
NVIDIA Corp. (a)*		58,456		2,038
PMC — Sierra, Inc. (a)*		18,535		123
Teradyne, Inc. *		37,408		525
Texas Instruments, Inc.		254,314		7,675
Xilinx, Inc. (a)		56,439		1,440
				55,207
Software & Services 5.4%
Adobe Systems, Inc. *		96,169		3,678
Affiliated Computer Services, Inc., Class A *		17,993		962
Autodesk, Inc. *		38,471		1,414
Automatic Data Processing, Inc.		92,234		4,560
BMC Software, Inc. (a)*		40,314		1,222
CA, Inc.		69,880		1,730
Citrix Systems, Inc. *		30,552		902
Computer Sciences Corp. *		28,536		1,508
Compuware Corp. *		59,340		477
Convergys Corp. *		25,295		537
Electronic Arts, Inc. *		50,920		2,693
Electronic Data Systems Corp.		91,637		2,321
First Data Corp.		126,987		3,079
Fiserv, Inc. *		30,347		1,499
Google, Inc., Class A (a)*		35,263		16,799
Intuit, Inc. *		57,495		2,030
Microsoft Corp. (b)		1,433,501		41,156
Novell, Inc. *		58,583		352
Oracle Corp. *		669,403		12,364
Parametric Technology Corp. *		17,533		343
Paychex, Inc. (a)		56,181		2,218
Sabre Holdings Corp., Class A (a)		21,122		537
Symantec Corp. *		164,170		3,257
Unisys Corp. *		52,541		344
VeriSign, Inc. *		40,696		842
Yahoo! Inc. (a)*		202,064		5,322
				112,146
Technology Hardware & Equipment 6.8%
ADC Telecommunications, Inc. *		19,488		279
Agilent Technologies, Inc. *		69,330		2,468

See financial notes.  5

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Apple Computer, Inc. (a)*		141,159		11,445
Avaya, Inc. *		73,345		940
Ciena Corp. *		13,528		318
Cisco Systems, Inc. (b)*		1,013,155		24,447
Comverse Technology, Inc. *		33,494		729
Corning, Inc. (a)*		258,838		5,288
Dell, Inc. (b)*		372,733		9,069
EMC Corp. *		381,475		4,673
Hewlett-Packard Co.		456,585		17,688
International Business Machines Corp.		253,427		23,399
Jabil Circuit, Inc.		29,647		851
JDS Uniphase Corp. *		27,977		407
Juniper Networks, Inc. *		92,171		1,587
Lexmark International, Inc., Class A *		19,578		1,245
Lucent Technologies, Inc. *		743,904		1,808
Molex, Inc.		24,651		860
Motorola, Inc.		406,651		9,377
NCR Corp. *		30,258		1,256
Network Appliance, Inc. *		61,767		2,254
QLogic Corp. *		29,893		615
QUALCOMM, Inc.		274,179		9,977
SanDisk Corp. *		31,867		1,533
Sanmina — SCI Corp. *		81,576		322
Solectron Corp. *		146,290		489
Sun Microsystems, Inc. *		582,428		3,163
Symbol Technologies, Inc.		40,759		609
Tektronix, Inc.		16,824		511
Tellabs, Inc. *		75,431		795
Xerox Corp. (a)*		170,094		2,892
				141,294
Telecommunication Services 3.5%
ALLTEL Corp.		64,424		3,435
AT&T Corp. (a)		644,616		22,078
BellSouth Corp.		301,323		13,590
CenturyTel, Inc.		23,721		955
Citizens Communications Co. (a)		66,025		968
Embarq Corp.		24,786		1,198
Qwest Communications International, Inc. *		279,267		2,410
Sprint Nextel Corp.		495,817		9,267
Verizon Communications, Inc.		481,086		17,800
Windstream Corp.		76,048		1,043
				72,744
Transportation 1.8%
Burlington Northern Santa Fe Corp.		60,029		4,654
CSX Corp.		73,630		2,626
FedEx Corp.		50,876		5,827
Norfolk Southern Corp.		68,035		3,577
Ryder System, Inc.		10,291		542
Southwest Airlines Co.		138,261		2,078
Union Pacific Corp.		44,672		4,049
United Parcel Service, Inc., Class B (a)		179,457		13,522
				36,875
Utilities 3.4%
Allegheny Energy, Inc. *		27,991		1,204
Ameren Corp. (a)		32,380		1,752
American Electric Power Co., Inc.		65,340		2,707
CenterPoint Energy, Inc. (a)		43,936		680
CMS Energy Corp. *		36,742		547
Consolidated Edison, Inc.		36,742		1,776
Constellation Energy Group, Inc.		29,858		1,863
Dominion Resources, Inc.		57,278		4,639
DTE Energy Co. (a)		25,619		1,164
Duke Energy Corp.		207,020		6,550
Dynegy, Inc., Class A *		60,711		369
Edison International		54,039		2,401
Entergy Corp.		33,366		2,864
Exelon Corp.		111,144		6,889
FirstEnergy Corp.		54,727		3,221
FPL Group, Inc. (a)		67,160		3,425
KeySpan Corp.		28,072		1,139
Nicor, Inc.		4,127		190
NiSource, Inc.		40,929		952
Peoples Energy Corp.		6,411		280
PG&E Corp.		58,277		2,514
Pinnacle West Capital Corp.		15,846		758
PPL Corp.		63,271		2,184
Progress Energy, Inc. (a)		39,907		1,836
Public Service Enterprise Group, Inc.		40,151		2,451
Sempra Energy		41,469		2,200
TECO Energy, Inc.		33,523		553
The AES Corp. *		111,078		2,443
The Southern Co.		120,388		4,382
TXU Corp.		77,783		4,910
Xcel Energy, Inc. (a)		66,043		1,458
				70,301

Security	Face Amount
Rate, Maturity Date	($ x 1,000)
Short-Term Investment 0.6% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		11,977	11,977

6   See financial notes.  

Schwab Institutional Select S&P 500 Fund

Portfolio Holdings continued

	Maturity Amount		Value
Security	($ x 1,000)		($ x 1,000)
U.S. Treasury Obligations 0.2% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		2,500		2,486
4.91%, 12/14/06		150		149
4.93%, 12/14/06		600		597
5.00%, 12/14/06		50		50
				3,282

	Number of		Value
Security	Shares		($ x 1,000)
Warrants 0.0% of net assets
Technology Hardware & Equipment 0.0%
Lucent Technologies, Inc. * expires 12/10/07		11,390		2

End of Investments.

Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)
Collateral Invested for Securities on Loan 7.8% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		162,875,434		162,875

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $1,840,898, and the unrealized appreciation and depreciation were $272,607 and ($40,526), respectively, with a net unrealized appreciation of $232,081.

In addition to the above, the fund held the following at 10/31/2006. All numbers are x1,000 except number of futures contracts.

	Number of		Contract		Unrealized
	Contracts		Value		Gains
Futures Contracts
S&P500 Index, e-mini, Long, expires 12/15/06		177		12,241		276
S&P500 Index, Long, expires 12/14/06		20		6,916		31
						307

*	Non-income producing security.
(a)	All or a portion of security is on loan.
(b)	All or a portion of this security is held as collateral for open futures contracts.
(c)	Issuer is affiliated with the fund’s adviser.

See financial notes.  7

Schwab Small-Cap Index Fund^®

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

			Cost		Value
Holdings by Category			($ x 1,000)		($ x 1,000)
99.7	%	Common Stock		1,241,488		1,654,700
0.2	%	Short-Term Investment		3,156		3,156
—	%	U.S. Treasury Obligation		679		681
99.9	%	Total Investments		1,245,323		1,658,537
15.2	%	Collateral Invested for Securities on Loan		251,338		251,338
(15.1)	%	Other Assets and Liabilities, Net				(250,387	)
100.0	%	Total Net Assets				1,659,488

	Number of		Value
Security	Shares		($ x 1,000)
Common Stock 99.7% of net assets
Automobiles & Components 0.9%
American Axle & Manufacturing Holdings, Inc.		62,185		1,166
ArvinMeritor, Inc. (a)		94,012		1,412
Bandag, Inc. (a)		23,140		1,016
Cooper Tire & Rubber Co. (a)		77,323		830
Drew Industries, Inc. *		20,713		562
Fleetwood Enterprises, Inc. *		74,244		530
Lear Corp. (a)*		82,635		2,496
LKQ Corp. *		54,006		1,250
Modine Manufacturing Co.		48,491		1,154
Sauer-Danfoss, Inc.		69,820		1,852
Tenneco Automotive, Inc. *		58,618		1,331
Winnebago Industries, Inc.		48,930		1,629
				15,228
Banks 8.1%
1st Source Corp.		19,321		610
Accredited Home Lenders Holding Co. *		27,071		828
Alabama National Bancorp		23,882		1,620
Amcore Financial, Inc.		34,593		1,083
Anchor Bancorp Wisconsin, Inc.		30,587		888
BancFirst Corp.		16,416		817
BancorpSouth, Inc.		114,368		2,922
Bank Mutual Corp.		73,693		893
BankAtlantic Bancorp, Inc., Class A		71,834		941
BankUnited Financial Corp., Class A		48,313		1,303
Boston Private Financial Holdings, Inc.		44,772		1,238
Brookline Bancorp, Inc.		74,496		993
Cathay General Bancorp (a)		66,222		2,281
Centennial Bank Holdings, Inc. *		70,865		680
Central Pacific Financial Corp.		39,332		1,447
Charter Financial Corp. (a)		19,395		921
CharterMac (a)		71,623		1,458
Chemical Financial Corp.		35,103		1,050
Chittenden Corp.		64,424		1,900
Citizens Banking Corp. (a)		60,364		1,568
Corus Bankshares, Inc. (a)		77,748		1,596
CVB Financial Corp.		98,654		1,433
Doral Financial Corp. (a)		144,207		663
Downey Financial Corp. (a)		39,030		2,688
East West Bancorp, Inc.		64,357		2,350
F.N.B. Corp. (a)		74,937		1,269
Fidelity Bankshares, Inc.		32,583		1,293
First Bancorp.		112,777		1,116
First Charter Corp.		39,758		990
First Citizens BancShares, Inc., Class A		15,465		2,904
First Commonwealth Financial Corp. (a)		83,956		1,122
First Community Bancorp		29,816		1,594
First Financial Bancorp (a)		61,089		992
First Financial Bankshares, Inc. (a)		31,221		1,251
First Midwest Bancorp, Inc. Illinois		59,763		2,273
First Niagra Financial Group, Inc.		155,736		2,230
First Republic Bank		32,135		1,251
FirstFed Financial Corp. (a)*		21,895		1,352
FirstMerit Corp.		93,382		2,168
Flagstar Bancorp, Inc.		78,430		1,179
Fremont General Corp.		86,162		1,252
Frontier Financial Corp.		59,185		1,717
Glacier Bancorp, Inc.		37,074		1,295
Greater Bay Bancorp		71,490		1,841
Hancock Holding Co.		49,310		2,530
Hanmi Financial Corp.		68,488		1,464
Harbor Florida Bancshares, Inc.		33,205		1,508
International Bancshares Corp.		79,323		2,434
Kearny Financial Corp.		93,878		1,502
MAF Bancorp, Inc.		41,486		1,788
MB Financial, Inc.		40,024		1,443
National Penn Bancshares, Inc. (a)		62,019		1,271
NBT Bancorp., Inc.		45,485		1,130
NewAlliance Bancshares, Inc.		147,911		2,290

See financial notes.     1

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Northwest Bancorp, Inc.		70,928		1,897
Old National Bancorp		96,483		1,831
Pacific Capital Bancorp		63,642		1,958
Park National Corp.		19,953		2,023
PFF Bancorp, Inc.		30,461		945
PrivateBancorp, Inc. (a)		29,276		1,202
Prosperity Bancshares, Inc.		38,365		1,331
Provident Bankshares Corp.		44,069		1,593
Provident Financial Services, Inc.		102,351		1,877
Republic Bancorp, Inc.		101,521		1,358
S&T Bancorp, Inc.		31,881		1,079
Santander BanCorp (a)		69,003		1,290
Signature Bank NY *		32,909		998
Sterling Bancshares, Inc. Texas		62,608		1,146
Sterling Financial Corp. Washington		48,347		1,608
Susquehanna Bancshares, Inc.		64,808		1,620
SVB Financial Group *		49,523		2,279
Texas Regional Bancshares, Inc., Class A		75,466		2,932
The South Financial Group, Inc.		83,525		2,216
Trustco Bank Corp. NY (a)		103,702		1,146
Trustmark Corp.		77,877		2,466
UCBH Holdings, Inc.		112,125		1,922
UMB Financial Corp.		61,624		2,210
Umpqua Holdings Corp.		53,595		1,514
United Bankshares, Inc.		56,322		2,151
United Community Banks, Inc. Georgia		55,840		1,756
W Holding Co., Inc. (a)		209,214		1,190
Washington Federal, Inc.		117,539		2,732
WesBanco, Inc.		32,298		1,058
Westamerica Bancorp		43,470		2,167
Western Alliance Bancorp (a)*		31,231		1,061
Wintrust Financial Corp.		29,655		1,431
				134,607
Capital Goods 7.8%
A.O. Smith Corp.		39,130		1,376
A.S.V., Inc. (a)*		30,875		451
AAR Corp. *		44,997		1,172
Actuant Corp., Class A		36,574		1,878
Acuity Brands, Inc.		66,532		3,296
AGCO Corp. *		125,945		3,369
Albany International Corp., Class A		42,500		1,428
Applied Industrial Technologies, Inc.		68,166		1,959
Armor Holdings, Inc. *		45,516		2,342
Astec Industries, Inc. *		23,395		746
Baldor Electric Co.		46,308		1,486
Barnes Group, Inc.		63,640		1,276
BE Aerospace, Inc. *		79,551		2,011
Beacon Roofing Supply, Inc. (a)*		47,182		934
Belden CDT, Inc.		65,393		2,367
Blount International, Inc. *		56,662		620
Briggs & Stratton Corp.		63,693		1,624
Bucyrus International, Inc., Class A		37,846		1,586
Builders FirstSource, Inc. *		18,760		297
Ceradyne, Inc. (a)*		34,012		1,403
Clarcor, Inc.		71,898		2,342
Curtiss-Wright Corp.		54,756		1,853
DHB Industries, Inc. *		19,920		46
DRS Technologies, Inc.		52,091		2,303
ElkCorp.		25,396		638
EMCOR Group, Inc. *		49,802		2,946
Encore Wire Corp. (a)*		29,441		791
Energy Conversion Devices, Inc. *		41,063		1,511
ESCO Technologies, Inc. *		35,469		1,540
Esterline Technologies Corp. *		30,311		1,143
Evergreen Solar, Inc. (a)*		66,889		582
Federal Signal Corp.		71,459		1,090
Franklin Electric Co., Inc.		28,318		1,528
Freightcar America, Inc.		17,490		930
Gardner Denver, Inc. *		71,912		2,444
GATX Corp.		67,590		2,945
GenCorp, Inc. (a)*		76,552		1,003
General Cable Corp. *		74,632		2,806
Genlyte Group, Inc. *		41,815		3,231
Granite Construction, Inc.		58,056		3,025
Griffon Corp. *		43,450		1,068
H&E Equipment Services, Inc. *		48,927		1,313
Hexcel Corp. *		91,783		1,486
Infrasource Services, Inc. *		32,158		629
Interline Brands, Inc. *		43,134		1,033
Ionatron, Inc. (a)*		75,240		332
Jacuzzi Brands, Inc. *		105,290		1,305
Kaydon Corp.		44,235		1,849
Lennox International, Inc.		86,403		2,329
Lincoln Electric Holdings, Inc.		57,525		3,537
Middleby Corp. *		10,826		976
Moog, Inc., Class A *		53,872		2,009
Mueller Industries, Inc.		48,924		1,794
NACCO Industries, Inc., Class A		11,477		1,728
Navistar International Corp. *		97,719		2,710
NCI Building Systems, Inc. *		27,506		1,646
Nordson Corp.		49,343		2,272
Orbital Sciences Corp. *		77,536		1,408
Perini Corp. *		25,130		621
Quanta Services, Inc. *		170,136		3,114
Regal Beloit Corp.		42,447		2,099
Sequa Corp., Class A *		14,713		1,561
Simpson Manufacturing Co., Inc. (a)(b)		60,694		1,723
TAL International Group, Inc.		44,122		1,023
Teledyne Technologies, Inc. *		46,925		1,958
Toro Co.		60,335		2,604
Triumph Group, Inc.		21,101		1,016
UAP Holding Corp.		62,413		1,562
Universal Forest Products, Inc.		22,762		1,033
URS Corp. *		67,253		2,718
Valmont Industries, Inc.		39,547		2,207
Vicor Corp.		55,668		662
Wabtec Corp.		63,550		1,995
Washington Group International, Inc. *		36,647		2,075
Watsco, Inc.		34,982		1,742
Watts Water Technologies, Inc., Class A		43,107		1,604

2     See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Williams Scotsman International, Inc. *		54,033		1,271
Woodward Governor Co.		47,317		1,690
				130,020
Commercial Services & Supplies 3.8%
ABM Industries, Inc.		68,209		1,355
Acco Brands Corp. *		58,123		1,412
Administaff, Inc.		40,110		1,382
American Reprographics Co. *		60,006		2,130
Banta Corp.		33,464		1,482
Brady Corp., Class A		61,729		2,284
Cenveo, Inc. *		47,842		949
Consolidated Graphics, Inc. *		22,600		1,405
Corrections Corp. of America *		81,973		3,745
CoStar Group, Inc. *		21,783		1,031
Deluxe Corp.		58,446		1,325
First Advantage Corp. (a)*		52,008		1,082
FTI Consulting, Inc. *		55,008		1,563
G&K Services, Inc., Class A		23,530		897
Global Cash Access, Inc. *		110,039		1,755
IHS, Inc. *		76,340		2,639
IKON Office Solutions, Inc.		209,821		3,128
John H. Harland Co.		42,260		1,728
Kelly Services, Inc., Class A		48,023		1,382
Knoll, Inc.		70,603		1,398
Korn/Ferry International *		57,161		1,264
Labor Ready, Inc. *		81,514		1,427
McGrath Rentcorp		24,932		673
Mine Safety Appliances Co. (a)		47,289		1,788
Mobile Mini, Inc. *		31,368		1,009
Navigant Consulting, Inc. *		58,748		1,046
NCO Group, Inc. *		36,449		983
PHH Corp. *		73,463		2,028
Resources Connection, Inc. *		58,250		1,686
Rollins, Inc.		103,950		2,250
School Specialty, Inc. *		30,293		1,186
TeleTech Holdings, Inc. *		103,400		2,007
Tetra Tech, Inc. *		78,478		1,427
The Advisory Board Co. *		26,676		1,473
United Stationers, Inc. *		41,467		1,980
Viad Corp.		30,896		1,142
Waste Connections, Inc. *		57,629		2,345
Watson Wyatt & Co., Holdings		58,181		2,627
				62,413
Consumer Durables & Apparel 3.6%
American Greetings Corp., Class A		91,711		2,193
Blyth, Inc.		49,309		1,180
Brookfield Homes Corp. (a)		35,727		1,159
Brown Shoe Co., Inc.		36,250		1,412
Callaway Golf Co.		94,369		1,267
Carter’s, Inc. *		75,514		2,132
Champion Enterprises Inc *		91,233		845
Columbia Sportswear Co. (a)*		52,819		2,949
Crocs, Inc. (a)*		49,709		1,969
Ethan Allen Interiors, Inc.		46,579		1,659
Fossil, Inc. *		81,866		1,788
Furniture Brands International, Inc. (a)		68,702		1,278
JAKKS Pacific, Inc. *		37,574		815
Jarden Corp. *		75,508		2,717
K-Swiss, Inc., Class A		41,928		1,481
Kellwood Co. (a)		40,528		1,240
Kimball International, Inc., Class B		12,351		307
La-Z-Boy, Inc. (a)		69,209		848
Leapfrog Enterprises, Inc. (a)*		69,425		669
Marvel Entertainment, Inc. (a)*		122,630		3,109
Meritage Homes Corp. (a)*		32,185		1,473
Oakley, Inc.		83,709		1,555
Oxford Industries, Inc.		20,018		1,057
Phillips-Van Heusen Corp.		60,675		2,777
Polaris Industries, Inc. (a)		52,123		2,232
Quiksilver, Inc. *		142,112		1,982
RC2 Corp. *		25,886		1,170
Skechers U.S.A., Inc., Class A *		56,178		1,679
Technical Olympic USA, Inc. (a)		73,701		818
Tempur-Pedic International, Inc. *		110,662		2,184
The Warnaco Group, Inc. *		57,363		1,218
The Yankee Candle Co., Inc.		58,346		1,975
Tupperware Corp.		76,811		1,631
Under Armour, Inc. (a)*		61,820		2,865
Volcom Inc (a)*		29,290		960
WCI Communities, Inc. (a)*		56,688		914
Whirlpool Corp.		172		15
Wolverine World Wide, Inc.		83,436		2,366
				59,888
Consumer Services 4.9%
American Real Estate Partners L.P. (a)		55,192		3,455
Ameristar Casinos, Inc.		76,075		1,872
Applebee’s International, Inc.		100,230		2,287
Aztar Corp. *		44,048		2,360
Bally Technologies, Inc. (a)*		71,762		1,424
Bob Evans Farms, Inc.		47,146		1,599
Bright Horizons Family Solutions, Inc. *		37,188		1,429
CBRL Group, Inc.		27,553		1,210
CEC Entertainment, Inc. *		45,538		1,570
Cedar Fair L.P. *		70,332		1,930
Chipotle Mexican Grill, Inc. Class A (a)*		45,347		2,716
CKE Restaurants, Inc. (a)		83,079		1,623
Corinthian Colleges, Inc. *		120,729		1,479
DeVry, Inc. *		98,080		2,388
Domino’s Pizza, Inc.		90,379		2,457
Escala Group, Inc. (a)*		38,196		193
Gaylord Entertainment Co. *		53,835		2,506
IHOP Corp.		33,472		1,746
Isle of Capri Casinos, Inc. (a)*		36,884		926
Jack in the Box, Inc. *		55,481		3,113
Jackson Hewitt Tax Service, Inc.		48,676		1,684
Landry’s Restaurants, Inc.		27,036		792
Life Time Fitness, Inc. *		45,677		2,354
Marcus Corp.		29,083		727

See financial notes.     3

Schwab Small-Cap Index Fund

Portfolio Holdings continued

		Number of		Value
Security		Shares		($ x 1,000)
Matthews International Corp., Class A			40,284		1,548
Orient-Express Hotels Ltd., Class A			79,772		3,147
P.F. Chang’s China Bistro, Inc. (a)*			33,142		1,386
Papa John’s International, Inc. *			49,255		1,808
Pinnacle Entertainment, Inc. *			63,985		1,936
RARE Hospitality International, Inc. *			42,882		1,351
Red Robin Gourmet Burgers, Inc. (a)*			18,227		879
Regis Corp.			57,249		2,150
Ruby Tuesday, Inc.			77,514		2,151
Shuffle Master, Inc. (a)*			41,612		1,164
Six Flags, Inc. (a)*			101,908		581
Sonic Corp. *			114,429		2,603
Sotheby’s			78,741		2,992
Speedway Motorsports, Inc.			60,484		2,278
Steiner Leisure Ltd. *			28,609		1,306
Strayer Education, Inc.			19,371		2,191
Texas Roadhouse, Inc., Class A *			85,396		1,234
Triarc Cos., Class B (a)			101,831		1,710
Universal Technical Institute, Inc. *			37,056		740
Vail Resorts, Inc. *			51,871		2,005
WMS Industries, Inc. *			44,201		1,562
					80,562
Diversified Financials 2.3%
Advance America Cash Advance Centers, Inc.			115,065		1,725
Calamos Asset Management, Inc., Class A			32,096		938
Cash America International, Inc.			44,470		1,838
Cohen & Steers, Inc. (a)			41,928		1,462
CompuCredit Corp. (a)*			68,200		2,371
Credit Acceptance Corp. (a)*			32,166		1,076
Financial Federal Corp.			36,123		994
GAMCO Investors, Inc., Class A (a)			42,031		1,664
GFI Group, Inc. (a)*			37,342		2,154
Greenhill & Co., Inc. (a)			40,182		2,730
International Securities Exchange, Inc.			56,748		2,914
Investment Technology Group, Inc. *			63,465		2,964
Knight Capital Group, Inc., Class A *			149,872		2,795
LaBranche & Co., Inc. (a)*			82,987		736
OptionsXpress Holdings, Inc.			82,447		2,563
Piper Jaffray Cos. *			30,339		2,098
Portfolio Recovery Associates, Inc. (a)*			20,743		967
TradeStation Group, Inc. *			58,079		909
W.P. Carey & Co. LLC (a)			51,366		1,484
W.P. Stewart & Co., Ltd. (a)			57,051		787
Waddell & Reed Financial, Inc., Class A			115,139		2,936
					38,105
Energy 8.0%
Alliance Resource Partners L.P.			50,610		1,802
Alon USA Energy, Inc.			64,178		1,802
Alpha Natural Resources, Inc. *			72,661		1,156
Atlas America, Inc. *			25,609		1,230
ATP Oil & Gas Corp. (a)*			32,533		1,399
Atwood Oceanics, Inc. *			40,404		1,867
Basic Energy Services, Inc. *			47,102		1,151
Berry Petroleum Co., Class A			56,612		1,690
Bill Barrett Corp. (a)*			55,093		1,572
Boardwalk Pipeline Partners, LP (a)			138,835		3,993
Bois d’Arc Energy, Inc. *			70,602		1,135
BP Prudhoe Bay Royalty Trust (a)			29,865		2,161
Bristow Group, Inc. (a)*			30,287		1,006
Buckeye Partners L.P. (a)*			52,908		2,423
CARBO Ceramics, Inc. (a)			30,420		1,025
Comstock Resources, Inc. *			50,726		1,415
Crosstex Energy, Inc. (a)			10,348		993
Crosstex Energy, LP (a)*			31,183		1,169
Delta Petroleum Corp. *			52,127		1,340
Dorchester Minerals L.P. (a)			39,409		975
Dril-Quip, Inc. *			51,350		2,022
Encore Acquisition Co. *			63,377		1,587
Energy Partners, Ltd. *			46,878		1,145
Evergreen Energy, Inc. (a)*			101,457		1,304
EXCO Resources, Inc. *			127,851		1,851
Foundation Coal Holdings, Inc.			59,578		2,187
General Maritime Corp.			52,796		1,929
Giant Industries, Inc. *			20,130		1,630
Global Industries Ltd. *			158,982		2,639
Grey Wolf, Inc. *			266,348		1,864
Hanover Compressor Co. *	��		133,762		2,477
Hercules Offshore, Inc. *			42,204		1,503
Holly Corp.			79,906		3,800
Hornbeck Offshore Services, Inc. *			37,545		1,355
Hugoton Royalty Trust (a)			55,820		1,437
Hydril Co. *			30,414		1,826
Inergy Holdings LP (a)			18,510		648
Inergy, L.P. *			54,952		1,605
International Coal Group, Inc. (a)*			113,868		591
Lone Star Technologies, Inc. *			40,425		1,952
Lufkin Industries, Inc.			14,195		857
Magellan Midstream Holdings LP (a)			87,425		2,010
Magellan Midstream Partners (a)			92,608		3,620
Natural Resource Partners L.P. (a)			33,263		1,733
Newpark Resources, Inc. *			81,810		481
NS Group, Inc. *			31,016		2,027
Oceaneering International, Inc. *			70,322		2,531
Oil States International, Inc. *			63,236		1,836
OMI Corp. (a)			104,787		2,339
Overseas Shipholding Group, Inc.			53,961		3,375
Pacific Energy Partners L.P. (a)			47,887		1,714
Parker Drilling Co. *			155,165		1,271
Penn Virginia Corp.			25,289		1,809

