Schwab Core Equity Fund NCSR 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)

Randall W. Merk
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, 2008

Item 1: Report(s) to Shareholders.

Annual report dated October 31, 2008 enclosed.

Schwab Active Equity Funds

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

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Schwab Active Equity Funds

Annual Report

October 31, 2008

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

The power of Schwab Equity Ratings^®.

The convenience and diversification of mutual funds.

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

Schwab Funds offers Select Shares, a share class that carries lower expenses than Investor Shares^tm 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 Sector/Industry classifications in this report use 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. The Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.

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)		-38.37%
Select Shares^® (Ticker Symbol: SWPSX)		-38.32%
Benchmark: S&P 500^® Index		-36.10%
Fund Category: Morningstar Large-Cap Blend		-37.22%

Performance Details		pages 6-7



Schwab Core Equity Fund^tm
(Ticker Symbol: SWANX)		-33.71%

Benchmark: S&P 500^® Index		-36.10%
Fund Category: Morningstar Large-Cap Blend		-37.22%

Performance Details		pages 8-9



Schwab Dividend Equity Fund^tm

Investor Shares (Ticker Symbol: SWDIX)		-30.30%
Select Shares^® (Ticker Symbol: SWDSX)		-30.23%
Benchmark: S&P 500^® Index		-36.10%
Fund Category: Morningstar Large-Cap Value		-37.31%

Performance Details		pages 10-11



Schwab Large-Cap Growth Fund^tm

Investor Shares (Ticker Symbol: SWLNX)		-35.45%
Select Shares^® (Ticker Symbol: SWLSX)		-35.36%
Benchmark: Russell 1000 Growth Index		-36.95%
Fund Category: Morningstar Large-Cap Growth		-38.96%

Performance Details		pages 12-13



Schwab Small-Cap Equity Fund^tm

Investor Shares (Ticker Symbol: SWSIX)		-38.25%
Select Shares^® (Ticker Symbol: SWSCX)		-38.16%
Benchmark: S&P Small-Cap 600 Index		-32.44%
Fund Category: Morningstar Small-Cap Blend		-37.24%

Performance Details		pages 14-15



Schwab Hedged Equity Fund^tm

Investor Shares (Ticker Symbol: SWHIX)		-22.80%
Select Shares^® (Ticker Symbol: SWHEX)		-22.66%
Benchmark: S&P 500^® Index		-36.10%
Fund Category: Morningstar Long-Short		-14.31%

Performance Details		pages 16-17



Schwab Financial Services Fund^tm
(Ticker Symbol: SWFFX)		-42.12%

Benchmark: S&P 1500 SuperComposite Financials Sector Index		-49.94%
Fund Category: Morningstar Financial Services		-43.97%

Performance Details		pages 18-19



Schwab Health Care Fund^tm
(Ticker Symbol: SWHFX)		-25.87%

Benchmark: S&P 1500 SuperComposite Health Care Sector Index		-24.48%
Fund Category: Morningstar Health Care		-25.35%

Performance Details		pages 20-21




Minimum Initial Investment¹

Investor Shares		$ 100
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.

Fund 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.

Source for category information: Morningstar, Inc.


¹	Please see prospectus for further detail and eligibility requirements.

Schwab Active Equity Funds 1

From the Chairman

Charles Schwab

Chairman

Dear Shareholder,

The past year has been a particularly tumultuous and trying time for many investors. Domestic and international markets have suffered significant declines amidst falling real estate valuations, tightening credit, and price volatility.

During periods like this, the most natural instinct is to react emotionally rather than strategically. Making confident investment decisions as prices are swinging wildly is one of the hardest tasks for any investor. However, trying to time the market is both difficult and risky. Financial research has shown that a carefully constructed investment plan that focuses on asset-allocation and diversification is the best way to weather the inevitable ups and downs of the market.

Throughout my career I’ve seen nine notable downturns in the market, but in every case the markets eventually recovered. Smart investing is about having an individualized investment plan that can help moderate the effects of down markets and share in the gains of up markets.

Here at Schwab, our goal is to help you reach your financial goals no matter what the market conditions may be. We’re here to provide the guidance and support you need – whatever type of investor you are.

Thank you for investing with us.

Sincerely,

Diversification strategies do not assure a profit and do not protect against losses in declining markets.

2 Schwab Active Equity Funds

From the President

Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the funds covered in this report. He joined the firm in 2002 and has held a variety of executive positions at Schwab.

Dear Shareholder,

In the past year, investors experienced one of the most difficult periods in financial history. Both domestically and abroad, corporations and economies faced significant headwinds, while governments across the world grappled with interventionist policy designed to provide stability and infuse liquidity. In this environment, investors became extremely cautious about owning anything other than assets that carried government guarantees, such as U.S. Treasuries. Equity markets reacted emphatically to these unusual economic conditions, and prices declined meaningfully across most major equity indexes and averages.

In these difficult times, I want to emphasize that all of us here at Schwab are committed to the disciplined management of your money. I encourage you to read the Investment Environment and Fund Summaries on the following pages where our portfolio management team details the previous year’s market conditions and the impact on our funds.

During this period of market uncertainty, it is more important than ever to ensure that your portfolio allocation reflects your goals and tolerance for risk while not losing sight of your investment strategy. While there may be a temptation to compromise an established investment plan when faced with volatility, we encourage you to carefully consider any changes to your portfolio and to contact your Schwab financial consultant or independent investment adviser if appropriate.

Should you have any questions about our funds, we are always available at 1-800-435-4000. Thank you for investing with us.

Sincerely,

Schwab Active Equity Funds 3

The Investment Environment

Over the past year, the U.S. financial markets experienced a degree of disruption and uncertainty rarely seen in its history as volatility, price declines and tight credit contributed to atypical market conditions. While financials had been ailing since last August following the subprime mortgage crisis, the persistence of tight lending conditions finally began to take a greater toll toward the middle to end of the reporting period. In September, the Federal Government took over mortgage giants Freddie Mac and Fannie Mae, followed by the bankruptcy of Lehman Brothers, the sale of Merrill Lynch, and government intervention in AIG, among other events. In this erratic environment investors became extremely cautious of all but government backed assets, such as U.S. Treasuries, and in many cases preferred safety over yield.

Significant economic indicators, such as Gross Domestic Product (GDP), commodity prices, and consumer confidence sent mixed messages with regard to economic health at various times throughout the period, but finished on a pessimistic note. The GDP growth rate oscillated between expansion and contraction, falling -0.2% in the fourth quarter of 2007, rebounding 2.8% in the second quarter of 2008, then sinking -0.3% in the third quarter. Commodity prices surged toward the middle of the period, with oil prices moving upward of $147 dollars a barrel in July, while gold also rose to new highs. By October, oil prices had fallen sharply to below $65 a barrel giving consumers much-needed relief. However, the sentiment remained bleak on the expectation that the economy would slow given the persistence of broad-based turmoil. In October, the Consumer Confidence Index reached an all time low of 38.0, down from 61.4 in September.

When looking at the S&P 500 Index, which is usually seen as a bellwether for financial markets, returns for the period were solidly negative in all major sectors. For the twelve month period ending October 31, 2008, the S&P 500 Index was down -36.10%. By comparison, the Wilshire 5000 Index was down -36.41%. In the S&P 500, Financials returned -52.06% for the period, followed by Information Technology and Materials, which were down -41.20% and -41.19%, respectively. Though still negative, relatively better performing sectors were Consumer Staples and Health Care, down -11.88% and -23.96%, respectively. In general, stock prices experienced heightened volatility throughout the period, exacerbated by forced selling in large institutional funds, a flight to the safety of cash and government-backed assets, and a number of dramatic market events, such as the collapse of Bear Stearns and Lehman Brothers.

In an attempt to stabilize market conditions, the Government instituted a variety of stimulus measures, including a $700 billion financial rescue package and the depression era Exchange Stabilization Fund. Additionally, the Federal Reserve (the Fed) lowered the interest rate to 1.00%, its sixth rate cut thus far in 2008. Although inflation was a concern earlier in the period, as the economy slowed and the prices of many commodities declined toward October, the Fed decided that thawing credit markets and stimulating the economy outweighed inflation concerns. Despite these interventionist moves, market volatility persisted and credit remained tight.

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.


-36.10%	S&P 500^® Index: measures U.S. large-cap stocks

-34.16%	Russell 2000^® Index: measures U.S. small-cap stocks

-46.62%	MSCI EAFE^® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East


0.30%	Lehman Brothers U.S. Aggregate Bond Index¹: measures the U.S. bond market

2.38%	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.

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.


¹	Please note that the index’s name has changed to Barclays Capital U.S. Aggregate Bond Index.

4 Schwab Active Equity Funds

Fund Management



		Jeffrey Mortimer, CFA, Chief Investment Officer, Charles Schwab Investment Management, is responsible for the overall management of each of the funds. Prior to joining the firm in October 1997, he worked for more than 8 years in asset management.

		Vivienne Hsu, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of each of the funds. Prior to joining the firm in August 2004, she worked for more than 11 years in asset management and quantitative analysis at other investment firms.

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

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

Schwab Active Equity Funds 5

Schwab Premier Equity Fund^®

The Schwab Premier Equity Fund Investor Shares returned -38.37% during the period, underperforming the benchmark S&P 500 Index, which returned -36.10%. In general, major indexes and averages experienced heightened volatility and price declines throughout the period as turmoil in the financial sector and a lack of confidence in the broader economy contributed to investor pessimism and a flight to the safety of government backed assets. When looking at sectors represented in the fund, Utilities, Materials, and Telecommunications Services experienced the largest declines, followed by Consumer Discretionary and Financials. Stock selection in the Financials sector benefitted the fund; however, the results of stock selection were negative overall. Better performing securities in the fund included General Mills Inc. and United States Steel Co. In addition, avoiding Citigroup Inc. and American International Group, also benefitted the fund. Detracting from performance were Hartford Financial Services Group and Cigna Corp., among others.

As of 10/31/08:

Statistics


Number of Holdings	103

Weighted Average

Market Cap


($ x 1,000,000)	$35,581


Price/Earnings Ratio (P/E)	24.0


Price/Book Ratio (P/B)	1.5


Portfolio Turnover Rate	92%

Sector Weightings % of Investments


Information Technology	17.7%


Health Care	15.9%


Financials	13.5%


Industrials	13.1%


Energy	12.1%


Consumer Staples	10.8%


Consumer Discretionary	7.9%


Materials	2.0%


Utilities	1.6%


Telecommunication Services	1.4%


Other	4.0%


Total	100.0%

Top Holdings % Net Assets¹


JPMorgan Chase & Co.	1.5%


Raytheon Co.	1.5%


Devon Energy Corp.	1.4%


Hewlett-Packard Co.	1.4%


Exxon Mobil Corp.	1.4%


Wal-Mart Stores, Inc.	1.4%


Church & Dwight Co., Inc.	1.4%


BMC Software, Inc.	1.4%


The Procter & Gamble Co.	1.4%


Omnicare, Inc.	1.4%


Total	14.2%

Manager views and 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 10/31/08

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

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

Average Annual Total Returns^1,2


Fund Class and Inception Date	1 Year		3 Years		Since Inception


Investor Shares (3/21/05)		-38.37%		-6.84%		-3.93%
Select Shares (3/21/05)		-38.32%		-6.72%		-3.80%
Benchmark: S&P 500^® Index		-36.10%		-5.21%		-3.68%
Fund Category: Morningstar Large-Cap Blend		-37.22%		-6.10%		-4.22%

Fund Expense Ratios³: Investor Shares: 1.16% / Select Shares: 1.00%

Style Assessment⁴

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.


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). For actual ratios during the period, refer to the financial highlights section of the financial statements.

⁴	Source: 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 10/31/08, 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^tm

The Schwab Core Equity Fund returned -33.71% for the period, outperforming the benchmark S&P 500 Index, which returned -36.10%. In general, major indexes and averages experienced heightened volatility and price declines throughout the period as turmoil in the financial sector and a lack of confidence in the broader economy contributed to investor pessimism and a flight to the safety of government backed assets. On a sector specific level, Telecommunications Services, Materials and Financials were the most negative in the fund, where returns were down more than 41% on average. The fund, like the benchmark, was more weighted toward Information Technology and Financials, when compared to other sectors. Stock selection was the primary factor accounting for outperformance relative to the benchmark. Good selection in Information Technology and Financials led performance contributors. Better performing securities in the fund included Electronic Data Systems Inc. and General Mills Inc. Securities detracting from performance included Boeing Co. and MetLife Inc.

As of 10/31/08:

Statistics


Number of Holdings	118

Weighted Average

Market Cap


($ x 1,000,000)	$73,234


Price/Earnings Ratio (P/E)	11.8


Price/Book Ratio (P/B)	1.8


Portfolio Turnover	35%

Sector Weightings % of Investments


Information Technology	17.7%


Health Care	16.7%


Financials	14.7%


Energy	12.1%


Industrials	12.0%


Consumer Staples	10.2%


Consumer Discretionary	6.4%


Materials	3.7%


Telecommunication Services	1.7%


Utilities	1.4%


Other	3.4%


Total	100.0%

Top Holdings % Net Assets¹


Exxon Mobil Corp.	4.6%

International Business Machines


Corp.	4.5%


Hewlett-Packard Co.	4.3%


Raytheon Co.	4.2%


JPMorgan Chase & Co.	4.1%


Lockheed Martin Corp.	3.9%


Pfizer, Inc.	3.7%


The Procter & Gamble Co.	2.6%


Chevron Corp.	2.3%


Baxter International, Inc.	2.1%


Total	36.3%

Manager views and 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.

8 Schwab Active Equity Funds

Schwab Core Equity Fund^tm

Performance Summary as of 10/31/08

Performance of a Hypothetical
$10,000 Investment¹

Average Annual Total Returns^1,2


Fund and Inception Date	1 Year		5 Years		10 Years


Fund: Schwab Core Equity Fund^tm (7/1/96)		-33.71%		2.30%		2.00%
Benchmark: S&P 500^®Index		-36.10%		0.26%		0.40%
Fund Category: Morningstar Large-Cap Blend		-37.22%		-0.29%		0.87%

Fund Expense Ratios³: Net 0.75%; Gross 0.78%

Style Assessment⁴


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). Net Expense: Expenses reduced by a contractual fee waiver in effect through at least 2/27/09. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements.

⁴	Source: 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 10/31/08, 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^tm

The Schwab Dividend Equity Fund Investor Shares returned -30.30% for the period, outperforming the benchmark S&P 500 Index, which returned -36.10%. In general, major indexes and averages experienced heightened volatility and price declines throughout the period as turmoil in the financial sector and a lack of confidence in the broader economy contributed to investor pessimism and a flight to the safety of government backed assets. The fund’s outperformance relative to the benchmark was primarily the result of being weighted toward dividend paying stocks. In general, dividend paying companies were seen as more resilient to weathering the current economic crisis and outperformed their non dividend counterparts by about 9% on average. On a sector specific level, Materials, Financials, and Industrials were the most negative in the fund, with returns in each sector down more than 34% on average. Relative to the benchmark, good stock selection in Financials and Information Technology were among the primary factors contributing to outperformance. Better performing securities in the fund included General Mills Inc. and Electronic Data Systems. In addition, avoiding names such as General Electric Co. and American International Group helped the fund. Detracting from performance were Bank of America Corp. and Microsoft Corp., among others.

As of 10/31/08:

Statistics


Number of Holdings	111

Weighted Average

Market Cap


($ x 1,000,000)	$56,703


Price/Earnings Ratio (P/E)	12.4


Price/Book Ratio (P/B)	1.7


Portfolio Turnover	22%

Sector Weightings % of Investments


Financials	15.8%


Health Care	13.2%


Consumer Staples	12.7%


Information Technology	12.2%


Industrials	12.1%


Energy	11.5%


Utilities	8.9%


Consumer Discretionary	6.4%


Telecommunication Services	3.6%


Materials	2.3%


Other	1.3%


Total	100.0%

Top Holdings % Net Assets¹


JPMorgan Chase & Co.	2.6%


Bank of New York Mellon Corp.	2.3%


Chevron Corp.	2.3%


General Mills, Inc.	2.0%


Raytheon Co.	2.0%


Microsoft Corp.	2.0%


Exxon Mobil Corp.	2.0%


Johnson & Johnson	1.9%


Abbott Laboratories	1.9%


Occidental Petroleum Corp.	1.9%


Total	20.9%

Manager views and 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.

10 Schwab Active Equity Funds

Schwab Dividend Equity Fund^tm

Performance Summary as of 10/31/08

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

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

Average Annual Total Returns^1,2


Fund Class and Inception Date	1 Year		5 Years		Since Inception


Investor Shares (9/2/03)		-30.30%		3.29%		4.35%
Select Shares (9/2/03)		-30.23%		3.42%		4.47%
Benchmark: S&P 500^®Index		-36.10%		0.26%		1.12%
Fund Category: Morningstar Large-Cap Value		-37.31%		0.60%		1.52%

Fund Expense Ratios³: Investor Shares: 1.04% / Select Shares: 0.89%

Style Assessment⁴

Yields¹


SEC Yield
Investor Shares			2.93%
Select Shares			3.08%


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). For actual ratios during the period, refer to the financial highlights section of the financial statements.

⁴	Source: 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 10/31/08, 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^tm

The Schwab Large-Cap Growth Fund Investor Shares returned -35.45% during the period, slightly outperforming the benchmark Russell 1000 Growth Index, which returned -36.95%. In general, major indexes and averages experienced heightened volatility and price declines throughout the period as turmoil in the financial sector and a lack of confidence in the broader economy contributed to investor pessimism and a flight to the safety of government backed assets. On a sector specific level, Materials, Energy, and Financials had the most negative returns in the fund, where returns in each sector were down more than 40% on average. Stock selection, particularly in Information Technology, contributed to the slight outperformance relative to the benchmark. Better performing securities in the fund included General Mills Inc. and Millennium Pharmaceuticals Inc. In addition, avoiding Schlumberger Ltd. and Dell Inc. helped the fund. Detracting from performance were Merck & Co. Inc. and Boeing Co., among others.

As of 10/31/08:

Statistics


Number of Holdings	150

Weighted Average

Market Cap


($ x 1,000,000)	$67,482


Price/Earnings Ratio (P/E)	13.4


Price/Book Ratio (P/B)	2.7


Portfolio Turnover	49%

Sector Weightings % of Investments


Information Technology	30.4%


Health Care	17.7%


Consumer Staples	12.1%


Industrials	10.1%


Consumer Discretionary	8.8%


Energy	8.6%


Financials	4.4%


Materials	3.9%


Telecommunication Services	0.5%


Utilities	0.1%


Other	3.4%


Total	100.0%

Top Holdings % Net Assets¹

International Business Machines


Corp.	4.7%


Baxter International, Inc.	4.6%


Hewlett-Packard Co.	4.4%


Exxon Mobil Corp.	3.9%


Lockheed Martin Corp.	3.9%


Microsoft Corp.	3.2%


Accenture Ltd., Class A	3.2%


General Mills, Inc.	2.9%


The Procter & Gamble Co.	2.6%


McDonald’s Corp.	2.6%


Total	36.0%

Manager views and 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.

12 Schwab Active Equity Funds

Schwab Large-Cap Growth Fund^tm

Performance Summary as of 10/31/08

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

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

Average Annual Total Returns^1,2


Fund Class and Inception Date	1 Year		3 Years		Since Inception


Investor Shares (10/3/05)		-35.45%		-5.38%		-6.07%
Select Shares (10/3/05)		-35.36%		-5.22%		-5.92%
Benchmark: Russell 1000 Growth Index		-36.95%		-5.90%		-6.04%
Fund Category: Morningstar Large-Cap Growth		-38.96%		-6.70%		-6.92%

Fund Expense Ratios³: Investor Shares: 1.18% / Select Shares: Net 0.99%; Gross 1.03%

Style Assessment⁴


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). Net Expense: Expenses reduced by a contractual fee waiver in effect through at least 2/27/09. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements.

⁴	Source: 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 10/31/08, 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^tm

The Schwab Small-Cap Equity Fund Investor Shares returned -38.25% during the period, underperforming the benchmark S&P 600 Index, which returned -32.44%. In general, major indexes and averages experienced heightened volatility and price declines throughout the period as turmoil in the financial sector and a lack of confidence in the broader economy contributed to investor pessimism and a flight to the safety of government backed assets. On a sector specific level, Materials, Consumer Discretionary, and Information Technology were the most negative in the fund, where returns were down more than 40% on the average. Stock selection was among the primary factors accounting for underperformance relative to the benchmark, led by selection in the Materials and Industrials sectors. Securities detracting from performance included Crane Co. and Rockwood Holdings Inc. Better performing securities included Stone Energy Corp. and Massey Energy Corp.

As of 10/31/08:

Statistics


Number of Holdings	222

Weighted Average

Market Cap


($ x 1,000,000)	$1,415


Price/Earnings Ratio (P/E)	18.4


Price/Book Ratio (P/B)	1.3


Portfolio Turnover	50%

Sector Weightings % of Investments


Information Technology	18.8%


Financials	18.3%


Industrials	16.9%


Health Care	14.4%


Consumer Discretionary	12.3%


Energy	5.4%


Consumer Staples	4.3%


Materials	3.9%


Utilities	2.5%


Telecommunication Services	1.6%


Other	1.6%


Total	100.0%

Top Holdings % Net Assets¹


Magellan Health Services, Inc.	2.8%


Acuity Brands, Inc.	2.4%


SVB Financial Group	2.1%


Sybase, Inc.	2.0%


BJ’s Wholesale Club, Inc.	2.0%


National Fuel Gas Co.	1.9%


Commerce Bancshares, Inc.	1.8%


Hewitt Associates, Inc., Class A	1.8%


EMCOR Group, Inc.	1.7%


Platinum Underwriters Holdings, Ltd.	1.7%


Total	20.2%

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.