4     See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Penn Virginia Resource Partners, L.P. (a)*		41,446		1,084
Petrohawk Energy Corp. (a)*		193,850		2,196
Petroleum Development Corp. *		19,903		919
Pioneer Drilling Co. *		64,031		841
Regency Energy Partners LP		53,320		1,386
RPC, Inc.		83,926		1,823
SEACOR Holdings, Inc. *		34,616		3,097
Ship Finance International Ltd.		95,125		2,004
Stone Energy Corp. *		34,269		1,335
Sunoco Logistics Partners L.P. (a)*		25,986		1,212
Superior Energy Services, Inc. *		104,787		3,280
Swift Energy Co. *		39,001		1,822
TETRA Technologies, Inc. (a)*		85,674		2,219
The Houston Exploration Co. *		36,501		1,977
Universal Compression Holdings, Inc. *		39,803		2,399
USEC, Inc. *		116,923		1,305
Veritas DGC, Inc. *		52,792		3,802
W-H Energy Services, Inc. *		34,578		1,619
Warren Resources, Inc. (a)*		47,045		555
Western Refining, Inc.		92,722		2,185
Whiting Petroleum Corp. *		46,811		2,088
World Fuel Services Corp.		34,978		1,505
				132,912
Food & Staples Retailing 1.0%
Casey’s General Stores, Inc.		64,726		1,571
Central European Distribution Corp. *		24,517		622
Longs Drug Stores Corp.		52,605		2,264
Performance Food Group Co. *		48,074		1,398
Rite Aid Corp. (a)*		721,895		3,379
Ruddick Corp.		57,956		1,634
The Great Atlantic & Pacific Tea Co., Inc. *		56,990		1,577
The Pantry, Inc. *		30,276		1,652
United Natural Foods, Inc. *		53,282		1,860
Weis Markets, Inc.		37,793		1,534
				17,491
Food, Beverage & Tobacco 1.7%
Chiquita Brands International, Inc. *		57,002		781
Corn Products International, Inc.		101,390		3,669
Delta & Pine Land Co.		43,215		1,751
Flowers Foods, Inc.		81,284		2,208
Fresh Del Monte Produce, Inc. (a)*		80,046		1,248
Gold Kist, Inc. *		54,954		1,089
Hansen Natural Corp. (a)*		112,460		3,571
Lancaster Colony Corp.		43,543		1,766
Pilgrim’s Pride Corp., Class B		88,880		2,220
Ralcorp Holdings, Inc. *		36,235		1,792
Seaboard Corp. (b)		1,875		2,647
The Hain Celestial Group, Inc. *		47,931		1,353
Tootsie Roll Industries, Inc.		72,392		2,301
Universal Corp.		31,545		1,161
Vector Group Ltd. (a)		71,250		1,221
				28,778
Health Care Equipment & Services 4.9%
Allscripts Healthcare Solutions, Inc. (a)*		58,875		1,389
American Medical Systems Holdings, Inc. (a)*		95,025		1,692
AMERIGROUP Corp. *		69,442		2,081
Analogic Corp.		15,054		840
Apria Healthcare Group, Inc. *		69,737		1,624
Arrow International, Inc.		58,720		2,099
Arthrocare Corp. (a)*		32,330		1,306
Biosite, Inc. *		23,575		1,083
Brookdale Senior Living, Inc.		78,669		3,786
Centene Corp. *		51,692		1,219
Chemed Corp. (b)		32,900		1,168
Conor Medsystems, Inc. *		41,331		1,015
Cyberonics, Inc. (a)*		29,385		530
Eclipsys Corp. *		57,467		1,218
ev3, Inc. *		46,423		796
Foxhollow Technologies, Inc. (a)*		26,404		924
Genesis HealthCare Corp. *		27,778		1,345
Haemonetics Corp. *		33,655		1,535
HealthExtras, Inc. *		47,365		1,091
Healthspring, Inc. *		79,949		1,610
Healthways, Inc. *		47,563		2,014
Immucor, Inc. *		93,954		2,587
Integra LifeSciences Holdings *		40,148		1,483
Intermagnetics General Corp. *		38,914		1,064
Invacare Corp.		38,911		849
inVentiv Health, Inc. *		37,301		1,067
Inverness Medical Innovations, Inc. (a)*		26,856		1,012
Kindred Healthcare, Inc. *		51,492		1,390
Kyphon, Inc. *		55,736		2,202
LCA-Vision, Inc.		25,343		890
LifePoint Hospitals, Inc. *		71,941		2,554
Magellan Health Services, Inc. *		51,010		2,226
Matria Healthcare, Inc. (a)*		21,841		616
Mentor Corp. (a)(b)		59,996		2,808
Molina Healthcare, Inc. *		44,813		1,758
Odyssey Healthcare, Inc. *		48,141		638
Owens & Minor, Inc.		51,592		1,626
Per-Se Technologies, Inc. (a)*		47,565		1,164
PolyMedica Corp. (a)		31,147		1,294
PSS World Medical, Inc. *		90,366		1,818
Psychiatric Solutions, Inc. *		71,054		2,359
Sirona Dental Systems, Inc. *		22,565		835
Steris Corp.		95,958		2,339
Sunrise Senior Living, Inc. *		59,277		1,850
SurModics, Inc. (a)*		25,819		901
Symmetry Medical, Inc. *		38,991		608
Thoratec Corp. *		66,726		1,051
TriZetto Group, Inc. *		68,880		1,177
United Surgical Partners International, Inc. *		60,344		1,498
Viasys Healthcare, Inc. *		32,484		931

See financial notes.     5

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
WebMD Health Corp., Class A (a)*		69,724		2,542
WellCare Health Plans, Inc. *		54,593		3,207
West Pharmaceutical Services, Inc.		44,265		1,861
				80,570
Household & Personal Products 0.7%
Central Garden & Pet Co. *		22,392		1,119
Chattem, Inc. *		26,313		1,116
Elizabeth Arden, Inc. *		33,898		591
NBTY, Inc. *		94,529		2,630
Nu Skin Enterprises, Inc., Class A		96,822		1,851
Playtex Products, Inc. *		88,541		1,234
Revlon, Inc. (b)*		533,983		710
Spectrum Brands, Inc. (a)*		54,470		530
USANA Health Sciences, Inc. (a)*		26,529		1,192
				10,973
Insurance 4.2%
21st Century Insurance Group		114,205		1,802
Alfa Corp.		118,311		2,185
American Equity Investment Life Holding Co.		49,964		638
Arch Capital Group Ltd. *		49,227		3,165
Argonaut Group, Inc. *		46,100		1,568
Aspen Insurance Holdings Ltd.		105,962		2,630
Assured Guaranty Ltd.		82,537		2,077
CNA Surety Corp. *		71,600		1,456
Commerce Group, Inc.		93,348		2,763
Delphi Financial Group, Inc., Class A		71,880		2,821
FBL Financial Group, Inc., Class A		47,368		1,674
Great American Financial Resources, Inc.		83,565		1,931
Harleysville Group, Inc.		50,760		1,831
Hilb, Rogal & Hobbs Co.		54,619		2,180
Horace Mann Educators Corp.		59,678		1,202
Infinity Property & Casualty Corp.		28,892		1,243
IPC Holdings Ltd.		86,677		2,604
LandAmerica Financial Group, Inc.		28,933		1,825
Max Re Capital Ltd.		79,384		1,848
Montpelier Re Holdings Ltd.		124,449		2,209
National Financial Partners Corp.		45,638		1,798
National Western Life Insurance Co., Class A *		5,594		1,342
Navigators Group, Inc. *		21,485		1,011
Odyssey Re Holdings Corp. (a)		96,583		3,424
Ohio Casualty Corp.		85,043		2,333
Platinum Underwriters Holdings, Ltd.		73,457		2,193
ProAssurance Corp. *		48,289		2,352
RLI Corp.		35,155		1,906
Scottish Re Group Ltd.		68,688		785
Selective Insurance Group, Inc.		42,857		2,368
State Auto Financial Corp.		62,256		2,000
Stewart Information Services Corp.		23,843		884
The Phoenix Cos., Inc.		143,992		2,281
United Fire & Casualty Co.		34,300		1,214
Universal American Financial Corp. *		85,502		1,590
USI Holdings Corp. *		61,971		987
Zenith National Insurance Corp.		49,545		2,305
				70,425
Materials 5.0%
A. Schulman, Inc.		42,709		1,034
AK Steel Holding Corp. *		167,419		2,500
Albemarle Corp.		63,716		4,144
Aleris International, Inc. *		35,799		1,844
AMCOL International Corp. (a)		34,352		904
Aptargroup, Inc.		50,163		2,755
Arch Chemicals, Inc.		32,672		1,093
Bowater, Inc. (a)		66,581		1,392
Carpenter Technology Corp.		36,101		3,863
Century Aluminum Co. (a)*		40,074		1,560
CF Industries Holdings, Inc.		76,753		1,521
Chaparral Steel Co.		63,646		2,647
Cleveland-Cliffs, Inc. (a)		54,698		2,313
Coeur d’Alene Mines Corp. (a)*		316,606		1,551
Compass Minerals International, Inc.		43,082		1,333
Ferro Corp.		53,277		1,051
Georgia Gulf Corp.		41,655		891
Gibraltar Industries, Inc.		44,711		944
Graphic Packaging Corp. *		215,915		842
Greif, Inc., Class A		35,431		3,320
H.B. Fuller Co.		88,516		2,194
Headwaters, Inc. (a)*		55,014		1,362
Hercules, Inc. *		169,914		3,093
Kronos Worldwide, Inc.		49,005		1,461
MacDermid, Inc.		42,282		1,414
Metal Management, Inc.		35,021		962
Minerals Technologies, Inc.		25,461		1,404
NL Industries, Inc. (a)		62,046		689
Olin Corp.		93,291		1,614
Oregon Steel Mills, Inc. *		48,885		2,659
PolyOne Corp. *		123,875		1,016
Quanex Corp.		56,404		1,890
Rockwood Holdings, Inc. *		98,688		2,300
Royal Gold, Inc. (a)		32,138		946
RPM International, Inc.		134,451		2,575
RTI International Metals, Inc. (a)*		25,166		1,543
Ryerson Tull, Inc. (a)		33,292		802
Schnitzer Steel Industries, Inc., Class A		39,055		1,365
Sensient Technologies Corp.		65,425		1,508
Silgan Holdings, Inc.		55,912		2,313
Spartech Corp.		44,813		1,228
Steel Dynamics, Inc.		67,162		4,037
Stillwater Mining Co. *		113,541		1,221
Symyx Technologies, Inc. *		44,812		1,100
Texas Industries, Inc. (a)		30,751		1,910
Wausau-Mosinee Paper Corp.		58,820		798
Worthington Industries, Inc.		112,560		1,945
				82,851

6     See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Media 2.1%
Advo, Inc.		37,205		1,092
Arbitron, Inc.		41,256		1,733
Catalina Marketing Corp.		67,006		1,699
Citadel Broadcasting Co.		171,124		1,752
CKX, Inc. *		87,671		1,201
Crown Media Holdings, Inc., Class A (a)*		57,213		228
Cumulus Media, Inc., Class A (a)*		72,889		781
Entercom Communications Corp.		58,784		1,627
Entravision Communications Corp. *		58,927		432
Gemstar — TV Guide International, Inc. (b)*		472,286		1,644
Hearst-Argyle Television, Inc.		71,980		1,814
Journal Communications, Inc., Class A		98,678		1,154
Lee Enterprises, Inc.		54,740		1,562
Live Nation, Inc. *		90,289		1,919
Martha Stewart Living Omnimedia, Class A (a)*		72,005		1,526
Media General, Inc., Class A		32,336		1,200
Mediacom Communications Corp., Class A *		163,086		1,362
Morningstar, Inc. *		41,951		1,717
Radio One, Inc., Class A *		154,088		1,062
RCN Corp. *		50,068		1,446
Readers Digest Association, Inc., Class A		128,843		1,853
Scholastic Corp. *		55,269		1,737
Sun-Times Media Group, Inc., Class A		134,680		781
Valassis Communications, Inc. *		65,162		978
Westwood One, Inc.		106,610		843
World Wrestling Entertainment, Inc.		97,288		1,622
				34,765
Pharmaceuticals & Biotechnology 4.6%
Adams Respiratory Therapeutics, Inc. *		44,510		1,918
Adolor Corp. *		54,247		744
Alexion Pharmaceuticals, Inc. (a)*		39,628		1,480
Alpharma, Inc., Class A		73,230		1,616
Andrx Corp. *		101,578		2,498
Applera Corp. — Celera Genomics Group *		101,917		1,582
Bio-Rad Laboratories, Inc., Class A *		39,731		2,917
BioMarin Pharmaceuticals, Inc. *		102,214		1,638
Bruker BioSciences Corp. *		32,426		258
Cubist Pharmaceuticals, Inc. *		60,332		1,344
CV Therapeutics, Inc. (a)*		52,063		674
Digene Corp. *		31,316		1,454
Dionex Corp. *		24,844		1,352
eResearch Technology, Inc. (a)*		47,155		388
Exelixis, Inc. *		66,572		646
Human Genome Sciences, Inc. *		167,581		2,237
ICOS Corp. *		88,589		2,810
Idenix Pharmaceuticals, Inc. (a)*		45,058		383
Illumina, Inc. *		50,994		2,242
KV Pharmaceutical Co., Class A *		76,401		1,705
MannKind Corp. (a)*		36,232		734
Martek Biosciences Corp. (a)*		38,976		924
Medarex, Inc. *		145,550		1,880
Medicis Pharmaceutical Corp., Class A (a)		74,549		2,612
MGI Pharma, Inc. (b)*		99,791		1,899
Momenta Pharmaceuticals, Inc. (a)*		30,383		453
Myogen, Inc. *		52,687		2,756
Myriad Genetics, Inc. *		46,765		1,257
Nektar Therapeutics (a)*		110,171		1,590
New River Pharmaceuticals, Inc. (a)*		31,777		1,616
Nuvelo, Inc. *		65,908		1,215
Onyx Pharmaceuticals, Inc. (a)*		49,666		933
OSI Pharmaceuticals, Inc. (a)*		74,491		2,852
Par Pharmaceutical Cos., Inc. *		42,280		824
PAREXEL International Corp. *		12,509		370
Perrigo Co.		130,651		2,337
Progenics Pharmaceuticals, Inc. *		33,697		880
Regeneron Pharmaceuticals, Inc. *		74,349		1,491
Salix Pharmaceuticals Ltd. *		63,733		850
Sciele Pharma, Inc. *		49,432		1,078
Tanox, Inc. *		56,454		758
Telik, Inc. (a)*		63,826		1,209
The Medicines Co. *		60,508		1,571
Theravance, Inc. *		80,538		2,534
United Therapeutics Corp. (a)*		31,576		1,890
Valeant Pharmaceuticals International *		127,586		2,383
Varian, Inc. *		49,171		2,306
Ventana Medical Systems, Inc. *		48,506		1,959
ViroPharma, Inc. *		93,374		1,245
ZymoGenetics, Inc. *		82,977		1,332
				75,624
Real Estate 7.0%
Alexander’s, Inc. *		7,210		2,630
Alexandria Real Estate Equities, Inc.		31,429		3,133
American Financial Realty Trust		179,117		2,090
American Home Mortgage Investment Corp. (a)		69,169		2,364
Annaly Mortgage Management, Inc.		169,245		2,221
Biomed Property Trust, Inc.		62,234		2,006
Commercial Net Lease Realty (a)		75,126		1,688
Corporate Office Properties Trust SBI (a)		55,249		2,640
Cousins Properties, Inc.		70,545		2,523
Digital Realty Trust, Inc.		27,304		912
EastGroup Properties, Inc.		30,590		1,628
Entertainment Properties Trust		34,955		1,923
Equity Inns, Inc.		73,687		1,236

See financial notes.     7

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Equity Lifestyle Properties, Inc.		31,859		1,570
Equity One, Inc.		104,337		2,621
Extra Space Storage, Inc.		51,858		956
FelCor Lodging Trust, Inc. *		82,894		1,721
First Industrial Realty Trust (a)		60,301		2,772
Franklin Street Properties Corp.		76,865		1,580
Friedman, Billings, Ramsey Group, Inc., Class A (a)		218,817		1,670
Getty Realty Corp. (a)		34,442		1,102
Glimcher Realty Trust (a)		49,548		1,276
Healthcare Realty Trust, Inc.		65,681		2,660
Highwoods Properties, Inc.		74,842		2,859
Home Properties, Inc. (a)		43,965		2,777
Inland Real Estate Corp.		93,136		1,741
Innkeepers USA Trust		52,723		904
Kilroy Realty Corp.		39,658		2,987
KKR Financial Corp.		112,163		3,009
LaSalle Hotel Properties		49,326		2,084
Lexington Corp. Properties Trust (a)		72,291		1,540
Longview Fibre Co.		89,821		1,892
Maguire Properties, Inc.		61,635		2,636
Mid-America Apartment Communities, Inc.		30,352		1,932
Move, Inc. *		181,052		865
National Health Investors, Inc.		38,368		1,233
Nationwide Health Properties, Inc.		94,280		2,710
Newcastle Investment Corp.		60,230		1,787
Novastar Financial, Inc. (a)		41,026		1,310
Omega Healthcare Investors, Inc.		77,858		1,314
Pennsylvania Real Estate Investment Trust		50,312		2,168
Post Properties, Inc.		56,867		2,785
Potlatch Corp.		50,803		2,063
PS Business Parks, Inc.		30,438		2,004
RAIT Investment Trust		38,506		1,158
Realty Income Corp. (a)		115,196		3,041
Redwood Trust, Inc.		34,329		1,887
Senior Housing Properties Trust		100,216		2,298
Sovran Self Storage, Inc. (a)		22,026		1,299
Spirit Finance Corp.		111,121		1,323
Strategic Hotel & Resorts, Inc.		67,931		1,445
Sunstone Hotel Investors, Inc.		74,509		2,195
Tanger Factory Outlet Centers, Inc.		43,034		1,605
Taubman Centers, Inc.		70,883		3,324
Tejon Ranch Co. *		19,392		941
Trammell Crow Co. *		45,293		2,208
Trustreet Properties, Inc. (a)		92,532		1,570
U-store-It Trust		75,979		1,669
Washington Real Estate Investment Trust (a)		58,282		2,457
				115,942
Retailing 5.5%
99 Cents Only Stores *		97,006		1,163
Aaron Rents, Inc.		64,371		1,602
Aeropostale, Inc. *		71,988		2,110
bebe stores, Inc. (b)		122,563		3,043
Big Lots, Inc. *		161,833		3,411
Blockbuster, Inc., Class A (a)*		265,621		1,041
Borders Group, Inc.		89,850		1,850
Building Material Holding Corp. (a)		35,248		919
Cabela’s, Inc., Class A (a)*		84,836		2,002
Charming Shoppes, Inc. *		170,253		2,520
Christopher & Banks Corp.		48,724		1,315
Coldwater Creek, Inc. *		120,979		3,689
Conn’s, Inc. (a)*		26,403		634
CSK Auto Corp. *		61,103		953
Dick’s Sporting Goods, Inc. *		68,840		3,425
Dress Barn, Inc. *		84,512		1,836
DSW, Inc. (a)*		58,697		2,031
Genesco, Inc. *		29,044		1,091
Group 1 Automotive, Inc.		31,664		1,815
Guess?, Inc. *		62,886		3,581
Guitar Center, Inc. *		32,874		1,426
Hibbett Sporting Goods, Inc. *		45,775		1,338
Jos. A. Bank Clothiers, Inc. (a)*		23,212		689
Keystone Automotive Industries, Inc. *		20,135		774
NetFlix, Inc. (a)*		82,886		2,293
New York & Co., Inc. *		70,523		917
Nutri/System, Inc. (a)*		42,048		2,593
OfficeMax, Inc.		96,592		4,596
Pacific Sunwear of California, Inc. *		94,761		1,670
Payless Shoesource, Inc. *		104,919		2,807
Pier 1 Imports, Inc. (a)		114,402		748
Priceline.com, Inc. (a)*		54,130		2,181
Rent-A-Center, Inc. *		98,405		2,830
Select Comfort Corp. (a)*		66,001		1,411
Sonic Automotive, Inc.		40,832		1,074
Stage Stores, Inc.		32,818		1,064
Stamps.com, Inc. *		27,811		446
Stein Mart, Inc.		53,599		877
Talbots, Inc.		74,770		2,097
The Buckle, Inc.		24,784		981
The Cato Corp., Class A		11,504		263
The Children’s Place Retail Stores, Inc. *		34,813		2,443
The Finish Line, Class A		57,517		745
The Gymboree Corp. *		42,910		1,994
The Men’s Wearhouse, Inc. (b)		82,645		3,293
The Pep Boys-Manny, Moe & Jack		75,504		1,071
Tuesday Morning Corp. (a)		49,425		815
Tween Brands, Inc. *		46,055		1,926
United Auto Group, Inc. (a)		123,616		2,841
VistaPrint Ltd. *		48,900		1,530
Zale Corp. (b)*		68,744		1,983
				91,747
Semiconductors & Semiconductor Equipment 3.4%
AMIS Holdings, Inc. *		125,998		1,208
Amkor Technology, Inc. (a)*		245,218		1,695
Applied Micro Circuits Corp. (b)*		461,563		1,408
Atheros Communications (a)*		62,643		1,361
ATMI, Inc. *		51,954		1,647
Axcelis Technologies, Inc. *		135,141		933
Brooks Automation, Inc. *		114,831		1,631

8     See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Cabot Microelectronics Corp. *		34,600		988
Cirrus Logic, Inc. *		139,004		981
Conexant Systems, Inc. (b)*		617,555		1,192
Credence Systems Corp. *		138,747		447
Cree, Inc. (a)*		101,396		2,230
Cymer, Inc. *		56,165		2,602
Diodes, Inc. (a)*		35,154		1,548
DSP Group, Inc. *		31,411		682
Entegris, Inc. *		189,572		2,125
FormFactor, Inc. *		57,373		2,191
Genesis Microchip, Inc. (a)*		46,089		472
Hittite Microwave Corp. *		39,909		1,369
Micrel, Inc. *		116,105		1,296
Microsemi Corp. *		86,019		1,686
MKS Instruments, Inc. *		84,499		1,829
OmniVision Technologies, Inc. (a)*		64,073		1,052
ON Semiconductor Corp. (b)*		387,846		2,412
Photronics, Inc. *		55,774		780
PMC — Sierra, Inc. (a)*		254,323		1,686
Power Integrations, Inc. *		47,962		1,052
RF Micro Devices, Inc. *		252,854		1,846
Semtech Corp. *		113,829		1,483
Silicon Image, Inc. *		111,022		1,313
SiRF Technology Holdings, Inc. (a)*		64,046		1,801
Skyworks Solutions, Inc. *		205,708		1,364
Spansion, Inc. Class A (a)*		171,763		2,449
Standard Microsystems Corp. *		20,592		635
Tessera Technologies, Inc. *		55,290		1,930
Trident Microsystems, Inc. *		80,243		1,696
Varian Semiconductor Equipment Associates, Inc. *		78,714		2,872
Vitesse Semiconductor Corp. (a)*		306,394		359
Zoran Corp. *		68,524		954
				57,205
Software & Services 7.2%
Advent Software, Inc. *		51,014		1,889
Ansys, Inc. *		52,024		2,393
aQuantive, Inc. (a)*		97,522		2,651
BearingPoint, Inc. *		274,757		2,289
Blackbaud, Inc.		59,369		1,484
Blackboard, Inc. (a)*		35,961		997
CACI International, Inc., Class A *		39,627		2,280
Clarent Corp. *		105,200		2
CNET Networks, Inc. *		198,430		1,774
CSG Systems International, Inc. *		78,045		2,106
DealerTrack Holdings, Inc. *		44,336		1,130
Digital Insight Corp. *		44,337		1,365
Digital River, Inc. *		47,870		2,769
Digitas, Inc. *		121,908		1,287
EarthLink, Inc. *		216,981		1,523
eFunds Corp. *		55,913		1,387
Equinix, Inc. (a)*		35,147		2,404
Euronet Worldwide, Inc. (a)*		43,736		1,300
FactSet Research Systems, Inc.		66,796		3,400
Gartner, Inc. *		149,949		2,789
Gevity HR, Inc.		37,581		849
Heartland Payment Systems, Inc. (a)		45,670		1,220
Hyperion Solutions Corp. *		86,914		3,251
Informatica Corp. *		135,581		1,680
Infospace, Inc. *		46,479		939
Intergraph Corp. *		44,162		1,929
j2 Global Communications, Inc. (a)*		68,328		1,875
Jack Henry & Associates, Inc.		106,620		2,323
Kronos, Inc. *		44,255		1,500
Lawson Software, Inc. *		171,651		1,308
Macrovision Corp. *		73,451		1,955
Manhattan Associates, Inc. *		6,247		185
ManTech International Corp., Class A *		39,282		1,338
Marchex, Inc., Class B (a)*		37,600		533
MAXIMUS, Inc.		26,774		747
Mentor Graphics Corp. *		121,767		2,054
Micros Systems, Inc. *		52,817		2,624
MicroStrategy, Inc., Class A *		21,162		2,526
Midway Games, Inc. (a)*		116,054		993
MPS Group, Inc. *		154,646		2,358
Nuance Communications, Inc. (a)*		193,257		2,230
Openwave Systems, Inc. *		123,792		1,068
Opsware, Inc. *		110,042		1,000
Parametric Technology Corp. *		149,552		2,922
Perot Systems Corp., Class A *		164,492		2,426
Progress Software Corp. *		51,480		1,482
Quality Systems, Inc. *		32,172		1,365
Quest Software, Inc. *		138,488		2,040
RealNetworks, Inc. *		236,530		2,597
Sapient Corp. (a)*		106,663		581
Secure Computing Corp. *		73,419		527
SRA International, Inc., Class A *		69,595		2,231
Sybase, Inc. *		135,719		3,305
Syntel, Inc. (a)		49,458		1,239
Take-Two Interactive Software, Inc. (a)*		89,004		1,245
Talx Corp.		34,153		831
The BISYS Group, Inc. *		167,618		1,851
THQ, Inc. *		79,461		2,389
TIBCO Software, Inc. *		301,136		2,786
Transaction Systems Architects, Inc., Class A *		50,259		1,694
United Online, Inc.		101,887		1,378
ValueClick, Inc. *		133,043		2,501
VeriFone Holdings, Inc. (a)*		90,343		2,639
Verint Systems, Inc. *		44,222		1,448
WebEx Communications, Inc. *		64,659		2,486
Websense, Inc. *		70,904		1,941
Wind River Systems, Inc. *		118,836		1,305
Wright Express Corp. *		43,376		1,187
				120,100
Technology Hardware & Equipment 5.3%
3Com Corp. *		517,119		2,513
Adaptec, Inc. *		182,113		825
Aeroflex, Inc. *		94,880		1,025
Anixter International, Inc. (a)*		52,843		3,158