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

14 Schwab Active Equity Funds

Schwab Small-Cap Equity Fund^tm

Performance Summary as of 10/31/08

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

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

Average Annual Total Returns^1,2


Fund Class and Inception Date	1 Year		5 Years		Since Inception


Investor Shares (7/1/03)		-38.25%		1.99%		5.08%
Select Shares (7/1/03)		-38.16%		2.17%		5.26%
Benchmark: S&P Small-Cap 600 Index		-32.44%		3.34%		6.07%
Fund Category: Morningstar Small-Cap Blend		-37.24%		1.07%		3.95%

Fund Expense Ratios³: Investor Shares: 1.24% / Select Shares: 1.09%

Style Assessment⁴


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). For actual ratios during the period, refer to the financial highlights section of the financial statements.

⁴	Source: 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 10/31/08, 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^tm

The Schwab Hedged Equity Fund Investor Shares returned -22.80% for the period, outperforming the benchmark S&P 500 Index, which returned -36.10%. Many of the fund’s short positions declined in value, contributing to outperformance versus the benchmark. The fund was able to take advantage of heightened market volatility and price declines across a wide range of industry groups following a general lack of confidence in the economy. For example, when looking at S&P 500 sectors, Financials, Information Technology, and Materials were among those that experienced declines over 40% on average. In terms of stock selection, performance drivers on the short side included RTI International Metals Inc. and Texas Industrials Inc. On the long side, stock selection detracted slightly from performance relative to the benchmark. Primary detractors were Reliant Resources Inc. and Prudential Financial Inc. Avoiding significant decliners General Electric Co. and American International Group helped the fund.

As of 10/31/08:

Statistics

Number of Holdings


Long Holdings	120


Short Positions	119

Weighted Average

Market Cap

($ x 1,000,000)


Long Holdings	$27,027


Short Positions	$5,261

Price/Earnings Ratio (P/E)


Long Holdings	13.2


Short Positions	18.2

Price/Book Ratio (P/B)


Long Holdings	1.5


Short Positions	1.6


Portfolio Turnover Rate	138%

Portfolio Turnover Rate


excluding short sales	59%

Top Long Holdings % of Net Assets¹


Hewlett-Packard Co.	3.1%


Raytheon Co.	3.1%


BMC Software, Inc.	2.9%


Exxon Mobil Corp.	2.8%


Church & Dwight Co., Inc.	2.8%


Total	14.7%

Top Short Holdings % of Net Assets¹


Equinix, Inc.	1.6%


Aqua America, Inc.	1.4%


Staples, Inc.	1.3%


Knight Transportation, Inc.	1.2%


CLARCOR, Inc.	1.2%


Total	6.7%

Manager views and 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.

16 Schwab Active Equity Funds

Schwab Hedged Equity Fund^tm

Performance Summary as of 10/31/08

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

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

Average Annual Total Returns^1,2


Fund Class and Inception Date	1 Year		3 Years		5 Years		Since Inception


Investor Shares (3/1/05)		-22.80%		-3.63%		n/a		-1.18%
Select Shares (9/3/02)		-22.66%		-3.46%		3.42%		5.16%
Benchmark: S&P 500^® Index		-36.10%		-5.21%		0.26%		(3/1/05) -3.91%
								(9/3/02) 2.82%
Fund Category: Morningstar Long-Short		-14.31%		-0.32%		2.24%		(3/1/05) 0.36%
								(9/3/02) 3.03%

Fund Expense Ratios³: Investor Shares: 2.19% / Select Shares: Net 2.03%; Gross 2.04%

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.


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). Includes dividend expense on securities sold short. Net Expense: Expenses reduced by a contractual fee waiver in effect through at least 2/27/09. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements.

Schwab Active Equity Funds 17

Schwab Financial Services Fund^tm

The Schwab Financial Services Fund returned -42.12% during the period, outperforming the benchmark S&P 1500 SuperComposite Financials Sector Index, which returned -49.94%. Financials were rocked by a number of dramatic market events throughout the reporting period, beginning with the subprime mortgage crisis and including the takeover of Fannie Mae and Freddie Mac by the U.S. Government, as well as the bankruptcy of Lehman Brothers and the insolvency of major banks, such as Washington Mutual and Wachovia. Despite actions by the U.S. Government and other entities to contain the crisis, financial services stocks suffered markedly. Outperformance relative to the benchmark was primarily the result of stock selection. Positions in BancFirst Corp. and NBT Bancorp Inc. were among those contributing to performance. Additionally, avoiding names such as American International Group, Citigroup Inc., and Wachovia Corp. benefitted the fund. Detracting from fund performance were positions in Ameriprise Financial Inc. and Hartford Financial Services, among others.

As of 10/31/08:

Statistics


Number of Holdings	79

Weighted Average

Market Cap


($ x 1,000,000)	$31,729


Price/Earnings Ratio (P/E)	16.4


Price/Book Ratio (P/B)	1.0


Portfolio Turnover	59%

Industry Weightings % of Investments


Diversified Financials	42.2%


Insurance	25.8%


Banks	19.0%


Software & Services	3.7%


Real Estate	3.7%


Commerical Services & Supplies	0.7%


Media	0.6%


Other	4.3%


Total	100.0%

Top Holdings % Net Assets¹


JPMorgan Chase & Co.	6.1%


State Street Corp.	4.7%


SunTrust Banks, Inc.	4.0%


Northern Trust Corp.	3.7%


Bank of America Corp.	3.5%


Bank of New York Mellon Corp.	3.4%


Ameriprise Financial, Inc.	3.0%


The Chubb Corp.	2.9%


The Goldman Sachs Group, Inc.	2.8%


Metlife, Inc.	2.8%


Total	36.9%

Manager views and 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.

18 Schwab Active Equity Funds

Schwab Financial Services Fund^tm

Performance Summary as of 10/31/08

Performance of a Hypothetical
$10,000 Investment¹

Average Annual Total Returns^1,2


Fund and Inception Date	1 Year		5 Years		Since Inception


Fund: Schwab Financial Services Fund^tm (7/3/00)*		-42.12%		-1.84%		1.69%
Benchmark: S&P 1500 SuperComposite Financials Sector Index		-49.94%		-7.09%		-1.53%
Fund Category: Morningstar Financial Services		-43.97%		-5.17%		1.73%

Fund Expense Ratio³: 0.90%

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.

The one-year total return presented in the above table differs from the total return for the same period presented in the Financial Highlights section of the report. The total returns presented in the above table are calculated based on the NAV at which shareholder transactions were processed on 10/31/08. The total returns presented in the Financial Highlights are calculated in the same manner but also taking into account certain adjustments that are necessary under generally accepted accounting principles and which are required when preparing the annual report.


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). For actual ratios during the period, refer to the financial highlights section of the financial statements.

Schwab Active Equity Funds 19

Schwab Health Care Fund^tm

The Schwab Health Care Fund returned -25.87% for the period, underperforming the benchmark S&P 1500 SuperComposite Health Care Sector Index, which returned -24.48%. Although Health Care is typically seen as one of the more defensive sectors in down markets, the depth and duration of current economic turmoil began to erode returns in this sector. On an industry group level, the portfolio’s stock selection in and overweight to Managed Health Care detracted from performance. Returns in Managed Health Care were down around 60% in the fund compared to 55% in the benchmark. Holding names such as Cigna Corp. and Humana Inc. weighed on performance. In Pharmaceutical & Biotechnology, the portfolio was underweight relative to the benchmark, but the results of stock selection led to returns of around -28% compared to the benchmark Pharmaceutical sector returns of -23%. During the reporting period, Merck & Co., Inc. and Schering-Plough Corp. experienced price declines as the effectiveness of the combination of their two cholesterol drugs, Vytorin and Zetia, was questioned. Despite the negative returns in Health Care, not all securities did poorly. Better performing securities in the fund included Genentech Inc. and Amgen.

As of 10/31/08:

Statistics


Number of Holdings	88

Weighted Average

Market Cap


($ x 1,000,000)	$39,381


Price/Earnings Ratio (P/E)	18.1


Price/Book Ratio (P/B)	2.3


Portfolio Turnover	50%

Industry Weightings % of Investments


Pharmaceuticals & Biotechnology	57.5%


Health Care Equipment & Services	38.1%


Real Estate	1.0%


Materials	0.8%


Other	2.6%


Total	100.0%

Top Holdings % Net Assets¹


Johnson & Johnson	6.2%


Baxter International, Inc.	5.7%


Amgen, Inc.	5.0%


Pfizer, Inc.	4.9%


Abbott Laboratories	4.7%


Merck & Co., Inc.	4.0%


Express Scripts, Inc.	3.3%


Becton, Dickinson & Co.	3.3%


Medtronic, Inc.	3.1%


Thermo Fisher Scientific, Inc.	2.6%


Total	42.8%

Manager views and 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.

20 Schwab Active Equity Funds

Schwab Health Care Fund^tm

Performance Summary as of 10/31/08

Performance of a Hypothetical
$10,000 Investment¹

Average Annual Total Returns^1,2


Fund and Inception Date	1 Year		5 Years		Since Inception


Fund: Schwab Health Care Fund^tm (7/3/00)		-25.87%		8.67%		3.25%
Benchmark: S&P 1500 SuperComposite Health Care Sector Index		-24.48%		1.15%		-0.83%
Fund Category: Morningstar Health Care		-25.35%		2.68%		0.43%

Fund Expense Ratio³: 0.82%

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.


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus (amended 5/8/08). For actual ratios during the period, refer to the financial highlights section of the financial statements.

Schwab Active Equity Funds 21

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, 2008 and held through October 31, 2008.

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.


					Ending
			Beginning		Account Value		Expenses Paid
	Expense Ratio¹		Account Value		(Net of Expenses)		During Period²
	(Annualized)		at 5/1/08		at 10/31/08		5/1/08 - 10/31/08



Schwab Premier Equity Fund^tm
Investor Shares
Actual Return		1.18%	$	1,000	$	695.50	$	5.03
Hypothetical 5% Return		1.18%	$	1,000	$	1,019.20	$	5.99
Select Shares^®
Actual Return		1.03%	$	1,000	$	696.40	$	4.39
Hypothetical 5% Return		1.03%	$	1,000	$	1,019.96	$	5.23


Schwab Core Equity Fund^tm
Actual Return		0.75%	$	1,000	$	741.20	$	3.28
Hypothetical 5% Return		0.75%	$	1,000	$	1,021.37	$	3.81


Schwab Dividend Equity Fund^tm
Investor Shares
Actual Return		1.04%	$	1,000	$	763.30	$	4.61
Hypothetical 5% Return		1.04%	$	1,000	$	1,019.91	$	5.28
Select Shares
Actual Return		0.94%	$	1,000	$	763.70	$	4.17
Hypothetical 5% Return		0.94%	$	1,000	$	1,020.41	$	4.77


Schwab Large-Cap Growth Fund^tm
Investor Shares
Actual Return		1.16%	$	1,000	$	731.70	$	5.05
Hypothetical 5% Return		1.16%	$	1,000	$	1,019.30	$	5.89
Select Shares
Actual Return		0.99%	$	1,000	$	732.00	$	4.31
Hypothetical 5% Return		0.99%	$	1,000	$	1,020.16	$	5.03


Schwab Small-Cap Equity Fund^tm
Investor Shares
Actual Return		1.25%	$	1,000	$	719.40	$	5.40
Hypothetical 5% Return		1.25%	$	1,000	$	1,018.85	$	6.34
Select Shares
Actual Return		1.10%	$	1,000	$	720.10	$	4.76
Hypothetical 5% Return		1.10%	$	1,000	$	1,019.61	$	5.58


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 the 184 days of the period, and divided by the 366 days of the fiscal year.

22 Schwab Active Equity Funds

Fund Expenses (Unaudited) continued


					Ending
			Beginning		Account Value		Expenses Paid
	Expense Ratio¹		Account Value		(Net of Expenses)		During Period²
	(Annualized)		at 5/1/08		at 10/31/08		5/1/08 - 10/31/08



Schwab Hedged Equity Fund^tm
Investor Shares
Actual Return		2.43%	$	1,000	$	839.70	$	11.24
Hypothetical 5% Return		2.43%	$	1,000	$	1,012.92	$	12.30
Select Shares
Actual Return		2.24%	$	1,000	$	840.60	$	10.36
Hypothetical 5% Return		2.24%	$	1,000	$	1,013.88	$	11.34


Schwab Financial Services Focus Fund
Actual Return		0.96%	$	1,000	$	670.90	$	4.03
Hypothetical 5% Return		0.96%	$	1,000	$	1,020.31	$	4.88


Schwab Health Care Focus Fund
Actual Return		0.83%	$	1,000	$	852.00	$	3.86
Hypothetical 5% Return		0.83%	$	1,000	$	1,020.96	$	4.22


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 the 184 days of the period, and divided by the 366 days of the fiscal year.

Schwab Active Equity Funds 23

Schwab Premier Equity Fund^®

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			3/21/05¹-
Investor Shares	10/31/08			10/31/07			10/31/06			10/31/05


Per—Share Data ($)

Net asset value at beginning of period		13.98			12.50			10.70			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.05			0.03			0.01			0.02
Net realized and unrealized gains (losses)		(5.10	)		1.46			1.83			0.68

Total from investment operations		(5.05	)		1.49			1.84			0.70
Less distributions:
Distributions from net investment income		(0.03	)		(0.01	)		(0.04	)		—
Distributions from net realized gains		(0.86	)		—			—			—

Total distributions		(0.89	)		(0.01	)		(0.04	)		—

Net asset value at end of period		8.04			13.98			12.50			10.70

Total return (%)		(38.37	)		11.89			17.22			7.00	²

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.17			1.16	³		1.17			0.78	⁴
Gross operating expenses		1.17			1.16			1.18			1.23	⁴
Net investment income (loss)		0.35			0.18			0.01			0.52	⁴
Portfolio turnover rate		92			72			73			33	²
Net assets, end of period ($ x 1,000,000)		261			663			690			364


	11/1/07-			11/1/06-			11/1/05-			3/21/05¹-
Select Shares	10/31/08			10/31/07			10/31/06			10/31/05


Per—Share Data ($)

Net asset value at beginning of period		14.01			12.51			10.71			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.06			0.04			0.02			0.03
Net realized and unrealized gains (losses)		(5.11	)		1.48			1.83			0.68

Total from investment operations		(5.05	)		1.52			1.85			0.71
Less distributions:
Distributions from net investment income		(0.05	)		(0.02	)		(0.05	)		—
Net realized and unrealized gains (losses)		(0.86	)		—			—			—

Total distributions		(0.91	)		(0.02	)		(0.05	)		—

Net asset value at end of period		8.05			14.01			12.51			10.71

Total return (%)		(38.32	)		12.20			17.28			7.10	²

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.02			1.01			1.02			0.68	⁴
Gross operating expenses		1.02			1.01			1.03			1.08	⁴
Net investment income (loss)		0.50			0.32			0.17			0.63	⁴
Portfolio turnover rate		92			72			73			33	²
Net assets, end of period ($ x 1,000,000)		441			983			857			481

¹ Commencement of operations.

² Not annualized.

³ The ratio of net operating expenses would have been 1.15% if interest expenses had not been included.

⁴ Annualized.

24 See financial notes

Schwab Premier Equity Fund

Portfolio Holdings as of October 31, 2008

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)

.3%

Common Stock

838,548

675,791

.1%

Short-Term Investments

28,384

100

.4%

Total Investments

866,932

704,175

.4)%

Other Assets and Liabilities, Net

(2,539

)

100

.0%

Total Net Assets

701,636


	Number		Value
Security	of Shares		($ x 1,000)


Common Stock 96.3% of net assets


Banks 1.9%
KeyCorp		700,000		8,561
SunTrust Banks, Inc.		125,000		5,017

				13,578


Capital Goods 8.5%
AGCO Corp. *		200,000		6,304
Dover Corp.		150,000		4,765
Fluor Corp.		155,000		6,189
L-3 Communications Holdings, Inc.		112,200		9,107
Lockheed Martin Corp.		92,200		7,842
Northrop Grumman Corp.		175,000		8,206
Raytheon Co.		200,900		10,268
Tyco International Ltd.		275,000		6,952

				59,633


Commercial & Professional Supplies 2.4%
Covanta Holding Corp. *		350,000		7,546
Waste Management, Inc.		300,000		9,369

				16,915


Consumer Durables & Apparel 3.6%
NIKE, Inc., Class B		111,800		6,443
Polo Ralph Lauren Corp.		125,000		5,896
Pulte Homes, Inc.		700,000		7,798
The Warnaco Group, Inc. *		175,000		5,217

				25,354


Consumer Services 0.6%
Yum! Brands, Inc.		150,000		4,351


Diversified Financials 7.2%
Ameriprise Financial, Inc.		200,000		4,320
Bank of America Corp.		375,000		9,064
JPMorgan Chase & Co.		250,000		10,312
Northern Trust Corp.		150,000		8,447
Raymond James Financial, Inc.		300,000		6,987
State Street Corp.		160,000		6,936
The Goldman Sachs Group, Inc.		50,000		4,625

				50,691


Energy 12.1%
Chevron Corp.		125,000		9,325
ConocoPhillips		150,000		7,803
Devon Energy Corp.		125,000		10,107
ENSCO International, Inc.		150,000		5,702
Exxon Mobil Corp.		132,100		9,791
Hess Corp.		75,000		4,516
National-Oilwell Varco, Inc. *		225,000		6,725
Noble Energy		150,000		7,773
Occidental Petroleum Corp.		170,000		9,442
Oil States International, Inc. *		225,000		5,204
The Williams Cos., Inc.		250,000		5,243
W&T Offshore, Inc.		175,000		3,355

				84,986


Food & Staples Retailing 3.9%
BJ’s Wholesale Club, Inc. *		235,000		8,272
The Kroger Co.		350,000		9,611
Wal-Mart Stores, Inc.		175,000		9,767

				27,650


Food, Beverage & Tobacco 4.1%
Darling International, Inc. *		700,000		5,278
General Mills, Inc.		140,000		9,484
Sara Lee Corp.		700,000		7,826
The Pepsi Bottling Group, Inc.		275,000		6,358

				28,946


Health Care Equipment & Services 6.5%
AmerisourceBergen Corp. (a)		175,000		5,472
Baxter International, Inc.		150,000		9,074
CIGNA Corp.		301,000		4,906
Express Scripts, Inc. *		150,000		9,092
Medtronic, Inc.		175,000		7,058
Omnicare, Inc.		350,000		9,649

				45,251


Household & Personal Products 2.8%
Church & Dwight Co., Inc.		165,000		9,750
The Procter & Gamble Co.		150,000		9,681

				19,431


Insurance 4.4%
Prudential Financial, Inc.		175,000		5,250
The Chubb Corp.		172,600		8,944

See financial notes 25

Schwab Premier Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)
The Hartford Financial Services Group, Inc.		200,000		2,064
The Travelers Cos., Inc.		225,000		9,574
Unum Provident Corp.		325,000		5,119

				30,951


Materials 2.0%
Calgon Carbon Corp. *		160,000		2,131
Chemtura Corp.		950,000		1,644
FMC Corp.		125,000		5,442
Owens-Illinois, Inc. *		225,000		5,148

				14,365


Media 1.2%
The Interpublic Group of Cos., Inc. *		900,000		4,671
Time Warner, Inc.		350,000		3,531

				8,202


Pharmaceuticals & Biotechnology 9.5%
Amgen, Inc. *		100,000		5,989
Bristol-Myers Squibb Co.		250,000		5,137
Cephalon, Inc. *		75,000		5,379
Forest Laboratories, Inc. *		344,900		8,012
Invitrogen Corp. *		200,000		5,758
Johnson & Johnson		100,000		6,134
King Pharmaceuticals, Inc. *		450,000		3,956
Pfizer, Inc.		300,000		5,313
Thermo Fisher Scientific, Inc. *		200,000		8,120
Warner Chilcott Ltd., Class A *		350,000		4,855
Watson Pharmaceuticals, Inc. *		300,000		7,851

				66,504


Retailing 2.6%
Family Dollar Stores, Inc.		150,000		4,036
Macy’s, Inc.		500,000		6,145
The Gap, Inc.		600,000		7,764

				17,945


Semiconductors & Semiconductor Equipment 2.2%
Analog Devices, Inc.		300,000		6,408
Intel Corp.		550,000		8,800

				15,208


Software & Services 9.0%
Adobe Systems, Inc. *		200,000		5,328
Alliance Data Systems Corp. *		75,000		3,762
BMC Software, Inc. *		375,000		9,682
CA, Inc.		350,000		6,230
MasterCard, Inc., Class A		35,000		5,174
Sybase, Inc. *		309,000		8,229
Symantec Corp. *		600,000		7,548
Synopsys, Inc. *		500,100		9,142
Take-Two Interactive Software, Inc. *		300,000		3,558
Western Union Co.		300,000		4,578

				63,231


Technology Hardware & Equipment 6.6%
Avocent Corp. *		300,000		4,506
Hewlett-Packard Co.		263,500		10,087
International Business Machines Corp.		100,000		9,297
Jabil Circuit, Inc.		450,000		3,784
JDS Uniphase Corp. *		800,000		4,368
NCR Corp. *		450,000		8,226
QLogic Corp. *		500,000		6,010

				46,278


Telecommunication Services 1.4%
Sprint Nextel Corp.		1,200,000		3,756
Telephone & Data Systems, Inc.		225,000		6,041

				9,797






Transportation 2.2%
AMR Corp. *		870,000		8,883
Union Pacific Corp.		100,000		6,677

				15,560


Utilities 1.6%
DTE Energy Co.		125,000		4,412
Duke Energy Corp.		400,000		6,552

				10,964

Total Common Stock (Cost $838,548)				675,791



	Face/Maturity
Issuer	Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 4.1% of net assets


Repurchase Agreement 3.7%
Fixed Income Clearing Corp. Fully
collateralized by Federal Home Loan Bank with a value of $ 26,404 0.03%, issued 10/31/08, due 11/03/08		25,882		25,882


U.S. Treasury Obligations 0.4%
U.S. Treasury Bills
0.25%, 12/18/08 (a)		483		483
0.51%, 12/18/08 (a)		150		150
0.87%, 12/18/08 (a)		620		619
0.03%, 12/18/08 (a)		1,000		1,000

26 See financial notes

Schwab Premier Equity Fund

Portfolio Holdings continued


	Face/Maturity
Issuer	Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)

0.05%, 12/18/08 (a)		250		250

				2,502

Total Short-Term Investment (Cost $28,384)				28,384


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $866,932 and the unrealized appreciation and depreciation were $30,296 and ($193,053), respectively, with a net depreciation of ($162,757).


*		Non-income producing security.
(a)		All or a portion of this security is held as collateral for open futures contracts.

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Losses

Futures Contract

S & P 500 Index, e-mini, Long, expires 12/19/08

450

21,764

(2,668

)

See financial notes 27

Schwab Premier Equity Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $866,932)		$704,175
Receivables:
Investments sold		8,359
Dividends		452
Fund shares sold		299
Due from brokers for futures		131
Income from securities on loan		61
Prepaid expenses	+	3


Total assets		713,480


Liabilities
Payables:
Investments bought		10,533
Investment adviser and administrator fees		47
Transfer agent and shareholder services fees		8
Fund shares redeemed		1,167
Accrued expenses	+	89


Total liabilities		11,844


Net Assets
Total assets		713,480
Total liabilities	−	11,844


Net assets		$701,636
Net Assets by Source
Capital received from investors		919,397
Net investment income not yet distributed		3,076
Net realized capital losses		(55,412	)
Net unrealized capital losses		(165,425	)

Net Asset Value (NAV) by Shares Class


			Shares
Share Class	Net Assets	¸	Outstanding	=	NAV

Investor Shares	$261,228		32,498			$8.04
Select Shares	$440,408		54,719			$8.05

28 See financial notes

Schwab Premier Equity Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$17,137
Interest		383
Securities on loan	+	696


Total investment income		18,216


Net Realized Gains and Losses
Net realized losses on investments		(51,448	)
Net realized losses on futures contracts	+	(3,639	)


Net realized losses		(55,087	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(454,941	)
Net unrealized losses on futures contracts	+	(2,993	)


Net unrealized losses		(457,934	)


Expenses
Investment adviser and administrator fees		10,658
Transfer agent and shareholder service fees:
Investor Shares		1,183
Select Shares		723
Shareholder reports		116
Portfolio accounting fees		61
Registration fees		57
Professional fees		40
Custodian fees		31
Trustees’ fees		17
Interest expense		7
Other expenses	+	15


Total expenses		12,908
Custody Credits	−	2


Net expenses		12,906


Increase (Decrease) in Net Assets from Operations
Total investment income		18,216
Net Expenses	−	12,906


Net investment income		5,310
Net realized losses		(55,087	)
Net unrealized losses	+	(457,934	)


Decrease in net assets from operations		($507,711	)

See financial notes 29

Schwab Premier Equity Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$5,310			$4,370
Net realized gains (losses)			(55,087	)		98,599
Net unrealized gains (losses)	+		(457,934	)		80,460


Increase (Decrease) in net assets from operations			($507,711	)		$183,429


Distributions to Shareholders
Distributions from net investment income
Investor Shares			1,212			334
Select Shares	+		3,379			1,669


Total distributions from net investment income			$4,591			$2,003


Distributions from net realized gains
Investor Shares			39,517			—
Select Shares	+		58,845			—


Total distributions from net realized gains			$98,362			$-

Total distributions			$102,953			$2,003

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares			1,998			$23,061			6,110			$80,950
Select Shares	+		8,803			96,437			21,080			280,364


Total Shares Sold			10,801			$119,498			27,190			$361,314


Shares Reinvested
Investor Shares			3,027			$37,593			24			$306
Select Shares	+		3,526			43,788			104			1,352


Total Shares Reinvested			6,553			$81,381			128			$1,658


Shares Redeemed
Investor Shares			(19,931	)		($223,871	)		(13,943	)		($186,154	)
Select Shares	+		(27,777	)		(310,406	)		(19,482	)		(259,173	)


Total Shares Redeemed			(47,708	)		($534,277	)		(33,425	)		($445,327	)

Net transactions in fund shares			(30,354	)		($333,398	)		(6,107	)		($82,355	)


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			117,571			$1,645,698			123,678			$1,546,627
Total increase or decrease	+		(30,354	)		(944,062	)		(6,107	)		99,071


End of period			87,217			$701,636			117,571			$1,645,698


Net investment income not yet distributed						$3,076						$2,367

30 See financial notes

Schwab Core Equity Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		20.49			18.40			15.81			13.81			12.71

Income (loss) from investment operations:
Net investment income (loss)		0.23			0.16			0.10			0.13			0.12
Net realized and unrealized gains (losses)		(7.06	)		2.35			2.58			2.03			1.09

Total from investment operations		(6.83	)		2.51			2.68			2.16			1.21
Less distributions:
Distributions from net investment income		(0.18	)		(0.10	)		(0.09	)		(0.16	)		(0.11	)
Distributions from net realized gains		(0.05	)		(0.32	)		—			—			—

Total distributions		(0.23	)		(0.42	)		(0.09	)		(0.16	)		(0.11	)

Net asset value at end of period		13.43			20.49			18.40			15.81			13.81

Total return (%)		(33.71	)		13.88			17.02			15.74			9.57

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.75			0.75			0.75			0.75			0.75
Gross operating expenses		0.78			0.78			0.81			0.85			0.88
Net investment income (loss)		1.28			0.91			0.63			0.93			0.89
Portfolio turnover rate		35			18			42			48			86
Net assets, end of period ($ x 1,000,000)		1,449			2,133			1,125			547			263

See financial notes 31

Schwab Core Equity Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.1%

Common Stock

1,709,727

1,392,804

.4%

Short-Term Investments

49,190

.5%

Total Investments

1,758,917

1,441,994

.5%

Other Assets and Liabilities, Net

7,169

100

.0%

Total Net Assets

1,449,163


	Number		Value
Security	of Shares		($ x 1,000)


Common Stock 96.1% of net assets


Banks 0.2%
KeyCorp		300,000		3,669


Capital Goods 10.8%
AGCO Corp. *		115,510		3,641
Emerson Electric Co.		178,320		5,837
Fluor Corp.		124,500		4,971
General Dynamics Corp.		50,110		3,023
Lockheed Martin Corp.		669,430		56,935
Northrop Grumman Corp.		220,450		10,337
Raytheon Co.		1,185,720		60,602
Tyco International Ltd.		449,100		11,353

				156,699


Consumer Durables & Apparel 1.2%
Hasbro, Inc.		284,900		8,282
NIKE, Inc., Class B		106,000		6,109
Polo Ralph Lauren Corp.		25,000		1,179
Toll Brothers, Inc. *		50,000		1,156

				16,726


Consumer Services 1.4%
McDonald’s Corp.		350,000		20,276


Diversified Financials 8.8%
Ameriprise Financial, Inc.		433,550		9,365
Bank of America Corp.		350,000		8,459
Bank of New York Mellon Corp.		528,280		17,222
Discover Financial Services		300,000		3,675
JPMorgan Chase & Co.		1,424,200		58,748
Northern Trust Corp.		143,290		8,069
State Street Corp.		495,100		21,463

				127,001


Energy 12.0%
Anadarko Petroleum Corp.		100,000		3,530
Chevron Corp.		443,030		33,050
ConocoPhillips		374,900		19,502
Devon Energy Corp.		120,000		9,703
Exxon Mobil Corp.		900,950		66,779
Massey Energy Co.		25,000		577
National-Oilwell Varco, Inc. *		101,050		3,020
Noble Energy		197,500		10,235
Occidental Petroleum Corp.		464,490		25,798
The Williams Cos., Inc.		100,000		2,097

				174,291


Food & Staples Retailing 2.2%
The Kroger Co.		630,000		17,300
Wal-Mart Stores, Inc.		255,000		14,231

				31,531


Food, Beverage & Tobacco 4.5%
Altria Group, Inc.		490,890		9,420
General Mills, Inc.		430,340		29,151
Reynolds American, Inc.		93,960		4,600
Sara Lee Corp.		139,580		1,561
The Coca-Cola Co.		380,440		16,762
The Pepsi Bottling Group, Inc.		150,000		3,468

				64,962


Health Care Equipment & Services 6.1%
Aetna, Inc.		499,095		12,412
Baxter International, Inc.		496,680		30,044
Becton, Dickinson & Co.		123,110		8,544
CIGNA Corp.		326,760		5,326
Express Scripts, Inc. *		246,160		14,920
Humana, Inc. *		255,885		7,572
Omnicare, Inc.		360,000		9,925

				88,743


Household & Personal Products 3.5%
Church & Dwight Co., Inc.		205,000		12,114
The Procter & Gamble Co.		591,030		38,145

				50,259


Insurance 5.6%
Aflac, Inc.		100,400		4,446
American Financial Group, Inc.		79,290		1,802
Loews Corp.		123,169		4,090
MetLife, Inc.		700,000		23,254
Nationwide Financial Services, Inc., Class A		81,650		3,863
Prudential Financial, Inc.		211,090		6,333
The Chubb Corp.		152,660		7,911
The Hartford Financial Services Group, Inc.		209,990		2,167

32 See financial notes

Schwab Core Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

The Travelers Cos., Inc.		582,940		24,804
W. R. Berkley Corp.		112,630		2,959

				81,629


Materials 3.7%
AK Steel Holding Corp.		127,270		1,772
Celanese Corp., Series A		307,530		4,262
International Paper Co.		327,155		5,634
Monsanto Co.		230,120		20,476
Owens-Illinois, Inc. *		123,710		2,830
Sonoco Products Co.		326,650		8,225
Terra Industries, Inc.		125,000		2,749
The Lubrizol Corp.		188,070		7,068

				53,016


Media 2.1%
CBS Corp., Class B		469,090		4,555
Omnicom Group, Inc.		263,050		7,770
The Walt Disney Co.		715,120		18,522

				30,847


Pharmaceuticals & Biotechnology 10.5%
Amgen, Inc. *		300,000		17,967
Applied Biosystems, Inc.		500,650		15,435
Cephalon, Inc. *		245,000		17,571
Endo Pharmaceuticals Holdings, Inc. *		86,560		1,601
Forest Laboratories, Inc. *		350,000		8,131
Genentech, Inc. *		125,000		10,367
Johnson & Johnson		50,000		3,067
Merck & Co., Inc.		517,080		16,004
Pfizer, Inc.		3,057,530		54,149
Watson Pharmaceuticals, Inc. *		305,000		7,982

				152,274


Retailing 1.6%
Amazon.com, Inc. *		168,610		9,651
Family Dollar Stores, Inc.		200,000		5,382
The Gap, Inc.		690,000		8,929

				23,962


Semiconductors & Semiconductor Equipment 2.2%
Broadcom Corp., Class A *		629,150		10,746
Intel Corp.		848,020		13,568
LSI Corp. *		650,000		2,503
National Semiconductor Corp.		350,000		4,609

				31,426


Software & Services 4.4%
Accenture Ltd., Class A		125,000		4,131
BMC Software, Inc. *		510,640		13,185
Cadence Design Systems, Inc. *		602,790		2,453
Microsoft Corp.		645,650		14,418
Oracle Corp. *		200,000		3,658
Symantec Corp. *		1,285,900		16,177
Synopsys, Inc. *		506,140		9,252

				63,274


Technology Hardware & Equipment 11.1%
Apple, Inc. *		200,565		21,579
Cisco Systems, Inc. *		202,650		3,601
Dolby Laboratories, Inc., Class A *		50,910		1,607
Hewlett-Packard Co.		1,628,900		62,354
International Business Machines Corp.		693,160		64,443
NCR Corp. *		126,445		2,311
Xerox Corp.		549,070		4,404

				160,299


Telecommunication Services 1.7%
CenturyTel, Inc.		248,360		6,236
Frontier Communications Corp.		1,100,555		8,375
Qwest Communications International, Inc.		2,119,420		6,061
Telephone & Data Systems, Inc.		80,290		2,156
Verizon Communications, Inc.		57,720		1,713

				24,541


Transportation 1.1%
Continental Airlines, Inc., Class B *		170,960		3,235
CSX Corp.		70,000		3,200
Union Pacific Corp.		150,000		10,015

				16,450


Utilities 1.4%
Duke Energy Corp.		425,000		6,962
Edison International		333,500		11,869
PG&E Corp.		57,220		2,098

				20,929

Total Common Stock (Cost $1,709,727)				1,392,804



	Face/Maturity
Issuer	Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 3.4% of net assets


Repurchase Agreement 3.2%
Fixed Income Clearing Corp.
Fully collateralized by Federal Home Loan Bank with a value of $47,064
0.03%, issued 10/31/08,
due 11/03/08		46,139		46,139


U.S. Treasury Obligations 0.2%
U.S. Treasury Bills
0.03%, 12/18/08 (a)		775		774
0.05%, 12/18/08 (a)		1,050		1,050
0.25%, 12/18/08 (a)		727		727
0.15%, 12/18/08 (a)		25		25

See financial notes 33

Schwab Core Equity Fund

Portfolio Holdings continued


	Face/Maturity
Issuer	Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)

0.31%, 12/18/08 (a)		475		475

				3,051

Total Short-Term Investment (Cost $49,190)				49,190


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08 the tax basis cost of the fund’s investments was $1,764,462 and the unrealized appreciation and depreciation were $57,789 and ($380,257), respectively, with a net unrealized depreciation of ($322,468).


*		Non-income producing security.
(a)		All or a portion of this security is held as collateral for open futures contracts.

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Gains

Futures Contract

S & P 500 Index, e-mini, Long, expires 12/19/08

700

33,856

1,483

34 See financial notes

Schwab Core Equity Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $1,758,917)		$1,441,994
Cash		1
Receivables:
Investments sold		5,047
Fund shares sold		4,990
Dividends		1,357
Due from brokers for futures		184
Income from securities on loan		52
Prepaid expenses	+	10


Total assets		1,453,635


Liabilities
Payables:
Investments bought		3,260
Investment adviser and administrator fees		50
Transfer agent and shareholder services fees		27
Fund shares redeemed		1,021
Accrued expenses	+	114


Total liabilities		4,472


Net Assets
Total assets		1,453,635
Total liabilities	−	4,472


Net assets		$1,449,163
Net Assets by Source
Capital received from investors		1,837,648
Net investment income not yet distributed		18,139
Net realized capital losses		(91,184	)
Net unrealized capital losses		(315,440	)

Net Asset Value (NAV)


		Shares
Net Assets	¸	Outstanding	=	NAV

$1,449,163		107,910			$13.43

See financial notes 35

Schwab Core Equity Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$37,735
Interest		337
Securities on loan	+	374


Total investment income		38,446


Net Realized Gains and Losses
Net realized losses on investments		(88,480	)
Net realized losses on futures contracts	+	(2,136	)


Net realized losses		(90,616	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(660,496	)
Net unrealized gains on futures contracts	+	914


Net unrealized losses		(659,582	)


Expenses
Investment adviser and administrator fees		9,545
Transfer agent and shareholder service fees		4,742
Shareholder reports		173
Portfolio accounting fees		76
Registration fees		61
Custodian fees		38
Professional fees		37
Trustees’ fees		22
Interest expense		2
Other expenses	+	19


Total expenses		14,715
Expense reduction by adviser and Schwab	−	485


Net expenses		14,230


Increase (Decrease) in Net Assets from Operations
Total investment income		38,446
Net expenses	−	14,230


Net investment income		24,216
Net realized losses		(90,616	)
Net unrealized losses	+	(659,582	)


Decrease in net assets from operations		($725,982	)

36 See financial notes

Schwab Core Equity Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$24,216			$15,389
Net realized gains (losses)			(90,616	)		4,262
Net unrealized gains (losses)	+		(659,582	)		189,829


Increase (Decrease) in net assets from operations			(725,982	)		209,480


Distributions to Shareholders
Distributions from net investment income			18,271			7,073
Distributions from net realized gains	+		4,682			21,463


Total distributions			$22,953			$28,536

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE
Shares Sold			31,275			$534,240			55,950			$1,081,379
Shares Reinvested			845			16,336			1,237			23,020
Shares Redeemed	+		(28,312	)		(485,951	)		(14,242	)		(277,177	)


Net transactions in fund shares			3,808			$64,625			42,945			$827,222


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			104,102			$2,133,473			61,157			$1,125,307
Total increase or decrease	+		3,808			(684,310	)		42,945			1,008,166


End of period			107,910			$1,449,163			104,102			$2,133,473


Net investment income not yet distributed						$18,139						$12,196

See financial notes 37

Schwab Dividend Equity Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
Investor Shares	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		15.70			14.61			12.80			12.06			10.60

Income (loss) from investment operations:
Net investment income (loss)		0.32			0.26			0.24			0.26			0.29
Net realized and unrealized gains (losses)		(5.01	)		1.38			1.97			0.93			1.49

Total from investment operations		(4.69	)		1.64			2.21			1.19			1.78
Less distributions:
Distributions from net investment income		(0.28	)		(0.24	)		(0.24	)		(0.26	)		(0.32	)
Distributions from net realized gains		(0.05	)		(0.31	)		(0.16	)		(0.19	)		—

Total distributions		(0.33	)		(0.55	)		(0.40	)		(0.45	)		(0.32	)

Net asset value at end of period		10.68			15.70			14.61			12.80			12.06

Total return (%)		(30.30	)		11.43			17.63			9.98			17.00

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.04			1.04			1.05			1.07			0.65
Gross operating expenses		1.04			1.04			1.05			1.09			1.19
Net investment income (loss)		2.19			1.71			1.78			2.17			2.71
Portfolio turnover rate		22			18			36			26			39
Net assets, end of period ($ x 1,000,000)		415			760			624			528			267


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
Select Shares	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		15.66			14.60			12.80			12.06			10.60

Income (loss) from investment operations:
Net investment income (loss)		0.32			0.28			0.26			0.28			0.31
Net realized and unrealized gains (losses)		(4.97	)		1.37			1.98			0.93			1.48

Total from investment operations		(4.65	)		1.65			2.24			1.21			1.79
Less distributions:
Distributions from net investment income		(0.33	)		(0.28	)		(0.28	)		(0.28	)		(0.33	)
Distributions from net realized gains		(0.05	)		(0.31	)		(0.16	)		(0.19	)		—

Total distributions		(0.38	)		(0.59	)		(0.44	)		(0.47	)		(0.33	)

Net asset value at end of period		10.63			15.66			14.60			12.80			12.06

Total return (%)		(30.23	)		11.55			17.86			10.17			17.07

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.89			0.89			0.90			0.92			0.54
Gross operating expenses		0.89			0.89			0.90			0.94			1.04
Net investment income (loss)		2.33			1.83			1.92			2.32			2.83
Portfolio turnover rate		22			18			36			26			39
Net assets, end of period ($ x 1,000,000)		824			1,340			729			509			252

38 See financial notes

Schwab Dividend Equity Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.3%

Common Stock

1,449,649

1,218,011

.3%

Short-Term Investments

16,105

.6%

Total Investments

1,465,754

1,234,116

.4%

Other Assets and Liabilities, Net

5,351

100

.0%

Total Net Assets

1,239,467


	Number		Value
Security	of Shares		($ x 1,000)


Common Stock 98.3% of net assets


Banks 1.5%
KeyCorp		577,500		7,063
SunTrust Banks, Inc.		300,887		12,077

				19,140


Capital Goods 8.9%
Cooper Industries Ltd., Class A		255,000		7,892
Eaton Corp.		130,000		5,798
Emerson Electric Co.		423,600		13,864
L-3 Communications Holdings, Inc.		150,000		12,176
Lockheed Martin Corp.		200,000		17,010
Masco Corp.		300,000		3,045
Northrop Grumman Corp.		290,400		13,617
Raytheon Co.		487,100		24,896
Tyco International Ltd.		300,000		7,584
United Technologies Corp.		75,000		4,122

				110,004


Commercial & Professional Supplies 2.5%
Pitney Bowes, Inc.		200,000		4,956
R.R. Donnelley & Sons Co.		460,000		7,622
Waste Management, Inc.		590,000		18,426

				31,004


Consumer Durables & Apparel 3.6%
D.R. Horton, Inc.		1,169,314		8,630
Hasbro, Inc.		475,000		13,808
Leggett & Platt, Inc.		250,000		4,340
NIKE, Inc., Class B		210,000		12,102
VF Corp.		100,000		5,510

				44,390


Consumer Services 1.7%
McDonald’s Corp.		375,000		21,724


Diversified Financials 7.3%
Bank of America Corp.		775,400		18,741
Bank of New York Mellon Corp.		879,845		28,683
JPMorgan Chase & Co.		775,584		31,993
State Street Corp.		245,000		10,621

				90,038


Energy 11.5%
Boardwalk Pipeline Partners L.P.		191,500		4,596
Chevron Corp.		375,000		27,975
ConocoPhillips		400,000		20,808
Devon Energy Corp.		160,000		12,937
Exxon Mobil Corp.		325,800		24,148
Noble Energy		182,500		9,457
Occidental Petroleum Corp.		420,000		23,327
Patterson-UTI Energy, Inc.		225,000		2,986
Spectra Energy Corp.		275,000		5,316
The Williams Cos., Inc.		510,000		10,695

				142,245


Food & Staples Retailing 1.2%
The Kroger Co.		335,000		9,199
Wal-Mart Stores, Inc.		100,000		5,581

				14,780


Food, Beverage & Tobacco 8.7%
Altria Group, Inc.		510,000		9,787
General Mills, Inc.		370,000		25,064
H.J. Heinz Co.		435,000		19,062
Kellogg Co.		340,000		17,143
Reynolds American, Inc.		426,400		20,876
The Coca-Cola Co.		370,000		16,302

				108,234


Health Care Equipment & Services 3.0%
Baxter International, Inc.		325,000		19,659
Becton, Dickinson & Co.		254,000		17,628

				37,287


Household & Personal Products 2.8%
Colgate-Palmolive Co.		235,000		14,749
The Procter & Gamble Co.		303,950		19,617