See financial notes.     9

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Arris Group, Inc. *		144,990		1,943
Avid Technology, Inc. (a)*		50,605		1,828
Avocent Corp. *		65,856		2,418
Benchmark Electronics, Inc. *		86,494		2,296
Black Box Corp.		19,892		887
Brightpoint, Inc. *		68,295		826
Brocade Communications Systems, Inc. (b)*		383,283		3,108
Checkpoint Systems, Inc. *		56,844		1,035
Cogent, Inc. *		105,809		1,217
Cognex Corp.		61,809		1,423
Coherent, Inc. *		50,300		1,621
CommScope, Inc. *		82,649		2,637
Dycom Industries, Inc. *		55,932		1,304
Electro Scientific Industries, Inc. *		39,085		780
Electronics for Imaging, Inc. *		73,409		1,735
Emulex Corp. *		129,290		2,431
FLIR Systems, Inc. (a)*		83,754		2,675
Foundry Networks, Inc. *		187,424		2,373
Gateway, Inc. (b)*		417,106		701
Global Imaging Systems, Inc. *		54,654		1,190
Hutchinson Technology, Inc. *		26,486		613
Imation Corp.		52,013		2,381
Insight Enterprises, Inc. *		59,600		1,281
InterDigital Communications Corp. *		82,994		2,968
Intermec, Inc. *		84,440		1,908
Itron, Inc. (a)*		32,459		1,767
Ixia *		64,940		594
Kemet Corp. *		129,031		948
Komag, Inc. (a)*		38,484		1,472
L-1 Identity Solutions, Inc. (a)*		36,584		524
MasTec, Inc. *		53,073		581
MTS Systems Corp.		32,375		1,078
Multi-Fineline Electronix, Inc. (a)*		22,181		536
Newport Corp. *		55,737		1,205
Palm, Inc. (a)*		132,160		2,029
Paxar Corp. *		52,961		1,060
Plantronics, Inc. (a)		50,093		1,058
Plexus Corp. *		58,862		1,290
Polycom, Inc. *		138,739		3,801
Powerwave Technologies, Inc. (a)*		136,674		890
Rackable Systems, Inc. *		31,589		980
Redback Networks, Inc. *		76,859		1,216
Rofin-Sinar Technologies, Inc. *		24,268		1,494
Rogers Corp. *		23,367		1,635
ScanSource, Inc. *		33,778		1,060
Sonus Networks, Inc. (a)*		306,958		1,605
Sycamore Networks, Inc. (b)*		366,015		1,373
SYNNEX Corp. *		12,600		283
Technitrol, Inc.		54,043		1,363
Tekelec *		88,927		1,312
Trimble Navigation Ltd. *		74,801		3,457
UTStarcom, Inc. (a)*		152,163		1,639
ViaSat, Inc. *		27,019		733
				88,083
Telecommunication Services 1.2%
Broadwing Corp. *		104,779		1,570
Centennial Communications Corp. *		139,175		718
Cincinnati Bell, Inc. *		342,245		1,605
Commonwealth Telephone Enterprises, Inc.		30,467		1,275
Dobson Communications Corp., Class A *		226,146		1,755
IDT Corp., Class B *		125,205		1,626
NeuStar, Inc. *		79,495		2,323
SBA Communications Corp. *		118,934		3,177
Syniverse Holdings, Inc. *		90,479		1,335
Time Warner Telecom, Inc., Class A (a)*		160,808		3,206
USA Mobility, Inc.		36,309		922
				19,512
Transportation 2.9%
AirTran Holdings, Inc. (a)*		108,098		1,078
Alaska Air Group, Inc. *		45,809		1,839
Amerco, Inc. *		27,804		2,550
American Commercial Lines, Inc. *		41,001		2,630
AMR Corp. (a)*		14,417		409
Arkansas Best Corp.		34,572		1,417
Continental Airlines, Inc., Class B (a)*		125,511		4,629
Dollar Thrifty Automotive Group, Inc. *		30,658		1,231
EGL, Inc. *		54,206		1,843
Florida East Coast Industries, Class A		43,450		2,596
Forward Air Corp.		41,682		1,353
Genesee & Wyoming, Inc. *		46,572		1,308
Heartland Express, Inc.		139,552		2,279
Hub Group, Inc., Class A *		66,192		1,798
JetBlue Airways Corp. (a)*		212,303		2,667
Kansas City Southern *		95,309		2,706
Kirby Corp. *		68,534		2,401
Knight Transportation, Inc.		109,888		2,002
Macquaire Infrastructure Co. Trust		36,051		1,075
Old Dominion Freight Line *		49,989		1,383
Pacer International, Inc.		52,018		1,596
SkyWest, Inc.		82,212		2,192
Swift Transportation Co., Inc. *		102,350		2,574
Werner Enterprises, Inc.		102,143		1,874
				47,430
Utilities 3.6%
Allete, Inc.		39,490		1,781
Aquila, Inc. (b)*		521,091		2,392
Avista Corp.		58,612		1,509
Black Hills Corp.		44,198		1,525
California Water Service Group		21,487		836
CH Energy Group, Inc.		19,497		1,014
Cleco Corp.		66,715		1,715
Duquesne Light Holdings, Inc.		104,177		2,066
Dynegy, Inc., Class A *		530,336		3,224
El Paso Electric Co. *		66,416		1,551
Great Plains Energy, Inc. (a)		80,281		2,612
Idacorp, Inc.		52,798		2,082

10     See financial notes.

Schwab Small-Cap Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
ITC Holdings Corp.		17,156		609
MGE Energy, Inc.		25,560		874
New Jersey Resources Corp.		35,909		1,862
Nicor, Inc.		57,694		2,652
Northwest Natural Gas Co.		36,395		1,506
NorthWestern Corp.		49,712		1,759
Ormat Technologies, Inc. (a)		44,045		1,691
Otter Tail Corp.		40,409		1,210
Peoples Energy Corp.		47,712		2,084
Piedmont Natural Gas Co., Inc. (a)		99,377		2,683
PNM Resources, Inc.		90,129		2,538
Sierra Pacific Resources *		214,037		3,245
South Jersey Industries, Inc.		34,460		1,066
Southwest Gas Corp.		50,196		1,801
The Laclede Group, Inc.		25,977		926
UIL Holdings Corp.		33,775		1,343
Unisource Energy Corp.		47,817		1,701
Vectren Corp.		101,117		2,938
Westar Energy, Inc.		104,921		2,657
WGL Holdings, Inc.		62,161		2,017
				59,469

Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)
Short-Term Investment 0.2% of net assets
JP Morgan, Grand Cayman Time Deposit 4.71%, 11/01/06		3,156		3,156
U.S. Treasury Obligation 0.0% of net assets
U.S. Treasury Bill 5.03%, 12/14/06		685		681
End of Investments.
Collateral Invested for Securities on Loan 15.2% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust		251,338		251,338

At 10/31/06 the tax basis cost of the fund’s investments was $1,245,704, and the unrealized appreciation and depreciation were $498,655 and ($85,822), respectively, with a net unrealized appreciation of $412,833.

In addition to the above, the fund held the following at 10/31/06. All numbers are x1,000 except number of futures contracts.

	Number of		Contract		Unrealized
	Contracts		Value		Gains
Futures Contract
Russell 2000 Index, e-mini Futures, Long expires 12/31/06		51		3,932		182

*	Non-income producing security.
(a)	All or a portion of this security is on loan.
(b)	All or a portion of this security is held as collateral for open futures contracts.

See financial notes.     11

Schwab Total Stock Market Index Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

			Cost		Value
Holdings by Category			($ x 1,000)		($ x 1,000)
99.6	%	Common Stock		1,038,021		1,363,639
0.1	%	Foreign Common Stock		425		994
—	%	Preferred Stock		64		94
—	%	U.S. Treasury Obligation		308		308
—	%	Rights		—		—
99.7	%	Total Investments		1,038,818		1,365,035
3.9	%	Collateral Invested for Securities on Loan		52,763		52,763
(3.6)	%	Other Assets and Liabilities, Net				(49,183	)
100.0	%	Net Assets				1,368,615

	Number of		Value
Security	Shares		($ x 1,000)
Common Stock 99.6% of net assets
Automobiles & Components 0.6%
Aftermarket Technology Corp. *		2,511		47
American Axle & Manufacturing Holdings, Inc.		5,300		99
ArvinMeritor, Inc. (a)		4,900		74
Bandag, Inc. (a)		700		31
BorgWarner, Inc.		5,400		310
Collins & Aikman Corp. *		1,400		—
Cooper Tire & Rubber Co. (a)		6,400		69
Drew Industries, Inc. *		2,400		65
Federal Screw Works		250		4
Ford Motor Co.		148,736		1,232
General Motors Corp. (a)		45,386		1,585
Gentex Corp.		4,600		73
Harley-Davidson, Inc.		25,500		1,750
Hawk Corp., Class A *		1,800		26
Johnson Controls, Inc.		15,000		1,223
Lear Corp. (a)		5,800		175
Modine Manufacturing Co.		3,700		88
Monaco Coach Corp.		1,200		14
Proliance International, Inc. *		872		4
Sauer-Danfoss, Inc.		3,800		101
Standard Motor Products, Inc.		2,000		22
Stoneridge, Inc. *		1,700		12
Strattec Security Corp. *		1,500		58
Superior Industries International, Inc.		800		14
Tenneco Automotive, Inc. *		4,480		102
The Goodyear Tire & Rubber Co. (a)*		12,500		192
Thor Industries, Inc.		4,500		197
TRW Automotive Holdings Corp. *		7,800		200
Visteon Corp. *		5,451		40
Winnebago Industries, Inc.		2,600		87
				7,894
Banks 5.9%
1st Source Corp.		1,728		55
Abigail Adams National Bancorp		550		7
Accredited Home Lenders Holding Co. *		2,500		76
Alabama National Bancorp		1,600		109
Amcore Financial, Inc.		1,200		38
Ameris Bancorp		1,800		50
AmSouth Bancorp		28,403		858
Anchor Bancorp Wisconsin, Inc.		3,100		90
Arrow Financial Corp.		1,050		27
Associated Banc-Corp.		15,500		509
Astoria Financial Corp.		8,300		241
BancFirst Corp.		1,000		50
BancorpSouth, Inc.		7,612		194
BancTrust Financial Group, Inc.		1,100		27
Bank Mutual Corp.		6,168		75
Bank of Hawaii Corp.		3,500		183
Bank of the Ozarks, Inc. (a)		2,800		88
BankAtlantic Bancorp, Inc., Class A		2,200		29
BankUnited Financial Corp., Class A		2,200		59
Banner Corp.		1,200		52
Bay View Capital Corp. *		506		8
BB&T Corp.		47,046		2,047
Berkshire Bancorp, Inc.		3,600		56
Berkshire Hills Bancorp, Inc.		1,400		51
BOK Financial Corp.		4,540		233
Boston Private Financial Holdings, Inc.		2,129		59
Brookline Bancorp, Inc.		2,405		32
Bryn Mawr Bank Corp.		1,400		31
Camco Financial Corp.		700		10
Camden National Corp.		700		31
Capital City Bank Group, Inc.		1,875		63
Capital Crossing Bank *		2,000		58
Capitol Bancorp Ltd.		1,500		70
Capitol Federal Financial (a)		6,920		262
Cascade Bancorp		2,655		97

See financial notes.     1

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Cathay General Bancorp		3,200		110
Central Pacific Financial Corp.		3,400		125
Century Bancorp Inc., Class A		800		21
Charter Financial Corp.		900		43
CharterMac		3,900		79
Chemical Financial Corp.		1,383		41
Chittenden Corp.		2,272		67
Citizens Banking Corp. (a)		4,590		119
Citizens First Bancorp, Inc.		700		21
Citizens South Banking Corp.		1,000		13
City Holding Co.		1,800		71
City National Corp.		3,100		206
Coastal Financial Corp.		3,670		50
Columbia Banking System, Inc.		1,951		62
Comerica, Inc.		13,496		785
Commerce Bancorp, Inc. (a)		11,320		395
Commerce Bancshares, Inc.		13,331		660
Community Bank System, Inc.		1,400		35
Community Trust Bancorp, Inc.		2,487		95
Compass Bancshares, Inc.		11,400		641
Corus Bankshares, Inc. (a)		4,000		82
Countrywide Financial Corp.		45,000		1,715
Cullen/Frost Bankers, Inc.		3,300		179
CVB Financial Corp.		5,283		77
Dime Community Bancshares, Inc.		3,375		47
Doral Financial Corp. (a)		9,900		46
Downey Financial Corp.		2,000		138
East West Bancorp, Inc.		2,600		95
Exchange National Bancshares, Inc.		750		23
F.N.B. Corp. (a)		2,639		45
Fannie Mae		78,900		4,676
Fidelity Bankshares, Inc.		2,899		115
Fifth Third Bancorp		42,601		1,698
First Bancorp.		4,200		42
First Busey Corp.		1,500		34
First Charter Corp.		3,500		87
First Citizens BancShares, Inc., Class A		300		56
First Commonwealth Financial Corp.		2,504		33
First Financial Bancorp		1,839		30
First Financial Bankshares, Inc.		2,000		80
First Financial Corp. Indiana		600		21
First Financial Holdings, Inc.		1,400		51
First Horizon National Corp. (c)		10,800		425
First Indiana Corp.		1,718		44
First M&F Corp.		2,000		38
First Merchants Corp.		1,041		26
First Midwest Bancorp, Inc. Illinois		3,125		119
First Niagra Financial Group, Inc.		7,670		110
First Place Financial Corp.		2,900		68
First Republic Bank		1,200		47
First United Corp.		2,200		48
FirstFed Financial Corp. *		400		25
FirstMerit Corp.		7,300		169
Flagstar Bancorp, Inc.		6,200		93
Flushing Financial Corp.		3,300		58
Freddie Mac		56,100		3,870
Fremont General Corp.		6,200		90
Frontier Financial Corp.		1,575		46
Fulton Financial Corp.		14,762		236
Glacier Bancorp, Inc.		2,465		86
Great Southern Bancorp, Inc.		1,400		44
Greater Bay Bancorp		5,406		139
Hancock Holding Co.		2,100		108
Harbor Florida Bancshares, Inc.		1,100		50
Harleysville National Corp.		1,274		27
Heritage Financial Corp/WA		735		18
Home Federal Bancorp		800		22
Horizon Financial Corp.		2,695		63
Hudson City Bancorp, Inc.		48,731		669
Huntington Bancshares, Inc. (a)		19,856		485
IBERIABANK Corp.		875		51
Independent Bank Corp. Michigan		1,802		43
Independent Bank Corp/Rockland MA		1,000		33
IndyMac Bancorp, Inc.		5,900		268
Integra Bank Corp.		1,225		32
Interchange Financial Services Corp.		1,575		36
International Bancshares Corp.		4,577		140
Irwin Financial Corp.		3,700		82
ITLA Capital Corp.		700		40
KeyCorp		34,300		1,274
Lakeland Financial Corp.		2,200		57
M&T Bank Corp.		8,962		1,092
MAF Bancorp, Inc.		2,028		87
MainSource Financial Group, Inc.		1,653		30
Marshall & Ilsley Corp.		19,650		942
Massbank Corp.		1,500		50
MB Financial, Inc.		2,133		77
Mercantile Bankshares Corp.		8,361		377
Merchants Bancshares, Inc.		750		18
MGIC Investment Corp.		9,300		546
Mid-State Bancshares		3,500		105
Midwest Banc Holdings, Inc.		1,300		31
MutualFirst Financial, Inc.		2,000		42
Nara Bancorp, Inc.		4,000		76
National City Corp.		56,821		2,117
National Penn Bancshares, Inc. (a)		1,457		30
NBT Bancorp., Inc.		1,400		35
NetBank, Inc.		3,300		18
New York Community Bancorp, Inc.		22,697		371
North Fork Bancorp, Inc.		38,411		1,098
North Valley Bancorp		1,500		28
Northrim BanCorp, Inc.		2,625		71

2     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Northway Financial, Inc.		200		7
Northwest Bancorp, Inc.		5,000		134
Oak Hill Financial, Inc.		1,000		27
OceanFirst Financial Corp.		1,050		25
Ocwen Financial Corp. *		5,920		93
Old National Bancorp		6,244		118
Omega Financial Corp.		1,000		32
Oriental Financial Group, Inc.		1,663		20
PAB Bankshares, Inc.		700		15
Pacific Capital Bancorp		2,844		87
Park National Corp.		845		86
Partners Trust Financial Group, Inc.		3,970		45
Pennfed Finance Services, Inc.		4,000		73
People’s Bank		12,375		504
Peoples Financial Corp.		3,000		81
PFF Bancorp, Inc.		1,680		52
Pinnacle Financial Partners, Inc. *		475		16
PNC Financial Services Group, Inc.		24,500		1,716
Popular, Inc.		21,700		395
Prosperity Bancshares, Inc.		2,400		83
Provident Bankshares Corp.		1,657		60
Provident Financial Holdings, Inc.		750		23
Provident Financial Services, Inc.		917		17
R&G Financial Corp., Class B		2,550		20
Radian Group, Inc.		6,702		357
Regions Financial Corp.		39,314		1,492
Renasant Corp.		1,125		36
Republic Bancorp, Inc.		5,648		76
Republic Bancorp, Inc., Class A		1,735		37
S&T Bancorp, Inc.		1,400		47
Sandy Spring Bancorp, Inc.		2,900		106
Santander BanCorp		4,686		88
Seacoast Banking Corp of Florida		1,980		53
Shore Bancshares, Inc.		750		22
Simmons First National Corp., Class A		1,000		31
Sky Financial Group, Inc.		8,510		213
Southwest Bancorp, Inc.		3,300		89
Sovereign Bancorp, Inc.		30,389		725
State Bancorp, Inc.		1,058		19
Sterling Bancorp		1,918		37
Sterling Bancshares, Inc. Texas		2,100		38
Sterling Financial Corp. Pennsylvania		1,562		36
Sterling Financial Corp. Washington		1,827		61
Suffolk Bancorp		2,400		84
Sun Bancorp, Inc.,NJ *		3,645		76
SunTrust Banks, Inc.		31,842		2,515
Susquehanna Bancshares, Inc.		3,168		79
SVB Financial Group *		2,200		101
SY Bancorp, Inc.		1,470		43
Synovus Financial Corp.		24,600		723
TCF Financial Corp.		13,600		354
TD Banknorth, Inc.		11,496		340
Texas Regional Bancshares, Inc., Class A		2,558		99
TF Financial Corp.		700		23
The Colonial BancGroup, Inc.		10,100		241
The First of Long Island Corp.		2,000		88
The PMI Group, Inc.		8,100		345
The South Financial Group, Inc.		4,500		119
Timberland Bancorp, Inc.		1,000		35
Tompkins Trustco, Inc.		931		46
Triad Guaranty, Inc. *		1,700		88
TriCo Bancshares		400		10
Trustco Bank Corp. NY		2,857		32
Trustmark Corp.		4,300		136
U.S. Bancorp		158,531		5,365
UCBH Holdings, Inc.		9,400		161
UMB Financial Corp.		3,574		128
Umpqua Holdings Corp.		343		10
Union Bankshares Corp.		1,050		32
UnionBanCal Corp.		20,100		1,157
United Bankshares, Inc.		3,400		130
United Community Banks, Inc. Georgia		3,750		118
USB Holding Co., Inc.		1,958		44
Valley National Bancorp		8,550		223
W Holding Co., Inc.		11,938		68
Wachovia Corp.		163,314		9,064
Washington Federal, Inc.		7,942		185
Washington Mutual, Inc.		78,449		3,318
Washington Trust Bancorp, Inc.		1,000		27
Webster Financial Corp.		4,663		225
Wells Fargo & Co.		275,154		9,985
WesBanco, Inc.		3,200		105
West Coast Bancorp		1,200		39
Westamerica Bancorp		1,700		85
Whitney Holding Corp.		6,675		218
Willow Financial Bancorp, Inc.		1,596		25
Wilmington Trust Corp.		5,700		237
Wintrust Financial Corp.		1,800		87
WSFS Financial Corp.		1,000		64
Zions Bancorp		7,725		621
				80,044
Capital Goods 7.9%
3D Systems Corp. (a)*		1,400		23
3M Co.		65,000		5,125
A.O. Smith Corp.		1,300		46
Aaon, Inc.		4,075		95
AAR Corp. *		2,500		65
Actuant Corp., Class A		2,840		146
Acuity Brands, Inc.		5,200		258
Aerosonic Corp. *		300		2

See financial notes.     3

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
AGCO Corp. *		6,762		181
Alamo Group, Inc.		500		12
Albany International Corp., Class A		3,918		132
Alliant Techsystems, Inc. *		2,437		188
American Power Conversion Corp.		16,600		502
American Science & Engineering, Inc. *		500		26
American Standard Cos., Inc.		15,400		682
American Superconductor Corp. *		700		7
American Woodmark Corp. (a)		1,000		37
Ameron International Corp.		900		66
Ametek, Inc.		4,200		196
Ampco-Pittsburgh Corp.		2,800		93
Apogee Enterprises, Inc.		1,200		19
Applied Industrial Technologies, Inc.		6,525		187
Armor Holdings, Inc. *		500		26
Astronics Corp. *		1,250		22
Badger Meter, Inc.		4,000		101
Baldor Electric Co.		3,800		122
BE Aerospace, Inc. *		1,100		28
Belden CDT, Inc.		4,400		159
Blount International, Inc. *		1,200		13
Breeze-Eastern Corp. *		500		6
Briggs & Stratton Corp.		3,500		89
C&D Technologies, Inc.		4,500		22
Carlisle Cos., Inc.		1,600		134
Cascade Corp.		4,400		225
Caterpillar, Inc.		53,800		3,266
Ceradyne, Inc. *		2,500		103
Chase Corp.		100		2
CIRCOR International, Inc.		3,750		124
Clarcor, Inc.		3,400		111
Columbus McKinnon Corp. *		2,400		53
Cooper Industries Ltd., Class A		13,700		1,225
Crane Co.		5,000		195
Cummins, Inc. (a)		3,900		495
Curtiss-Wright Corp.		600		20
Danaher Corp.		24,000		1,722
Deere & Co.		19,000		1,617
Distributed Energy Systems Corp. *		1,400		5
Donaldson Co., Inc.		6,500		244
Dover Corp.		16,700		793
DRS Technologies, Inc.		2,357		104
Ducommun, Inc. *		3,200		67
Eaton Corp.		12,600		913
Electro Rent Corp. *		5,100		84
ElkCorp.		3,450		87
EMCOR Group, Inc. *		3,900		231
Emerson Electric Co.		35,000		2,954
Energy Conversion Devices, Inc. *		600		22
ESCO Technologies, Inc. *		2,800		122
Esterline Technologies Corp. *		2,400		90
Evergreen Solar, Inc. (a)*		1,000		9
Fastenal Co.		13,200		531
Federal Signal Corp.		2,800		43
Flow International Corp. *		900		11
Flowserve Corp. *		3,900		207
Fluor Corp.		5,600		439
Foster Wheeler Ltd. *		5,200		234
Franklin Electric Co., Inc.		1,300		70
FuelCell Energy, Inc. *		1,200		8
Gardner Denver, Inc. *		3,400		116
GATX Corp.		4,000		174
GenCorp, Inc. (a)*		2,500		33
General Cable Corp. *		4,700		177
General Dynamics Corp.		31,400		2,233
General Electric Co. (c)		815,966		28,649
Genlyte Group, Inc. *		3,200		247
Global Power Equipment Group, Inc. *		1,000		1
Goodrich Corp.		8,404		370
Graco, Inc.		7,012		286
GrafTech International, Ltd. *		2,100		13
Granite Construction, Inc.		4,850		253
Hardinge, Inc.		1,800		27
Harsco Corp.		3,100		253
Heico Corp., Class A		2,286		69
Herley Industries, Inc. *		4,000		59
Hexcel Corp. *		2,000		32
Honeywell International, Inc.		71,062		2,993
Hubbell, Inc., Class B		3,800		188
Huttig Building Products, Inc. *		811		4
IDEX Corp.		3,150		148
II-VI, Inc. *		3,800		93
Illinois Tool Works, Inc.		51,700		2,478
Ingersoll-Rand Co., Ltd., Class A		27,400		1,006
Insituform Technologies, Inc., Class A *		1,300		30
Integrated Electrical Services, Inc. *		105		2
ITT Corp.		17,400		946
Jacobs Engineering Group, Inc. *		3,800		287
Jacuzzi Brands, Inc. *		4,500		56
JLG Industries, Inc.		8,600		238
Joy Global, Inc.		19,350		757
Kadant, Inc. *		1		—
Kaydon Corp.		3,300		138
Kennametal, Inc.		4,000		247
L-3 Communications Holdings, Inc.		9,100		733
Ladish Co., Inc. *		1,300		41
Lawson Products, Inc.		2,000		97
Lennox International, Inc.		4,771		129
Lincoln Electric Holdings, Inc.		3,900		240
Lockheed Martin Corp.		37,052		3,221
Magnetek, Inc. *		1,500		7
Masco Corp. (a)		35,800		990
McDermott International, Inc. *		7,500		335
Medis Technologies Ltd. (a)*		1,110		30
Merrimac Industries, Inc. *		600		6