				34,366


Insurance 6.1%
Aon Corp.		396,250		16,761
Axis Capital Holdings Ltd.		100,000		2,848
HCC Insurance Holdings, Inc.		385,000		8,493
Lincoln National Corp.		300,000		5,172
The Allstate Corp.		328,200		8,661
The Chubb Corp.		351,000		18,189

See financial notes 39

Schwab Dividend Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

The Travelers Cos., Inc.		358,000		15,233

				75,357


Materials 2.2%
Eastman Chemical Co.		75,000		3,029
International Paper Co.		500,000		8,610
MeadWestvaco Corp.		150,000		2,105
Sonoco Products Co.		100,000		2,518
The Dow Chemical Co.		150,800		4,022
The Lubrizol Corp.		200,000		7,516

				27,800


Media 0.6%
CBS Corp., Class B		600,000		5,826
Gannett Co., Inc.		200,000		2,200

				8,026


Pharmaceuticals & Biotechnology 10.1%
Abbott Laboratories		425,000		23,439
Bristol-Myers Squibb Co.		750,000		15,412
Eli Lilly & Co.		444,000		15,016
Johnson & Johnson		387,000		23,739
Merck & Co., Inc.		560,000		17,332
PerkinElmer, Inc.		270,500		4,853
Pfizer, Inc.		1,100,000		19,481
Wyeth		195,000		6,275

				125,547


Real Estate 0.9%
Boston Properties, Inc.		50,000		3,544
Essex Property Trust, Inc.		40,000		3,892
Vornado Realty Trust		50,000		3,527

				10,963


Retailing 0.4%
Genuine Parts Co.		121,000		4,761


Semiconductors & Semiconductor Equipment 2.7%
Analog Devices, Inc.		290,000		6,194
Applied Materials, Inc.		700,000		9,037
Intel Corp.		1,125,000		18,000

				33,231


Software & Services 5.0%
Accenture Ltd., Class A		535,000		17,682
Automatic Data Processing, Inc.		335,000		11,708
Microsoft Corp.		1,100,000		24,563
Paychex, Inc.		266,300		7,600

				61,553


Technology Hardware & Equipment 4.5%
Harris Corp.		100,000		3,595
Hewlett-Packard Co.		520,000		19,906
International Business Machines Corp.		242,500		22,545
Molex, Inc.		100,000		1,441
QUALCOMM, Inc.		75,000		2,870
Seagate Technology		385,000		2,606
Xerox Corp.		290,000		2,326

				55,289


Telecommunication Services 3.5%
AT&T, Inc.		450,407		12,057
CenturyTel, Inc.		100,000		2,511
Embarq Corp.		210,000		6,300
Frontier Communications Corp.		700,000		5,327
Qwest Communications International, Inc.		700,000		2,002
Verizon Communications, Inc.		477,300		14,162
Windstream Corp.		200,000		1,502

				43,861


Transportation 0.7%
CSX Corp.		150,000		6,858
Southwest Airlines Co.		150,000		1,767

				8,625


Utilities 8.9%
Alliant Energy Corp.		350,000		10,283
American Electric Power Co., Inc.		451,000		14,716
CenterPoint Energy, Inc.		150,000		1,728
Consolidated Edison, Inc.		135,000		5,848
DTE Energy Co.		425,000		15,002
Duke Energy Corp.		250,000		4,095
Edison International		400,000		14,236
Integrys Energy Group, Inc.		50,000		2,384
PG&E Corp.		485,000		17,785
Pinnacle West Capital Corp.		75,000		2,374
Progress Energy, Inc.		410,000		16,142
TECO Energy, Inc.		450,000		5,193

				109,786

Total Common Stock (Cost $1,449,649)				1,218,011



Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 1.3% of net assets


Commercial Paper & Other Obligations 1.3%
Citibank, London Time Deposit
0.56%, 11/03/08		15,546		15,546


U.S. Treasury Obligations 0.0%
U.S. Treasury Bill
0.05%, 12/18/08 (a)		35		35

40 See financial notes

Schwab Dividend Equity Fund

Portfolio Holdings continued


Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)

U.S. Treasury Bills
0.31%, 12/18/08 (a)		525		524

				559

Total Short-Term Investments (Cost $16,105)				16,105


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $1,465,754, and the unrealized appreciation and depreciation were $74,356 and ($305,994), respectively, with a net unrealized depreciation of ($231,638).


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

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Gains

Futures Contract

S & P 500 Index, e-mini, Long, expires 12/19/08

100

4,837

400

See financial notes 41

Schwab Dividend Equity Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $1,465,754)		$1,234,116
Receivables:
Dividends		3,157
Fund shares sold		3,043
Due from brokers for futures		29
Prepaid expenses	+	11


Total assets		1,240,356


Liabilities
Payables:
Investments bought		35
Investment adviser and administrator fees		73
Transfer agent and shareholder services fees		14
Fund shares redeemed		667
Accrued expenses	+	100


Total liabilities		889


Net Assets
Total assets		1,240,356
Total liabilities	−	889


Net assets		$1,239,467
Net Assets by Source
Capital received from investors		1,512,790
Net investment income not yet distributed		2,236
Net realized capital losses		(44,321	)
Net unrealized capital losses		(231,238	)

Net Asset Value (NAV) by Shares Class


			Shares
Share Class	Net Assets	¸	Outstanding	=	NAV

Investor Shares	$415,388		38,904			$10.68
Select Shares	$824,079		77,515			$10.63

42 See financial notes

Schwab Dividend Equity Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$56,035
Interest	+	188


Total investment income		56,223


Net Realized Gains and Losses
Net realized losses on investments		(43,248	)
Net realized losses on futures contracts	+	(1,204	)


Net realized losses		(44,452	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(576,617	)
Net unrealized gains on futures contracts	+	531


Net unrealized losses		(576,086	)


Expenses
Investment advisor and administrator fees		13,362
Transfer agent and shareholder service fees:
Investor Shares		1,506
Select Shares		1,139
Shareholder reports		138
Portfolio accounting fees		75
Registration fees		60
Professional fees		42
Custodian fees		40
Trustees’ fees		21
Interest expense		9
Other expenses	+	19


Net expenses		16,411


Increase (Decrease) in Net Assets from Operations
Total investment income		56,223
Net expenses	−	16,411


Net investment income		39,812
Net realized losses		(44,452	)
Net unrealized losses	+	(576,086	)


Decrease in net assets from operations		($580,726	)

See financial notes 43

Schwab Dividend Equity Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$39,812			$33,115
Net realized gains (losses)			(44,452	)		8,254
Net unrealized gains (losses)	+		(576,086	)		138,793


Increase (Decrease) in net assets from operations			(580,726	)		180,162


Distributions to Shareholders
Distributions from net investment income
Investor Shares			12,236			11,773
Select Shares	+		27,045			20,876


Total distributions from net investment income			$39,281			$32,649


Distributions from net realized gains
Investor Shares			2,493			13,513
Select Shares	+		4,513			16,664


Total distributions from net realized gains			$7,006			$30,177

Total distributions			$46,287			$62,826

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE


Shares Sold
Investor Shares			4,894			$64,964			19,321			$294,567
Select Shares	+		16,086			217,167			49,096			751,702


Total shares sold			20,980			$282,131			68,417			$1,046,269


Shares Reinvested
Investor Shares			890			$12,329			1,412			$21,131
Select Shares	+		1,256			17,359			1,561			23,343


Total shares reinvested			2,146			$29,688			2,973			$44,474


Shares Redeemed
Investor Shares			(15,293	)		($207,978	)		(15,025	)		($230,326	)
Select Shares	+		(25,411	)		(338,104	)		(14,990	)		(229,725	)


Total shares redeemed			(40,704	)		($546,082	)		(30,015	)		($460,051	)

Net transactions in fund shares			(17,578	)		($234,263	)		41,375			$630,692


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			133,997			$2,100,743			92,622			$1,352,715
Total increase or decrease	+		(17,578	)		(861,276	)		41,375			748,028


End of period			116,419			$1,239,467			133,997			$2,100,743


Net investment income not yet distributed						$2,236						$1,709

44 See financial notes

Schwab Large-Cap Growth Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			10/3/05¹-
Investor Shares	10/31/08			10/31/07			10/31/06			10/31/05


Per—Share Data ($)

Net asset value at beginning of period		12.75			11.07			9.73			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.04			0.02			0.01			(0.00	)²
Net realized and unrealized gains (losses)		(4.55	)		1.67			1.33			(0.27	)

Total from investment operations		(4.51	)		1.69			1.34			(0.27	)
Less distributions:
Distributions from net investment income		(0.03	)		(0.01	)		(0.00	)²		—

Net asset value at end of period		8.21			12.75			11.07			9.73

Total return (%)		(35.45	)		15.32			13.80			(2.70	)³

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.16			1.18			1.20			1.20	⁴
Gross operating expenses		1.16			1.18			1.26			1.71	⁴
Net investment income (loss)		0.37			0.22			0.09			(0.61	)⁴
Portfolio turnover rate		49			30			53			4	³
Net assets, end of period ($ x 1,000,000)		65			119			70			25


	11/1/07-			11/1/06-			11/1/05-			10/3/05¹-
Select Shares	10/31/08			10/31/07			10/31/06			10/31/05


Per—Share Data ($)

Net asset value at beginning of period		12.77			11.09			9.73			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.06			0.04			0.02			(0.00	)²
Net realized and unrealized gains (losses)		(4.56	)		1.67			1.35			(0.27	)

Total from investment operations		(4.50	)		1.71			1.37			(0.27	)
Less distributions:
Distributions from net investment income		(0.05	)		(0.03	)		(0.01	)		—

Net asset value at end of period		8.22			12.77			11.09			9.73

Total return (%)		(35.36	)		15.47			14.04			(2.70	)³

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.99			0.99			0.99			0.99	⁴
Gross operating expenses		1.01			1.03			1.12			1.56	⁴
Net investment income (loss)		0.53			0.33			0.26			(0.40	)⁴
Portfolio turnover rate		49			30			53			4	³
Net assets, end of period ($ x 1,000,000)		332			492			107			33

¹ Commencement of operations.

² Per share amount was less then $0.01.

³ Not annualized.

⁴ Annualized.

See financial notes 45

Schwab Large-Cap Growth Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.6%

Common Stock

472,014

382,604

.4%

Short-Term Investments

13,544

100

.0%

Total Investments

485,558

396,148

.0%

Other Assets and Liabilities, Net

170

100

.0%

Total Net Assets

396,318


	Number		Value
Security	of Shares		($ x 1,000)

Common Stock 96.6% of net assets


Capital Goods 8.1%
Cooper Industries Ltd., Class A		111,800		3,460
Emerson Electric Co.		14,600		478
Fluor Corp.		90,000		3,594
ITT Corp.		48,000		2,136
Lockheed Martin Corp.		180,000		15,309
Northrop Grumman Corp.		20,000		938
Raytheon Co.		122,800		6,276

				32,191


Commercial & Professional Supplies 1.5%
Covanta Holding Corp. *		270,000		5,821


Consumer Durables & Apparel 1.9%
Hasbro, Inc.		118,000		3,430
NIKE, Inc., Class B		70,000		4,034

				7,464


Consumer Services 3.0%
Apollo Group, Inc., Class A *		25,000		1,738
McDonald’s Corp.		175,000		10,138

				11,876


Diversified Financials 2.2%
JPMorgan Chase & Co.		88,900		3,667
Northern Trust Corp.		65,000		3,660
State Street Corp.		33,000		1,431

				8,758


Energy 8.6%
Exxon Mobil Corp.		210,800		15,624
Halliburton Co.		50,000		990
Massey Energy Co.		130,000		3,002
National-Oilwell Varco, Inc. *		15,500		463
Noble Energy		105,000		5,441
Occidental Petroleum Corp.		122,500		6,804
The Williams Cos., Inc.		88,000		1,845

				34,169


Food & Staples Retailing 3.3%
The Kroger Co.		155,000		4,256
Wal-Mart Stores, Inc.		155,000		8,651

				12,907


Food, Beverage & Tobacco 5.1%
Altria Group, Inc.		270,000		5,181
General Mills, Inc.		168,100		11,387
H.J. Heinz Co.		13,500		592
Molson Coors Brewing Co., Class B		25,000		934
The Coca-Cola Co.		35,800		1,577
The Pepsi Bottling Group, Inc.		25,000		578

				20,249


Health Care Equipment & Services 9.7%
Aetna, Inc.		19,900		495
Baxter International, Inc.		300,000		18,147
Becton, Dickinson & Co.		60,800		4,220
CIGNA Corp.		40,500		660
Express Scripts, Inc. *		150,000		9,091
Humana, Inc. *		40,000		1,184
Medtronic, Inc.		50,000		2,016
St. Jude Medical, Inc. *		29,000		1,103
Varian Medical Systems, Inc. *		35,000		1,593

				38,509


Household & Personal Products 3.8%
Church & Dwight Co., Inc.		78,000		4,609
The Procter & Gamble Co.		160,000		10,326

				14,935


Insurance 2.2%
Aflac, Inc.		40,000		1,771
Axis Capital Holdings Ltd.		97,600		2,779
MetLife, Inc.		37,500		1,246
Prudential Financial, Inc.		33,500		1,005
The Travelers Cos., Inc.		41,500		1,766

				8,567


Materials 3.9%
AK Steel Holding Corp.		158,500		2,206
Celanese Corp., Series A		300,000		4,158
Monsanto Co.		30,000		2,670
Owens-Illinois, Inc. *		75,000		1,716

46 See financial notes

Schwab Large-Cap Growth Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)
Sonoco Products Co.		89,000		2,241
Terra Industries, Inc.		60,000		1,319
The Lubrizol Corp.		18,000		677
The Mosaic Co.		8,000		315

				15,302


Media 1.9%
Omnicom Group, Inc.		114,000		3,368
The DIRECTV Group, Inc. *		50,000		1,094
The Interpublic Group of Cos., Inc. *		50,000		260
The Walt Disney Co.		106,000		2,745

				7,467


Pharmaceuticals & Biotechnology 7.9%
Abbott Laboratories		27,000		1,489
Amgen, Inc. *		75,000		4,492
Applied Biosystems, Inc.		50,000		1,541
Celgene Corp. *		60,000		3,856
Cephalon, Inc. *		126,000		9,037
Endo Pharmaceuticals Holdings, Inc. *		35,000		647
Forest Laboratories, Inc. *		125,000		2,904
Merck & Co., Inc.		125,000		3,869
Pfizer, Inc.		200,000		3,542

				31,377


Retailing 2.0%
Amazon.com, Inc. *		100,000		5,724
The Gap, Inc.		175,000		2,265

				7,989


Semiconductors & Semiconductor Equipment 3.4%
Analog Devices, Inc.		7,000		149
Broadcom Corp., Class A *		210,000		3,587
Intel Corp.		500,000		8,000
LSI Corp. *		165,000		635
National Semiconductor Corp.		10,000		132
Texas Instruments, Inc.		50,000		978

				13,481


Software & Services 13.9%
Accenture Ltd., Class A		380,000		12,559
Adobe Systems, Inc. *		40,000		1,066
BMC Software, Inc. *		301,500		7,785
eBay, Inc. *		165,500		2,527
Google, Inc., Class A *		7,000		2,515
MasterCard, Inc., Class A		10,000		1,478
Microsoft Corp.		572,500		12,784
Oracle Corp. *		285,000		5,213
Symantec Corp. *		516,000		6,491
Synopsys, Inc. *		93,500		1,709
Western Union Co.		65,000		992

				55,119


Technology Hardware & Equipment 13.1%
Agilent Technologies, Inc. *		47,700		1,059
Apple, Inc. *		65,000		6,993
Cisco Systems, Inc. *		300,700		5,343
Dolby Laboratories, Inc., Class A *		30,000		947
Hewlett-Packard Co.		455,000		17,417
International Business Machines Corp.		200,000		18,594
NCR Corp. *		67,500		1,234
Seagate Technology		45,000		305

				51,892


Telecommunication Services 0.5%
Embarq Corp.		45,000		1,350
Sprint Nextel Corp.		200,000		626

				1,976


Transportation 0.5%
Union Pacific Corp.		30,000		2,003


Utilities 0.1%
Edison International		15,500		552
Total Common Stock (Cost $472,014)				382,604



Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 3.4% of net assets


Commercial Paper & Other Obligations 3.3%
Citibank, London Time Deposit
0.56%, 11/03/08		12,984		12,984


U.S. Treasury Obligations 0.1%
U.S. Treasury Bills
0.05%, 12/18/08 (a)		40		40
0.87%, 12/18/08 (a)		200		200
0.05%, 12/18/08 (a)		320		320

				560

Total Short-Term Investment (Cost $13,544)				13,544


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $485,570, and the unrealized appreciation and depreciation were $8,007 and ($97,429), respectively, with a net unrealized depreciation of ($89,422).


*		Non-income producing security.
(a)		All or a portion of this security is held as collateral for futures contracts.

See financial notes 47

Schwab Large-Cap Growth Fund

Portfolio Holdings continued

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Gains

Futures Contract

S & P 500 Index, e-mini, Long, expires 12/19/08

100

4,837

112

48 See financial notes

Schwab Large-Cap Growth Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $485,558)		$396,148
Receivables:
Investments sold		3,387
Fund shares sold		488
Dividends		432
Due from brokers for futures		29
Income from securities on loan		5
Prepaid expenses	+	3


Total assets		400,492


Liabilities
Payables:
Investments bought		3,684
Investment adviser and administrator fees		26
Transfer agent and shareholder services fees		2
Fund shares redeemed		402
Accrued expenses	+	60


Total liabilities		4,174


Net Assets
Total assets		400,492
Total liabilities	−	4,174


Net assets		$396,318
Net Assets by Source
Capital received from investors		543,321
Net investment income not yet distributed		1,246
Net realized capital losses		(58,951	)
Net unrealized capital losses		(89,298	)

Net Asset Value (NAV) by Shares Class


			Shares
Share Class	Net Assets	¸	Outstanding	=	NAV

Investor Shares	$64,741		7,889			$8.21
Select Shares	$331,577		40,329			$8.22

See financial notes 49

Schwab Large-Cap Growth Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$7,952
Interest		61
Securities on loan	+	123


Total investment income		8,136


Net Realized Gains and Losses
Net realized losses on investments		(53,483	)
Net realized losses on futures contracts	+	(549	)


Net realized losses		(54,032	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(165,790	)
Net unrealized gains on futures contracts	+	124


Net unrealized losses		(165,666	)


Expenses
Investment adviser and administrator fees		4,630
Transfer agent and shareholder service fees:
Investor Shares		243
Select Shares		436
Shareholder reports		65
Registration fees		55
Portfolio accounting fees		48
Professional fees		36
Custodian fees		16
Trustees’ fees		11
Interest expense		1
Other expenses	+	7


Total expenses		5,548
Expense reduction by adviser and Schwab	−	103


Net expenses		5,445


Increase (Decrease) in Net Assets from Operations
Total investment income		8,136
Net expenses	−	5,445


Net investment income		2,691
Net realized losses		(54,032	)
Net unrealized losses	+	(165,666	)


Decrease in net assets from operations		($217,007	)

50 See financial notes

Schwab Large-Cap Growth Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$2,691			$1,279
Net realized losses			(54,032	)		(2,041	)
Net unrealized gains (losses)	+		(165,666	)		61,526


Increase (Decrease) in net assets from operations			(217,007	)		60,764


Distributions to Shareholders
Distributions from net investment income
Investor Shares			282			92
Select Shares	+		2,030			458


Total distributions from net investment income			$2,312			$550

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE


Shares Sold
Investor Shares			1,823			$20,286			5,538			$65,288
Select Shares	+		11,725			125,732			32,748			384,845


Total shares sold			13,548			$146,018			38,286			$450,133


Shares Reinvested
Investor Shares			21			$254			7			$80
Select Shares	+		27			328			10			110


Total shares reinvested			48			$582			17			$190


Shares Redeemed
Investor Shares			(3,257	)		($35,189	)		(2,566	)		($30,404	)
Select Shares	+		(9,952	)		(106,495	)		(3,868	)		(46,276	)


Total shares redeemed			(13,209	)		($141,684	)		(6,434	)		($76,680	)

Net transactions in fund shares			387			$4,916			31,869			$373,643


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			47,831			$610,721			15,962			$176,864
Total increase or decrease	+		387			(214,403	)		31,869			433,857


End of period			48,218			$396,318			47,831			$610,721


Net investment income not yet distributed						$1,246						$867

See financial notes 51

Schwab Small-Cap Equity Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
Investor Shares	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		18.10			17.72			15.72			14.13			11.81

Income (loss) from investment operations:
Net investment income (loss)		(0.05	)		(0.09	)		(0.05	)		0.01			(0.04	)
Net realized and unrealized gains (losses)		(6.52	)		0.55			2.48			3.12			2.58

Total from investment operations		(6.57	)		0.46			2.43			3.13			2.54
Less distributions:
Distributions from net investment income		—			—			(0.00	)¹		—			—
Distributions from net realized gains		(1.07	)		(0.08	)		(0.43	)		(1.54	)		(0.22	)

Total distributions		(1.07	)		(0.08	)		(0.43	)		(1.54	)		(0.22	)

Net asset value at end of period		10.46			18.10			17.72			15.72			14.13

Total return (%)		(38.25	)		2.59			15.71			23.65			21.74

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.27			1.24			1.29			1.28			1.30
Gross operating expenses		1.27			1.24			1.29			1.38			1.61
Net investment income (loss)		(0.25	)		(0.43	)		(0.39	)		0.11			(0.35	)
Portfolio turnover rate		50			106			82			90			118
Net assets, end of period ($ x 1,000,000)		135			420			431			170			37


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
Select Shares	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		18.22			17.80			15.78			14.16			11.81

Income (loss) from investment operations:
Net investment income (loss)		(0.01	)		(0.10	)		(0.02	)		0.00	¹		(0.02	)
Net realized and unrealized gains (losses)		(6.59	)		0.60			2.49			3.16			2.59

Total from investment operations		(6.60	)		0.50			2.47			3.16			2.57
Less distributions:
Distributions from net investment income		—			—			(0.02	)		—			—
Distributions from net realized gains		(1.07	)		(0.08	)		(0.43	)		(1.54	)		(0.22	)

Total distributions		(1.07	)		(0.08	)		(0.45	)		(1.54	)		(0.22	)

Net asset value at end of period		10.55			18.22			17.80			15.78			14.16

Total return (%)		(38.16	)		2.80			15.89			23.83			22.00

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		1.11			1.09			1.12			1.11			1.12
Gross operating expenses		1.12			1.09			1.14			1.23			1.46
Net investment income (loss)		(0.09	)		(0.28	)		(0.21	)		0.09			(0.16	)
Portfolio turnover rate		50			106			82			90			118
Net assets, end of period ($ x 1,000,000)		79			228			276			80			18

¹ Per share amount was less than $0.01.

52 See financial notes

Schwab Small-Cap Equity Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.4%

Common Stock

277,460

206,667

.7%

Foreign Common Stock

4,142

3,682

.6%

Short-Term Investment

3,478

.7%

Total Investments

285,080

213,827

.3%

Other Assets and Liabilities, Net

604

100

.0%

Total Net Assets

214,431


	Number		Value
Security	of Shares		($ x 1,000)

Common Stock 96.4% of net assets


Automobiles & Components 0.4%
Cooper Tire & Rubber Co.		27,900		213
Lear Corp. *		57,300		115
Stoneridge, Inc. *		60,600		345
TRW Automotive Holdings Corp. *		24,400		154
Visteon Corp. *		53,200		37

				864


Banks 8.5%
BancFirst Corp.		48,100		2,424
Bank Mutual Corp.		20,200		233
Chemical Financial Corp.		15,000		394
Commerce Bancshares, Inc.		82,715		3,911
First Citizens BancShares, Inc., Class A		3,900		596
NBT Bancorp, Inc.		37,700		1,051
SVB Financial Group *		87,200		4,487
TrustCo Bank Corp. NY		3,100		38
UCBH Holdings, Inc.		31,100		164
UMB Financial Corp.		67,800		3,073
Webster Financial Corp.		100,800		1,869

				18,240


Capital Goods 12.4%
A.O. Smith Corp.		26,700		842
Acuity Brands, Inc.		147,200		5,146
AGCO Corp. *		115,000		3,625
American Woodmark Corp.		20,900		387
Applied Signal Technology, Inc.		3,200		57
Brady Corp., Class A		23,200		719
Crane Co.		166,900		2,732
Cubic Corp.		50,500		1,124
EMCOR Group, Inc. *		210,000		3,732
Encore Wire Corp.		13,100		251
EnPro Industries, Inc. *		48,200		1,071
Gardner Denver, Inc. *		33,600		861
Gibraltar Industries, Inc.		72,200		957
Insteel Industries, Inc.		19,700		202
Mueller Industries, Inc.		27,700		634
Robbins & Myers, Inc.		30,000		612
Tecumseh Products Co., Class A *		12,400		230
Teledyne Technologies, Inc. *		1,800		82
Tredegar Corp.		83,700		1,232
United Rentals, Inc. *		56,200		576
Wabash National Corp.		39,800		240
Watts Water Technologies, Inc., Class A		40,300		1,065
Woodward Governor Co.		9,600		308

				26,685


Commercial & Professional Supplies 3.2%
Bowne & Co., Inc.		88,900		692
CDI Corp.		32,800		426
CRA International, Inc. *		7,500		203
Hudson Highland Group, Inc. *		46,300		243
Spherion Corp. *		290,900		925
The Brink’s Co.		21,900		1,062
Volt Information Sciences, Inc. *		107,000		819
Watson Wyatt Worldwide, Inc., Class A		57,200		2,429

				6,799


Consumer Durables & Apparel 6.5%
American Greetings Corp., Class A		50,300		588
Blyth, Inc.		133,300		1,146
Furniture Brands International, Inc.		132,300		753
Helen of Troy Ltd. *		23,900		430
JAKKS Pacific, Inc. *		19,400		434
KB HOME		43,000		718
Kenneth Cole Productions, Inc., Class A		20,000		266
Lennar Corp., Class A		8,700		67
Movado Group, Inc.		30,400		462
NVR, Inc. *		1,600		784
Perry Ellis International, Inc. *		17,700		173
Pulte Homes, Inc.		38,100		424
Steinway Musical Instruments, Inc. *		8,200		183
Steven Madden Ltd. *		47,600		1,037
The Stanley Works		38,400		1,257
The Timberland Co., Class A *		51,400		622
The Warnaco Group, Inc. *		121,200		3,613
Toll Brothers, Inc. *		22,200		513
Wolverine World Wide, Inc.		21,600		508

				13,978


Consumer Services 1.8%
Career Education Corp. *		87,400		1,382
DeVry, Inc.		18,800		1,065
Krispy Kreme Doughnuts, Inc. *		254,300		702

See financial notes 53

Schwab Small-Cap Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

Regis Corp.		57,000		705

				3,854


Diversified Financials 1.8%
Advanta Corp., Class B		194,200		878
Cash America International, Inc.		12,000		424
GAMCO Investors, Inc., Class A		5,800		221
LaBranche & Co., Inc. *		90,100		561
Nelnet, Inc., Class A		20,300		297
optionsXpress Holdings, Inc.		50,100		890
TradeStation Group, Inc. *		65,600		514

				3,785


Energy 5.3%
Basic Energy Services, Inc. *		37,800		517
Callon Petroleum Co. *		29,000		299
Dresser-Rand Group, Inc. *		132,000		2,957
Foundation Coal Holdings, Inc.		19,500		405
Lufkin Industries, Inc.		11,600		607
Massey Energy Co.		48,400		1,118
Matrix Service Co. *		46,800		573
Oil States International, Inc. *		5,500		127
Pioneer Drilling Co. *		5,100		39
Rosetta Resources, Inc. *		84,700		894
SEACOR Holdings, Inc. *		5,500		369
Superior Energy Services, Inc. *		1,900		41
Tidewater, Inc.		21,700		946
VAALCO Energy, Inc. *		156,200		828
W&T Offshore, Inc.		92,000		1,764

				11,484


Food & Staples Retailing 2.0%
BJ’s Wholesale Club, Inc. *		121,000		4,259


Food, Beverage & Tobacco 1.6%
Alliance One International, Inc. *		583,400		1,948
Chiquita Brands International, Inc. *		16,900		231
Diamond Foods, Inc.		24,600		719
Universal Corp.		14,400		570

				3,468


Health Care Equipment & Services 10.0%
Alliance Imaging, Inc. *		46,800		381
AMERIGROUP Corp. *		144,600		3,615
Analogic Corp.		11,200		495
Centene Corp. *		60,000		1,130
CONMED Corp. *		69,800		1,829
CryoLife, Inc. *		46,100		618
Emergency Medical Services Corp., Class A *		24,800		815
Hanger Orthopedic Group, Inc. *		25,400		423
Invacare Corp.		29,200		531
Kindred Healthcare, Inc. *		13,800		200
Magellan Health Services, Inc. *		159,600		5,896
Merit Medical Systems, Inc. *		136,900		2,505
Molina Healthcare, Inc. *		62,500		1,392
Omnicare, Inc.		36,000		993
Omnicell, Inc. *		23,400		257
RehabCare Group, Inc. *		3,900		67
Res-Care, Inc. *		14,500		223

				21,370


Household & Personal Products 0.7%
Alberto-Culver Co.		6,200		160
Church & Dwight Co., Inc.		2,200		130
NBTY, Inc. *		52,300		1,222

				1,512


Insurance 4.3%
Allied World Assurance Co. Holdings Ltd.		20,300		651
American Financial Group, Inc.		138,300		3,143
American Physicians Capital, Inc.		15,250		624
Amerisafe, Inc. *		33,300		574
Aspen Insurance Holdings Ltd.		3,400		78
Harleysville Group, Inc.		85,200		2,691
HCC Insurance Holdings, Inc.		57,100		1,260
ProAssurance Corp. *		1,400		77
Selective Insurance Group, Inc.		2,000		47

				9,145


Materials 3.9%
A. Schulman, Inc.		20,600		369
AK Steel Holding Corp.		102,700		1,430
Minerals Technologies, Inc.		5,700		324
OM Group, Inc. *		3,000		64
PolyOne Corp. *		130,300		619
Quaker Chemical Corp.		41,300		790
Rock-Tenn Co., Class A		39,700		1,207
Rockwood Holdings, Inc. *		187,800		2,319
Sonoco Products Co.		37,200		937
The Lubrizol Corp.		6,500		244

				8,303


Media 0.3%
The Interpublic Group of Cos., Inc. *		119,700		621


Pharmaceuticals & Biotechnology 4.4%
Cephalon, Inc. *		12,700		911
Invitrogen Corp. *		71,600		2,061
King Pharmaceuticals, Inc. *		41,500		365
Medicis Pharmaceutical Corp., Class A		72,000		1,027
OSI Pharmaceuticals, Inc. *		61,200		2,323
Par Pharmaceutical Cos., Inc. *		73,900		739
Regeneron Pharmaceuticals, Inc. *		8,000		154
Sepracor, Inc. *		30,700		409
ViroPharma, Inc. *		21,100		265
VIVUS, Inc. *		43,400		264
Watson Pharmaceuticals, Inc. *		33,300		872

				9,390


Real Estate 2.0%
BioMed Realty Trust, Inc.		45,000		632
Entertainment Properties Trust		20,000		749

54 See financial notes

Schwab Small-Cap Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

Essex Property Trust, Inc.		1,500		146
Home Properties, Inc.		20,000		810
Kilroy Realty Corp.		2,000		64
National Retail Properties, Inc.		45,000		802
Senior Housing Properties Trust		55,000		1,055

				4,258


Retailing 3.3%
Christopher & Banks Corp.		42,700		223
Hot Topic, Inc. *		195,400		1,266
Jo-Ann Stores, Inc. *		39,500		757
RadioShack Corp.		68,900		872
Rent-A-Center, Inc. *		6,800		99
The Cato Corp., Class A		79,800		1,239
The Children’s Place Retail Stores, Inc. *		25,600		856
The Dress Barn, Inc. *		31,100		297
The Finish Line, Inc., Class A		49,300		472
The Talbots, Inc.		95,500		937

				7,018


Semiconductors & Semiconductor Equipment 3.4%
Amkor Technology, Inc. *		151,600		616
Applied Micro Circuits Corp. *		28,200		144
Atmel Corp. *		357,100		1,482
Cabot Microelectronics Corp. *		8,300		238
Conexant Systems, Inc. *		11,900		18
Entegris, Inc. *		49,000		132
Integrated Device Technology, Inc. *		189,300		1,204
Lattice Semiconductor Corp. *		18,300		34
MKS Instruments, Inc. *		10,400		193
Teradyne, Inc. *		378,800		1,932
Ultratech, Inc. *		74,500		1,124
Veeco Instruments, Inc. *		33,700		261

				7,378


Software & Services 8.3%
CIBER, Inc. *		41,900		226
CSG Systems International, Inc. *		1,900		32
Global Payments, Inc.		68,500		2,775
Hewitt Associates, Inc., Class A *		137,300		3,829
JDA Software Group, Inc. *		13,800		197
Novell, Inc. *		725,700		3,382
SPSS, Inc. *		25,100		586
Sybase, Inc. *		162,100		4,317
Synopsys, Inc. *		137,100		2,506

				17,850


Technology Hardware & Equipment 7.0%
3Com Corp. *		67,900		185
Adaptec, Inc. *		257,500		827
ADC Telecommunications, Inc. *		25,800		164
Avid Technology, Inc. *		20,300		301
Avocent Corp. *		21,500		323
Benchmark Electronics, Inc. *		22,200		266
Cognex Corp.		41,100		658
Coherent, Inc. *		19,500		493
Dolby Laboratories, Inc., Class A *		21,300		672
Emulex Corp. *		353,100		3,354
Harmonic, Inc. *		54,500		388
Hutchinson Technology, Inc. *		97,800		669
Insight Enterprises, Inc. *		3,000		29
Jabil Circuit, Inc.		8,500		72
JDS Uniphase Corp. *		48,100		263
Mercury Computer Systems, Inc. *		16,100		116
Methode Electronics, Inc.		252,100		1,913
NCR Corp. *		20,900		382
Plantronics, Inc.		39,900		576
QLogic Corp. *		116,300		1,398
Rackable Systems, Inc. *		84,900		605
Rogers Corp. *		9,900		298
Tekelec *		21,900		278
Tellabs, Inc. *		83,100		352
Vishay Intertechnology, Inc. *		92,500		399

				14,981


Telecommunication Services 1.6%
CenturyTel, Inc.		24,800		623
NTELOS Holdings Corp.		9,800		255
Syniverse Holdings, Inc. *		138,300		2,600

				3,478


Transportation 1.2%
Con-way, Inc.		47,600		1,620
Hub Group, Inc., Class A *		6,600		207
JetBlue Airways Corp. *		68,600		381
SkyWest, Inc.		27,700		427

				2,635


Utilities 2.5%
National Fuel Gas Co.		111,800		4,046
Portland General Electric Co.		61,700		1,266

				5,312

Total Common Stock (Cost $277,460)				206,667






Foreign Common Stock 1.7% of net assets


Bermuda 1.7%


Insurance 1.7%
Platinum Underwriters Holdings, Ltd.		116,000		3,682

Total Foreign Common Stock (Cost $4,142)				3,682

See financial notes 55

Schwab Small-Cap Equity Fund

Portfolio Holdings continued


Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investment 1.6% of net assets


Commercial Paper & Other Obligations 1.6%
Citibank, London Time Deposit
0.56%, 11/03/08		3,478		3,478

Total Short-Term Investment (Cost $3,478)				3,478


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $285,340 and the unrealized appreciation and depreciation were $7,298 and ($78,811), respectively, with a net unrealized depreciation of ($71,513).


*		Non-income producing security.

56 See financial notes

Schwab Small-Cap Equity Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $285,080)		$213,827
Receivables:
Investments sold		6,073
Fund shares sold		329
Dividends		111
Income from securities on loan		36
Prepaid expenses	+	1


Total assets		220,377


Liabilities
Payables:
Investments bought		5,513
Investment advisers and administrator fees		13
Transfer agent and shareholder services fees		3
Fund shares redeemed		367
Accrued expenses	+	50


Total liabilities		5,946


Net Assets
Total assets		220,377
Total liabilities	−	5,946


Net assets		$214,431
Net Assets by Source
Capital received from investors		333,834
Net investment income not yet distributed		7
Net realized capital losses		(48,157	)
Net unrealized capital losses		(71,253	)

Net Asset Value (NAV) by Shares Class


			Shares
Share Class	Net Assets	¸	Outstanding	=	NAV

Investor Shares	$135,515		12,959			$10.46
Select Shares	$78,916		7,481			$10.55

See financial notes 57

Schwab Small-Cap Equity Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends (net of foreign withholding tax of $2)		$3,429
Interest		235
Securities on loan	+	345


Total investment income		4,009


Net Realized Gains and Losses
Net realized losses on investments		(46,661	)
Net realized losses on futures contracts	+	(1,219	)


Net realized losses		(47,880	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(125,680	)
Net unrealized losses on futures contracts	+	(76	)


Net unrealized losses		(125,756	)


Expenses
Investment adviser and administrator fees		3,812
Transfer agent and shareholder service fees:
Investor Shares		629
Select Shares		140
Portfolio accounting fees		45
Registration fees		41
Professional fees		36
Shareholder reports		34
Custodian fees		16
Trustees’ fees		11
Interest expense		3
Other expenses	+	8


Total expenses		4,775
Expense reduction by adviser and Schwab	−	(15	)


Net expenses		4,760


Increase (Decrease) in Net Assets from Operations
Total investment income		4,009
Net expenses	−	4,760


Net investment loss		(751	)
Net realized losses		(47,880	)
Net unrealized losses	+	(125,756	)


Decrease in net assets from operations		($174,387	)

58 See financial notes

Schwab Small-Cap Equity Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment loss			($751	)		($3,498	)
Net realized gains (losses)			(47,880	)		33,493
Net unrealized losses	+		(125,756	)		(23,541	)


Increase (Decrease) in net assets from operations			(174,387	)		6,454


Distributions to Shareholders
Distributions from net realized gains
Investor Shares			22,156			2,059
Select Shares	+		11,434			1,551


Total distributions from net realized gains			$33,590			$3,610

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE


Shares Sold
Investor Shares			568			$8,177			9,679			$177,205
Select Shares	+		1,043			14,622			22,102			408,478


Total shares sold			1,611			$22,799			31,781			$585,683


Shares Reinvested
Investor Shares			1,303			$20,400			104			$1,890
Select Shares	+		640			10,084			49			897


Total shares reinvested			1,943			$30,484			153			$2,787


Shares Redeemed
Investor Shares			(12,120	)		($178,753	)		(10,906	)		($199,419	)
Select Shares	+		(6,725	)		(100,469	)		(25,103	)		(450,090	)


Total shares redeemed			(18,845	)		($279,222	)		(36,009	)		($649,509	)

Net transactions in fund shares			(15,291	)		($225,939	)		(4,075	)		($61,039	)


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			35,731			$648,347			39,806			$706,542
Total decrease	+		(15,291	)		(433,916	)		(4,075	)		(58,195	)


End of period			20,440			$214,431			35,731			$648,347


Net investment income not yet distributed						$7						$7

See financial notes 59

Schwab Hedged Equity Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			3/1/05¹-
Investor Shares	10/31/08			10/31/07			10/31/06			10/31/05


Per—Share Data ($)

Net asset value at beginning of period		16.35			15.95			14.45			13.51

Income (loss) from investment operations:
Net investment income (loss)		(0.11	)		0.11			0.06			0.03
Net realized and unrealized gains (losses)		(3.59	)		0.36			1.74			0.91

Total from investment operations		(3.70	)		0.47			1.80			0.94
Less distributions:
Distributions from net investment income		(0.13	)		(0.07	)		(0.04	)		—
Distributions from net realized gains		—			—			(0.26	)		—

Total distributions		(0.13	)		(0.07	)		(0.30	)		—

Net asset value at end of period		12.52			16.35			15.95			14.45

Total return (%)		(22.80	)		2.94			12.71			6.96	²

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses (including dividend expense on short sales)		2.34			2.19			2.11			2.32	³
Net operating expenses (excluding dividend expense on short sales)		1.95			1.93			1.99	⁴		2.05	^3,4
Gross operating expenses		2.34			2.19			2.12			2.35	³
Net investment income (loss)		(0.35	)		0.64			0.58			0.56	³
Portfolio turnover rate		138			72			100			87	²
Net assets, end of period ($ x 1,000,000)		79			211			207			33

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.

60 See financial notes

Schwab Hedged Equity Fund^tm

Financial Highlights continued


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
Select Shares	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		16.39			15.98			14.46			13.01			11.53

Income (loss) from investment operations:
Net investment income (loss)		(0.05	)		0.14			0.07			0.04			(0.09	)
Net realized and unrealized gains (losses)		(3.63	)		0.36			1.76			2.05			1.57

Total from investment operations		(3.68	)		0.50			1.83			2.09			1.48
Less distributions:
Distributions from net investment income		(0.16	)		(0.09	)		(0.05	)		—			—
Distributions from net realized gains		—			—			(0.26	)		(0.64	)		—

Total distributions		(0.16	)		(0.09	)		(0.31	)		(0.64	)		—

Net asset value at end of period		12.55			16.39			15.98			14.46			13.01

Total return (%)		(22.66	)		3.11			12.82			16.52			12.84

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses (including dividend expense on short sales)		2.17	¹		2.03	¹		1.90			2.26			2.43
Net operating expenses (excluding dividend expense on short sales)		1.77			1.77			1.77	²		1.92	²		2.10	²
Gross operating expenses		2.19			2.04			1.97			2.39			2.71
Net investment income (loss)		(0.17	)		0.79			0.77			0.55			(0.86	)
Portfolio turnover rate		138			72			100			87			99
Net assets, end of period ($ x 1,000,000)		343			948			931			229			68

¹ The ratio of net operating expenses would have been 2.02% and 2.16% for periods ended 10/31/07 and 10/31/08, respectively, if interest expenses had not been included.