4     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Michael Baker Corp. *		500		11
Middleby Corp. *		3,500		315
Modtech Holdings, Inc. *		1,000		5
Moog, Inc., Class A *		2,787		104
MSC Industrial Direct Co., Class A		4,300		176
Mueller Industries, Inc.		1,700		62
NACCO Industries, Inc., Class A		1,300		196
Navistar International Corp. *		6,900		191
NCI Building Systems, Inc. *		2,900		174
Nordson Corp.		4,000		184
Northrop Grumman Corp. (a)		30,032		1,994
Omega Flex, Inc. *		700		15
Orbital Sciences Corp. *		4,600		84
Oshkosh Truck Corp.		9,000		407
PACCAR, Inc.		21,150		1,252
Pall Corp.		10,900		348
Parker Hannifin Corp.		11,000		920
Pentair, Inc.		9,500		313
Plug Power, Inc. *		2,248		9
Powell Industries, Inc. *		1,000		24
Power-One, Inc. *		6,000		41
Precision Castparts Corp.		10,302		701
Quanta Services, Inc. *		8,900		163
Quipp, Inc.		900		7
Quixote Corp.		1,300		24
Raven Industries, Inc.		2,800		90
Raytheon Co.		34,900		1,743
Regal Beloit Corp.		2,500		124
Rockwell Automation, Inc.		15,700		973
Rockwell Collins, Inc.		13,100		761
Roper Industries, Inc.		6,500		311
Rush Enterprises, Inc., Class B *		500		9
Sequa Corp., Class A *		2,800		297
Simpson Manufacturing Co., Inc. (a)		3,200		91
SPX Corp.		8,610		495
Standex International Corp.		3,000		87
Stantec, Inc. *		1,690		35
Taser International, Inc. *		1,700		16
Tecumseh Products Co., Class A *		3,200		54
Teledyne Technologies, Inc. *		12,157		507
Teleflex, Inc.		4,300		267
Tennant Co.		4,200		116
Terex Corp. *		7,400		383
Textron, Inc.		11,800		1,073
The Allied Defense Group, Inc. *		500		8
The Boeing Co.		68,800		5,494
The Gorman-Rupp Co.		2,875		109
The Greenbrier Cos., Inc.		1,600		60
The Manitowoc Co., Inc.		5,800		318
The Shaw Group, Inc. *		2,000		53
The Timken Co.		6,600		198
Thomas & Betts Corp. *		7,300		376
Titan International, Inc.		800		15
Toro Co.		4,100		177
Tredegar Corp.		2,600		45
Trinity Industries, Inc.		1,650		59
Triumph Group, Inc.		1,200		58
Tyco International Ltd.		154,100		4,535
United Industrial Corp.		1,200		54
United Rentals, Inc. *		5,900		140
United Technologies Corp.		84,068		5,525
Universal Forest Products, Inc.		2,500		113
UQM Technologies, Inc. *		1,500		4
URS Corp. *		3,700		149
USG Corp. *		3,900		191
Valence Technology, Inc. *		1,400		2
Valmont Industries, Inc.		1,900		106
Vicor Corp.		4,200		50
W.W. Grainger, Inc.		7,300		531
Wabash National Corp.		2,500		35
Wabtec Corp.		2,828		89
Walter Industries, Inc.		1,900		88
Watsco, Inc.		3,400		169
Watts Water Technologies, Inc., Class A		1,000		37
WESCO International, Inc. *		4,800		313
Wolverine Tube, Inc. (a)*		1,000		3
Woodward Governor Co.		1,500		54
Xanser Corp. *		1,400		8
				107,986
Commercial Services & Supplies 1.2%
A.T. Cross Co., Class A *		2,400		17
ABM Industries, Inc.		4,900		97
Adesa, Inc.		8,200		206
Administaff, Inc.		2,800		96
Allied Waste Industries, Inc. *		29,100		354
American Locker Group, Inc. *		500		2
American Reprographics Co. *		4,000		142
Angelica Corp.		2,500		52
ARAMARK Corp., Class B		14,800		495
Avery Dennison Corp.		9,700		612
Banta Corp.		2,700		120
Bowne & Co., Inc.		4,200		66
Brady Corp., Class A		1,400		52
Casella Waste Systems, Inc., Class A *		2,500		28
CDI Corp.		3,700		87
Cenveo, Inc. *		1,300		26
ChoicePoint, Inc. *		6,900		251
Cintas Corp.		15,350		636
Clean Harbors, Inc. *		2,500		107
CompX International, Inc.		800		14
Consolidated Graphics, Inc. *		3,900		242
Copart, Inc. *		6,550		190
Cornell Cos., Inc. *		2,100		38
Corrections Corp. of America *		5,742		262

See financial notes.     5

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
CoStar Group, Inc. *		800		38
CRA International, Inc. *		2,500		127
Deluxe Corp.		3,800		86
Diamond Management & Technology Consultants, Inc. *		1,000		11
Ennis, Inc.		4,500		103
Equifax, Inc.		11,800		449
Exponent, Inc. *		6,000		109
First Consulting Group, Inc. *		1,800		19
FTI Consulting, Inc. *		2,700		77
G&K Services, Inc., Class A		1,600		61
GP Strategies Corp. *		1,500		12
Healthcare Services Group		5,625		153
Heidrick & Struggles International, Inc. *		3,100		127
Herman Miller, Inc.		5,700		195
HNI Corp.		4,000		180
Hudson Highland Group, Inc. *		720		8
ICT Group, Inc. *		500		16
IHS, Inc. *		3,600		124
IKON Office Solutions, Inc.		12,500		186
John H. Harland Co.		3,500		143
Kelly Services, Inc., Class A		3,200		92
Kforce, Inc. *		405		6
Korn/Ferry International *		3,600		80
Labor Ready, Inc. *		3,500		61
Learning Tree International, Inc. *		1,400		12
M&F Worldwide Corp. *		1,200		19
Manpower, Inc.		6,991		474
McGrath Rentcorp		1,600		43
Mine Safety Appliances Co. (a)		2,700		102
Mobile Mini, Inc. *		1,200		39
Monster Worldwide, Inc. *		9,800		397
Multi-Color Corp.		750		24
Navigant Consulting, Inc. *		5,000		89
NCO Group, Inc. *		2,701		73
On Assignment, Inc. *		1,700		19
PHH Corp. *		4,186		116
Pitney Bowes, Inc.		20,000		934
R.R. Donnelley & Sons Co.		17,000		576
Republic Services, Inc.		17,700		726
Resources Connection, Inc. *		3,700		107
Robert Half International, Inc.		14,000		512
Rollins, Inc.		6,675		144
School Specialty, Inc. *		1,600		63
Sitel Corp. *		2,800		12
Spherion Corp. *		4,330		31
Steelcase, Inc., Class A		11,500		191
Stericycle, Inc. *		3,200		226
TeleTech Holdings, Inc. *		5,000		97
Tetra Tech, Inc. *		12,031		219
The Advisory Board Co. *		1,000		55
The Brink’s Co.		5,600		294
The Corporate Executive Board Co.		2,700		243
The Dun & Bradstreet Corp. *		12,140		938
The Geo Group, Inc. *		5,700		217
The Standard Register Co.		4,100		55
TRC Cos., Inc. *		1,350		11
United Stationers, Inc. *		2,900		138
Viad Corp.		3,625		134
Volt Information Sciences, Inc. *		2,100		83
Waste Connections, Inc. *		3,650		149
Waste Industries USA, Inc.		1,500		43
Waste Management, Inc.		48,100		1,803
Watson Wyatt & Co., Holdings		4,600		208
Westaff, Inc. *		2,000		8
				16,279
Consumer Durables & Apparel 1.6%
American Greetings Corp., Class A		8,500		203
Applica, Inc. *		3,100		18
Beazer Homes USA, Inc.		2,553		111
Blyth, Inc.		4,800		115
Brookfield Homes Corp. (a)		3,074		100
Brown Shoe Co., Inc.		1,950		76
Brunswick Corp.		7,400		233
Callaway Golf Co.		5,600		75
Carter’s, Inc. *		5,000		141
Cavco Industries, Inc. *		410		14
Centex Corp.		10,700		560
Chromcraft Revington, Inc. *		1,300		12
Coach, Inc. *		32,008		1,269
Columbia Sportswear Co. *		4,350		243
Craftmade International, Inc.		2,800		55
CSS Industries, Inc.		900		28
D.R. Horton, Inc.		24,604		576
DGSE Cos, Inc. *		700		2
Dominion Homes, Inc. (a)*		500		3
Eastman Kodak Co.		22,700		554
Ethan Allen Interiors, Inc.		4,200		150
Flexsteel Industries, Inc.		600		8
Foamex International, Inc. *		2,600		14
Fortune Brands, Inc.		11,500		885
Fossil, Inc. *		2,962		65
Furniture Brands International, Inc. (a)		4,700		87
Garmin Ltd. (a)		10,000		534
Hampshire Group Ltd. *		2,000		27
Hanesbrands, Inc. *		8,047		190
Harman International Industries, Inc.		6,800		696
Hasbro, Inc.		14,500		376
Hovnanian Enterprises, Inc., Class A *		3,700		114
Interface, Inc., Class A *		3,300		48
Jarden Corp. *		2,475		89
Jones Apparel Group, Inc.		12,156		406
K-Swiss, Inc., Class A		2,400		85
K2, Inc. *		1,700		23
KB Home		7,800		351

6     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Kellwood Co.		2,900		89
Kenneth Cole Productions, Inc., Class A		3,100		79
Kimball International, Inc., Class B		3,600		89
Leggett & Platt, Inc.		16,200		378
Lennar Corp., Class A		12,190		579
Lenox Group, Inc. *		3,300		20
Levitt Corp., Class A		550		7
Liz Claiborne, Inc.		8,600		363
M.D.C. Holdings, Inc. (a)		1,903		95
M/I Homes, Inc.		1,800		65
Marine Products Corp.		405		4
MarineMax, Inc. *		800		23
Marvel Entertainment, Inc. (a)*		11,700		297
Mattel, Inc.		34,300		776
Meade Instruments Corp. *		800		2
Meritage Homes Corp. (a)*		1,000		46
Mity Enterprises, Inc. *		600		11
Mohawk Industries, Inc. *		4,819		350
Movado Group, Inc.		3,300		85
Nautilus Group, Inc. (a)		4,125		58
Newell Rubbermaid, Inc.		23,900		688
Nike, Inc., Class B		20,700		1,902
NVR, Inc. *		500		281
Oakley, Inc.		6,700		124
Oneida Ltd. (b)*		700		—
Palm Harbor Homes, Inc. (a)*		2,700		38
Phillips-Van Heusen Corp.		4,300		197
Polaris Industries, Inc. (a)		3,200		137
Polo Ralph Lauren Corp.		7,500		533
Pool Corp.		5,662		232
Pulte Homes, Inc.		20,244		627
Quiksilver, Inc. *		4,000		56
RC2 Corp. *		2,200		99
Recoton Corp. *		500		—
Russ Berrie & Co., Inc. *		1,000		15
Salton, Inc. *		1,100		3
Skechers U.S.A., Inc., Class A *		6,500		194
Skyline Corp.		2,600		103
Snap-On, Inc.		4,000		188
SONICblue, Inc. *		2,600		—
Standard Pacific Corp.		4,800		116
Stanley Furniture Co., Inc.		5,200		115
Steven Madden Ltd. *		2,700		116
Stride Rite Corp.		2,900		43
Superior Uniform Group, Inc.		1,600		20
Tandy Brands Accessories, Inc.		1,000		12
Tarragon Corp. (a)		4,422		50
Technical Olympic USA, Inc. (a)		2,812		31
Tempur-Pedic International, Inc. *		8,000		158
The Black & Decker Corp.		7,100		596
The Boyds Collection Ltd. (e)*		34		—
The Fairchild Corp., Class A *		3,100		8
The Ryland Group, Inc. (a)		3,700		170
The Stanley Works		6,600		314
The Warnaco Group, Inc. *		2,500		53
The Yankee Candle Co., Inc.		3,700		125
Timberland Co., Class A *		5,300		153
Toll Brothers, Inc. *		11,200		324
Tupperware Corp.		4,800		102
Unifi, Inc. *		1,900		5
Unifirst Corp.		1,500		54
Uniroyal Technology Corp. *		1,100		—
Universal Electronics, Inc. *		2,200		48
VF Corp.		13,500		1,026
Virco Manufacturing Corp. *		1,170		7
WCI Communities, Inc. (a)*		3,800		61
Whirlpool Corp.		6,849		595
Wolverine World Wide, Inc.		7,800		221
				21,892
Consumer Services 2.4%
Ambassadors Groups, Inc.		3,400		93
Ambassadors International, Inc.		1,700		66
American Real Estate Partners L.P.		3,800		238
Ameristar Casinos, Inc.		3,400		84
Apollo Group, Inc., Class A *		14,550		538
Applebee’s International, Inc.		7,912		181
Aztar Corp. *		1,900		102
Bally Technologies, Inc. (a)*		3,000		60
Bally Total Fitness Holding Corp. (a)*		6,500		18
Bob Evans Farms, Inc.		2,200		75
Boyd Gaming Corp.		7,800		308
Bright Horizons Family Solutions, Inc. *		2,600		100
Brinker International, Inc.		6,900		320
Buca, Inc. *		1,100		6
Career Education Corp. *		8,614		192
Carnival Corp.		50,000		2,441
CBRL Group, Inc.		946		42
CEC Entertainment, Inc. *		2,025		70
Cedar Fair L.P. *		5,300		145
Choice Hotels International, Inc.		6,800		285
Churchill Downs, Inc.		900		38
CKE Restaurants, Inc. (a)		4,800		94
Corinthian Colleges, Inc. *		9,200		113
CPI Corp.		400		19
Darden Restaurants, Inc.		13,300		557
DeVry, Inc. *		4,800		117
Domino’s Pizza, Inc.		5,100		139
Dover Downs Gaming & Entertainment, Inc.		4,899		69
Dover Motorsports, Inc.		1,400		7
Empire Resorts, Inc. (a)*		500		4
Gaylord Entertainment Co. *		2,625		122
H&R Block, Inc.		26,300		575
Harrah’s Entertainment, Inc.		15,273		1,135
Hilton Hotels Corp.		32,926		952

See financial notes.     7

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
IHOP Corp.		3,000		157
International Game Technology (a)		29,100		1,237
International Speedway Corp., Class A		3,245		168
Interstate Hotels & Resorts, Inc. *		82		1
Isle of Capri Casinos, Inc. *		4,400		110
ITT Educational Services, Inc. *		6,000		414
Jack in the Box, Inc. *		4,200		236
Jackson Hewitt Tax Service, Inc.		3,000		104
Krispy Kreme Doughnuts, Inc. (a)*		2,100		23
Landry’s Restaurants, Inc.		1,800		53
Las Vegas Sands Corp. *		17,000		1,295
Laureate Education, Inc. *		4,700		248
Life Time Fitness, Inc. *		2,500		129
Lone Star Steakhouse & Saloon, Inc.		1,600		44
Luby’s, Inc. *		1,400		14
Marriott International, Inc., Class A		37,400		1,562
Matthews International Corp., Class A		1,900		73
McDonald’s Corp.		105,300		4,414
MGM Mirage *		22,500		968
MTR Gaming Group, Inc. *		2,300		24
Multimedia Games, Inc. *		1,500		14
Nobel Learning Communities, Inc.		500		5
O’Charley’s, Inc. *		400		8
Orient-Express Hotels Ltd., Class A		1,600		63
OSI Restaurant Partners, Inc.		7,000		233
P.F. Chang’s China Bistro, Inc. (a)*		800		33
Panera Bread Co., Class A *		800		49
Papa John’s International, Inc. *		3,400		125
Penn National Gaming, Inc. *		6,800		249
Pre-Paid Legal Services, Inc. (a)		3,600		153
RARE Hospitality International, Inc. *		3,325		105
Regis Corp.		3,900		146
Royal Caribbean Cruises, Ltd.		16,500		668
Ruby Tuesday, Inc.		5,600		155
Ryan’s Restaurant Group, Inc. *		2,250		37
Scientific Games Corp., Class A *		6,500		182
Service Corp. International		24,100		220
Shuffle Master, Inc. (a)*		2,812		79
Six Flags, Inc. (a)*		7,500		43
Smith & Wollensky Restaurant Group, Inc. *		900		4
Sonic Corp. *		7,968		181
Sotheby’s		5,438		207
Speedway Motorsports, Inc.		4,800		181
Starbucks Corp. (a)*		62,600		2,363
Starwood Hotels & Resorts Worldwide, Inc.		17,730		1,059
Station Casinos, Inc. (a)		4,650		280
Stewart Enterprises, Inc., Class A		7,200		45
Strayer Education, Inc.		700		79
The Cheesecake Factory, Inc. *		2,887		82
The ServiceMaster Co.		22,900		259
The Steak n Shake Co. *		1,580		29
Tim Hortons, Inc.		13,949		403
Triarc Cos., Class B		4,400		74
Vail Resorts, Inc. *		3,800		147
Vertrue, Inc. *		4,500		202
Weight Watchers International, Inc.		8,700		379
Wendy’s International, Inc.		10,300		356
Western Union Co. *		62,932		1,388
Wyndham Worldwide Corp. *		16,744		494
Wynn Resorts Ltd. (a)*		4,000		294
YUM! Brands, Inc.		24,000		1,427
				33,079
Diversified Financials 8.9%
A.G. Edwards, Inc.		5,900		337
Advanta Corp., Class A		7,400		266
Affiliated Managers Group, Inc. (a)*		1,800		180
AllianceBernstein Holding LP *		7,700		598
American Express Co.		105,150		6,079
AmeriCredit Corp. *		12,300		314
Ameriprise Financial, Inc.		21,030		1,083
Asset Acceptance Capital Corp. *		2,500		44
Asta Funding, Inc.		2,000		68
Bank of America Corp. (c)		381,577		20,556
BlackRock, Inc., Class A		3,400		513
Capital One Financial Corp.		23,710		1,881
Cash America International, Inc.		2,500		103
CBOT Holdings, Inc., Class A (a)*		4,400		653
Chicago Mercantile Exchange Holdings, Inc.		2,200		1,102
CIT Group, Inc.		18,600		968
Citigroup, Inc. (c)		412,286		20,680
CompuCredit Corp. *		4,400		153
Credit Acceptance Corp. *		2,400		80
E*TRADE Financial Corp. *		34,335		799
Eaton Vance Corp.		11,600		360
Federated Investors, Inc., Class B		9,950		341
Financial Federal Corp.		1,200		33
Franklin Resources, Inc.		20,600		2,348
GAMCO Investors, Inc., Class A		700		28
Greenhill & Co., Inc. (a)		2,500		170
IntercontinentalExchange, Inc. *		5,100		431
International Securities Exchange, Inc.		3,000		154
Investment Technology Group, Inc. *		4,750		222
Investors Financial Services Corp.		5,500		216
Janus Capital Group, Inc.		19,200		386
Jefferies Group, Inc.		8,200		236
JPMorgan Chase & Co.		295,944		14,040
Knight Capital Group, Inc., Class A *		9,700		181
LaBranche & Co., Inc. (a)*		2,400		21
Legg Mason, Inc.		10,050		905
Lehman Brothers Holdings, Inc.		47,744		3,716

8     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Leucadia National Corp.		17,908		472
Mellon Financial Corp.		35,800		1,389
Merrill Lynch & Co., Inc.		79,800		6,976
MicroFinancial, Inc.		1,900		7
Moody’s Corp.		26,600		1,764
Morgan Stanley		90,300		6,902
Nasdaq Stock Market, Inc. *		8,800		314
Nelnet, Inc., Class A *		4,500		132
Northern Trust Corp.		18,500		1,086
Nuveen Investments, Inc., Class A		7,300		360
NYSE Group, Inc. (a)*		11,500		851
Piper Jaffray Cos. *		950		66
Portfolio Recovery Associates, Inc. (a)*		2,000		93
Raymond James Financial, Inc.		10,350		330
Resource America, Inc., Class A		2,000		46
SEI Investments Co.		9,700		546
Siebert Financial Corp. *		2,900		10
SLM Corp.		37,300		1,816
State Street Corp.		28,000		1,798
Student Loan Corp.		1,700		352
SWS Group, Inc.		1,141		32
T. Rowe Price Group, Inc.		21,400		1,012
TD Ameritrade Holding Corp. *		47,100		776
The Bank of New York Co., Inc.		63,000		2,165
The Bear Stearns Cos., Inc.		13,620		2,061
The Charles Schwab Corp. (d)		111,120		2,025
The First Marblehead Corp.		5,000		337
The Goldman Sachs Group, Inc. (a)		38,700		7,345
W.P. Carey & Co. LLC		4,100		118
Waddell & Reed Financial, Inc., Class A		7,250		185
Westwood Holdings Group, Inc.		285		6
World Acceptance Corp. *		1,000		50
				121,667
Energy 8.5%
Alliance Resource Partners L.P.		3,400		121
Alon USA Energy, Inc.		3,700		104
Anadarko Petroleum Corp.		39,060		1,813
Apache Corp.		25,772		1,683
APCO Argentina, Inc.		200		16
Arch Coal, Inc.		7,000		242
Atlas America, Inc. *		1,780		85
ATP Oil & Gas Corp. (a)*		1,600		69
Atwood Oceanics, Inc. *		2,400		111
Baker Hughes, Inc.		28,300		1,954
Basic Energy Services, Inc. *		3,000		73
Berry Petroleum Co., Class A		4,000		119
BJ Services Co.		28,600		863
Boardwalk Pipeline Partners L.P. (a)		8,000		230
BP Prudhoe Bay Royalty Trust (a)		2,200		159
Bristow Group, Inc. (a)*		1,800		60
Buckeye Partners L.P. (a)*		3,400		156
Cabot Oil & Gas Corp.		13,600		720
Cameron International Corp. *		9,100		456
CARBO Ceramics, Inc. (a)		1,900		64
Chesapeake Energy Corp. (a)		19,200		623
ChevronTexaco Corp.		178,939		12,025
Cimarex Energy Co.		5,508		198
CNX Gas Corp. *		12,000		314
Comstock Resources, Inc. *		4,500		126
ConocoPhillips		131,623		7,929
CONSOL Energy, Inc.		14,100		499
CREDO Petroleum Corp. *		2,700		35
Cross Timbers Royalty Trust (a)		1,500		73
Crosstex Energy L.P. (a)*		2,000		75
Denbury Resources, Inc. *		9,800		282
Devon Energy Corp.		37,360		2,497
Diamond Offshore Drilling, Inc. (a)		9,800		678
Dresser-Rand Group, Inc. *		6,000		130
El Paso Corp.		51,387		704
Enbridge Energy Management LLC *		1,313		64
Encore Acquisition Co. *		2,250		56
Energy Partners, Ltd. (a)*		1,700		42
Energy Transfer Partners L.P.		4,000		196
ENSCO International, Inc. (a)		11,200		548
Enterprise GP Holdings L.P. (a)		2,100		71
Enterprise Products Partners L.P. (a)		29,500		811
EOG Resources, Inc.		22,800		1,517
Exxon Mobil Corp. (c)		493,166		35,222
FMC Technologies, Inc. *		4,591		278
Forest Oil Corp. *		4,450		145
Frontier Oil Corp.		14,400		423
General Maritime Corp.		3,000		110
Global Industries Ltd. *		8,900		148
Grant Prideco, Inc. *		10,100		381
Grey Wolf, Inc. *		15,000		105
Gulf Island Fabrication, Inc.		2,800		82
GulfMark Offshore, Inc. *		1,600		55
Halliburton Co.		78,200		2,530
Hanover Compressor Co. *		5,600		104
Harvest Natural Resources, Inc. *		6,000		67
Helix Energy Solutions Group, Inc. *		6,064		196
Helmerich & Payne, Inc.		9,600		230
Hess Corp. (a)		19,200		814
Holly Corp.		3,000		143
Hornbeck Offshore Services, Inc. *		2,500		90
Hugoton Royalty Trust		4,846		125
Hydril Co. *		2,500		150
Inergy, L.P. *		2,000		58
Input/Output, Inc. *		4,200		47
Key Energy Services, Inc. *		10,300		144
Kinder Morgan Management, LLC *		3,819		166
Kinder Morgan, Inc.		10,700		1,125
Lone Star Technologies, Inc. *		1,200		58
Lufkin Industries, Inc.		1,000		60
Magellan Midstream Partners (a)		2,400		94

See financial notes.     9

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Marathon Oil Corp.		30,654		2,649
Mariner Energy, Inc. *		6,601		131
Maritrans, Inc.		2,500		93
Markwest Energy Partners L.P. *		500		27
Massey Energy Co.		6,800		172
Meridian Resource Corp. *		3,100		10
Murphy Oil Corp.		14,500		684
Nabors Industries Ltd. *		23,634		730
NATCO Group, Inc., Class A *		1,200		40
National-Oilwell Varco, Inc. *		11,540		697
Natural Resource Partners L.P. (a)		2,000		104
Newfield Exploration Co. *		7,400		302
Noble Corp.		10,100		708
Noble Energy, Inc.		14,218		691
Occidental Petroleum Corp.		75,020		3,521
Oceaneering International, Inc. *		2,200		79
Oil States International, Inc. *		3,600		105
OMI Corp. (a)		6,500		145
Overseas Shipholding Group, Inc.		3,700		231
Pacific Energy Partners L.P. (a)		3,500		125
Parker Drilling Co. *		7,800		64
Patterson-UTI Energy, Inc.		13,200		306
Peabody Energy Corp.		18,500		776
Penn Virginia Corp.		2,500		179
Penn Virginia Resource Partners, L.P. (a)*		5,000		131
Pioneer Natural Resources Co.		10,133		413
Plains All American Pipeline L.P. (a)		4,600		218
Plains Exploration & Production Co. *		6,579		278
Pogo Producing Co.		4,700		210
Pride International, Inc. *		12,700		351
Quicksilver Resources, Inc. (a)*		4,200		144
Range Resources Corp.		8,100		220
Rowan Cos., Inc.		8,400		280
RPC, Inc.		7,650		166
Schlumberger Ltd.		100,000		6,308
SEACOR Holdings, Inc. *		1,250		112
Smith International, Inc.		17,300		683
St. Mary Land & Exploration Co.		7,400		276
Stone Energy Corp. *		976		38
Sunoco Logistics Partners L.P. (a)*		2,000		93
Sunoco, Inc.		11,000		727
Superior Energy Services, Inc. *		7,400		232
Swift Energy Co. *		2,500		117
Syntroleum Corp. *		4,000		16
TC Pipelines L.P. *		2,400		77
Teekay Shipping Corp.		3,000		123
TEL Offshore Trust		83		1
TEPPCO Partners L.P. (a)		7,000		276
Tesoro Corp.		4,800		307
TETRA Technologies, Inc. *		5,300		137
The Houston Exploration Co. *		2,200		119
Tidewater, Inc.		5,200		259
Todco *		5,500		188
Transocean, Inc. (a)*		27,731		2,012
Ultra Petroleum Corp. *		13,000		694
Unit Corp. *		4,400		204
Universal Compression Holdings, Inc.		2,900		175
USEC, Inc.		6,800		76
Valero Energy Corp.		47,980		2,511
Valero L.P. *		1,600		86
Veritas DGC, Inc. *		3,000		216
W&T Offshore, Inc.		5,000		169
W-H Energy Services, Inc. *		900		42
Weatherford International Ltd. *		21,200		871
Westmoreland Coal Co. *		3,500		80
Williams Cos., Inc.		42,360		1,035
World Fuel Services Corp.		2,100		90
XTO Energy, Inc.		25,942		1,210
				116,281
Food & Staples Retailing 2.2%
Arden Group, Inc.		600		84
BJ’s Wholesale Club, Inc. *		6,100		175
Casey’s General Stores, Inc.		5,100		124
Costco Wholesale Corp.		38,600		2,060
CVS Corp.		63,700		1,999
Ingles Markets, Inc., Class A		300		9
Longs Drug Stores Corp.		3,300		142
Nash Finch Co.		1,700		44
Pathmark Stores, Inc. *		3,900		40
Performance Food Group Co. *		1,900		55
PriceSmart, Inc. *		500		8
Rite Aid Corp. (a)*		40,400		189
Ruddick Corp.		3,100		87
Safeway, Inc.		35,900		1,054
Smart & Final, Inc. *		2,700		49
Spartan Corp.		500		10
Supervalu, Inc.		19,832		662
Sysco Corp.		48,636		1,701
The Andersons, Inc.		1,000		36
The Great Atlantic & Pacific Tea Co., Inc. *		2,200		61
The Kroger Co.		60,800		1,367
The Pantry, Inc. *		1,000		55
The Topps Co., Inc.		1,700		15
United Natural Foods, Inc. *		2,600		91
Wal-Mart Stores, Inc.		309,100		15,232
Walgreen Co.		80,400		3,512
Weis Markets, Inc.		1,700		69
Whole Foods Market, Inc. (a)		10,900		696
Wild Oats Markets, Inc. *		3,800		68
				29,694
Food, Beverage & Tobacco 4.5%
Alliance One International, Inc. *		3,300		16
Altria Group, Inc.		168,800		13,729
American Italian Pasta Co., Class A *		1,000		8
Anheuser-Busch Cos., Inc.		61,500		2,916
Archer-Daniels-Midland Co.		53,958		2,077

10     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Bridgford Foods Corp. *		300		2
Brown-Forman Corp., Class B		9,912		716
Campbell Soup Co.		35,400		1,323
Chiquita Brands International, Inc.		3,200		44
Coca-Cola Bottling Co. Consolidated		400		25
Coca-Cola Enterprises, Inc.		30,000		601
ConAgra Foods, Inc.		43,293		1,132
Constellation Brands, Inc., Class A *		17,600		484
Corn Products International, Inc.		5,800		210
Dean Foods Co. *		8,613		361
Del Monte Foods Co.		8,931		96
Delta & Pine Land Co.		2,000		81
Flowers Foods, Inc.		4,772		130
Fresh Del Monte Produce, Inc.		4,200		66
General Mills, Inc.		31,300		1,778
Green Mountain Coffee Roasters, Inc. *		900		36
Griffin Land & Nurseries, Inc. *		300		8
H.J. Heinz Co.		27,900		1,176
Hormel Foods Corp.		9,000		325
J & J Snack Foods Corp.		6,400		214
John B. Sanfilippo & Son *		5,000		53
Kellogg Co.		34,400		1,731
Kraft Foods, Inc., Class A (a)		128,700		4,427
Lancaster Colony Corp.		3,400		138
Lance, Inc.		2,900		57
Loews Corp. — Carolina Group		5,600		324
Maui Land & Pineapple Co, Inc. *		800		25
McCormick & Co., Inc.		11,300		423
MGP Ingredients, Inc.		3,400		76
Molson Coors Brewing Co., Class B		6,000		427
Monterey Gourmet Foods, Inc. *		700		3
Peet’s Coffee & Tea, Inc. (a)*		1,800		48
PepsiAmericas, Inc.		13,200		270
PepsiCo, Inc.		140,800		8,932
Pilgrim’s Pride Corp., Class B		1,400		35
Ralcorp Holdings, Inc. *		6,700		331
Reynolds American, Inc. (a)		22,664		1,431
Rocky Mountain Chocolate Factory, Inc.		2,311		30
Sanderson Farms, Inc.		1,750		46
Sara Lee Corp.		64,378		1,101
Seaboard Corp.		200		282
Smithfield Foods, Inc. *		6,300		169
Tasty Baking Co.		500		5
The Coca-Cola Co.		202,200		9,447
The Hain Celestial Group, Inc. *		1,406		40
The Hershey Co.		19,400		1,026
The J.M. Smucker Co.		2,438		119
The Pepsi Bottling Group, Inc.		23,400		740
Tootsie Roll Industries, Inc.		2,391		76
TreeHouse Foods, Inc. *		1,722		44
Tyson Foods, Inc., Class A		30,340		438
Universal Corp.		1,800		66
UST, Inc.		12,700		680
Vector Group Ltd. (a)		3,735		64
Wm. Wrigley Jr. Co.		20,750		1,078
Zapata Corp. *		8,000		49
				61,785
Health Care Equipment & Services 4.4%
ABIOMED, Inc. *		800		11
Advanced Medical Optics, Inc. *		4,111		168
Aetna, Inc.		59,200		2,440
Align Technology, Inc. *		8,700		121
Alliance Imaging, Inc. *		1,800		15
Allscripts Healthcare Solutions, Inc. (a)*		1,900		45
Amedisys, Inc. *		2,500		101
America Service Group, Inc. *		3,550		55
American Medical Systems Holdings, Inc. *		7,800		139
AMERIGROUP Corp. *		1,800		54
AmerisourceBergen Corp.		20,648		975
AMN Healthcare Services, Inc. *		4,110		104
Amsurg Corp. *		2,300		48
Analogic Corp.		1,400		78
Apria Healthcare Group, Inc. *		4,100		95
Arrow International, Inc.		3,500		125
Arthrocare Corp. (a)*		1,400		57
Aspect Medical Systems, Inc. *		3,700		66
Bausch & Lomb, Inc.		3,400		182
Baxter International, Inc.		50,118		2,304
Beckman Coulter, Inc.		5,100		294
Becton Dickinson & Co.		21,300		1,492
Biomet, Inc.		20,125		762
BioScrip, Inc. *		2,172		5
Biosite, Inc. *		1,400		64
Boston Scientific Corp. *		109,568		1,743
Brookdale Senior Living, Inc.		300		14
C.R. Bard, Inc.		8,000		656
Cantel Medical Corp. *		3,571		51
Cardinal Health, Inc.		36,160		2,367
Caremark Rx, Inc.		37,090		1,826
Centene Corp. *		1,000		24
Cerner Corp. *		8,400		406
Cerus Corp. *		500		4
Chemed Corp.		1,400		50
Chindex International, Inc. (a)*		2,200		29
Cholestech Corp. *		1,700		26
CIGNA Corp.		12,800		1,497
Clinical Data, Inc. *		117		2
Community Health Systems, Inc. *		7,100		230
Conmed Corp. *		1,700		38
CorVel Corp. *		1,900		82
Coventry Health Care, Inc. *		23,937		1,124
Cross Country Healthcare, Inc. *		1,600		31
CryoLife, Inc. *		750		4

See financial notes.     11

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Cyberonics, Inc. (a)*		1,200		22
Cytyc Corp. *		7,800		206
Dade Behring Holdings, Inc.		5,200		189
Datascope Corp.		2,500		90
DaVita, Inc. *		8,250		459
Dendrite International, Inc. *		3,600		38
Dentsply International, Inc.		13,100		410
DJ Orthopedics, Inc. *		3,000		121
Dynacq Healthcare, Inc. *		3,616		7
Eclipsys Corp. *		3,800		81
Edwards Lifesciences Corp. *		3,900		167
Emdeon Corp. *		21,926		255
Enpath Medical, Inc. *		3,000		29
Express Scripts, Inc. *		12,600		803
Five Star Quality Care, Inc. *		135		1
Gen-Probe, Inc. *		3,400		163
Genesis HealthCare Corp. *		6,250		303
Gentiva Health Services, Inc. *		3,250		60
Greatbatch, Inc. *		1,100		25
Haemonetics Corp. *		3,700		169
Hanger Orthopedic Group, Inc. *		5,400		42
HCA, Inc.		27,200		1,374
Health Management Associates, Inc., Class A		15,900		313
Health Net, Inc. *		9,100		378
HealthExtras, Inc. *		1,900		44
HealthTronics, Inc. *		3,500		24
Healthways, Inc. *		3,100		131
Henry Schein, Inc. *		4,600		229
Hillenbrand Industries, Inc.		5,800		340
Hologic, Inc. *		5,200		250
Hooper Holmes, Inc.		4,600		17
Hospira, Inc. *		14,070		511
Humana, Inc. *		18,900		1,134
ICU Medical, Inc. *		550		23
IDEXX Laboratories, Inc. *		2,500		208
Immucor, Inc. *		3,795		104
IMS Health, Inc.		19,300		537
Integra LifeSciences Holdings *		1,100		41
Intermagnetics General Corp. *		3,084		84
Intuitive Surgical, Inc. *		1,050		104
Invacare Corp.		2,000		44
inVentiv Health, Inc. *		2,233		64
Kindred Healthcare, Inc. *		4,624		125
Kinetic Concepts, Inc. *		2,500		87
Kyphon, Inc. *		3,000		118
Laboratory Corp. of America Holdings *		12,800		877
Landauer, Inc.		1,100		60
LifePoint Hospitals, Inc. *		3,707		132
Lincare Holdings, Inc. *		7,100		238
Magellan Health Services, Inc. *		3,007		131
Manor Care, Inc.		8,000		384
Matria Healthcare, Inc. (a)*		1,800		51
McKesson Corp.		22,900		1,147
MedCath Corp. *		1,500		40
Medco Health Solutions, Inc. *		25,033		1,339
Medical Action Industries, Inc. *		2,500		66
Medical Staffing Network Holdings, Inc. *		1,300		7
Medtronic, Inc.		95,374		4,643
Mentor Corp.		3,000		140
Meridian Bioscience, Inc.		7,500		173
Merit Medical Systems, Inc. *		2,222		35
Molina Healthcare, Inc. *		2,500		98
National Healthcare Corp.		600		33
National Medical Health Card Systems, Inc. *		800		11
Neogen Corp. *		625		13
Novoste Corp. *		400		1
Nutraceutical International Corp. *		5,000		75
OCA, Inc. *		2,112		—
Odyssey Healthcare, Inc. *		2,250		30
Omnicare, Inc.		7,500		284
Option Care, Inc. (a)		2,250		29
OraSure Technologies, Inc. *		1,500		12
Owens & Minor, Inc.		2,000		63
Patterson Cos., Inc. *		10,600		348
PDI, Inc. *		2,900		30
Pediatrix Medical Group, Inc. *		6,000		270
Per-Se Technologies, Inc. (a)*		5,428		133
PolyMedica Corp. (a)		779		32
PSS World Medical, Inc. *		5,800		117
Q-Med, Inc. *		500		2
Quest Diagnostics, Inc.		14,820		737
Regeneration Technologies, Inc. *		1,700		11
RehabCare Group, Inc. *		4,000		51
Res-Care, Inc. *		4,500		87
ResMed, Inc. *		4,000		176
Respironics, Inc. *		3,800		134
Sierra Health Services, Inc. *		21,500		736
SonoSite, Inc. *		1,600		46
St. Jude Medical, Inc. *		29,600		1,017
Steris Corp.		6,100		149
Stryker Corp.		31,100		1,626
Sunrise Senior Living, Inc. *		3,400		106
Symbion, Inc. *		2,500		41
Tenet Healthcare Corp. *		36,650		259
The Cooper Cos., Inc.		2,781		160
Theragenics Corp. *		2,500		8
Thoratec Corp. *		2,636		42
Triad Hospitals, Inc. *		6,044		224
TriPath Imaging, Inc. *		2,600		24
TriZetto Group, Inc. *		5,900		101
United Surgical Partners International, Inc. *		2,100		52
UnitedHealth Group, Inc.		118,880		5,799
Universal Health Services, Inc., Class B		4,000		212
Urologix, Inc. *		1,800		5

12     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
US Physical Therapy, Inc. *		3,500		42
Utah Medical Products, Inc.		2,500		85
Varian Medical Systems, Inc. *		11,900		653
VCA Antech, Inc. *		5,400		175
Viasys Healthcare, Inc. *		2,982		85
VistaCare, Inc., Class A *		1,000		13
Vital Signs, Inc.		1,900		107
WebMD Health Corp., Class A (a)*		2,600		95
WellPoint, Inc. *		57,723		4,405
West Pharmaceutical Services, Inc.		4,600		193
Wright Medical Group, Inc. *		1,700		42
Young Innovations, Inc.		2,000		72
Zimmer Holdings, Inc. *		20,300		1,462
				60,204
Household & Personal Products 1.9%
Alberto-Culver Co., Class B		6,950		353
Avon Products, Inc.		39,000		1,186
Central Garden & Pet Co. *		1,600		80
Chattem, Inc. *		1,200		51
Church & Dwight Co., Inc.		4,950		201
Clorox Co.		12,200		788
Colgate-Palmolive Co.		42,500		2,719
Energizer Holdings, Inc. *		6,333		495
Herbalife Ltd. *		300		11
Inter Parfums, Inc.		675		13
Kimberly-Clark Corp.		40,639		2,703
NBTY, Inc. *		5,400		150
Nu Skin Enterprises, Inc., Class A		6,500		124
Oil-Dri Corp. of America		500		8
Procter & Gamble Co. (c)		269,915		17,110
Spectrum Brands, Inc. (a)*		2,800		27
The Estee Lauder Cos., Inc., Class A		10,300		416
USANA Health Sciences, Inc. (a)*		1,000		45
WD-40 Co.		1,600		55
				26,535
Insurance 5.5%
21st Century Holding Co.		1,500		42
21st Century Insurance Group		7,200		114
ACE Ltd.		23,100		1,322
AFLAC, Inc.		42,600		1,914
Alfa Corp.		6,800		126
Alleghany Corp. *		220		67
Ambac Financial Group, Inc.		7,750		647
American Financial Group, Inc.		5,500		263
American International Group, Inc.		211,922		14,235
American National Insurance Co.		1,300		151
American Physicians Capital, Inc. *		2,500		137
AmerUs Group Co.		4,400		301
AON Corp. (a)		25,500		887
Arch Capital Group Ltd. *		3,900		251
Argonaut Group, Inc. *		2,400		82
Arthur J. Gallagher & Co.		6,800		189
Assurant, Inc.		11,500		606
Axis Capital Holdings Ltd.		7,200		237
Baldwin & Lyons, Inc., Class B		750		19
Berkshire Hathaway, Inc., Class A *		121		12,762
Brown & Brown, Inc.		11,000		322
Cincinnati Financial Corp.		13,450		614
Clark, Inc.		1,700		21
CNA Financial Corp. *		20,900		783
CNA Surety Corp. *		2,200		45
Commerce Group, Inc.		3,200		95
Conseco, Inc. *		11,500		234
Crawford & Co., Class B		1,600		12
Delphi Financial Group, Inc., Class A		6,772		266
EMC Insurance Group, Inc.		1,200		37
Erie Indemnity Co., Class A		5,500		279
Everest Re Group Ltd.		2,900		288
FBL Financial Group, Inc., Class A		2,090		74
Fidelity National Financial, Inc.		13,517		301
Fidelity National Title Group, Inc., Class A		17,327		381
First American Corp.		7,800		318
FPIC Insurance Group, Inc. *		400		14
Genworth Financial, Inc., Class A		37,500		1,254
Great American Financial Resources, Inc.		2,800		65
Hanover Insurance Group, Inc.		4,900		222
Harleysville Group, Inc.		1,800		65
HCC Insurance Holdings, Inc.		7,950		268
Hilb, Rogal & Hobbs Co.		3,000		120
Horace Mann Educators Corp.		4,300		87
Independence Holding Co.		2,700		64
Infinity Property & Casualty Corp.		2,500		108
LandAmerica Financial Group, Inc.		5,300		334
Lincoln National Corp.		21,926		1,388
Loews Corp.		45,000		1,751
Markel Corp. *		300		120
Marsh & McLennan Cos., Inc.		43,000		1,266
MBIA, Inc.		11,250		698
Mercury General Corp.		5,400		280
MetLife, Inc.		62,000		3,542
MIIX Group, Inc. *		2,400		—
National Financial Partners Corp.		2,500		98
National Western Life Insurance Co., Class A *		300		72
Nationwide Financial Services, Inc., Class A		11,400		580
Navigators Group, Inc. *		1,500		71
NYMAGIC, Inc.		2,100		67
Odyssey Re Holdings Corp.		5,400		191
Ohio Casualty Corp.		5,500		151
Old Republic International Corp.		20,437		460
PartnerRe Ltd. (a)		1,900		133
Penn Treaty American Corp. *		150		1

See financial notes.     13

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Philadelphia Consolidated Holding Corp. *		5,500		215
PMA Capital Corp., Class A *		700		7
Presidential Life Corp.		1,000		24
Principal Financial Group, Inc.		25,400		1,435
ProAssurance Corp. *		1,670		81
Protective Life Corp.		5,500		243
Prudential Financial, Inc.		45,500		3,500
Reinsurance Group of America, Inc.		5,100		288
RenaissanceRe Holdings Ltd.		1,800		98
RLI Corp.		2,800		152
SAFECO Corp.		12,500		727
Safety Insurance Group, Inc.		1,000		50
SCPIE Holdings, Inc. *		700		20
Selective Insurance Group, Inc.		1,200		66
SNTL Litigation Trust Certificates *		1,300		—
StanCorp Financial Group, Inc.		5,000		228
State Auto Financial Corp.		3,800		122
Stewart Information Services Corp.		1,400		52
The Allstate Corp.		58,874		3,613
The Chubb Corp.		33,094		1,759
The Hartford Financial Services Group, Inc.		24,400		2,127
The Midland Co.		1,800		84
The Phoenix Cos., Inc.		7,000		111
The Progressive Corp.		85,200		2,059
The St. Paul Travelers Cos., Inc.		54,550		2,789
Torchmark Corp.		10,600		654
Transatlantic Holdings, Inc.		6,437		392
United Fire & Casualty Co.		1,000		35
Unitrin, Inc.		5,600		240
UnumProvident Corp.		23,914		473
USI Holdings Corp. *		4,500		72
W. R. Berkley Corp.		22,950		846
Wesco Financial Corp.		200		96
White Mountains Insurance Group Ltd.		200		114
XL Capital Ltd., Class A		14,700		1,037
Zenith National Insurance Corp.		3,400		158
				75,859
Materials 3.1%
A. Schulman, Inc.		2,300		56
A.M. Castle & Co.		1,500		50
AEP Industries, Inc. *		400		21
Air Products & Chemicals, Inc.		17,700		1,233
Airgas, Inc.		5,000		189
AK Steel Holding Corp. *		9,527		142
Albemarle Corp.		4,500		293
Alcoa, Inc.		68,664		1,985
Aleris International, Inc. *		2,459		127
Allegheny Technologies, Inc.		7,700		606
Aptargroup, Inc.		2,200		121
Arch Chemicals, Inc.		2,700		90
Ashland, Inc.		5,500		325
Ball Corp.		5,700		237
Bemis Co.		8,900		299
Bowater, Inc. (a)		2,300		48
Buckeye Technologies, Inc. *		1,200		12
Cabot Corp.		5,200		206
Carpenter Technology Corp.		2,500		267
Celanese Corp.		12,500		258
Century Aluminum Co. *		600		23
Chaparral Steel Co.		4,500		187
Chemtura Corp.		16,927		145
Chesapeake Corp.		1,000		16
Commercial Metals Co.		9,000		239
Compass Minerals International, Inc.		2,500		77
Crown Holdings, Inc. *		10,400		202
Cytec Industries, Inc.		3,600		199
Deltic Timber Corp.		700		36
E.I. du Pont de Nemours & Co.		78,195		3,581
Eagle Materials, Inc.		4,143		152
Eastman Chemical Co.		5,600		341
Ecolab, Inc.		21,500		975
Ferro Corp.		4,200		83
Florida Rock Industries, Inc.		5,987		257
FMC Corp.		3,100		213
Freeport-McMoRan Copper & Gold, Inc., Class B		16,000		968
Georgia Gulf Corp.		3,300		71
Gibraltar Industries, Inc.		2,500		53
Glamis Gold Ltd. *		11,100		490
Greif, Inc., Class A		3,700		347
H.B. Fuller Co.		4,000		99
Hawkins, Inc.		1,900		27
Headwaters, Inc. (a)*		2,500		62
Hercules, Inc. *		8,500		155
Huntsman Corp. *		17,500		302
International Flavors & Fragrances, Inc.		4,400		187
International Paper Co.		39,304		1,311
Kronos Worldwide, Inc.		2,560		76
LESCO, Inc. *		500		4
Louisiana-Pacific Corp.		8,300		164
Lyondell Chemical Co.		19,930		512
MacDermid, Inc.		3,800		127
Martin Marietta Materials, Inc.		4,200		370
Material Sciences Corp. *		4,000		48
MeadWestvaco Corp.		14,474		398
Meridian Gold, Inc. *		6,600		167
Minerals Technologies, Inc.		600		33
Mod-Pac Corp. *		500		6
Monsanto Co.		43,290		1,914
Myers Industries, Inc.		2,580		47
Nalco Holding Co. *		11,100		225
Neenah Paper, Inc.		1,231		45
NewMarket Corp.		2,000		129
Newmont Mining Corp.		32,251		1,460

14     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
NL Industries, Inc. (a)		5,300		59
NN, Inc.		1,800		20
Nucor Corp.		27,000		1,577
Olin Corp.		4,820		83
OM Group, Inc. *		2,400		137
Omnova Solutions, Inc. *		3,400		15
Oregon Steel Mills, Inc. *		2,500		136
Owens-Illinois, Inc. *		13,700		227
Packaging Corp. of America		8,500		195
Pactiv Corp. *		12,400		382
Penford Corp.		2,700		44
Phelps Dodge Corp.		14,660		1,472
PolyOne Corp. *		3,200		26
PPG Industries, Inc.		13,900		951
Praxair, Inc.		25,700		1,548
Quanex Corp.		5,625		189
Reliance Steel & Aluminum Co.		8,500		292
Rock-Tennessee Co., Class A		1,500		31
Rohm & Haas Co.		26,753		1,386
Royal Gold, Inc. (a)		2,200		65
RPM International, Inc.		9,600		184
RTI International Metals, Inc. (a)*		1,500		92
Schnitzer Steel Industries, Inc., Class A		1,650		58
Schweitzer-Mauduit International, Inc.		2,300		53
Sealed Air Corp.		6,000		357
Sensient Technologies Corp.		4,800		111
Sigma-Aldrich Corp.		6,300		473
Silgan Holdings, Inc.		5,800		240
Smurfit-Stone Container Corp. *		20,000		213
Sonoco Products Co.		4,100		145
Southern Copper Corp. (a)		10,800		555
Spartech Corp.		4,200		115
Steel Dynamics, Inc.		3,500		210
Stepan Co.		1,200		38
Stillwater Mining Co. *		7,133		77
Symyx Technologies, Inc. *		3,800		93
Temple-Inland, Inc.		8,800		347
Texas Industries, Inc.		1,000		62
The Dow Chemical Co.		78,766		3,213
The Lubrizol Corp.		5,400		243
The Mosaic Co. *		29,500		552
The Scotts Miracle-Gro Co., Class A		5,600		277
Titanium Metals Corp. *		7,200		212
United States Steel Corp.		9,900		669
Valhi, Inc.		8,600		212
Valspar Corp.		8,400		225
Vulcan Materials Co.		6,900		562
Wausau-Mosinee Paper Corp.		4,700		64
Westlake Chemical Corp.		5,100		161
Weyerhaeuser Co.		18,250		1,161
Worthington Industries, Inc.		7,200		124
				43,021
Media 4.0%
4Kids Entertainment, Inc. *		1,000		18
Acme Communications, Inc. *		1,900		10
ACT Teleconferencing, Inc. *		1,100		—
Adelphia Communications, Class A *		6,301		—
Advo, Inc.		4,050		119
Arbitron, Inc.		2,120		89
Belo Corp., Class A		9,400		165
Cablevision Systems Corp., Class A *		21,100		586
Cadmus Communications Corp.		3,900		59
Carmike Cinemas, Inc.		2,500		50
Catalina Marketing Corp.		5,900		150
CBS Corp., Class B		72,006		2,084
Citadel Broadcasting Co.		2,500		26
Clear Channel Communications, Inc.		49,721		1,733
Clear Channel Outdoor Holdings, Inc., Class A *		23,700		582
Comcast Corp. *		42,800		1,733
Comcast Corp., Class A *		151,336		6,155
Cox Radio, Inc., Class A *		4,600		77
Crown Media Holdings, Inc., Class A (a)*		6,000		24
Cumulus Media, Inc., Class A *		4,351		47
Daily Journal Corp. *		500		20
Discovery Holding Co., Class A *		22,323		331
Dow Jones & Co., Inc. (a)		6,500		228
DreamWorks Animation SKG, Inc., Class A *		2,800		74
EchoStar Communications Corp., Class A *		37,700		1,339
Emak Worldwide, Inc. *		500		3
Emmis Communications Corp., Class A *		713		9
Entercom Communications Corp.		3,000		83
Entravision Communications Corp. *		5,000		37
Gannett Co., Inc.		19,500		1,153
Gemstar — TV Guide International, Inc. *		33,360		116
Getty Images, Inc. *		4,600		199
Gray Television, Inc.		5,600		36
Harte-Hanks, Inc.		8,100		205
Hearst-Argyle Television, Inc.		3,700		93
Interactive Data Corp. *		20,700		473
John Wiley & Sons, Inc., Class A		6,300		222
Journal Communications, Inc., Class A		7,500		88
Journal Register Co.		3,200		25
Lakes Entertainment, Inc. *		1,800		20
Lamar Advertising Co., Class A *		9,200		531
Lee Enterprises, Inc.		2,500		71
Liberty Global, Inc., Class A *		12,575		330
Liberty Global, Inc., Class C *		12,601		320