² 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, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.6%

Common Stock

536,749

415,706

.8%

Short-Term Investments

15,844

102

.4%

Total Investments

552,593

431,550

(54

.6)%

Short Sales

(325,303

)

(230,074

)

.2%

Other Assets and Liabilities, Net

220,099

100

.0%

Total Net Assets

421,575


	Number		Value
Security	of Shares		($ x 1,000)

Common Stock 98.6% of net assets


Automobiles & Components 0.1%
Lear Corp. (a) *		126,800		255


Banks 2.6%
Bank of Hawaii Corp. (a)		90,500		4,589
SunTrust Banks, Inc.		32,100		1,289
UMB Financial Corp. (a)		113,000		5,122

				11,000


Capital Goods 11.1%
Acuity Brands, Inc. (a)		24,700		864
AGCO Corp. (a) *		256,000		8,069
EMCOR Group, Inc. *		513,900		9,132
Emerson Electric Co.		82,400		2,697
Fluor Corp.		38,800		1,549
Jacobs Engineering Group, Inc. *		11,400		415
Lockheed Martin Corp. (a)		87,200		7,416
Raytheon Co. (a)		253,400		12,951
Tyco International Ltd. (a)		80,000		2,023
URS Corp. *		54,600		1,605

				46,721


Commercial & Professional Supplies 3.2%
Covanta Holding Corp. (a) *		112,700		2,430
R.R. Donnelley & Sons Co. (a)		227,700		3,773
Waste Management, Inc.		228,100		7,123

				13,326


Consumer Durables & Apparel 2.8%
Hasbro, Inc.		21 7,300		6,317
Polo Ralph Lauren Corp.		12,800		604
Pulte Homes, Inc.		86,700		966
The Warnaco Group, Inc. (a) *		128,600		3,833

				11,720


Consumer Services 0.2%
Regis Corp.		54,300		672


Diversified Financials 4.4%
Discover Financial Services (a)		326,500		4,000
JPMorgan Chase & Co.		66,800		2,755
Northern Trust Corp.		141,100		7,945
optionsXpress Holdings, Inc. (a)		43,400		771
State Street Corp.		74,800		3,243

				18,714


Energy 10.8%
ConocoPhillips		9,100		473
Dresser-Rand Group, Inc. (a) *		205,800		4,610
Exxon Mobil Corp. (a)		158,600		11,755
Massey Energy Co. (a)		160,000		3,694
National-Oilwell Varco, Inc. (a) *		49,500		1,479
Noble Energy (a)		71,800		3,721
Occidental Petroleum Corp.		196,900		10,936
Patterson-UTI Energy, Inc. (a)		295,300		3,919
W&T Offshore, Inc. (a)		255,800		4,904

				45,491


Food & Staples Retailing 2.7%
BJ’s Wholesale Club, Inc. (a) *		172,000		6,055
The Kroger Co. (a)		200,450		5,504

				11,559


Food, Beverage & Tobacco 3.0%
Altria Group, Inc. (a)		114,000		2,188
Chiquita Brands International, Inc. (a) *		263,100		3,591
General Mills, Inc. (a)		45,500		3,082
The Pepsi Bottling Group, Inc.		77,200		1,785
Tyson Foods, Inc., Class A (a)		237,200		2,073

				12,719


Health Care Equipment & Services 7.6%
Baxter International, Inc.		189,000		11,433
Boston Scientific Corp. (a) *		458,400		4,139
CIGNA Corp.		59,700		973
Humana, Inc. *		172,100		5,093
Magellan Health Services, Inc. (a) *		237,500		8,773
Teleflex, Inc.		5,100		270
Thoratec Corp. *		51,000		1,256

				31,937


Household & Personal Products 3.2%
Alberto-Culver Co. (a)		77,500		1,994

62 See financial notes

Schwab Hedged Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

Church & Dwight Co., Inc. (a)		198,700		11,741

				13,735


Insurance 4.8%
American Financial Group, Inc. (a)		12,400		282
Arch Capital Group Ltd. *		3,500		244
Axis Capital Holdings Ltd. (a)		37,700		1,074
Harleysville Group, Inc.		42,700		1,348
MetLife, Inc. (a)		146,900		4,880
Prudential Financial, Inc. (a)		152,100		4,563
W. R. Berkley Corp. (a)		295,412		7,761

				20,152


Materials 3.6%
AK Steel Holding Corp. (a)		162,100		2,256
Celanese Corp., Series A (a)		150,700		2,089
Chemtura Corp.		112,300		194
MeadWestvaco Corp. (a)		49,800		699
Owens-Illinois, Inc. *		4,500		103
Rock-Tenn Co., Class A		34,600		1,052
Rockwood Holdings, Inc. *		53,500		661
Sonoco Products Co. (a)		180,700		4,550
Terra Industries, Inc.		6,900		152
The Lubrizol Corp. (a)		92,300		3,468

				15,224


Media 2.2%
Cablevision Systems Corp., Class A (a)		190,800		3,383
Liberty Global, Inc., Series A *		17,800		294
The Interpublic Group of Cos., Inc. *		77,300		401
The Walt Disney Co.		59,000		1,528
Time Warner, Inc. (a)		379,400		3,828

				9,434


Pharmaceuticals & Biotechnology 6.0%
Amgen, Inc. (a) *		51,200		3,066
Cephalon, Inc. (a) *		53,500		3,837
Forest Laboratories, Inc. *		99,000		2,300
King Pharmaceuticals, Inc. (a) *		734,600		6,457
Medicis Pharmaceutical Corp., Class A (a)		92,300		1,317
Pfizer, Inc.		230,600		4,084
The Medicines Co. (a) *		98,300		1,713
Thermo Fisher Scientific, Inc. (a) *		57,600		2,339
Watson Pharmaceuticals, Inc. *		7,300		191

				25,304


Retailing 3.5%
Family Dollar Stores, Inc. (a)		106,500		2,866
Macy’s, Inc.		6,700		82
RadioShack Corp. (a)		427,600		5,414
The Gap, Inc. (a)		486,800		6,299

				14,661


Semiconductors & Semiconductor Equipment 1.7%
Amkor Technology, Inc. (a) *		725,900		2,947
Atmel Corp. (a) *		483,600		2,007
Integrated Device Technology, Inc. *		70,800		450
MKS Instruments, Inc. (a) *		41,700		774
Teradyne, Inc. (a) *		172,000		877

				7,055


Software & Services 7.7%
BMC Software, Inc. (a) *		478,500		12,355
Hewitt Associates, Inc., Class A (a) *		261,700		7,299
Sybase, Inc. (a) *		337,000		8,974
Synopsys, Inc. (a) *		204,200		3,733

				32,361


Technology Hardware & Equipment 8.7%
3Com Corp. *		1,871,300		5,109
Brocade Communications Systems, Inc. (a) *		309,100		1,165
Hewlett-Packard Co. (a)		339,300		12,988
International Business Machines Corp. (a)		86,600		8,051
Jabil Circuit, Inc. (a)		428,500		3,604
JDS Uniphase Corp. (a) *		769,700		4,203
Plantronics, Inc.		50,900		735
Tellabs, Inc. *		180,400		765

				36,620


Telecommunication Services 2.6%
CenturyTel, Inc.		272,900		6,853
Sprint Nextel Corp.		18,600		58
Syniverse Holdings, Inc. (a) *		93,300		1,754
Telephone & Data Systems, Inc.		94,300		2,532

				11,197


Transportation 2.5%
AMR Corp. (a) *		585,600		5,979
Arkansas Best Corp. (a)		99,700		2,910
Con-way, Inc. (a)		31,400		1,069
Union Pacific Corp.		4,200		280
Werner Enterprises, Inc.		11,300		222

				10,460


Utilities 3.6%
DTE Energy Co.		68,600		2,422
Edison International (a)		161,900		5,762
ONEOK, Inc. (a)		44,800		1,429
Portland General Electric Co. (a)		82,400		1,691
Reliant Energy, Inc. (a) *		778,200		4,085

				15,389

Total Common Stock (Cost $536,749)				415,706

See financial notes 63

Schwab Hedged Equity Fund

Portfolio Holdings continued


Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 3.8% of net assets


Repurchase Agreement 3.2%
Fixed Income Clearing Corp.
Fully collateralized by Federal Home Loan Mortgage Discount Notes. with a value of $13,863.
0.03%, issued 10/31/08,
due 11/03/08		13,590		13,590


U.S. Treasury Bills 0.6%
U.S. Treasury Bills
0.05%, 12/18/08 (b)		250		250
0.61%, 12/18/08 (b)		100		100
0.10%, 12/18/08 (b)		150		150
0.82%, 12/18/08 (b)		4		4
0.03%, 12/18/08 (b)		1,000		1,000
0.25%, 12/18/08 (b)		750		750

				2,254

Total Short-Term Investment (Cost $15,844)				15,844


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $552,623 and the unrealized appreciation and depreciation were $20,937 and ($142,010), respectively, with a net unrealized depreciation of ($121,073).


*		Non-income producing security.
(a)		All or a portion of this security is held as collateral for short sales.
(b)		All or a portion of this security is held as collateral for open futures contracts.

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Gains

Futures Contract

S & P 500 Index, Long, expires 12/18/08

9,673

1,056

64 See financial notes

Schwab Hedged Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

Short Sales 54.6% of net assets


Automobiles & Components 0.1%
Harley-Davidson, Inc.		11,900		291


Banks 2.6%
City National Corp.		46,700		2,500
New York Community Bancorp, Inc.		35,100		550
PrivateBancorp, Inc.		5,400		194
TCF Financial Corp.		193,700		3,436
Washington Federal, Inc.		192,900		3,399
Wilmington Trust Corp.		36,000		1,039

				(11,118	)


Capital Goods 5.3%
Albany International Corp., Class A		42,000		611
CLARCOR, Inc.		143,700		5,086
Franklin Electric Co., Inc.		54,000		2,277
Graco, Inc.		41,800		1,034
Kaydon Corp.		59,700		1,995
Nordson Corp.		31,600		1,167
RSC Holdings, Inc. *		80,600		592
Spirit AeroSystems Holdings, Inc., Class A *		273,300		4,408
The Boeing Co.		90,400		4,725
Watsco, Inc.		6,800		279

				(22,174	)


Commercial & Professional Supplies 3.3%
Corrections Corp. of America *		111,900		2,138
Huron Consulting Group, Inc. *		75,400		4,100
Iron Mountain, Inc. *		61,900		1,503
Mine Safety Appliances Co.		171,700		4,636
The Geo Group, Inc. *		80,800		1,427

				(13,804	)


Consumer Durables & Apparel 1.0%
Deckers Outdoor Corp. *		10,000		849
Hanesbrands, Inc. *		192,100		3,356

				(4,205	)


Consumer Services 3.2%
Coinstar, Inc. *		77,900		1,869
Gaylord Entertainment Co. *		30,000		642
Las Vegas Sands Corp. *		63,000		894
Royal Caribbean Cruises Ltd.		45,200		613
Scientific Games Corp., Class A *		168,000		3,024
Sonic Corp. *		181,400		1,941
The Cheesecake Factory, Inc. *		253,400		2,230
Weight Watchers International, Inc.		44,900		1,405
Wynn Resorts Ltd.		13,600		821

				(13,439	)


Diversified Financials 1.5%
CME Group, Inc.		500		141
Legg Mason, Inc.		15,300		340
Leucadia National Corp.		138,900		3,728
MSCI, Inc., Class A *		115,600		1,993

				(6,202	)


Energy 4.3%
BPZ Resources, Inc. *		227,800		2,255
Continental Resources, Inc. *		104,700		3,391
Frontier Oil Corp.		105,300		1,391
Quicksilver Resources, Inc. *		40,000		419
Range Resources Corp.		63,900		2,698
Rowan Cos., Inc.		189,100		3,430
RPC, Inc.		68,400		724
XTO Energy, Inc.		102,100		3,671

				(17,979	)


Food & Staples Retailing 1.8%
CVS Caremark Corp.		107,800		3,304
United Natural Foods, Inc. *		88,400		1,975
Walgreen Co.		24,000		611
Whole Foods Market, Inc.		165,400		1,773

				(7,663	)


Food, Beverage & Tobacco 0.9%
Hansen Natural Corp. *		19,500		494
PepsiCo, Inc.		21,900		1,248
Smithfield Foods, Inc. *		185,100		1,947

				(3,689	)


Health Care Equipment & Services 2.5%
Eclipsys Corp. *		38,700		575
Emeritus Corp. *		72,100		831
Healthways, Inc. *		127,200		1,285
Masimo Corp. *		29,600		947
Psychiatric Solutions, Inc. *		115,200		3,835
The Cooper Cos., Inc.		175,500		2,892

				(10,365	)


Insurance 1.0%
Fidelity National Financial, Inc., Class A		490,300		4,418


Materials 4.7%
Coeur d’Alene Mines Corp. *		96,640		70
Eagle Materials, Inc.		30,500		540
Kaiser Aluminum Corp.		30,100		1,010
Martin Marietta Materials, Inc.		42,800		3,355
RTI International Metals, Inc. *		229,400		3,622
Steel Dynamics, Inc.		222,100		2,647
Texas Industries, Inc.		141,600		4,479
Titanium Metals Corp.		282,800		2,633
Westlake Chemical Corp.		88,000		1,604

				(19,960	)


Media 0.3%
Lamar Advertising Co., Class A *		60,200		913

See financial notes 65

Schwab Hedged Equity Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)

National CineMedia, Inc.		8,900		72
World Wrestling Entertainment, Inc., Class A		28,310		403

				(1,388	)


Pharmaceuticals & Biotechnology 3.7%
AMAG Pharmaceuticals, Inc. *		20,900		639
Amylin Pharmaceuticals, Inc. *		195,500		1,996
Auxilium Pharmaceuticals, Inc. *		158,000		3,105
BioMarin Pharmaceuticals, Inc. *		70,100		1,284
Cepheid, Inc. *		272,600		3,236
Covance, Inc. *		87,100		4,355
Sequenom, Inc. *		65,500		1,179

				(15,794	)


Real Estate 0.9%
CB Richard Ellis Group, Inc., Class A *		344,200		2,413
The St. Joe Co. *		45,900		1,419

				(3,832	)


Retailing 2.9%
J. Crew Group, Inc. *		142,900		2,894
LKQ Corp. *		147,000		1,682
Nordstrom, Inc.		21,600		391
Sally Beauty Holdings, Inc. *		214,700		1,091
Staples, Inc.		277,000		5,382
Target Corp.		5,600		224
Williams-Sonoma, Inc.		70,000		579

				(12,243	)


Semiconductors & Semiconductor Equipment 1.3%
Diodes, Inc. *		48,300		477
FormFactor, Inc. *		52,500		915
Microchip Technology, Inc.		5,200		128
Rambus, Inc. *		411,500		3,765

				(5,285	)


Software & Services 4.9%
ACI Worldwide, Inc. *		52,800		723
Blackbaud, Inc.		118,700		1,804
Commvault Systems, Inc. *		63,500		680
Concur Technologies, Inc. *		73,300		1,849
Equinix, Inc. *		113,644		7,094
Omniture, Inc. *		86,200		991
Quality Systems, Inc.		53,400		2,055
Syntel, Inc.		23,800		592
THQ, Inc. *		409,500		3,051
VeriFone Holdings, Inc. *		124,500		1,414
VistaPrint Ltd. *		23,000		393

				(20,646	)


Technology Hardware & Equipment 1.8%
Daktronics, Inc.		108,600		1,082
EchoStar Corp., Class A *		207,900		4,037
Polycom, Inc. *		23,200		488
SanDisk Corp. *		145,300		1,292
Zebra Technologies Corp., Class A *		43,300		876

				(7,775	)


Telecommunication Services 1.1%
Cbeyond, Inc. *		61,700		742
MetroPCS Communications, Inc. *		280,500		3,854

				(4,596	)


Transportation 2.0%
C.H. Robinson Worldwide, Inc.		3,500		181
Eagle Bulk Shipping, Inc.		158,800		1,583
Genco Shipping & Trading Ltd.		64,100		1,337
Knight Transportation, Inc.		335,100		5,328

				(8,429	)


Utilities 3.5%
Aqua America, Inc.		339,800		6,116
Equitable Resources, Inc.		119,500		4,148
IDACORP, Inc.		93,600		2,495
ITC Holdings Corp.		38,100		1,546
Westar Energy, Inc.		24,300		474

				(14,779	)

Total Short Sales (Proceeds $325,303)
				230,074


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, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $552,593)		$431,550
Deposits with broker for short sales		223,415
Cash		1
Receivables:
Fund shares sold		418
Dividends		200
Due from brokers for futures		70
Prepaid expenses	+	4


Total assets		655,658


Liabilities
Securities sold short, at value (proceeds $325,303)		$230,074
Payables:
Investments bought		2,251
Investment adviser and administrator fees		56
Transfer agent and shareholder services fees		2
Fund shares redeemed		1,569
Dividends on short sales		82
Accrued expenses	+	49


Total liabilities		234,083


Net Assets
Total assets		655,658
Total liabilities	−	234,083


Net assets		$421,575
Net Assets by Source
Capital received from investors		482,414
Net realized capital losses		(36,081	)
Net unrealized capital losses		(24,758	)

Net Asset Value (NAV) by Shares Class


			Shares
Share Class	Net Assets	¸	Outstanding	=	NAV

Investor Shares	$78,816		6,295			$12.52
Select Shares	$342,759		27,317			$12.55

See financial notes 67

Schwab Hedged Equity Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$10,408
Interest	+	5,069


Total investment income		15,477


Net Realized Gains and Losses
Net realized losses on investments		(2,055	)
Net realized gains on short sales		9,096
Net realized gains on futures contracts	+	2,328


Net realized gains		9,369


Net Unrealized Gains and Losses
Net unrealized losses on investments		(287,318	)
Net unrealized gains on short sales		103,542
Net unrealized gains on futures contracts	+	1,056


Net unrealized losses		(182,720	)


Expenses
Investment adviser and administrator fees		12,943
Transfer agent and shareholder service fees:
Investor Shares		356
Select Shares		635
Dividends on short sales		3,063
Portfolio accounting fees		50
Professional fees		50
Registration fees		48
Shareholder reports		36
Custodian fees		25
Interest expense		23
Trustees’ fees		14
Tax expenses		5
Other expenses	+	11


Total expenses		17,259
Expense reduction by Schwab	−	169
Custody credit	−	2


Net expenses		17,088


Increase (Decrease) in Net Assets from Operations
Total investment income		15,477
Net expenses	−	17,088


Net investment loss		(1,611	)
Net realized gains		9,369
Net unrealized losses	+	(182,720	)


Decrease in net assets from operations		($174,962	)

68 See financial notes

Schwab Hedged Equity Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/0710/31/08			11/1/06-10/31/07
Net investment income (loss)			($1,611	)		$10,205
Net realized gains (losses)			9,369			(22,790	)
Net unrealized gains (losses)	+		(182,720	)		37,380


Increase (Decrease) in net assets from operations			(174,962	)		24,795


Distributions to Shareholders
Dividends from net investment income
Investor Shares			1,512			943
Select Shares	+		8,315			5,319


Total dividends from net investment income			$9,827			$6,262

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE
Shares Sold
Investor Shares			1,439			$21,463			7,347			$118,205
Select Shares	+		7,429			111,815			36,575			591,433


Total shares sold			8,868			$133,278			43,922			$709,638


Shares Reinvested
Investor Shares			90			$1,392			54			$864
Select Shares	+		424			6,600			276			4,400


Total shares reinvested			514			$7,992			330			$5,264


Shares Redeemed
Investor Shares			(8,135	)		($121,483	)		(7,485	)		($120,355	)
Select Shares	+		(38,408	)		(572,804	)		(37,207	)		(591,582	)


Total shares redeemed			(46,543	)		($694,287	)		(44,692	)		($711,937	)

Net transactions in fund shares			(37,161	)		($553,017	)		(440	)		$2,965


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			70,773			$1,159,381			71,213			$1,137,883
Total increase or decrease	+		(37,161	)		(737,806	)		(440	)		21,498


End of period			33,612			$421,575			70,773			$1,159,381

Net investment income not yet distributed						$-						$8,210

See financial notes 69

Schwab Financial Services Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		15.88			15.75			14.42			13.12			11.77

Income (loss) from investment operations:
Net investment income (loss)		0.18			0.18			0.10			0.12			0.08
Net realized and unrealized gains (losses)		(6.78	)		0.25			1.98			2.21			1.37

Total from investment operations		(6.60	)		0.43			2.08			2.33			1.45
Less distributions:
Distributions from net investment income		(0.21	)		(0.11	)		(0.11	)		(0.09	)		(0.10	)
Distributions from net realized gains		(0.02	)		(0.19	)		(0.64	)		(0.94	)		—

Total distributions		(0.23	)		(0.30	)		(0.75	)		(1.03	)		(0.10	)

Net asset value at end of period		9.05			15.88			15.75			14.42			13.12

Total return (%)		(42.08	)		2.75			14.85			18.62			12.39

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.94			0.90			0.98			1.07			1.05
Gross operating expenses		0.94			0.90			0.98			1.15			1.25
Net investment income (loss)		1.56			1.06			0.87			1.01			0.62
Portfolio turnover rate		59			54			57			74			85
Net assets, end of period ($ x 1,000,000)		84			94			95			29			20

70 See financial notes

Schwab Financial Services Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.8%

Common Stock

110,217

79,900

.5%

Foreign Common Stock

462

432

.3%

Short-Term Investments

3,588

.6%

Total Investments

114,267

83,920

.4%

Other Assets and Liabilities, Net

332

100

.0%

Total Net Assets

84,252


	Number		Value
Security	of Shares		($ x 1,000)

Common Stock 94.8% of net assets


Banks 19.0%
1st Source Corp.		6,000		129
BancFirst Corp.		18,900		952
Bank of Hawaii Corp.		31,400		1,592
Commerce Bancshares, Inc.		14,846		702
First Citizens BancShares, Inc., Class A		7,408		1,133
Flagstar Bancorp, Inc.		60,000		114
Guaranty Bancorp *		2,500		11
KeyCorp		102,200		1,250
NBT Bancorp, Inc.		20,200		563
Popular, Inc.		56,100		426
Santander BanCorp		21,600		205
SunTrust Banks, Inc.		83,600		3,356
SVB Financial Group *		11,600		597
The South Financial Group, Inc.		50,100		291
UMB Financial Corp.		24,700		1,120
Webster Financial Corp.		46,500		862
Wells Fargo & Co.		67,000		2,281
WSFS Financial Corp.		8,600		412

				15,996


Commercial & Professional Supplies 0.2%
Duff & Phelps Corp., Class A *		10,000		190


Diversified Financials 42.5%
Advanta Corp., Class B		57,550		260
American Express Co.		61,000		1,678
AmeriCredit Corp. *		52,800		309
Ameriprise Financial, Inc.		117,900		2,547
Bank of America Corp.		122,800		2,968
Bank of New York Mellon Corp.		88,200		2,875
Capital One Financial Corp.		30,400		1,189
Cash America International, Inc.		30,000		1,061
Citigroup, Inc.		140,000		1,911
Discover Financial Services		60,800		745
Franklin Resources, Inc.		800		54
GAMCO Investors, Inc., Class A		25,500		971
Interactive Brokers Group, Inc., Class A *		23,500		502
JPMorgan Chase & Co.		124,600		5,140
LaBranche & Co., Inc. *		146,370		912
MarketAxess Holdings, Inc. *		25,300		145
Morgan Stanley		10,000		175
Nelnet, Inc., Class A		30,900		452
Northern Trust Corp.		55,800		3,142
PHH Corp. *		47,700		384
Raymond James Financial, Inc.		61,300		1,428
State Street Corp.		91,000		3,945
TD Ameritrade Holding Corp. *		50,000		665
The Goldman Sachs Group, Inc.		25,400		2,349

				35,807


Insurance 25.2%
American Financial Group, Inc.		77,950		1,772
Aon Corp.		8,200		347
Arch Capital Group Ltd. *		13,300		928
Assurant, Inc.		35,800		912
Axis Capital Holdings Ltd.		37,900		1,079
Berkshire Hathaway, Inc., Class A *		15		1,732
Genworth Financial, Inc., Class A		88,000		426
HCC Insurance Holdings, Inc.		44,700		986
Lincoln National Corp.		18,000		310
Loews Corp.		60,600		2,013
MetLife, Inc.		70,600		2,345
Prudential Financial, Inc.		32,700		981
RenaissanceRe Holdings Ltd.		4,700		216
The Chubb Corp.		47,400		2,456
The Hartford Financial Services Group, Inc.		31,500		325
The Travelers Cos., Inc.		51,000		2,170
Transatlantic Holdings, Inc.		7,300		313
Unum Group		98,800		1,556
W. R. Berkley Corp.		13,125		345

				21,212


Media 0.6%
Interactive Data Corp.		20,000		472


Real Estate 3.6%
AMB Property Corp.		3,500		84
AvalonBay Communities, Inc.		2,700		192
Boston Properties, Inc.		5,300		376
BRE Properties, Inc.		4,000		139
DiamondRock Hospitality Co.		10,000		52
Equity Residential		11,000		384
Essex Property Trust, Inc.		2,500		243
HCP, Inc.		9,000		269
Host Hotels & Resorts, Inc.		19,000		196
ProLogis		9,400		132
Simon Property Group, Inc.		8,000		536

See financial notes 71

Schwab Financial Services Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)
Vornado Realty Trust		6,700		473

				3,076


Software & Services 3.7%
MasterCard, Inc., Class A		12,000		1,774
Western Union Co.		90,000		1,373

				3,147

Total Common Stock (Cost $110,217)				79,900




Foreign Common Stock 0.5% of net assets


Bermuda 0.5%


Insurance 0.5%
Platinum Underwriters Holdings, Ltd.		13,600		432

Total Foreign Common Stock (Cost $462)				432



Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 4.3% of net assets
Citibank, London Time Deposit
0.56%, 11/03/08		2,980		2,980
0.56%, 11/03/08		608		608

Total Short-Term Investment (Cost $3,588)				3,588


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08 the tax basis cost of the fund’s investments was $114,264 and the unrealized appreciation and depreciation were $1,318 and ($31,662), respectively, with a net unrealized depreciation of ($30,344).