See financial notes.     15

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Liberty Media Holding Corp. — Capital *		11,161		994
Lin TV Corp., Class A *		3,300		27
Live Nation, Inc. *		6,215		132
Martha Stewart Living Omnimedia, Class A (a)*		3,900		83
Media General, Inc., Class A		2,000		74
Mediacom Communications Corp., Class A *		7,600		63
Meredith Corp.		3,800		199
Morningstar, Inc. *		3,200		131
News Corp., Class A		253,950		5,295
Nexstar Broadcasting Group, Inc., Class A *		4,500		17
NTL, Inc.		15,000		405
Omnicom Group, Inc.		16,800		1,704
Pegasus Communications Corp., Class A *		6,320		13
Playboy Enterprises, Inc., Class B *		4,500		48
ProQuest Co. *		1,700		22
R.H. Donnelley Corp. *		2,966		179
Radio One, Inc., Class A *		9,500		65
Readers Digest Association, Inc., Class A		7,300		105
Regal Entertainment Group, Class A (a)		4,200		87
Salem Communications Corp., Class A *		900		12
Scholastic Corp. *		2,200		69
Sinclair Broadcast Group, Inc., Class A		4,800		43
Sirius Satellite Radio, Inc. (a)*		2,600		10
Sun-Times Media Group, Inc., Class A		7,300		42
The DIRECTV Group, Inc. *		101,476		2,261
The E.W. Scripps Co., Class A		12,000		594
The Interpublic Group of Cos., Inc. *		34,537		377
The McClatchy Co., Class A		8,416		365
The McGraw-Hill Cos., Inc.		34,600		2,220
The New York Times Co., Class A (a)		13,200		319
The Walt Disney Co.		195,410		6,148
Time Warner, Inc.		367,052		7,345
Tivo, Inc. *		4,500		29
Tribune Co.		26,900		897
Triple Crown Media, Inc. *		560		4
Univision Communications, Inc., Class A *		25,510		894
Valassis Communications, Inc. *		3,700		56
Value Line, Inc.		300		16
Viacom, Inc., Class B *		56,606		2,203
Warner Music Group Corp.		11,700		303
Washington Post, Class B		600		452
Westwood One, Inc.		7,200		57
World Wrestling Entertainment, Inc.		4,900		82
XM Satellite Radio Holdings, Inc., Class A *		15,300		178
				54,332
Pharmaceuticals & Biotechnology 7.4%
Abbott Laboratories		125,705		5,972
Accelrys, Inc. *		1,300		8
Adolor Corp. *		1,700		23
Affymetrix, Inc. *		4,900		125
Albany Molecular Research, Inc. *		1,600		19
Alkermes, Inc. *		3,100		52
Allergan, Inc.		13,234		1,529
Alpharma, Inc., Class A		3,700		82
Amgen, Inc. *		103,268		7,839
Amylin Pharmaceuticals, Inc. *		2,300		101
Andrx Corp. *		6,400		157
Aphton Corp. *		800		—
Applera Corp. — Celera Genomics Group *		5,600		87
Applied Biosystems Group-Applera Corp.		16,500		615
Arena Pharmaceuticals, Inc. *		800		12
ArQule, Inc. *		8,800		35
AVANIR Pharmaceuticals, Class A (a)*		475		2
Avigen, Inc. *		900		5
Barr Pharmaceuticals, Inc. *		8,781		460
Bio-Rad Laboratories, Inc., Class A *		3,000		220
BioCryst Pharmaceuticals, Inc. *		1,400		17
Biogen Idec, Inc. *		28,125		1,339
BioMarin Pharmaceuticals, Inc. *		1,800		29
BioVeris Corp. *		3,800		36
Bradley Pharmaceuticals, Inc. *		1,700		30
Bristol-Myers Squibb Co.		153,750		3,805
Bruker BioSciences Corp. *		2,100		17
Caliper Life Sciences, Inc. *		700		4
Cambrex Corp.		3,400		80
Celgene Corp. *		27,000		1,443
Cell Genesys, Inc. *		1,500		7
Cephalon, Inc. *		3,500		246
Charles River Laboratories, Inc. *		6,416		275
CNS, Inc.		5,000		185
CollaGenex Pharmaceuticals, Inc. *		3,000		35
Connetics Corp. *		3,400		58
Covance, Inc. *		5,800		339
Cubist Pharmaceuticals, Inc. *		1,900		42
CuraGen Corp. *		2,100		8
CV Therapeutics, Inc. (a)*		1,100		14
CYTOGEN Corp. *		230		1
Dendreon Corp. *		1,400		7
Digene Corp. *		1,400		65
Dionex Corp. *		1,200		65
Diversa Corp. *		1,100		10
Durect Corp. *		2,000		9

16     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Dyax Corp. *		2,000		6
Eli Lilly & Co.		92,400		5,175
Embrex, Inc. *		1,300		15
Emisphere Technologies, Inc. (a)*		800		5
Encysive Pharmaceuticals, Inc. *		2,600		12
Endo Pharmaceutical Holdings, Inc. *		10,500		300
Entremed, Inc. *		1,200		3
Enzo Biochem, Inc. *		1,781		25
Enzon Pharmaceuticals, Inc. *		4,400		38
Epicept Corp. *		489		1
eResearch Technology, Inc. (a)*		5,625		46
Exelixis, Inc. *		1,800		17
Fisher Scientific International, Inc. *		8,876		760
Forest Laboratories, Inc. *		27,500		1,346
Gene Logic, Inc. *		1,300		2
Genentech, Inc. *		83,300		6,939
Genzyme Corp. *		20,732		1,400
Geron Corp. *		1,000		8
Gilead Sciences, Inc. *		35,420		2,440
Harvard Bioscience, Inc. *		500		3
Human Genome Sciences, Inc. *		5,100		68
ICOS Corp. *		2,700		86
Illumina, Inc. *		1,500		66
ImClone Systems, Inc. *		6,935		217
ImmunoGen, Inc. *		1,500		6
Impax Laboratories, Inc. *		1,600		11
Incyte Corp. *		2,600		12
Indevus Pharmaceuticals, Inc. *		1,800		12
Inspire Pharmaceuticals, Inc. *		1,300		7
InterMune, Inc. *		1,100		24
Invitrogen Corp. *		3,629		211
Isis Pharmaceuticals, Inc. *		1,900		16
Johnson & Johnson		246,370		16,605
Kendle International, Inc. *		2,700		93
King Pharmaceuticals, Inc. *		18,516		310
Kos Pharmaceuticals, Inc. *		3,200		159
Kosan Biosciences, Inc. *		2,500		10
KV Pharmaceutical Co., Class A *		2,700		60
Lexicon Genetics, Inc. *		6,900		28
Ligand Pharmaceuticals, Inc., Class B (a)*		2,300		25
Luminex Corp. *		800		13
Matrixx Initiatives, Inc. *		1,700		37
Maxygen, Inc. *		1,500		13
Medarex, Inc. *		3,000		39
Medicis Pharmaceutical Corp., Class A (a)		3,400		119
MedImmune, Inc. *		19,875		637
Merck & Co., Inc.		183,552		8,337
MGI Pharma, Inc. *		3,932		75
Millennium Pharmaceuticals, Inc. *		25,856		302
Millipore Corp. *		5,100		329
Molecular Devices Corp. *		3,200		64
Mylan Laboratories, Inc.		16,600		340
Myogen, Inc. *		2,500		131
Myriad Genetics, Inc. *		1,400		38
Nabi Biopharmaceuticals *		2,800		18
Nanogen, Inc. *		1,500		3
Nektar Therapeutics (a)*		2,200		32
Neose Technologies, Inc. *		500		1
Neurocrine Biosciences, Inc. *		1,400		16
Neurogen Corp. *		800		5
Northfield Laboratories, Inc. (a)*		1,100		15
Noven Pharmaceuticals, Inc. *		1,800		40
NPS Pharmacuticals, Inc. *		1,000		5
Nuvelo, Inc. *		300		6
Onyx Pharmaceuticals, Inc. (a)*		1,800		34
Orchid Cellmark, Inc. *		280		1
OSI Pharmaceuticals, Inc. (a)*		1,998		76
OXiGENE, Inc. (a)*		900		4
Pain Therapeutics, Inc. *		2,600		22
Par Pharmaceutical Cos., Inc. *		1,900		37
PAREXEL International Corp. *		2,400		71
PDL BioPharma, Inc. *		4,100		87
PerkinElmer, Inc.		11,477		245
Perrigo Co.		7,300		131
Pfizer, Inc.		610,192		16,262
Pharmaceutical Product Development, Inc. (PPD)		10,000		316
Pharmacopeia Drug Discovery, Inc. *		650		3
Pharmacyclics, Inc. *		1,100		6
PharmaNet Development Group, Inc. *		1,500		28
Pharmion Corp. *		2,500		61
POZEN, Inc. *		1,300		22
Regeneron Pharmaceuticals, Inc. *		1,900		38
Sangamo BioSciences, Inc. *		1,200		7
Savient Pharmaceuticals, Inc. *		2,300		17
Schering-Plough Corp.		121,750		2,696
Sciele Pharma, Inc. *		3,400		74
Sepracor, Inc. (a)*		6,600		342
SuperGen, Inc. *		900		5
Tanox, Inc. *		4,900		66
Techne Corp. *		3,800		212
The Medicines Co. *		1,700		44
Thermo Electron Corp. *		19,550		838
Third Wave Technologies, Inc. *		1,800		7
Titan Pharmaceuticals, Inc. *		800		2
Trimeris, Inc. *		500		4
Tripos, Inc. *		6,000		8
Valeant Pharmaceuticals International		7,900		148
Varian, Inc. *		5,800		272
Ventana Medical Systems, Inc. *		2,400		97
Vertex Pharmaceuticals, Inc. *		3,144		128
Vical, Inc. *		1,600		10

See financial notes.     17

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
ViroPharma, Inc. *		1,000		13
Waters Corp. *		8,700		433
Watson Pharmaceuticals, Inc. *		7,732		208
Wyeth		109,400		5,583
ZymoGenetics, Inc. *		2,000		32
				101,381
Real Estate 2.5%
Affordable Residential Communities *		3,000		33
Alexander’s, Inc. *		700		255
Alexandria Real Estate Equities, Inc.		2,500		249
AMB Property Corp.		7,300		426
American Financial Realty Trust		8,500		99
American Home Mortgage Investment Corp. (a)		4,500		154
American Land Lease, Inc.		1,700		44
American Mortgage Acceptance Co.		1,500		27
American Realty Investors, Inc. *		1,037		9
Annaly Mortgage Management, Inc.		9,400		123
Anthracite Capital, Inc.		4,900		70
Anworth Mortgage Asset Corp.		1,000		9
Apartment Investment & Management Co., Class A		7,400		424
Archstone-Smith Trust		15,285		920
AvalonBay Communities, Inc.		6,100		799
Boston Properties, Inc.		9,900		1,058
Brandywine Realty Trust		7,363		246
BRE Properties, Class A		5,000		331
Brookfield Properties Corp.		17,800		674
Camden Property Trust		2,300		186
CapitalSource, Inc. (a)		6,900		191
Capstead Mortgage Corp.		2,240		19
CB Richard Ellis Group, Inc., Class A *		17,500		526
CBL & Associates Properties, Inc.		4,400		192
Colonial Properties Trust		2,567		129
Commercial Net Lease Realty (a)		3,320		75
Consolidated-Tomoka Land Co.		900		58
Corporate Office Properties Trust SBI		3,500		167
Correctional Properties Trust		1,600		52
Cousins Properties, Inc.		5,200		186
Crescent Real Estate Equity Co.		7,400		161
Developers Diversified Realty Corp.		7,612		464
Duke Realty Corp.		12,990		520
EastGroup Properties, Inc.		900		48
Entertainment Properties Trust		2,200		121
Equity Inns, Inc.		2,700		45
Equity Lifestyle Properties, Inc.		3,000		148
Equity Office Properties Trust (a)		32,738		1,391
Equity One, Inc.		6,600		166
Equity Residential		24,700		1,349
Essex Property Trust, Inc.		2,600		347
Federal Realty Investment Trust		5,200		417
FelCor Lodging Trust, Inc. *		5,700		118
First Industrial Realty Trust (a)		2,600		120
Forest City Enterprises, Inc., Class A		10,400		571
Friedman, Billings, Ramsey Group, Inc., Class A		12,080		92
General Growth Properties, Inc.		20,460		1,062
Getty Realty Corp. (a)		2,000		64
Glenborough Realty Trust, Inc.		2,400		62
Glimcher Realty Trust (a)		3,800		98
Global Signal, Inc.		5,000		271
Health Care Property Investors, Inc.		10,648		334
Health Care REIT, Inc.		5,200		215
Healthcare Realty Trust, Inc.		4,900		198
Highwoods Properties, Inc.		5,600		214
Home Properties, Inc.		2,500		158
Hospitality Properties Trust		6,000		291
Host Hotels & Resorts, Inc.		39,254		905
HRPT Properties Trust		13,500		161
IMPAC Mortgage Holdings, Inc.		4,800		45
Inland Real Estate Corp.		5,500		103
Innkeepers USA Trust		1,500		26
iStar Financial, Inc.		9,390		435
Jones Lang LaSalle, Inc.		2,300		212
Kilroy Realty Corp.		1,800		136
Kimco Realty Corp.		19,196		853
LaSalle Hotel Properties		3,500		148
Lexington Corp. Properties Trust		3,000		64
Liberty Media Holding Corp. — Capital		8,300		400
LTC Properties, Inc.		2,800		76
Mack-Cali Realty Corp.		5,900		312
Maguire Properties, Inc.		3,000		128
MFA Mortgage Investments, Inc.		5,500		44
Mid-America Apartment Communities, Inc.		2,500		159
Move, Inc. *		5,020		24
National Health Investors, Inc.		3,100		100
National Health Realty, Inc.		2,300		47
Nationwide Health Properties, Inc.		5,100		147
New Century Financial Corp. (a)		3,600		142
New Plan Excel Realty Trust		8,500		245
Newcastle Investment Corp.		2,200		65
Novastar Financial, Inc. (a)		2,000		64
Omega Healthcare Investors, Inc.		2,784		47
Parkway Properties, Inc.		500		25
Pennsylvania Real Estate Investment Trust		2,500		108
Plum Creek Timber Co., Inc.		15,047		541

18     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
PMC Commercial Trust		1,500		21
Post Properties, Inc.		2,200		108
Potlatch Corp.		2,753		112
ProLogis		20,854		1,319
PS Business Parks, Inc.		3,000		198
Public Storage, Inc.		14,590		1,309
RAIT Investment Trust		3,300		99
Ramco-Gershenson Properties		1,400		46
Rayonier, Inc.		2,388		98
Realogy Corp. *		20,930		540
Realty Income Corp.		4,600		121
Reckson Associates Realty Corp.		5,300		234
Redwood Trust, Inc.		2,500		137
Regency Centers Corp.		5,700		411
Saul Centers, Inc.		2,100		102
Saxon Capital, Inc.		3,500		50
Senior Housing Properties Trust		4,950		114
Shelbourne Properties I (b)*		500		5
Shelbourne Properties III (b)*		500		3
Simon Property Group, Inc.		18,574		1,804
SL Green Realty Corp. (a)		4,200		508
Sovran Self Storage, Inc.		800		47
Sun Communities, Inc.		3,000		105
Tanger Factory Outlet Centers, Inc.		1,600		60
Taubman Centers, Inc.		4,100		192
Tejon Ranch Co. *		674		33
The Macerich Co.		5,200		418
The Mills Corp.		5,400		99
The St. Joe Co. (a)		5,300		285
Thornburg Mortgage, Inc. (a)		7,800		200
Trammell Crow Co. *		2,800		136
Trustreet Properties, Inc.		1,000		17
UMH Properties, Inc.		1,600		26
United Dominion Realty Trust, Inc.		9,400		304
Universal Health Realty Income		900		35
Urstadt Biddle Properties, Inc.		500		9
Urstadt Biddle Properties, Inc., Class A		1,000		19
Ventas, Inc.		5,800		226
Vornado Realty Trust		10,500		1,252
Washington Real Estate Investment Trust (a)		3,100		131
Weingarten Realty Investors		7,975		371
Wellsford Real Properties, Inc. *		1,400		9
				33,851
Retailing 4.0%
99 Cents Only Stores *		3,066		37
Aaron Rents, Inc.		3,750		93
Aaron Rents, Inc., Class A		2,175		49
Abercrombie & Fitch Co., Class A		5,800		445
Advance Auto Parts, Inc.		9,540		334
Advanced Marketing Services, Inc. *		2,400		7
Aeropostale, Inc. *		4,400		129
Amazon.com, Inc. (a)*		33,700		1,284
America’s Car-Mart, Inc. (a)*		3,750		56
American Eagle Outfitters, Inc.		12,100		554
AnnTaylor Stores Corp. *		9,825		432
Asbury Automotive Group, Inc.		4,100		98
Audiovox Corp., Class A *		1,600		21
AutoNation, Inc. (a)*		21,600		433
AutoZone, Inc. *		6,100		683
Barnes & Noble, Inc.		7,400		306
Bed, Bath & Beyond, Inc. *		23,700		955
Best Buy Co., Inc.		39,225		2,167
Big Lots, Inc. *		11,100		234
Blockbuster, Inc., Class A *		6,900		27
Borders Group, Inc.		5,700		117
Building Material Holding Corp. (a)		3,000		78
Cabela’s, Inc., Class A (a)*		3,500		83
CarMax, Inc. *		3,923		174
Charming Shoppes, Inc. *		10,200		151
Chico’s FAS, Inc. *		13,300		318
Christopher & Banks Corp.		2,900		78
Circuit City Stores, Inc.		16,500		445
Claire’s Stores, Inc.		16,000		454
Coldwater Creek, Inc. *		8,502		259
CSK Auto Corp. *		3,500		55
Deb Shops, Inc.		1,600		45
Dick’s Sporting Goods, Inc. *		3,000		149
Dillard’s, Inc., Class A		5,500		166
Dollar General Corp.		27,775		390
Dollar Tree Stores, Inc. *		8,650		269
Dress Barn, Inc. *		6,000		130
Duckwall-ALCO Stores, Inc. *		1,800		71
eBay, Inc. *		110,848		3,562
Expedia, Inc. *		31,345		509
Family Dollar Stores, Inc.		12,700		374
Federated Department Stores, Inc.		42,952		1,886
Finlay Enterprises, Inc. *		1,000		7
Foot Locker, Inc.		14,100		327
GameStop Corp., Class A (a)*		1,524		78
Genesco, Inc. *		4,300		162
Genuine Parts Co.		13,500		614
Group 1 Automotive, Inc.		1,400		80
Guess?, Inc. *		2,700		154
Guitar Center, Inc. *		1,700		74
Handleman Co.		6,600		53
Hibbett Sporting Goods, Inc. *		3,543		104
Hollywood Media Corp. *		1,100		5
Home Depot, Inc.		162,300		6,059
IAC/InterActiveCorp. *		31,345		971
J.C. Penney Co., Inc.		22,400		1,685

See financial notes.     19

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Keystone Automotive Industries, Inc. *		1,800		69
Kohl’s Corp. *		28,300		1,998
Liberty Media Holding Corp. - Interactive *		55,809		1,232
Limited Brands, Inc.		31,520		929
Lithia Motors, Inc., Class A		700		18
Lowe’s Cos., Inc.		122,500		3,692
Midas, Inc. *		1,300		27
Monro Muffler Brake, Inc.		1,050		40
NetFlix, Inc. (a)*		6,000		166
NexCen Brands, Inc. *		1,100		7
Nordstrom, Inc.		20,600		975
O’Reilly Automotive, Inc. *		4,400		142
Office Depot, Inc. *		26,000		1,092
OfficeMax, Inc.		6,400		304
Pacific Sunwear of California, Inc. *		7,475		132
Payless Shoesource, Inc. *		5,906		158
PETsMART, Inc.		11,100		319
Pomeroy IT Solutions, Inc. *		2,100		18
Priceline.com, Inc. (a)*		3,983		160
RadioShack Corp. (a)		10,700		191
Rent-A-Center, Inc. *		5,250		151
Rent-Way, Inc. (a)*		3,200		34
REX Stores Corp. *		1,875		31
Ross Stores, Inc.		13,400		394
Saks, Inc. *		10,800		209
Sears Holdings Corp. *		12,885		2,248
Select Comfort Corp. (a)*		4,500		96
Shoe Carnival, Inc. *		1,200		34
Sonic Automotive, Inc.		1,400		37
Source Interlink Cos., Inc. *		5,000		45
Stage Stores, Inc.		1,800		58
Staples, Inc.		61,800		1,594
Stein Mart, Inc.		3,800		62
Talbots, Inc.		5,700		160
Target Corp.		69,800		4,131
The Buckle, Inc.		3,500		139
The Cato Corp., Class A		4,300		98
The Children’s Place Retail Stores, Inc. *		1,800		126
The Finish Line, Class A		3,600		47
The Gap, Inc.		73,900		1,553
The Gymboree Corp. *		2,500		116
The Men’s Wearhouse, Inc.		3,600		143
The Sherwin-Williams Co.		13,000		770
The TJX Cos., Inc.		40,400		1,170
Tiffany & Co.		11,500		411
Tractor Supply Co. *		4,000		194
Trans World Entertainment Corp. *		1,500		10
Tuesday Morning Corp. (a)		2,500		41
Tween Brands, Inc. *		1,742		73
Tweeter Home Entertainment Group, Inc. *		1,100		4
United Auto Group, Inc.		2,000		46
Urban Outfitters, Inc. *		12,800		224
ValueVision Media, Inc., Class A *		1,400		18
Williams-Sonoma, Inc.		9,200		313
Winmark Corp. *		1,200		26
Zale Corp. *		5,020		145
				55,100
Semiconductors & Semiconductor Equipment 2.6%
Actel Corp. *		1,100		18
Advanced Energy Industries, Inc. *		3,900		61
Advanced Micro Devices, Inc. (a)*		34,200		727
Agere Systems, Inc. *		15,011		255
Alliance Semiconductor Corp. *		1,200		4
Altera Corp. *		30,400		561
AMIS Holdings, Inc. *		2,500		24
Amkor Technology, Inc. *		14,400		99
Anadigics, Inc. *		1,150		9
Analog Devices, Inc.		30,200		961
Applied Materials, Inc.		139,098		2,419
Applied Micro Circuits Corp. *		25,238		77
Asyst Technologies, Inc. *		1,700		13
Atmel Corp. *		37,900		218
ATMI, Inc. *		1,400		44
Axcelis Technologies, Inc. *		7,044		49
AXT, Inc. (a)*		800		4
Broadcom Corp., Class A *		40,700		1,232
Brooks Automation, Inc. *		5,585		79
Cabot Microelectronics Corp. *		660		19
CEVA, Inc. *		433		3
Cirrus Logic, Inc. *		3,800		27
Cohu, Inc.		1,100		22
Conexant Systems, Inc. *		37,546		72
Credence Systems Corp. *		1,700		5
Cree, Inc. (a)*		6,000		132
Cymer, Inc. *		4,200		195
Cypress Semiconductor Corp. (a)*		8,500		143
Diodes, Inc. *		4,275		188
DSP Group, Inc. *		3,300		72
Electroglas, Inc. *		900		3
EMCORE Corp. (a)*		1,500		9
Entegris, Inc. *		10,199		114
Exar Corp. *		3,300		43
Fairchild Semiconductor International, Inc. *		8,600		139
FEI Co. (a)*		1,500		34
FormFactor, Inc. *		2,500		95
Freescale Semiconductor, Inc., Class B *		31,360		1,233
FSI International, Inc. *		1,300		8
HI/FN, Inc. *		800		4
Ibis Technology Corp. *		800		2
Integrated Device Technology, Inc. *		11,220		178

20     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Integrated Silicon Solutions, Inc. *		3,400		18
Intel Corp.		483,832		10,325
International Rectifier Corp. *		6,600		237
Intersil Corp., Class A		12,364		290
IXYS Corp. *		900		9
KLA-Tencor Corp.		15,000		738
Kopin Corp. *		2,500		9
Kulicke & Soffa Industries, Inc. *		4,400		40
Lam Research Corp. *		11,600		574
Lattice Semiconductor Corp. *		4,600		29
Linear Technology Corp.		25,000		778
LSI Logic Corp. *		29,964		301
LTX Corp. *		1,900		9
Marvell Technology Group Ltd. *		32,400		592
Mattson Technology, Inc. *		4,100		40
Maxim Integrated Products, Inc.		25,453		764
MEMC Electronic Materials, Inc. *		16,300		579
Micrel, Inc. *		6,800		76
Microchip Technology, Inc.		16,475		543
Micron Technology, Inc. *		52,699		761
Microsemi Corp. *		7,652		150
MIPS Technologies, Inc. *		1,100		8
MKS Instruments, Inc. *		4,300		93
MoSys, Inc. *		1,200		9
Nanometrics, Inc. *		300		3
National Semiconductor Corp.		29,200		709
Novellus Systems, Inc. *		11,171		309
NVIDIA Corp. *		28,000		976
OmniVision Technologies, Inc. (a)*		4,800		79
ON Semiconductor Corp. *		21,000		131
Pericom Semiconductor Corp. *		600		6
Photronics, Inc. *		3,900		55
Pixelworks, Inc. *		4,100		9
PLX Technology, Inc. *		1,300		16
PMC — Sierra, Inc. (a)*		8,800		58
QuickLogic Corp. *		900		3
Rambus, Inc. *		8,200		136
RF Micro Devices, Inc. *		13,700		100
Rudolph Technologies, Inc. *		1,318		23
Semitool, Inc. *		4,300		52
Semtech Corp. *		6,000		78
Silicon Image, Inc. *		6,500		77
Silicon Laboratories, Inc. *		5,000		163
Silicon Storage Technology, Inc. *		7,000		29
Sipex Corp. *		1,600		6
SiRF Technology Holdings, Inc. (a)*		3,500		98
Skyworks Solutions, Inc. *		5,689		38
Standard Microsystems Corp. *		3,600		111
Supertex, Inc. *		1,400		62
Teradyne, Inc. *		15,559		218
Tessera Technologies, Inc. *		3,000		105
Texas Instruments, Inc.		143,397		4,328
Three-Five Systems, Inc. *		1,099		—
Transmeta Corp., Delaware *		4,500		5
Transwitch Corp. *		3,100		5
Trident Microsystems, Inc. *		5,000		106
TriQuint Semiconductor, Inc. *		5,310		24
Ultratech, Inc. *		1,300		19
Varian Semiconductor Equipment Associates, Inc. *		2,250		82
Veeco Instruments, Inc. *		3,500		65
Virage Logic Corp. *		1,400		13
Vitesse Semiconductor Corp. (a)*		6,986		8
Xilinx, Inc.		27,600		704
Zoran Corp. *		4,261		59
				35,634
Software & Services 6.2%
Accenture Ltd., Class A		72,000		2,370
Activision, Inc. *		19,866		306
Actuate Corp. *		2,300		12
Acxiom Corp.		13,300		329
Adobe Systems, Inc. *		46,210		1,768
Advent Software, Inc. *		4,100		152
Affiliated Computer Services, Inc., Class A *		9,900		529
Agile Software Corp. *		4,400		30
Akamai Technologies, Inc. *		12,138		569
Alliance Data Systems Corp. *		6,600		401
Altiris, Inc. *		2,500		56
Ansoft Corp. *		4,600		123
Answerthink, Inc. *		1,700		5
Ansys, Inc. *		3,400		156
aQuantive, Inc. *		6,000		163
Ariba, Inc. *		5,270		40
ARTISTdirect, Inc. *		1,000		3
Aspen Technology, Inc. *		6,000		60
Autodesk, Inc. *		16,800		617
Automatic Data Processing, Inc.		48,100		2,378
BEA Systems, Inc. *		30,400		495
BearingPoint, Inc. *		7,100		59
Blackbaud, Inc.		3,000		75
BMC Software, Inc. *		19,000		576
Borland Software Corp. *		3,000		17
Bottomline Technologies, Inc. *		2,000		19
BroadVision, Inc. *		1,090		1
CA, Inc.		47,508		1,176
CACI International, Inc., Class A *		2,100		121
Cadence Design Systems, Inc. *		22,600		404
Captaris, Inc. *		2,200		13
Carreker Corp. *		3,700		27
Catapult Communications Corp. *		1,600		14
Ceridian Corp. *		19,500		460
CheckFree Corp. *		7,900		312
Chordiant Software, Inc. *		1,100		3
CIBER, Inc. *		1,900		13

See financial notes.     21

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Citrix Systems, Inc. *		20,000		591
Clarent Corp. *		1,545		—
CNET Networks, Inc. *		9,983		89
Cognizant Technology Solutions Corp., Class A *		10,600		798
Computer Sciences Corp. *		16,238		858
Compuware Corp. *		19,900		160
Convergys Corp. *		10,500		223
Corillian Corp. *		2,000		6
Covansys Corp. *		5,000		117
CSG Systems International, Inc. *		5,400		146
Digimarc Corp. *		3,500		31
Digital Insight Corp. *		2,300		71
Digital River, Inc. *		2,100		122
Digitas, Inc. *		6,800		72
Divine, Inc. *		161		—
DST Systems, Inc. *		8,100		501
Dynamics Research Corp. *		1,200		12
EarthLink, Inc. *		11,850		83
Edgewater Technology, Inc. *		767		5
eFunds Corp. *		5,002		124
Electronic Arts, Inc. *		25,200		1,333
Electronic Data Systems Corp.		42,100		1,066
eLoyalty Corp. *		190		4
Embarcadero Technologies, Inc. *		2,900		24
Entrust, Inc. *		2,800		11
Epicor Software Corp. *		4,000		56
EPIQ Systems, Inc. *		550		8
Equinix, Inc. (a)*		2,565		175
eSPEED, Inc., Class A *		3,300		33
Euronet Worldwide, Inc. (a)*		2,500		74
FactSet Research Systems, Inc.		3,750		191
Fair Isaac Corp.		7,744		284
FalconStor Software, Inc. *		1,200		9
Fidelity National Information Services, Inc.		9,050		376
First Data Corp.		62,932		1,526
Firstwave Technologies, Inc. *		1,000		2
Fiserv, Inc. *		15,300		756
Forrester Research, Inc. *		4,100		129
Gartner, Inc. *		10,300		192
Global Payments, Inc.		6,240		273
Google, Inc., Class A *		22,900		10,909
GSE Systems, Inc. *		424		1
Hewitt Associates, Inc., Class A *		9,425		236
Hyperion Solutions Corp. *		4,275		160
iBEAM Broadcasting Corp. *		290		—
iGate Corp. *		3,800		21
Informatica Corp. *		6,700		83
Inforte Corp. *		3,700		15
Infospace, Inc. *		3,872		78
infoUSA, Inc. *		4,800		53
Interactive Intelligence, Inc. *		1,000		18
Intergraph Corp. *		9,700		424
Internet Capital Group, Inc. *		350		4
Intervoice, Inc. *		1,678		10
Interwoven, Inc. *		5,925		75
Intuit, Inc. *		33,430		1,180
Iron Mountain, Inc. (a)*		9,787		424
j2 Global Communications, Inc. (a)*		4,000		110
Jack Henry & Associates, Inc.		6,300		137
JDA Software Group, Inc. *		4,500		66
Kana Software, Inc. *		528		2
Kanbay International, Inc. *		3,000		85
Keane, Inc. *		3,960		46
Kronos, Inc. *		1,875		64
Lawson Software, Inc. *		8,000		61
Lightbridge, Inc. *		4,700		54
LookSmart, Ltd. *		480		2
Macrovision Corp. *		3,100		83
Magma Design Automation, Inc. *		1,700		16
Manhattan Associates, Inc. *		1,300		38
ManTech International Corp., Class A *		2,500		85
MapInfo Corp. *		3,125		42
Mastercard, Inc.		10,000		741
MAXIMUS, Inc.		1,700		47
McAfee, Inc. *		14,445		418
Mentor Graphics Corp. *		5,700		96
MetaSolv, Inc. *		2,800		11
Micros Systems, Inc. *		11,000		546
Microsoft Corp. (c)		800,850		22,992
MicroStrategy, Inc., Class A *		856		102
Midway Games, Inc. (a)*		5,600		48
Moldflow Corp. *		300		4
MoneyGram International, Inc.		7,500		257
MPS Group, Inc. *		8,100		124
MSC.Software Corp. *		1,800		24
Napster, Inc. *		724		3
NAVTEQ Corp. *		6,100		203
NetRatings, Inc. *		3,000		52
NetScout Systems, Inc. *		1,800		15
Novell, Inc. *		25,600		154
Nuance Communications, Inc. *		1,974		23
NYFIX, Inc. *		750		4
Openwave Systems, Inc. *		7,771		67
Opnet Technologies, Inc. *		3,600		53
Opsware, Inc. *		800		7
Oracle Corp. *		434,449		8,024
Parametric Technology Corp. *		8,680		170
Paychex, Inc.		32,400		1,279
Perot Systems Corp., Class A *		9,100		134
Phoenix Technologies Ltd. *		1,300		6
PLATO Learning, Inc. *		1,433		8
Progress Software Corp. *		4,200		121
Quality Systems, Inc. *		2,000		85
Quest Software, Inc. *		7,700		113
Quovadx, Inc. *		2,600		7
Radiant Systems, Inc. *		3,800		42

22     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
RealNetworks, Inc. *		13,300		146
Red Hat, Inc. *		14,600		239
Renaissance Learning, Inc. (a)		2,100		31
S1 Corp. *		12,930		64
Saba Software, Inc. *		1,349		8
Sabre Holdings Corp., Class A (a)		12,401		315
Sagent Technology, Inc. *		1,500		—
Salesforce.com, Inc. (a)*		8,500		332
Sapient Corp. (a)*		9,100		50
SAVVIS, Inc. *		4,000		124
Secure Computing Corp. *		3,200		23
Selectica, Inc. *		1,900		4
Sonic Foundry, Inc. *		600		2
SonicWALL, Inc. *		7,400		78
SPSS, Inc. *		3,200		89
SRA International, Inc., Class A *		5,000		160
Startek, Inc.		3,900		53
Stellent, Inc.		3,600		40
SumTotal Systems, Inc. *		463		3
SupportSoft, Inc. *		4,800		25
Sybase, Inc. *		19,036		464
Symantec Corp. *		93,673		1,858
Synopsys, Inc. *		13,684		308
Synplicity, Inc. *		1,200		8
Syntel, Inc.		2,500		63
Take-Two Interactive Software, Inc. *		6,000		84
Talx Corp.		3,825		93
TeleCommunication Systems, Inc., Class A *		1,300		4
The BISYS Group, Inc. *		9,000		99
THQ, Inc. *		2,925		88
TIBCO Software, Inc. *		16,000		148
Tier Technologies, Inc., Class B *		500		3
Total System Services, Inc.		16,300		393
Transaction Systems Architects, Inc., Class A *		5,200		175
Troy Group, Inc. *		2,000		8
Tumbleweed Communications Corp. *		2,000		5
Ulticom, Inc. *		4,800		48
Unisys Corp. *		27,600		181
United Online, Inc.		6,150		83
USinternetworking, Inc. *		1,100		—
VA Software Corp. *		4,527		18
ValueClick, Inc. *		8,500		160
VeriFone Holdings, Inc. *		1,500		44
Verint Systems, Inc. *		2,500		82
VeriSign, Inc. *		20,875		432
Vignette Corp. *		3,394		55
Vitria Technology, Inc. *		925		2
Web.com, Inc. *		510		2
WebEx Communications, Inc. *		4,500		173
webMethods, Inc. *		4,421		33
Websense, Inc. *		5,000		137
Wind River Systems, Inc. *		6,760		74
Witness Systems, Inc. *		2,100		37
Yahoo! Inc. *		111,144		2,928
				85,021
Technology Hardware & Equipment 6.1%
3Com Corp. *		17,900		87
Adaptec, Inc. *		5,700		26
ADC Telecommunications, Inc. *		4,031		58
ADTRAN, Inc.		7,000		162
Aeroflex, Inc. *		5,400		58
Agilent Technologies, Inc. *		39,317		1,400
Agilysys, Inc.		1,600		24
American Technical Ceramics Corp. *		500		7
Amphenol Corp., Class A		8,800		598
Anaren, Inc. *		3,300		66
Andrew Corp. *		13,425		124
Anixter International, Inc. *		3,300		197
Apple Computer, Inc. *		65,000		5,270
Arris Group, Inc. *		2,600		35
Arrow Electronics, Inc. *		12,000		358
Avanex Corp. *		2,100		3
Avaya, Inc. *		37,885		485
Avici Systems, Inc. *		375		3
Avid Technology, Inc. *		3,756		136
Avnet, Inc. *		11,288		267
Avocent Corp. *		3,963		145
AVX Corp.		14,000		221
Aware, Inc. *		1,100		5
Bel Fuse, Inc.		1,200		37
Bell Microproducts, Inc. *		1,000		7
Benchmark Electronics, Inc. *		4,575		121
Black Box Corp.		1,700		76
Blue Coat Systems, Inc. *		340		8
Brightpoint, Inc. *		4,454		54
Brocade Communications Systems, Inc. *		21,000		170
C-COR, Inc. *		3,100		31
CalAmp Corp. *		1,000		7
CDW Corp.		6,800		447
Checkpoint Systems, Inc. *		4,600		84
Ciena Corp. *		2,470		58
Cisco Systems, Inc. *		511,909		12,352
Cogent, Inc. *		5,000		57
Cognex Corp.		2,900		67
Cognitronics Corp. *		2,600		5
Coherent, Inc. *		1,300		42
Com21, Inc. *		1,400		—
Comarco, Inc. *		500		5
CommScope, Inc. *		4,900		156
Comtech Telecommunications Corp. *		2,175		78
Comverse Technology, Inc. *		13,400		292

See financial notes.     23

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Corning, Inc. *		121,807		2,489
CoSine Communications, Inc. *		730		2
CTS Corp.		5,800		82
Daktronics, Inc.		5,200		123
DDi Corp. *		1		—
Dell, Inc. *		178,900		4,353
Diebold, Inc.		5,300		232
Ditech Networks, Inc. *		4,100		32
Echelon Corp. (a)*		3,700		31
Electro Scientific Industries, Inc. *		1,300		26
Electronics for Imaging, Inc. *		3,400		80
EMC Corp. *		199,686		2,446
EMS Technologies, Inc. *		1,000		18
Emulex Corp. *		5,900		111
Excel Technology, Inc. *		600		15
Extreme Networks, Inc. *		4,500		17
F5 Networks, Inc. *		3,300		218
Finisar Corp. (a)*		7,900		27
FLIR Systems, Inc. *		4,800		153
Foundry Networks, Inc. *		9,300		118
Frequency Electronics, Inc.		500		7
Gateway, Inc. *		11,800		20
Gerber Scientific, Inc. *		1,900		28
Glenayre Technologies, Inc. *		2,300		6
Global Imaging Systems, Inc. *		4,200		91
Harmonic, Inc. *		6,342		51
Harris Corp.		14,000		596
Hewlett-Packard Co.		239,636		9,283
Hutchinson Technology, Inc. *		2,500		58
I.D. Systems, Inc. *		3,000		63
Imation Corp.		2,000		92
Immersion Corp. *		800		5
InFocus Corp. *		1,600		5
Ingram Micro, Inc., Class A *		13,400		276
Insight Enterprises, Inc. *		4,650		100
Intelli-Check, Inc. *		500		3
Inter-Tel, Inc.		6,000		124
InterDigital Communications Corp. *		4,500		161
Intermec, Inc. *		5,600		127
International Business Machines Corp.		131,510		12,142
Iomega Corp. *		12,400		51
Itron, Inc. *		2,500		136
Ixia *		5,200		48
Jabil Circuit, Inc.		15,400		442
JDS Uniphase Corp. *		14,053		204
Juniper Networks, Inc. *		40,565		699
Keithley Instruments, Inc.		3,200		44
Kemet Corp. *		6,700		49
L-1 Identity Solutions, Inc. *		756		11
LaserCard Corp. *		1,000		11
LeCroy Corp. *		900		11
Lexmark International, Inc., Class A *		10,900		693
Lightpath Technologies, Inc. *		75		—
Littelfuse, Inc. *		2,000		68
Lucent Technologies, Inc. *		301,923		734
MasTec, Inc. *		5,350		59
Maxwell Technologies, Inc. *		1,000		18
McData Corp., Class A *		4,047		23
Measurement Specialties, Inc. *		700		15
Mechanical Technology, Inc. *		1,800		3
Mercury Computer Systems, Inc. *		3,600		44
Merix Corp. *		3,700		33
Methode Electronics, Inc.		3,600		40
MOCON, Inc.		600		6
Molex, Inc.		16,125		563
Motorola, Inc.		195,955		4,519
MRV Communications, Inc. (a)*		4,307		15
MTS Systems Corp.		4,500		150
Multi-Fineline Electronix, Inc. (a)*		2,500		60
National Instruments Corp.		5,675		177
NCR Corp. *		23,800		988
Network Appliance, Inc. *		27,500		1,004
Network Equipment Technologies, Inc. *		5,000		28
Newport Corp. *		4,200		91
NMS Communications Corp. *		1,500		3
Oplink Communications, Inc. *		657		13
OSI Systems, Inc. *		3,700		77
OYO Geospace Corp. *		300		17
Packeteer, Inc. *		3,600		40
Palm, Inc. (a)*		3,138		48
Park Electrochemical Corp.		3,600		111
Parkervision, Inc. *		400		4
Paxar Corp. *		2,300		46
PC Connection, Inc. *		3,000		33
PC-Tel, Inc. *		1,400		15
Pemstar, Inc. (a)*		1,600		7
Performance Technologies, Inc. *		1,600		9
Photon Dynamics, Inc. *		3,400		40
Planar Systems, Inc. *		3,700		45
Plantronics, Inc. (a)		4,000		84
Plexus Corp. *		3,700		81
Polycom, Inc. *		9,200		252
Powerwave Technologies, Inc. (a)*		3,583		23
Presstek, Inc. *		1,100		7
Printronix, Inc.		2,400		29
QLogic Corp. *		17,044		351
QUALCOMM, Inc.		135,100		4,916
Quantum Corp. *		5,500		12
Radisys Corp. *		3,700		68
Redback Networks, Inc. *		8,076		128
Research Frontiers, Inc. *		800		5
Richardson Electronics, Ltd.		1,300		12
Rofin-Sinar Technologies, Inc. *		1,900		117
Rogers Corp. *		2,500		175
SafeNet, Inc. *		2,770		59
SanDisk Corp. *		11,000		529
Sanmina — SCI Corp. *		41,316		163
ScanSource, Inc. *		1,200		38
SCM Microsystems, Inc. *		1,200		4

24     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Seachange International, Inc. *		3,350		28
Seagate Technology		37,066		837
Sirenza Microdevices, Inc. *		1,300		10
Solectron Corp. *		81,520		272
Sonus Networks, Inc. (a)*		19,400		101
Spectralink Corp.		1,000		9
Stratasys, Inc. (a)*		1,350		38
Stratex Networks, Inc. *		2,800		13
Sun Microsystems, Inc. *		248,230		1,348
SunPower Corp., Class A (a)*		1,300		44
Sycamore Networks, Inc. *		18,200		68
Symbol Technologies, Inc.		19,690		294
Symmetricom, Inc. *		8,450		72
Synaptics, Inc. *		3,500		99
Tech Data Corp. *		5,300		209
Technitrol, Inc.		4,000		101
Tekelec *		8,700		128
Tektronix, Inc.		9,202		279
Tellabs, Inc. *		34,564		364
TESSCO Technologies, Inc. *		900		29
Tollgrade Communications, Inc. *		3,600		30
Trimble Navigation Ltd. *		5,700		263
TTM Technologies, Inc. *		4,400		53
UTStarcom, Inc. (a)*		9,500		102
Vertel Corp. *		900		—
ViaSat, Inc. *		3,500		95
Vishay Intertechnology, Inc. *		36,688		495
Westell Technologies, Inc., Class A *		2,560		6
Western Digital Corp. *		15,700		287
WJ Communications, Inc. *		2,300		5
Xerox Corp. *		69,700		1,185
Xybernaut Corp. *		1,400		—
Zebra Technologies Corp., Class A *		6,375		238
Zygo Corp. *		500		9
				83,409
Telecommunication Services 3.0%
@Road, Inc. *		4,400		28
ALLTEL Corp.		30,587		1,631
American Tower Corp., Class A *		33,800		1,218
AT&T Corp.		318,806		10,919
AT&T Latin America Corp., Class A *		2,100		—
Atlantic Tele-Network, Inc.		3,250		63
BellSouth Corp.		151,887		6,850
Centennial Communications Corp. *		8,000		41
CenturyTel, Inc.		10,500		423
Cincinnati Bell, Inc. *		18,568		87
Citizens Communications Co.		24,900		365
ClearOne Communications, Inc. *		107		—
Commonwealth Telephone Enterprises, Inc.		9,400		394
Covad Communications Group, Inc. *		7,000		9
Crown Castle International Corp. *		20,900		703
CT Communications, Inc.		4,500		105
D&E Communications, Inc.		3,500		49
Dobson Communications Corp., Class A *		13,300		103
Embarq Corp.		11,576		560
HickoryTech Corp.		4,600		33
IDT Corp., Class B *		7,600		99
Leap Wireless International, Inc. *		1,800		100
Level 3 Communications, Inc. (a)*		93,000		492
Lynch Interactive Corp. *		9		26
Moscow CableCom Corp. *		1,400		14
NII Holdings, Inc. *		1,900		124
North Pittsburgh Systems, Inc.		3,500		92
Qwest Communications International, Inc. *		151,337		1,306
Rural Cellular Corp. *		1,200		13
SBA Communications Corp. *		9,300		248
Sprint Nextel Corp.		234,030		4,374
TALK America Holdings, Inc. (a)*		5,000		40
Telephone & Data Systems, Inc.		5,100		249
Time Warner Telecom, Inc., Class A *		9,000		179
U.S. Cellular Corp. *		6,100		387
U.S. Wireless Corp. *		400		—
Verizon Communications, Inc.		247,572		9,160
Warwick Valley Telephone Co.		1,100		22
Windstream Corp.		31,624		434
Wireless Facilities, Inc. *		1,800		4
				40,944
Transportation 1.8%
AirTran Holdings, Inc. *		5,800		58
Alaska Air Group, Inc. *		1,900		76
Alexander & Baldwin, Inc.		3,400		157
Amerco, Inc. *		900		83
AMR Corp. (a)*		17,000		482
Arkansas Best Corp.		1,100		45
Avis Budget Group, Inc.		8,372		166
Burlington Northern Santa Fe Corp.		30,300		2,349
C.H. Robinson Worldwide, Inc.		15,000		626
Con-way, Inc.		4,500		212
Continental Airlines, Inc., Class B (a)*		7,500		277
CSX Corp.		34,200		1,220
Dollar Thrifty Automotive Group, Inc. *		3,500		141
EGL, Inc. *		3,500		119
Expeditors International of Washington, Inc.		16,200		768
ExpressJet Holdings, Inc. *		3,000		24
FedEx Corp.		24,063		2,756
Florida East Coast Industries, Class A		3,600		215
Forward Air Corp.		2,600		84
Heartland Express, Inc.		8,941		146
Hub Group, Inc., Class A *		1,400		38

See financial notes.     25

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Interpool, Inc.		1,200		29
J.B. Hunt Transport Services, Inc.		13,000		281
JetBlue Airways Corp. (a)*		11,962		150
Kansas City Southern *		5,050		143
Kirby Corp. *		5,600		196
Knight Transportation, Inc.		4,050		74
Laidlaw International, Inc.		8,200		238
Landstar Systems, Inc.		15,200		706
MAIR Holdings, Inc. *		1,100		6
Mesa Air Group, Inc. *		3,800		34
Norfolk Southern Corp.		32,000		1,682
Northwest Airlines Corp. *		6,500		5
Old Dominion Freight Line *		4,050		112
Pacer International, Inc.		2,800		86
Park-Ohio Holdings Corp. *		2,600		36
Ryder System, Inc.		6,400		337
Saia, Inc. *		1,100		29
SkyWest, Inc.		4,000		107
Southwest Airlines Co.		64,125		964
Swift Transportation Co., Inc. *		5,970		150
UAL Corp. *		5,600		201
Union Pacific Corp.		22,000		1,994
United Parcel Service, Inc., Class B		91,480		6,893
US Airways Group, Inc. *		5,900		294
UTI Worldwide, Inc.		4,300		111
Werner Enterprises, Inc.		5,832		107
YRC Worldwide, Inc. *		5,004		194
				25,201
Utilities 3.4%
AGL Resources, Inc.		4,300		161
Allegheny Energy, Inc. *		11,900		512
Allete, Inc.		2,733		123
Alliant Energy Corp.		9,300		357
Ameren Corp. (a)		15,100		817
American Electric Power Co., Inc.		33,820		1,401
Aqua America, Inc. (a)		4,894		119
Aquila, Inc. *		29,400		135
Atmos Energy Corp.		6,700		206
Avista Corp.		3,800		98
Black Hills Corp.		1,400		48
CenterPoint Energy, Inc. (a)		26,100		404
Central Vermont Public Service Corp.		2,700		61
CH Energy Group, Inc.		1,900		99
Cleco Corp.		3,400		87
CMS Energy Corp. *		17,400		259
Consolidated Edison, Inc.		17,000		822
Constellation Energy Group, Inc.		15,500		967
Dominion Resources, Inc.		26,610		2,155
DPL, Inc.		11,452		329
DTE Energy Co. (a)		13,801		627
Duke Energy Corp.		100,356		3,175
Duquesne Light Holdings, Inc.		6,100		121
Dynegy, Inc., Class A *		38,700		235
Edison International		37,710		1,676
El Paso Electric Co. *		2,800		65
Energen Corp.		5,200		223
Energy East Corp.		12,214		297
Entergy Corp.		15,700		1,347
Equitable Resources, Inc.		8,800		357
Exelon Corp.		54,474		3,376
FirstEnergy Corp.		28,217		1,661
Florida Public Utilites Co.		1,599		22
FPL Group, Inc. (a)		29,400		1,499
Great Plains Energy, Inc.		6,500		211
Green Mountain Power Corp.		3,800		128
Hawaiian Electric Industries, Inc.		7,700		216
Idacorp, Inc.		4,200		166
KeySpan Corp.		13,400		544
MDU Resources Group, Inc.		16,425		422
Mirant Corp. *		17,700		523
National Fuel Gas Co.		5,800		217
New Jersey Resources Corp.		1,650		85
Nicor, Inc.		3,000		138
NiSource, Inc.		22,864		532
Northeast Utilities		10,124		253
Northwest Natural Gas Co.		2,700		112
NRG Energy, Inc. (a)*		7,000		337
NSTAR		7,734		269
OGE Energy Corp.		6,500		251
Oneok, Inc.		9,900		412
Ormat Technologies, Inc.		2,800		107
Otter Tail Corp.		1,100		33
Peoples Energy Corp.		3,200		140
Pepco Holdings, Inc.		14,000		356
PG&E Corp.		29,900		1,290
Piedmont Natural Gas Co., Inc. (a)		3,200		86
Pinnacle West Capital Corp.		6,800		325
PNM Resources, Inc.		5,500		155
PPL Corp.		30,000		1,036
Progress Energy, Inc. (a)		21,159		973
Public Service Enterprise Group, Inc.		19,000		1,160
Puget Energy, Inc.		7,500		179
Questar Corp.		8,100		660
Reliant Energy, Inc. (a)*		25,125		319
SCANA Corp.		7,905		316
Sempra Energy		19,175		1,017
Sierra Pacific Resources *		4,476		68
Southern Union Co.		6,074		168
Southwest Gas Corp.		3,600		129
TECO Energy, Inc.		15,700		259
The AES Corp. *		52,596		1,157
The Laclede Group, Inc.		3,300		118
The Southern Co.		58,600		2,133
TXU Corp.		52,800		3,333
UGI Corp.		8,200		217
UIL Holdings Corp.		3,166		126
Unisource Energy Corp.		3,800		135

26     See financial notes.

Schwab Total Stock Market Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Unitil Corp.		600		15
Vectren Corp.		5,766		167
Westar Energy, Inc.		8,200		208
WGL Holdings, Inc.		3,000		97
Wisconsin Energy Corp.		11,400		524
WPS Resources Corp.		2,400		128
Xcel Energy, Inc.		34,195		755
				46,546
Foreign Common Stock 0.1% of net assets
Cayman Islands 0.1%
Energy 0.1%
GlobalSantaFe Corp.		19,155		994
Preferred Stock 0.0% of net assets
Real Estate 0.0%
Simon Property Group, Inc.		1,200		94

Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)
U.S. Treasury Obligation 0.0% of net assets
U.S. Treasury Bill 4.90%, 12/14/06		310		308

	Number of		Value
Security	Shares		($ x 1,000)
Rights 0.0% of net assets
OSI Pharmaceuticals, Inc. *		1,640		--
End of Investments.
Collateral Invested for Securities on Loan 3.9% of net assets
State Street Navigator Security Lending Prime Portfolio		52,763,359		52,763
End of collateral invested for securities on loan.

At October 31, 2006 the tax basis cost of the fund’s investments was $1,038,818 and the unrealized appreciation and depreciation were $420,363 and ($94,146), respectively, with a net unrealized appreciation of $326,217.

In addition to the above, the fund held the following at October 31, 2006. All numbers are x 1,000 except number of futures contracts.

	Number of		Contract		Unrealized
	Contracts		Value		Gains
Futures Contracts
Russell 2000 Index, e-mini, Long expires 12/31/06		10		771		56
S&P 500 Index, e-mini, Long, expires 12/15/06		10		692		36
						92

*	Non-income producing security.
(a)	All or a portion of this security is on loan.
(b)	Fair-valued by Management.
(c)	All or a portion of this security is held as collateral for open futures contracts.
(d)	Issuer is affiliated with the fund’s adviser.
(e)	Bankrupt security/delisted.