*		Non-income producing security.

72 See financial notes

Schwab Financial Services Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $114,267)		$83,920
Receivables:
Investments sold		871
Fund shares sold		270
Dividends		97
Income from securities on loan	+	10


Total assets		85,168


Liabilities
Payables:
Investments bought		853
Investment advisers and administrator fees		3
Transfer agent and shareholder services fees		2
Fund shares redeemed		26
Accrued expenses	+	32


Total liabilities		916


Net Assets
Total assets		85,168
Total liabilities	−	916


Net assets		$84,252
Net Assets by Source
Capital received from investors		122,396
Net investment income not yet distributed		989
Net realized capital losses		(8,786	)
Net unrealized capital losses		(30,347	)

Net Asset Value (NAV)


		Shares
Net Assets	¸	Outstanding	=	NAV

$84,252		9,310			$9.05

See financial notes 73

Schwab Financial Services Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends (net of foreign withholding tax of $1)		$2,019
Interest		83
Securities on loan	+	83


Total investment income		2,185


Net Realized Gains and Losses
Net realized losses on investments		(8,838	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(41,408	)


Expenses
Investment adviser and administrator fees		472
Transfer agent and shareholder service fees		218
Portfolio accounting fees		38
Registration fees		32
Professional fees		29
Shareholder reports		15
Trustees’ fees		8
Custodian fees		7
Other expenses	+	2


Net expenses		821


Increase (Decrease) in Net Assets from Operations
Total investment income		2,185
Net expenses	−	821


Net investment income		1,364
Net realized losses		(8,838	)
Net unrealized losses	+	(41,408	)


Decrease in net assets from operations		($48,882	)

74 See financial notes

Schwab Financial Services Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$1,364			$1,099
Net realized gains (losses)			(8,838	)		184
Net unrealized gains (losses)	+		(41,408	)		1,303


Increase (Decrease) in net assets from operations			(48,882	)		2,586


Distributions to Shareholders
Distribution from net investment income			1,182			704
Distribution from net realized gains	+		140			1,228


Total distributions			$1,322			$1,932

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE
Shares Sold			6,693			$82,051			2,478			$39,875
Shares Reinvested			83			1,188			108			1,727
Shares Redeemed	+		(3,361	)		(42,425	)		(2,738	)		(43,871	)


Net transactions in fund shares			3,415			$40,814			(152	)		($2,269	)


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			5,895			$93,642			6,047			$95,257
Total increase or decrease	+		3,415			(9,390	)		(152	)		(1,615	)


End of period			9,310			$84,252			5,895			$93,642


Net investment income not yet distributed						$989						$860

See financial notes 75

Schwab Health Care Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
	10/31/08			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		17.08			15.05			14.03			10.78			8.43

Income (loss) from investment operations:
Net investment income (loss)		0.08			0.05			(0.01	)		(0.02	)		(0.06	)
Net realized and unrealized gains (losses)		(4.46	)		2.11			1.03			3.27			2.41

Total from investment operations		(4.38	)		2.16			1.02			3.25			2.35
Less distributions:
Distributions from net investment income		(0.05	)		—			—			—			—
Distributions from net realized gains		(0.10	)		(0.13	)		—			—			—

Total distributions		(0.15	)		(0.13	)		—			—			—

Net asset value at end of period		12.55			17.08			15.05			14.03			10.78

Total return (%)		(25.87	)		14.49			7.27			30.15			27.88

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.82			0.82			0.84			0.89			1.04
Gross operating expenses		0.82			0.82			0.84			0.89			1.07
Net investment income (loss)		0.48			0.32			(0.07	)		(0.28	)		(0.73	)
Portfolio turnover rate		50			34			76			42			105
Net assets, end of period ($ x 1,000,000)		545			834			611			397			54

76 See financial notes

Schwab Health Care Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.0%

Common Stock

597,752

533,613

.6%

Short-Term Investments

14,142

100

.6%

Total Investments

611,894

547,755

.6)%

Other Assets and Liabilities, Net

(3,071

)

100

.0%

Total Net Assets

544,684


	Number		Value
Security	of Shares		($ x 1,000)

Common Stock 98.0% of net assets


Health Care Equipment & Services 38.4%
Aetna, Inc.		230,600		5,735
Alliance Imaging, Inc. *		75,000		611
AmerisourceBergen Corp.		150,000		4,690
Analogic Corp.		15,000		662
Baxter International, Inc.		510,000		30,850
Beckman Coulter, Inc.		50,000		2,496
Becton, Dickinson & Co.		260,000		18,044
Boston Scientific Corp. *		800,000		7,224
C.R. Bard, Inc.		65,000		5,736
Centene Corp. *		75,000		1,413
Cerner Corp. *		50,000		1,861
CIGNA Corp.		400,000		6,520
CONMED Corp. *		125,000		3,275
Covidien Ltd.		200,000		8,858
Datascope Corp.		7,500		376
DaVita, Inc. *		125,000		7,094
DENTSPLY International, Inc.		180,000		5,468
Edwards Lifesciences Corp. *		100,000		5,284
Express Scripts, Inc. *		300,000		18,183
Gen-Probe, Inc. *		50,000		2,353
Hanger Orthopedic Group, Inc. *		25,000		417
Hill-Rom Holdings, Inc.		50,000		1,138
Humana, Inc. *		174,300		5,158
Invacare Corp.		175,000		3,183
Inverness Medical Innovations, Inc. *		50,000		958
Kindred Healthcare, Inc. *		100,000		1,449
LifePoint Hospitals, Inc. *		50,000		1,199
Magellan Health Services, Inc. *		80,000		2,955
McKesson Corp.		50,000		1,840
Medco Health Solutions, Inc. *		100,000		3,795
Medtronic, Inc.		420,000		16,939
Merit Medical Systems, Inc. *		75,000		1,373
Molina Healthcare, Inc. *		50,000		1,114
Omnicare, Inc.		250,000		6,892
Owens & Minor, Inc.		62,500		2,704
Quest Diagnostics, Inc.		175,000		8,190
STERIS Corp.		25,000		851
Synovis Life Technologies, Inc. *		40,000		700
Thoratec Corp. *		75,000		1,846
UnitedHealth Group, Inc.		50,000		1,187
Varian Medical Systems, Inc. *		185,000		8,419

				209,040


Materials 0.8%
Sigma-Aldrich Corp.		100,000		4,386


Pharmaceuticals & Biotechnology 57.8%
Abbott Laboratories		465,000		25,645
Accelrys, Inc. *		73,100		350
Adolor Corp. *		175,000		551
Albany Molecular Research, Inc. *		25,000		316
Alkermes, Inc. *		75,000		741
Amgen, Inc. *		450,000		26,950
Bio-Imaging Technologies, Inc. *		10,000		41
Bio-Rad Laboratories, Inc., Class A *		15,000		1,281
Biogen Idec, Inc. *		250,000		10,637
Bristol-Myers Squibb Co.		550,000		11,302
Celgene Corp. *		160,000		10,282
Cephalon, Inc. *		150,000		10,758
CV Therapeutics, Inc. *		100,000		933
Eli Lilly & Co.		330,000		11,161
Endo Pharmaceuticals Holdings, Inc. *		175,000		3,238
Enzon Pharmaceuticals, Inc. *		25,000		124
Forest Laboratories, Inc. *		423,900		9,847
Genentech, Inc. *		100,000		8,294
Genzyme Corp. *		175,000		12,754
Invitrogen Corp. *		210,000		6,046
Isis Pharmaceuticals, Inc. *		75,000		1,055
Johnson & Johnson		550,000		33,737
King Pharmaceuticals, Inc. *		1,494,300		13,135
Martek Biosciences Corp. *		87,500		2,610
Matrixx Initiatives, Inc. *		5,000		82
Medicis Pharmaceutical Corp., Class A		300,000		4,281
Merck & Co., Inc.		708,900		21,940
Nabi Biopharmaceuticals *		100,000		392
NPS Pharmacuticals, Inc. *		25,000		175
PerkinElmer, Inc.		89,900		1,613
Perrigo Co.		75,000		2,550
Pfizer, Inc.		1,500,000		26,565
Schering-Plough Corp.		550,000		7,969
Techne Corp.		25,000		1,726
The Medicines Co. *		250,000		4,357
Thermo Fisher Scientific, Inc. *		350,000		14,210
Valeant Pharmaceuticals International *		75,000		1,408
ViroPharma, Inc. *		150,000		1,881
Warner Chilcott Ltd., Class A *		200,000		2,774
Waters Corp. *		50,000		2,190
Watson Pharmaceuticals, Inc. *		475,000		12,431

See financial notes 77

Schwab Health Care Fund

Portfolio Holdings continued


	Number		Value
Security	of Shares		($ x 1,000)
Wyeth		200,000		6,436

				314,768


Real Estate 1.0%
Health Care REIT, Inc.		50,000		2,225
Healthcare Realty Trust, Inc.		125,000		3,194

				5,419

Total Common Stock (Cost $597,752)				533,613



Security	Face Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investments 2.6% of net assets


Commercial Paper & Other Obligations 2.3%
Citibank, London Time Deposit
0.56%, 11/03/08		12,678		12,678


U.S. Treasury Obligations 0.3%
U.S. Treasury Bills
0.41%, 12/18/08 (a)		200		200
0.15%, 12/18/08 (a)		60		60
0.03%, 12/18/08 (a)		845		844
0.87%, 12/18/08 (a)		360		360

				1,464

Total Short-Term Investment (Cost $14,142)				14,142


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08 the tax basis cost of the fund’s investments was $611,988 and the unrealized appreciation and depreciation were $35,327 and ($99,560), respectively, with a net unrealized depreciation of ($64,233).


*		Non-income producing security.
(a)		All or a portion of this security is held as collateral for open futures contracts.

REIT — Real Estate Investment Trust

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000 except number of futures contracts.

Number of

Contract

Unrealized

Contracts

Value

Losses

Futures Contract

S & P 500 Index, e-mini, Long, expires 12/19/08

200

9,673

(2,209

)

78 See financial notes

Schwab Health Care Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $611,894)		$547,755
Receivables:
Fund shares sold		490
Dividends		264
Due from brokers for futures		50
Income from securities on loan		32
Prepaid expenses	+	4


Total assets		548,595


Liabilities
Payables:
Investments bought		3,166
Investment adviser and administrator fees		22
Transfer agent and shareholder service fees		10
Fund shares redeemed		635
Accrued expenses	+	78


Total liabilities		3,911


Net Assets
Total assets		548,595
Total liabilities	−	3,911


Net assets		$544,684
Net Assets by Source
Capital received from investors		613,667
Net investment income not yet distributed		3,430
Net realized capital losses		(6,065	)
Net unrealized capital losses		(66,348	)

Net Asset Value (NAV)


		Shares
Net Assets	¸	Outstanding	=	NAV

$544,684		43,402			$12.55

See financial notes 79

Schwab Health Care Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends		$8,929
Interest		528
Securities on loan	+	135


Total investment income		9,592


Net Realized Gains and Losses
Net realized gains on investments		1,380
Net realized losses on futures contracts	+	(6,557	)


Net realized losses		(5,177	)


Net Unrealized Gains and Losses
Net unrealized losses on investments		(206,455	)
Net unrealized losses on futures contracts	+	(2,779	)


Net unrealized losses		(209,234	)


Expenses
Investment adviser and administrator fees		3,921
Transfer agent and shareholder service fees		1,842
Shareholder reports		91
Registration fees		58
Portfolio accounting fees		51
Professional fees		32
Custodian fees		25
Trustees’ fees		13
Other expenses	+	8


Net expenses		6,041


Increase (Decrease) in Net Assets from Operations
Total investment income		9,592
Net expenses	−	6,041


Net investment Income		3,551
Net realized losses		(5,177	)
Net unrealized losses	+	(209,234	)


Decrease in net assets from operations		($210,860	)

80 See financial notes

Schwab Health Care Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$3,551			$2,267
Net realized gains (losses)			(5,177	)		4,674
Net unrealized gains (losses)	+		(209,234	)		83,662


Increase (Decrease) in net assets from operations			(210,860	)		90,603


Distributions to Shareholders
Distributions from net investment income			2,381			—
Distributions from net realized gains	+		4,855			5,277


Total distributions			$7,236			$5,277

Transactions in Fund Shares


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE
Shares Sold			12,076			$187,775			20,648			$335,280
Shares Reinvested			396			6,542			318			4,816
Shares Redeemed	+		(17,912	)		(265,632	)		(12,749	)		(202,578	)


Net transactions in fund shares			(5,440	)		($71,315	)		8,217			$137,518


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			48,842			$834,095			40,625			$611,251
Total increase or decrease	+		(5,440	)		(289,411	)		8,217			222,844


End of period			43,402			$544,684			48,842			$834,095


Net investment income not yet distributed						$3,430						$2,267

See financial notes 81

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 (the “trust”), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”). 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 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 Balanced Fund Schwab Target 2010 Fund Schwab Target 2015 Fund Schwab Target 2020 Fund Schwab Target 2025 Fund Schwab Target 2030 Fund Schwab Target 2035 Fund Schwab Target 2040 Fund Schwab Retirement Income Fund Schwab Fundamental US Large Company Index Fund Schwab Fundamental US Small-Mid Company Index Fund Schwab Fundamental International Large Company Index Fund Schwab Fundamental International Small-Mid Company Index Fund Schwab Fundamental Emerging Markets Index Fund Schwab Monthly Income Fund—Moderate Payout Schwab Monthly Income Fund—Enhanced Payout Schwab Monthly Income Fund—Maximum Payout Schwab International Core Equity 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, and Schwab Health Care Fund each offer one share class.

Shares are bought and sold (subject to a redemption fee, see Note 8) at net asset value, or closing NAV, which is the price for all outstanding shares of a fund or share class, as applicable. Each share has a par value of 1/1,000 of a cent, and the trustees may authorize the issuance of as many shares as necessary.

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 may keep certain assets in segregated accounts, as required by securities law.


2.	Significant Accounting Policies:

(All dollar amounts are x 1,000)

(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 valuation date 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 funds’ investment adviser using guidelines adopted by the funds’ 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

Schwab Active Equity Funds

Financial Notes (continued)


2.	Significant Accounting Policies (continued): (All dollar amounts are x 1,000)


		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 values adjusted for changes in value that may occur between the close of a foreign exchange and the time at which funds’ shares are priced. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures.


	•	Futures and Forwards: 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).

	•	Short-term securities (60 days or less to maturity): valued at amortized cost, which approximates market value.

	•	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.

Short Sale: Schwab Hedged Equity Fund may sell securities short (sell securities it does not own). When it does so, the fund identifies assets worth at least 100% of the value of the short securities 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 may exceed amounts recorded in the Statement 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 Agreements: The funds may enter into repurchase agreements. 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 or U.S. government agency 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:

Schwab Active Equity Funds

Financial Notes (continued)


2.	Significant Accounting Policies (continued): (All dollar amounts are x 1,000)

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 are recorded as an expense on the fund’s records.

The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.

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 of the contract, and records a realized gain or loss accordingly. A fund records the daily change in market value of futures, and also the change in the amount of margin deposit required (“due to / from broker”).

(d) Investment Income:

(e) Expenses:

Expenses that are specific to a fund or a class within the trust 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 make distributions from net investment income once a year, with the exception of Dividend Equity Fund which typically pays quarterly dividends. The funds make distributions from net realized capital gains once a year.

(g) Custody Credit:

Certain funds have an arrangement with their 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 funds’ 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.

Schwab Active Equity Funds

Financial Notes (continued)


2.	Significant Accounting Policies (continued): (All dollar amounts are x 1,000)

(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) Accounting Pronouncements:

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. As of October 31, 2008, management does not believe the adoption of SFAS No. 157 will impact the financial statement amounts; however, additional disclosures may be required about the inputs used to develop the measurements and the effects of certain of the measurements on changes in net assets for the period.

In March 2008, the FASB issued Statements of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires enhanced disclosures about the funds’ derivative and hedging activities. Management is currently evaluating the impact of the adoption of SFAS No. 161 on the funds’ financial statement disclosures.

3. Risk factors

Investing in the funds may involve certain risks including, but not limited to, those described below:

The prices of common stocks and other equity-type securities held by the funds may decline in response to certain events, including those directly involving issuers of these securities; adverse conditions affecting the general economy; overall market declines; world political, social, and economic instability; and currency fluctuations.

The values of, and the income generated by, most debt securities held by the funds, if any, may be affected by changing interest rates and by changes in the effective maturities and credit ratings of these securities. For example, the values of debt securities in a funds portfolio generally will decline when interest rates rise and increase when interest rates fall. In addition, falling interest rates may cause an issuer to redeem, “call” or refinance a security before its stated maturity, which may result in a fund having to reinvest the proceeds in lower yielding securities.

Investments in securities issued by entities based outside the United States may be subject to the risks described above to a greater extent and may also be affected by currency controls; different accounting, auditing, financial reporting, and legal standards and practices in some countries; expropriation; changes in tax policy; greater market volatility; differing securities market structures; higher transaction costs; and various administrative difficulties, such as delays in clearing and settling portfolio transactions or in receiving payment of dividends. These risks may be heightened in connection with investments in developing countries.


4.	Affiliates and Affiliated Transactions:

(All dollar amounts are x 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.

Schwab Active Equity Funds

Financial Notes (continued)


4.	Affiliates and Affiliated Transactions (continued): (All dollar amounts are x 1,000)

For its advisory and administrative services to each 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:


	Premier		Core		Dividend		Large-Cap		Small-Cap		Hedged
Average daily net assets	Equity Fund		Equity Fund		Equity Fund		Growth Fund		Equity Fund		Equity Fund

First $500 million		0.91%		0.54%		0.775%		0.87%		0.975%		1.675%
$500 million to $1 billion		0.885%		0.49%		0.77%		0.85%		0.93%		1.65%
$1 billion to $2 billion		0.860%		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


	Financial		Health
Average daily net assets	Services Fund		Care Fund

First $500 million		0.54%		0.54%
$500 million to $1 billion		0.515%		0.515%
$1 billion to $2 billion		0.490%		0.490%
over $2 billion		n/a		n/a

Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and is the trust’s transfer agent and shareholder services agent.

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, 2009, as follows:

Premier

Core

Dividend

Large-Cap

Small-Cap

Hedged

Equity Fund

Growth Fund

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

Health

Services Fund

Care Fund

Investor Shares

1.10%

Select Shares*

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.

Schwab Active Equity Funds

Financial Notes (continued)


4.	Affiliates and Affiliated Transactions (continued): (All dollar amounts are x 1,000)

Certain Schwab Funds may own shares of other Schwab Funds. The table below reflects the percentage of each Active Equity Fund owned by other Schwab Funds as of October 31, 2008.


	Core		Dividend			Small-Cap
	Equity Fund		Equity Fund			Equity Fund

Schwab Funds:
Target 2010		1.2%		0.3%			1.5%
Target 2015		0.1%		—	*		0.1%
Target 2020		2.8%		0.6%			3.3%
Target 2025		0.1%		—	*		0.2%
Target 2030		2.3%		0.5%			3.4%
Target 2035		0.1%		—	*		0.2%
Target 2040		1.9%		0.4%			2.8%
Retirement Income		—		0.4%			—
Schwab Balanced Fund		3.1%


*	Less than 0.05%

As of October 31, 2008, the shares owned by the Schwab Charitable Giving Trust as a percentage of the total share of the Dividend Equity Fund is 4.8%.