See financial notes.     27

Schwab International Index Fund

Portfolio Holdings as of October 31, 2006

This section shows all the securities in the fund’s portfolio and their value as of the report date.

The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting Schwab’s website at www.schwab.com/schwabfunds.

				Cost		Value
Holdings by Category				($ x 1,000)		($ x 1,000)
	99.4	%	Foreign Common Stock		967,386		1,649,642
	0.3	%	Short-Term Investment		4,182		4,182
	99.7	%	Total Investments		971,568		1,653,824
	5.8	%	Collateral Invested for Securities on Loan		96,480		96,480
	(5.5)	%	Other Assets and Liabilities, Net				(91,025	)
	100.0	%	Total Net Assets				1,659,279

	Number of		Value
Security	Shares		($ x 1,000)
Foreign Common Stock 99.4% of net assets
Australia 4.3%
Banks 1.7%
Australia and New Zealand Banking Group Ltd.		275,227		6,164
Commonwealth Bank of Australia		208,546		7,695
National Australia Bank Ltd.		251,679		7,420
St. George Bank Ltd. (a)		79,285		1,986
Westpac Banking Corp.		298,794		5,539
				28,804
Capital Goods 0.1%
Wesfarmers Ltd.		59,508		1,590
Diversified Financials 0.2%			��
Macquarie Bank Ltd.		36,389		2,098
Suncorp.-Metway Ltd. (a)		94,261		1,517
				3,615
Energy 0.1%
Woodside Petroleum Ltd.		70,492		2,071
Food & Staples Retailing 0.3%
Coles Myer Ltd.		185,781		1,953
Woolworths Ltd.		186,347		2,984
				4,937
Food, Beverage & Tobacco 0.1%
Foster’s Group Ltd.		310,703		1,552
Insurance 0.3%
AMP Ltd.		283,951		2,085
QBE Insurance Group Ltd.		128,017		2,446
				4,531
Materials 1.1%
BHP Billiton Ltd.		582,860		12,406
Rinker Group Ltd.		152,818		2,187
Rio Tinto Ltd. (a)		44,243		2,690
				17,283
Real Estate 0.2%
Westfield Group		250,650		3,615
Telecommunication Services 0.2%
Telstra Corp., Ltd. (a)		956,807		2,938
				70,936
Austria 0.2%
Banks 0.1%
Erste Bank der Oesterreichischen Sparkassen AG		33,336		2,268
Energy 0.1%
OMV AG		24,905		1,353
				3,621
Belgium 1.3%
Banks 0.4%
Dexia		116,326		3,138
KBC GROEP NV		32,914		3,594
				6,732
Diversified Financials 0.5%
Fortis		205,652		8,624
Food, Beverage & Tobacco 0.1%
InBev NV *		33,347		1,877
Materials 0.1%
Solvay SA		11,315		1,466
Utilities 0.2%
Electrabel SA		3,678		2,217
				20,916

See financial notes.     1

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Canada 6.7%
Automobiles & Components 0.1%
Magna International, Inc., Class A (a)		16,790		1,257
Banks 2.0%
Bank of Montreal (a)		82,275		5,088
Bank of Nova Scotia (a)		151,680		6,659
Canadian Imperial Bank of Commerce (a)		56,793		4,430
National Bank of Canada (a)		26,520		1,447
Royal Bank of Canada (a)		201,446		8,934
Toronto-Dominion Bank (a)		113,303		6,568
				33,126
Energy 1.9%
Canadian Natural Resources Ltd.		88,025		4,582
Enbridge, Inc. (a)		59,980		2,017
EnCana Corp.		132,106		6,274
Imperial Oil Ltd. (a)		52,047		1,774
Nexen, Inc.		42,457		2,265
Petro-Canada		79,554		3,392
Suncor Energy, Inc		72,088		5,537
Talisman Energy, Inc.		162,888		2,676
TransCanada Corp. (a)		75,940		2,457
				30,974
Food & Staples Retailing 0.1%
Shoppers Drug Mart Corp.		34,748		1,415
Insurance 0.8%
Manulife Financial Corp. (a)		245,296		7,973
Power Corp. of Canada (a)		48,677		1,475
Sun Life Financial, Inc. (a)		97,223		4,088
				13,536
Materials 0.7%
Alcan, Inc.		56,826		2,665
Barrick Gold Corp.		137,399		4,252
Novelis, Inc.		1		—
Potash Corp of Saskatchewan		16,545		2,073
Teck Cominco Ltd., Class B		33,931		2,500
				11,490
Media 0.1%
The Thomson Corp. (a)		32,575		1,348
Real Estate 0.1%
Brookfield Asset Management, Inc., Class A (a)		50,757		2,312
Technology Hardware & Equipment 0.3%
Nortel Networks Corp. *		703,685		1,573
Research In Motion Ltd. *		31,116		3,655
				5,228
Telecommunication Services 0.4%
BCE, Inc. (a)		135,368		3,821
Rogers Communications, Inc.		37,589		2,249
				6,070
Transportation 0.2%
Canadian National Railway Co.		86,466		4,119
				110,875
Denmark 0.5%
Banks 0.2%
Danske Bank A/S		71,510		2,995
Pharmaceuticals & Biotechnology 0.2%
Novo-Nordisk A/S, Class B		33,620		2,532
Transportation 0.1%
AP Moller - Maersk A/S		128		1,156
AP Moller - Maersk A/S		149		1,321
				2,477
				8,004
Finland 1.1%
Materials 0.2%
Stora Enso Oyj		103,510		1,673
UPM-Kymmene Oyj		83,482		2,119
				3,792
Technology Hardware & Equipment 0.8%
Nokia Oyj		653,383		12,987
Utilities 0.1%
Fortum Oyj		68,798		1,900
				18,679
France 10.3%
Automobiles & Components 0.4%
Compagnie Generale des Etablissements Michelin, Class B		20,614		1,680
PSA Peugeot Citroen		28,624		1,642
Renault S.A.		30,704		3,588
				6,910
Banks 1.7%
BNP Paribas		131,357		14,426
Credit Agricole S.A.		113,868		4,838
Societe Generale		58,802		9,762
				29,026

2     See financial notes.

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Capital Goods 0.7%
Compagnie de Saint-Gobain		53,044		3,909
Schneider Electric SA		34,576		3,591
Vinci S. A.		37,948		4,275
				11,775
Consumer Durables & Apparel 0.3%
LVMH Moet Hennessy Louis Vuitton S.A.		40,824		4,252
Consumer Services 0.2%
Accor SA		37,106		2,574
Energy 1.6%
Total SA		393,890		26,645
Food & Staples Retailing 0.3%
Carrefour S.A. *		96,720		5,891
Food, Beverage & Tobacco 0.5%
Groupe Danone		41,720		6,108
Pernod Ricard SA		13,699		2,742
				8,850
Health Care Equipment & Services 0.1%
Essilor International S.A.		16,331		1,712
Household & Personal Products 0.2%
L’Oreal S.A.		40,437		3,930
Insurance 0.8%
Assurances Generales de France (AGF)		12,978		1,823
Axa		292,677		11,134
				12,957
Materials 0.5%
Air Liquide S.A.		18,948		4,027
Lafarge S.A.		27,323		3,663
				7,690
Media 0.5%
Lagardere S.C.A.		22,134		1,592
Vivendi Universal S.A.		181,776		6,887
				8,479
Pharmaceuticals & Biotechnology 0.8%
Sanofi-Aventis		154,055		13,118
Retailing 0.1%
Pinault-Printemps-Redoute S.A.		12,173		1,815
Technology Hardware & Equipment 0.2%
Alcatel SA, Class A		206,671		2,623
Telecommunication Services 0.6%
Bouygues SA		39,073		2,278
France Telecom SA		270,491		7,044
				9,322
Utilities 0.8%
Suez SA		202,911		9,089
Veolia Environnement		65,105		3,984
				13,073
				170,642
Germany 7.6%
Automobiles & Components 1.0%
Bayerische Motoren Werke (BMW) AG		47,949		2,758
Continental AG		22,867		2,562
DaimlerChrysler AG		162,404		9,285
Volkswagen AG		30,793		3,042
				17,647
Banks 0.5%
Bayerische Hypo-und Vereinsbank AG (a)		101,300		4,594
Commerzbank AG		105,004		3,734
				8,328
Capital Goods 0.8%
Siemens AG *		142,378		12,844
Consumer Durables & Apparel 0.1%
Adidas-Salomon AG		25,972		1,303
Diversified Financials 0.8%
Deutsche Bank AG		82,735		10,464
Deutsche Boerse AG		16,600		2,682
				13,146
Insurance 1.1%
Allianz AG		63,388		11,779
Muenchener Rueckversicherungs AG		36,694		5,967
				17,746
Materials 0.9%
BASF AG		83,012		7,330
Bayer AG (a)		122,106		6,142

See financial notes.     3

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
ThyssenKrupp AG		60,228		2,242
				15,714
Software & Services 0.4%
SAP AG		34,535		6,875
Telecommunication Services 0.5%
Deutsche Telekom AG		485,962		8,425
Transportation 0.2%
Deutsche Post AG		113,727		3,152
Utilities 1.3%
E.ON AG		112,817		13,585
RWE AG		74,676		7,396
				20,981
				126,161
Greece 0.3%
Banks 0.3%
Alpha Bank A.E.		65,044		1,890
National Bank of Greece S.A.		58,220		2,639
				4,529
Hong Kong 0.8%
Banks 0.1%
Hang Seng Bank Ltd.		121,836		1,551
Capital Goods 0.2%
Hutchison Whampoa Ltd.		336,370		2,982
Real Estate 0.4%
Cheung Kong (Holdings) Ltd.		204,240		2,219
Sun Hung Kai Properties Ltd.		210,604		2,300
Swire Pacific Ltd.		167,890		1,772
				6,291
Utilities 0.1%
CLP Holdings Ltd.		247,080		1,569
Hong Kong & China Gas Co.		600,400		1,375
				2,944
				13,768
Ireland 0.7%
Banks 0.5%
Allied Irish Banks plc		138,658		3,751
Anglo Irish Bank Corp., plc		110,337		1,980
Bank of Ireland		155,007		3,104
				8,835
Materials 0.2%
CRH plc		87,100		3,077
				11,912
Italy 3.3%
Banks 1.2%
Banca Intesa S.p.A.		608,806		4,159
Banche Popolari Unite Scpa		56,071		1,539
SanPaolo IMI S.p.A.		164,991		3,520
UniCredito Italiano S.p.A.		541,340		4,508
UniCredito Italiano S.p.A.		777,937		6,447
				20,173
Energy 0.8%
Eni S.p.A. (a)		419,043		12,676
Insurance 0.4%
Assicurazioni Generali S.p.A. *		173,745		6,890
Media 0.1%
Mediaset S.p.A.		110,368		1,237
Telecommunication Services 0.4%
Telecom Italia RNC S.p.A.		963,731		2,435
Telecom Italia S.p.A.		1,701,963		5,155
				7,590
Utilities 0.4%
Enel S.p.A.		640,287		6,132
				54,698
Japan 18.8%
Automobiles & Components 2.6%
Bridgestone Corp.		91,657		1,909
Denso Corp.		68,000		2,592
Honda Motor Co., Ltd.		246,039		8,684
Nissan Motors Co., Ltd.		337,196		4,031
Toyota Motor Corp.		438,703		25,904
				43,120
Banks 3.4%
Mitsubishi UFJ Financial Group, Inc.		1,612		20,448
Mitsui Trust Holdings, Inc.		129,000		1,514
Mizuho Financial Group, Inc.		1,666		12,950
Resona Holdings, Inc.		1,748		5,305
Shinsei Bank Ltd.		222,000		1,280
Sumitomo Mitsui Financial Group, Inc.		1,014		11,081
The Bank of Yokohama Ltd.		214,000		1,649
The Sumitomo Trust & Banking Co., Ltd.		253,950		2,724
				56,951
Capital Goods 1.6%
Asahi Glass Co., Ltd.		143,000		1,644
Fanuc Ltd.		32,300		2,802

4     See financial notes.

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Itochu Corp.		237,000		1,886
Komatsu Ltd.		135,609		2,440
Mitsubishi Corp.		227,000		4,383
Mitsubishi Electric Corp.		303,000		2,638
Mitsubishi Heavy Industries Ltd.		565,000		2,518
Mitsui & Co., Ltd.		231,000		3,150
SMC Corp.		7,000		955
Sumitomo Corp.		188,000		2,470
Sumitomo Electric Industries Ltd.		97,000		1,371
				26,257
Commercial Services & Supplies 0.2%
Dai Nippon Printing Co., Ltd.		87,000		1,294
Secom Co., Ltd.		38,500		1,925
				3,219
Consumer Durables & Apparel 1.1%
Fuji Photo Film Co., Ltd.		70,811		2,631
Matsushita Electric Industrial Co., Ltd.		328,912		6,857
Sharp Corp.		123,785		2,203
Sony Corp.		159,500		6,519
				18,210
Diversified Financials 0.9%
Credit Saison Co., Ltd.		26,000		940
Daiwa Securities Group, Inc.		177,045		2,002
Nikko Cordial Corp.		120,000		1,433
Nomura Holdings, Inc.		311,000		5,468
ORIX Corp.		14,000		3,937
Takefuji Corp.		18,000		652
				14,432
Energy 0.1%
Nippon Oil Corp.		182,000		1,360
Food & Staples Retailing 0.4%
Aeon Co., Ltd.		97,000		2,281
Seven & I Holdings Co., Ltd.		133,203		4,273
				6,554
Food, Beverage & Tobacco 0.3%
Japan Tobacco, Inc.		750		3,264
Kirin Brewery Co., Ltd.		136,000		1,809
				5,073
Household & Personal Products 0.1%
Kao Corp.		78,619		2,065
Insurance 0.7%
Millea Holdings, Inc.		129,500		4,876
Mitsui Sumitomo Insurance Co., Ltd.		211,875		2,626
Sompo Japan Insurance, Inc.		140,920		1,870
T&D Holdings, Inc.		37,000		2,700
				12,072
Materials 1.0%
JFE Holdings, Inc.		85,000		3,413
Nippon Steel Corp.		1,020,000		4,145
Nitto Denko Corp.		28,000		1,593
Shin-Etsu Chemical Co., Ltd.		58,280		3,821
Sumitomo Chemical Co., Ltd.		229,000		1,630
Sumitomo Metal Industries, Ltd.		658,000		2,473
				17,075
Pharmaceuticals & Biotechnology 1.0%
Astellas Pharma, Inc.		79,370		3,574
Daiichi Sankyo Co., Ltd.		105,500		3,135
Eisai Co., Ltd.		45,000		2,302
Takeda Pharmaceutical Co., Ltd.		130,200		8,359
				17,370
Real Estate 0.4%
Mitsubishi Estate Co., Ltd.		181,502		4,341
Mitsui Fudosan Co., Ltd.		125,777		3,094
				7,435
Semiconductors & Semiconductor Equipment 0.2%
Rohm Co., Ltd.		14,112		1,296
Tokyo Electron Ltd.		28,000		2,088
				3,384
Software & Services 0.3%
Nintendo Co., Ltd.		18,239		3,727
Yahoo! Japan Corp.		1,840		715
				4,442
Technology Hardware & Equipment 2.0%
Canon, Inc.		190,995		10,200
Fujitsu Ltd.		326,000		2,656
Hitachi Ltd.		487,079		2,785
Hoya Corp.		69,607		2,690
Keyence Corp.		6,400		1,415
Kyocera Corp.		24,500		2,196
Murata Manufacturing Co., Ltd.		32,574		2,274
NEC Corp.		327,000		1,684
Ricoh Co., Ltd.		89,000		1,756
TDK Corp.		22,000		1,716
Toshiba Corp. (a)		471,178		2,974
				32,346

See financial notes.     5

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Telecommunication Services 1.0%
KDDI Corp.		444		2,769
Nippon Telegraph & Telephone Corp. (NTT)		1,565		7,862
NTT DoCoMo, Inc.		2,615		3,988
Softbank Corp. (a)		109,000		2,380
				16,999
Transportation 0.5%
Central Japan Railway Co.		272		2,930
East Japan Railway Co.		562		3,928
Mitsui O.S.K. Lines Ltd.		175,000		1,457
				8,315
Utilities 1.0%
Chubu Electric Power Co., Inc. (a)		102,100		2,827
Kyushu Electric Power Co., Inc.		58,493		1,368
The Kansai Electric Power Co., Inc.		130,000		3,067
The Tokyo Electric Power Co., Inc.		181,890		5,287
Tohoku Electric Power Co., Inc.		57,700		1,278
Tokyo Gas Co., Ltd.		394,201		2,012
				15,839
				312,518
Netherlands 4.1%
Banks 0.5%
ABN AMRO Holding N.V.		300,416		8,754
Capital Goods 0.1%
European Aeronautic Defense & Space Co.		46,558		1,261
Consumer Durables & Apparel 0.4%
Koninklijke (Royal) Philips Electronics N.V.		209,766		7,307
Diversified Financials 1.0%
ING Groep N.V.		366,162		16,217
Food & Staples Retailing 0.2%
Koninklijke Ahold NV *		248,229		2,615
Food, Beverage & Tobacco 0.6%
Heineken NV		34,407		1,558
Royal Numico N.V.		28,252		1,262
Unilever NV		272,295		6,715
				9,535
Insurance 0.2%
Aegon N.V.		184,183		3,384
Materials 0.5%
Akzo Nobel N.V.		39,704		2,226
Koninklijke DSM N.V.		32,938		1,502
Mittal Steel Co NV		98,640		4,236
				7,964
Media 0.1%
Reed Elsevier N.V.		105,903		1,808
Semiconductors & Semiconductor Equipment 0.2%
ASML Holding NV *		63,189		1,442
STMicroelectronics NV		70,117		1,213
				2,655
Telecommunication Services 0.2%
Koninklijke (Royal) KPN NV		303,896		4,063
Transportation 0.1%
TNT N.V.		67,143		2,579
				68,142
Norway 0.4%
Banks 0.1%
DNB NOR ASA		117,439		1,538
Energy 0.3%
Norsk Hydro ASA (a)		118,680		2,746
Statoil ASA		103,920		2,639
				5,385
				6,923
Portugal 0.2%
Banks 0.1%
Banco Comercial Portugues S.A.		531,272		1,730
Telecommunication Services 0.1%
Portugal Telecom, SGPS, S.A.		186,107		2,322
				4,052
Singapore 0.5%
Banks 0.4%
DBS Group Holdings Ltd.		175,246		2,291
Overseas-Chinese Banking Corp., Ltd.		437,552		1,965
United Overseas Bank Ltd.		214,682		2,439
				6,695
Telecommunication Services 0.1%
Singapore Telecommunications Ltd.		775,480		1,321
				8,016

6     See financial notes.

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
Spain 4.6%
Banks 2.0%
Banco Bilbao Vizcaya Argentaria S.A.		552,339		13,331
Banco Popular Espanol SA		155,820		2,700
Banco Santander Central Hispano S.A.		1,013,916		17,547
				33,578
Capital Goods 0.1%
ACS Actividades de Construction Y Servicios, SA		35,072		1,760
Energy 0.3%
Repsol YPF S.A.		154,504		5,136
Food, Beverage & Tobacco 0.1%
Altadis S.A.		42,027		2,010
Retailing 0.1%
Industria de Diseno Textil SA		41,211		1,969
Telecommunication Services 0.9%
Telefonica S.A.		777,060		14,960
Transportation 0.1%
Abertis Infraestructuras SA		52,740		1,428
Utilities 1.0%
Endesa S.A.		173,536		7,614
Iberdrola S.A.		143,905		6,595
Union Fenosa SA		38,092		1,933
				16,142
				76,983
Sweden 1.8%
Banks 0.7%
ForeningsSparbanken AB		64,379		2,106
Nordea Bank AB		346,815		4,770
Skandinaviska Enskilda Banken AB, (SEB) Series A		70,925		1,979
Svenska Handelsbanken AB, Class A		82,642		2,138
				10,993
Capital Goods 0.2%
Sandvik AB		160,500		1,958
Volvo AB		34,020		2,120
				4,078
Retailing 0.2%
Hennes & Mauritz AB, Series B		71,752		3,090
Technology Hardware & Equipment 0.5%
Telefonaktiebolaget LM Ericsson, Class B		2,372,504		8,968
Telecommunication Services 0.2%
TeliaSonera AB		343,834		2,503
				29,632
Switzerland 7.6%
Capital Goods 0.3%
ABB Ltd.		339,807		5,054
Consumer Durables & Apparel 0.2%
Compagnie Financiere Richemont AG, Series A		83,283		4,119
Diversified Financials 2.0%
Credit Suisse Group		199,166		12,006
UBS AG		348,598		20,815
				32,821
Food, Beverage & Tobacco 1.4%
Nestle S.A.		65,820		22,492
Insurance 0.6%
Swiss Re		53,201		4,364
Zurich Financial Services AG		22,760		5,623
				9,987
Materials 0.3%
Holcim Ltd.		26,619		2,292
Syngenta AG *		15,609		2,519
				4,811
Pharmaceuticals & Biotechnology 2.8%
Novartis AG — Reg’d.		436,697		26,508
Roche Holdings AG		111,022		19,439
				45,947
				125,231
United Kingdom 24.3%
Automobiles & Components 0.0%
Rolls Royce Group, Class B *		11,223,007		21
Banks 5.6%
Barclays plc		1,053,619		14,196
HBOS plc		605,157		12,537

See financial notes.     7

Schwab International Index Fund

Portfolio Holdings continued

	Number of		Value
Security	Shares		($ x 1,000)
HSBC Holdings plc		1,805,836		34,266
Lloyds TSB Group plc		895,483		9,565
Royal Bank of Scotland Group plc		501,714		17,860
Standard Chartered plc		183,129		5,152
				93,576
Capital Goods 0.6%
BAE Systems plc		490,319		3,920
Rolls-Royce Group plc *		305,804		2,737
Smiths Group plc		77,351		1,395
Wolseley plc		100,048		2,359
				10,411
Commercial Services & Supplies 0.1%
Experian Group Ltd. *		147,144		1,618
Consumer Services 0.3%
Carnival plc		30,775		1,498
Compass Group plc		328,860		1,757
Ladbrokes plc		101,485		791
				4,046
Diversified Financials 0.3%
3i Group plc		79,355		1,453
Man Group plc		305,124		2,835
				4,288
Energy 5.1%
BG Group plc		541,434		7,186
BP plc		3,203,910		35,817
Royal Dutch Shell plc, Class A		749,220		26,070
Royal Dutch Shell plc, Class B		434,049		15,596
				84,669
Food & Staples Retailing 0.6%
Boots Group plc		85,666		1,323
Tesco plc		1,227,342		9,208
				10,531
Food, Beverage & Tobacco 1.9%
British American Tobacco plc		232,940		6,344
Cadbury Schweppes plc		343,491		3,458
Diageo plc		445,768		8,242
Gallaher Group plc		117,546		1,995
Imperial Tobacco Group plc		106,921		3,787
SABMiller plc		124,102		2,400
Unilever plc		214,819		5,335
				31,561
Health Care Equipment & Services 0.1%
Smith & Nephew plc		175,479		1,714
Household & Personal Products 0.3%
Reckitt Benckiser plc		94,602		4,113
Insurance 1.0%
Aviva plc		375,087		5,540
Legal & General Group plc		992,966		2,738
Old Mutual plc		874,614		2,831
Prudential plc		394,603		4,834
				15,943
Materials 1.9%
Anglo American plc		240,109		10,867
BHP Billiton plc		385,794		7,429
Hanson plc		128,676		1,786
Rio Tinto plc		167,659		9,277
Xstrata plc		61,410		2,614
				31,973
Media 0.7%
British Sky Broadcasting Group plc		195,898		2,031
ITV plc		738,032		1,485
Pearson plc		143,637		2,120
Reed Elsevier plc		180,755		2,055
Reuters Group plc		196,728		1,677
WPP Group plc		214,518		2,748
				12,116
Pharmaceuticals & Biotechnology 2.4%
AstraZeneca plc		253,064		14,914
GlaxoSmithKline plc		932,267		24,845
				39,759
Real Estate 0.3%
British Land Co., plc		90,252		2,574
Land Securities Group plc		75,040		3,001
				5,575
Retailing 0.4%
Home Retail Group *		147,144		1,126
Kingfisher plc		310,070		1,555
Marks & Spencer Group plc		275,748		3,449
				6,130
Telecommunication Services 1.7%
BT Group plc		1,305,157		6,938
Vodafone Group plc		8,348,655		21,512
				28,450
Utilities 1.0%
Centrica plc		538,641		3,406
National Grid plc		405,043		5,165
Scottish Power plc		248,688		3,100
Scottish Southern Energy plc		133,187		3,341

8     See financial notes.

Schwab International Index Fund

Portfolio Holdings continued

Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)
United Utilities plc		139,438		1,898
				16,910
				403,404
Short-Term Investment 0.3% of net assets
Wells Fargo, Grand Cayman Time Deposit 4.71%, 11/01/06		4,182		4,182

End of Investments.

	Number of
Security	Shares
Collateral Invested for Securities on Loan 5.8% of net assets
Securities Lending Investment Fund, a series of the Brown Brothers Investment Trust.		96,479,879	96,480

End of collateral invested for securities on loan.

At 10/31/06 the tax basis cost of the fund’s investments was $986,474, and the unrealized appreciation and depreciation were $699,603 and ($32,253), respectively, with a net unrealized appreciation of $667,350.

As of 10/31/06, the prices of certain foreign securities held by the fund aggregating $1,515,837 were adjusted from their closing market prices following the guidelines adopted by the fund’s Board of Trustees.

*	Non-income producing security.
(a)	All or a portion of this security is on loan.

See financial notes.     9

Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8: Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10: Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 11: Controls and Procedures.

(a) Based on their evaluation of Registrant’s disclosure controls and procedures, as of a date within 90 days of the filing date, Registrant’s Chief Executive Officer, Evelyn Dilsaver and Registrant’s Principal Financial Officer, George Pereira, have concluded that Registrant’s disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant’s officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above.

(b) During the second fiscal quarter of the period covered by this report, there have been no changes in Registrant’s internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant’s internal control over financial reporting.

Item 12: Exhibits.

(a)(1)	Registrant’s code of ethics (that is the subject of the disclosure required by Item 2(a)) is attached.
(2)	Separate certifications for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached.
(3)	Not applicable.

(b) A certification for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Form N-CSR with the Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant) Schwab Capital Trust

By:	/s/ Evelyn Dilsaver
	Evelyn Dilsaver
	Chief Executive Officer

Date: December 20, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/ Evelyn Dilsaver
	Evelyn Dilsaver
	Chief Executive Officer

Date: December 20, 2006

By:	/s/ George Pereira
	George Pereira
	Principal Financial Officer

Date: December 20, 2006