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, 2008, each fund’s aggregate security transactions with other Schwab Funds were as follows:


Premier Equity Fund			$14,487
Core Equity Fund			19,125
Dividend Equity Fund			2,789
Large-Cap Growth Fund			3,982
Small-Cap Equity Fund			1,770
Hedged Equity Fund			—
Financial Services Fund			—
Health Care Fund			12,047

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 by the funds during the period.

5. Board of 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.

6. Borrowing from Banks:

Schwab Active Equity Funds

Financial Notes (continued)

6. Borrowing from Banks (continued):

uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman. The funds pay interest on the amounts they borrow at rates that are negotiated periodically. There were no borrowings from the lines of credit by the funds during the period. However, certain funds utilized their overdraft facility and incurred interest expense, which is disclosed in the Statement of Operations.


7.	Purchases and Sales of Investment Securities:

(All dollar amounts are x 1,000)

For the period ended October 31, 2008, purchases and sales of securities (excluding short-term obligations) were as follows:


	Purchases of Securities		Sales/Maturities of Securities

Premier Equity Fund		$1,091,279		$1,538,903
Core Equity Fund		702,512		661,618
Dividend Equity Fund		382,655		601,245
Large-Cap Growth Fund		261,927		267,337
Small-Cap Equity Fund		193,223		454,702
Hedged Equity Fund*		1,050,552		1,380,249
Financial Services Fund		90,056		49,692
Health Care Fund		357,194		422,560


*	Included securities sold short.


8.	Redemption Fee:

(All dollar amounts are x 1,000)

The funds charge a 2.00% redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior year are:


	Current Period		Prior Period
	(11/01/07-10/31/08)		(11/01/06-10/31/07)

Premier Equity Fund
Investor Shares		$5		$16
Select Shares		4		10
Core Equity Fund		57		83
Dividend Equity Fund
Investor Shares		23		45
Select Shares		22		28
Large-Cap Growth Fund
Investor Shares		6		15
Select Shares		10		10
Small-Cap Equity Fund
Investor Shares		3		30
Select Shares		0		15
Hedged Equity Fund
Investor Shares		5		14
Select Shares		19		157
Financial Services Fund		38		8
Health Care Fund		49		58

Schwab Active Equity Funds

Financial Notes (continued)


9.	Other

(All dollar amounts are x 1,000)

As a result of Lehman Brothers Holdings Inc. (Lehman) bankruptcy, the funds used their collateral deposit for all open loans with Lehman to replace those securities with identical securities. These transactions resulted in the funds recognizing the following gains or losses for financial statement purposes in accordance with Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FAS 140”) that are not recognized for Federal Income Tax purposes:


Schwab Small Cap Equity Fund	($33	)
Schwab Health Care Fund	18
Schwab Core Equity Fund	(2,301	)


10.	Federal Income Taxes:

(All dollar amounts are x 1,000)

As of October 31, 2008, the components of distributable earnings on a tax-basis were as follows:

distributable


	Premier			Core			Dividend			Large-Cap			Small-Cap			Hedged
	Equity Fund			Equity Fund			Equity Fund			Growth Fund			Equity Fund			Equity Fund

Undistributed Ordinary income		$3,076			$18,140			$2,236			$1,244			$—			$—
Undistributed long-term capital gains		—			—			—			—			—			—
Unrealized appreciation		30,296			57,789			74,356			8,007			7,298			20,937
Unrealized depreciation		(193,053	)		(380,257	)		(305,994	)		(97,429	)		(78,811	)		(142,010	)
Other unrealized appreciation/(depreciation)		—			—			—			—			—			95,229
Net unrealized appreciation/(depreciation)		$(162,757	)		$(322,468	)		$(231,638	)		$(89,422	)		$(71,513	)		$(25,844	)



	Financial			Health Care
	Services Fund			Fund

Undistributed Ordinary income		$987			$3,418
Undistributed long-term capital gains		—			—
Unrealized appreciation		1,318			35,327
Unrealized depreciation		(31,662	)		(99,560	)
Other unrealized appreciation/(depreciation)		—			—
Net unrealized appreciation/(depreciation)		$(30,344	)		$(64,233	)

The primary differences between book-basis and tax-basis are unrealized appreciation or unrealized depreciation of investments in Passive Foreign Investment Companies (PFIC), Real Estate Investment Trusts (REIT), Partnerships and the tax deferral of losses on wash sales.

Schwab Active Equity Funds

Financial Notes (continued)


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

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of October 31, 2008, the following funds had capital loss carry forwards available to offset net capital gains before the expiration dates:


	Premier		Core		Dividend		Large-Cap		Small-Cap		Hedged
Expire	Equity Fund		Equity Fund		Equity Fund		Growth Fund		Equity Fund		Equity Fund

2013		$—		$—		$—		$158		$—		$—
2014		—		—		—		2,674		—		12,200
2015		—		—		—		2,012		—		22,795
2016		58,079		84,157		43,921		53,983		47,891		—

Total		$58,079		$84,157		$43,921		$58,827		$47,891		$34,995



	Financial		Health Care
	Services Fund		Fund

2013		$—		$—
2014		—		—
2015		—		—
2016		8,786		8,169

Total		$8,786		$8,169

As of October 31, 2008, capital losses utilized to offset current year’s capital gains were as follows:


	Hedged
	Equity Fund

Capital losses utilized	$	10,335

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


	Premier		Core		Dividend		Large-Cap		Small-Cap		Hedged
	Equity Fund		Equity Fund		Equity Fund		Growth Fund		Equity Fund		Equity Fund

Current period distributions
Ordinary income		$4,601		$18,273		$39,286		$2,312		$—		$9,827
Long-term capital gains		98,352		4,680		7,001		—		33,590		—

Prior period distributions
Ordinary income		$2,003		$7,073		$32,649		$550		$—		$6,262
Long-term capital gains		—		21,463		30,177		—		$3,610		—


	Financial		Health Care
	Services Fund		Fund

Current period distributions
Ordinary income		$1,183		$2,384
Long-term capital gains		139		4,852

Prior period distributions
Ordinary income		$799		$—
Long-term capital gains		1,133		5,277

Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses, short-term capital gains and losses; capital losses related to wash sales, unrealized appreciation of certain investments in non-U.S. securities; paydowns on fixed-income securities; and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in

Schwab Active Equity Funds

Financial Notes (continued)


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

which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments have no impact on net assets or the results of operations. As of October 31, 2008, the funds made the following reclassifications:


	Premier			Core			Dividend			Large-Cap		Small-Cap			Hedged
	Equity Fund			Equity Fund			Equity Fund			Growth Fund		Equity Fund			Equity Fund

Capital Shares		$—			$—			$—			$—		$(758	)		$(3,107	)
Undistributed net investment income		(10	)		(2	)		(4	)		—		751			3,228
Net realized capital gains and losses		10			2			4			—		7			(121	)


	Financial			Health
	Services Fund			Care Fund

Undistributed net investment income		(53	)		(7	)
Net realized capital gains and losses		53			7

As of October 31, 2008, management has reviewed the tax positions for open periods, as applicable to the funds, and has determined that no provision for income tax is required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year ended October 31, 2008, the funds did not incur any interest or penalties. The funds are not subject to examination by U.S. federal tax authorities for tax years before 2004 and by state tax authorities for the tax years before 2003.

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

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, and Schwab Health Care Fund (eight of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2008, the results of each of their operations for the year then ended, the changes in each of their net assets and their 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, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 12, 2008

Other Federal Tax Information (unaudited)

(All dollar amounts are x 1,000)

For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2008, qualify for the corporate dividends received deduction:


	Percentage

Premier Equity Fund		100
Core Equity Fund		100
Dividend Equity Fund		100
Large-Cap Growth Fund		100
Small-Cap Equity Fund		—
Hedged Equity Fund		84
Financial Services Fund		100
Health Care Fund		100

For the fiscal year ended October 31, 2008, 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 2009 via IRS form 1099 of the amounts for use in preparing their 2008 income tax return.


Premier Equity Fund			$4,601
Core Equity Fund			18,273
Dividend Equity Fund			39,286
Large-Cap Growth Fund			2,312
Small-Cap Equity Fund			—
Hedged Equity Fund			9,827
Financial Services Fund			1,182
Health Care Fund			2,384

For the fiscal year ended October 31, 2008, the funds hereby designate the following amounts as capital gain dividends:


Premier Equity Fund			$98,352
Core Equity Fund			4,680
Dividend Equity Fund			7,001
Large-Cap Growth Fund			—
Small-Cap Equity Fund			33,590
Hedged Equity Fund			—
Financial Services Fund			139
Health Care Fund			4,852

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.

The Board, including a majority of the Independent Trustees, considered information specifically relating to its consideration of the continuance of the Agreement at meetings held on May 16, 2008, and June 2, 2008, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 2, 2008. 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 investments in CSIM’s mutual fund infrastructure and the fact that Schwab’s wide range of products, services, and channel alternatives such as free advice, investment and research tools, Internet access, and an array of account features that 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. 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 and peer category of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, when applicable, and market trends. As part of

this review, the Trustees considered the composition of the peer group and peer category, selection criteria and the reputation of the third party who prepared the peer group and peer category analysis. In evaluating the performance of each fund, the Trustees considered both 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 business operations 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 existing contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. Based on this evaluation 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, approved the continuation of the Agreement with respect to the funds and concluded that the compensation under the Agreement with respect to the funds 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.

Trustees and Officers

The tables below give information as of October 31, 2008, about the trustees and officers for Schwab Capital Trust which includes the fund covered in this report. The “Fund Complex” includes the Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Laudus Trust and Laudus Institutional Trust. As of October 31, 2008, the Fund Complex included 84 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,		Number of
and Position(s) with		Portfolios in
the trust; (Terms of		Fund Complex
office, and length of	Principal Occupations	Overseen by
Time Served⁽¹⁾)	During the Past Five Years	the Trustee		Other Directorships


Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC.		84	Board 1–Director, Redwood Trust, Inc. Board 2–Director, PMI Group, Inc.


John F. Cogan 1947 Trustee (Trustee of Schwab Capital Trust since 2008.)	Senior Fellow: The Hoover Institution at Stanford University; Stanford Institute for Economic Policy Research; Professor of Public Policy, Stanford University		69	Board 1–Director, Gilead Sciences, Inc. Board 2–Director, Monaco Coach Corporation Board 3–Director, Venture Lending and Leasing, Inc.


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).		84	Board 1–Director, Mission West Properties Board 2–Director, TOUSA Board 3–Director, Harris-Stratex Networks Board 4–Director, Genitope Corp. Board 5– Director, Ditech Networks Board 6–Director, Rubicon Limited


Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman, Chief Executive Officer and founder of Smith Graham & Co.(investment advisors).		69	Board 1–Board of Cooper Industries Board 2–Chairman of the Audit Committee of Oneok Partners LP


Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D. R. Stephens & Company (investments).		69	None.


Joseph H. Wender 1944 Trustee (Trustee of Schwab Capital Trust since 2008.)	Senior Managing Director, Chairman of the Finance Committee, GSC Group; General Partner, Goldman Sachs & Co., until June 2005.		69	Board 1–Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals


Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).		69	None.


Interested Trustees
Name, Year of Birth,		Number of
and Position(s) with		Portfolios in
the trust; (Terms of		Fund Complex
office, and length of	Principal Occupations	Overseen by
Time Served )	During the Past Five Years	the Trustee		Other Directorships



Charles R. Schwab⁽²⁾1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, The Charles Schwab Corporation, Charles Schwab & Co., Inc., 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, Schwab Holdings, Inc.; Through June 2007, Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until October 2008, Chief Executive Officer, The Charles Schwab Corporation, Charles Schwab & Co., Inc.		69	None.


Walter W. Bettinger II⁽²⁾1960 Trustee (Trustee of Schwab Capital Trust since 2008.)	As of October 2008, Chief Executive Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation; President and Chief Operating Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation; Director, Charles Schwab Bank; Executive Vice President and President – Schwab Investor Services, The Charles Schwab Corporation; Executive Vice President and President – Schwab Investor Services, Charles Schwab & Co., Inc.; Chairman and President, Schwab Retirement Plan Services, Inc.; President and Chief Executive Officer, The Charles Schwab Trust Company, Director, Charles Schwab Bank, N.A., Schwab Retirement Plan Services, and Schwab Retirement Technologies.		69	None.


Officers of the Trust
Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served⁽³⁾)		Principal Occupations During the Past Five Years



Randall W. Merk 1954 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2007.)		Executive Vice President and President, Investment Management Services, Charles Schwab & Co., Inc,; Executive Vice President, Charles Schwab & Co., Inc. (2002-present); President and Chief Executive Officer, Charles Schwab Investment Management, Inc. (2007-present); 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.


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 Institutional Trust; Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. Through June 2007, 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. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co. Inc.


Officers of the Trust continued
Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served⁽³⁾)		Principal Occupations During the Past Five Years


Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer (Officer of Schwab Capital Trust since 2004.)		Senior Vice President and Chief Investment Officer, Charles Schwab Investment Management, Inc.; President, CEO and Chief Investment Officer, Laudus Trust and Laudus Institutional Trust. Prior to March 31, 2008, Vice President and Chief Investment Officer, Laudus Trust and Laudus Institutional 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 Institutional Trust. Through June 2007, Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust.


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. Through June 2007, Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds Trust.


Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005.)		Vice President, Charles Schwab & Co., Inc. and Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Institutional Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Institutional Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.


Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005.)		Vice President-Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Institutional 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 Institutional 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 20 years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: 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 Bettinger also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Bettinger 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 of the other officers serves at the pleasure of the Board.

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.

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 are 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, 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, 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 Schwab Funds Family^®

Stock Funds

Schwab Premier Equity Fund^tm

Schwab Core Equity Fund^tm

Schwab Dividend Equity Fund^tm

Schwab Large-Cap Growth Fund^tm

Schwab Small-Cap Equity Fund^tm

Schwab Hedge Equity Fund^tm

Schwab Financial Services Fund^tm

Schwab Health Care Fund^tm

Schwab^® International Core Equity Fund

Schwab Fundamental US Large^* Company Index Fund

Schwab Fundamental US Small-Mid^* Company Index Fund

Schwab Fundamental International^* Large Company Index Fund

Schwab Fundamental International^* Small-Mid Company Index Fund

Schwab Fundamental Emerging Markets^* Index Fund

Schwab Global Real Estate Fund^tm

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 Balanced Fund^tm

Schwab MarketTrack All Equity Portfolio^tm

Schwab MarketTrack Growth Portfolio^tm

Schwab MarketTrack Balanced Portfolio^tm

Schwab MarketTrack Conservative Portfolio^tm

Schwab Target 2010 Fund

Schwab Target 2015 Fund

Schwab Target 2020 Fund

Schwab Target 2025 Fund

Schwab Target 2030 Fund

Schwab Target 2035 Fund

Schwab Target 2040 Fund

Schwab Retirement Income Fund

Schwab Monthly Income Fund – Moderate Payout

Schwab Monthly Income Fund – Enhanced Payout

Schwab Monthly Income Fund – Maximum Payout

Bond Funds

Schwab YieldPlus Fund^®

Schwab Short-Term Bond Market Fund^tm

Schwab^® Premier Income Fund

Schwab Total Bond Market Fund^tm

Schwab GNMA Fund^tm

Schwab Inflation Protected Fund^tm

Schwab Tax-Free YieldPlus Fund^tm

Schwab Tax-Free Bond Fund^tm

Schwab Long-Term Tax-Free Bond Fund^tm

Schwab California Tax-Free YieldPlus Fund^tm

Schwab California Tax-Free Bond Fund^tm

Schwab Money Funds

Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity¹. 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^®.


	^* SCHWAB is a registered trademark of Charles Schwab & Co., Inc. FUNDAMENTAL INDEX, FUNDAMENTAL US LARGE, FUNDAMENTAL US SMALL-MID, FUNDAMENTAL INTERNATIONAL AND FUNDAMENTAL EMERGING MARKETS are trademarks of Research Affiliates LLC.
	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.

Member SIPC

Printed on recycled paper.

MFR26298-05

Annual report dated October 31, 2008 enclosed.

Schwab Balanced Fund^tm

(formerly Schwab Viewpoints Fund^tm)

You could have received this

document faster via email.

Save paper. Sign up for electronic delivery

at www.schwab.com/edelivery.

This wrapper is not part of the shareholder reports.

Schwab MarketTrack Portfolios

A fast, easy way to a diversified portfolio of index funds
Give your portfolio a good, diversified base. Schwab MarketTrack Portfolios^® offers four index fund portfolios, each with a different mix of investments to match your risk tolerance and goals—in one cost-effective mutual fund.


	•	Choose from four distinct portfolios. Select one that’s right for you based on its risk/return characteristics.
	•	Get the power of indexing plus asset allocation. Indexing offers the potential to keep pace with market performance. And asset allocation helps you reduce risk.
	•	Take advantage of low investment minimums. Invest for as little as $100 for all account types, and pay no loads or transaction fees.

See MarketTrack Portfolio investments below:

To learn more

For more information on Schwab MarketTrack Portfolios, call 1-888-304-2312 or visit www.schwab.com/markettrack.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Diversification strategies do not assure a profit and do not protect against losses in declining markets.

Schwab Balanced Fund^tm

(formerly Schwab Viewpoints Fund^tm)

Annual Report

October 31, 2008

Schwab Balanced Fund^tm


In This Report
Performance at a Glance		1
From the Chairman		2
From the President		3
The Investment Environment		4
Fund Management		5
Schwab Balanced Fund^tm		6
Fund Expenses		8
Financial Statements		9
Financial Notes		14
Report of Independent Registered Public Accounting Firm		22
Investment Advisory Agreement Approval		24
Trustees and Officers		26
Glossary		29

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

The Sector/Industry classifications in this report use 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. The Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.

Performance at a Glance


Total Return for the Report Period


Schwab Balanced Fund^tm (Ticker Symbol: SWOBX)		-23.56%

Benchmark: Balanced Blended Index		-22.96%
Fund Category: Morningstar Moderate Allocation		-28.91%

Performance Details		pages 6-7



Minimum Initial Investment¹		$ 100

Source for category information: Morningstar, Inc.


¹	Please see prospectus for further detail and eligibility requirements.

Schwab Balanced Fund 1

From the Chairman

Charles Schwab

Chairman

Dear Shareholder,

Thank you for investing with us.

Sincerely,

Diversification strategies do not assure a profit and do not protect against losses in declining markets.

2 Schwab Balanced Fund

From the President

Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the fund covered in this report. He joined the firm in 2002 and has held a variety of executive positions at Schwab.

Dear Shareholder,

In these difficult times, I want to emphasize that all of us here at Schwab are committed to the disciplined management of your money. I encourage you to read the Investment Environment and Fund Summary on the following pages where our portfolio management team details the previous year’s market conditions and the impact on our fund.

Should you have any questions about our funds, we are always available at 1-800-435-4000. Thank you for investing with us.

Sincerely,

Schwab Balanced Fund 3

The Investment Environment

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.


-36.10%	S&P 500^® Index: measures U.S. large-cap stocks

-34.16%	Russell 2000^® Index: measures U.S. small-cap stocks

-46.62%	MSCI EAFE^® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East


0.30%	Lehman Brothers U.S. Aggregate Bond Index¹: measures the U.S. bond market

2.38%	Three-Month U.S. Treasury Bills (T-bills): measures short-term U.S. Treasury obligations

Data source: Charles Schwab & Co., Inc.

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.


¹	Please note that the index’s name has changed to Barclays Capital U.S. Aggregate Bond Index.

4 Schwab Balanced Fund

Fund Management



		Jeffrey Mortimer, CFA, Chief Investment officer, Charles Schwab Investment Management, is responsible for the overall management of the fund. Prior to joining the firm in October 1997, he worked for more than 8 years in asset management.

		Caroline Lee, a managing director and portfolio manager of the investment adviser, co-manages the fund. Prior to joining the firm in November 2005, she worked in asset management for over 4 years overseeing subadvisor relationships in the pension group of a major corporation. She has also had 3 years of previous experience in investment management at another financial services firm.

		Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day to-day co-management of the fund. He was appointed portfolio manager in 2008. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry.

Schwab Balanced Fund 5

Schwab Balanced Fund^tm

Schwab Balanced Fund Investor Shares returned -23.56% for the period, underperforming the Balanced Blended Benchmark, which returned -22.96%. During the period, the fund was converted to and renamed the Schwab Balanced Fund from the Schwab Viewpoints Fund. The change resulted in a 60% equity, 40% fixed income blended fund comprised of Schwab and Laudus branded mutual funds. The fund is now considered an actively managed fund-of-funds, primarily holding the Schwab Core Equity Fund, the Schwab Total Bond Market Fund, and the Laudus Small-Cap MarketMasters Fund.

The fund’s negative performance resulted from difficult investment conditions for the underlying funds created by atypical volatility in the equity and bond markets as asset prices declined, credit and lending tightened, and investors became more pessimistic about U.S. and global economic growth. During the period, equity and bond prices declined as investors continued to be concerned about the subprime mortgage and credit crisis, as well as the threat of recession and the instability of major financial institutions, among other events. Throughout the year, investors sought out safer alternatives such as U.S. Treasury securities and short-term money fund investments, which drove down prices on stocks and bonds.

During the period, the equity portion of the Schwab Balanced Fund’s portfolio experienced the largest drop in returns. The Schwab Core Equity Fund returned -33.71%, which outperformed the -36.10% for the S&P 500 Index. In the small-cap portion of the portfolio, the Laudus Small-Cap MarketMasters Fund declined by -34.28%, slightly underperforming the -34.16% drop in the Russell 2000 Index. In the fixed income market, investors continued their flight to safety, which drove down prices of non-U.S. Treasury debt securities, regardless of quality. Due to these extraordinary market conditions, the fixed income portion also contributed to the portfolio’s overall negative performance. The Schwab Total Bond Market Fund fell -8.06% and underperformed its respective benchmark, the Lehman Brothers U.S. Aggregate Bond Index, which returned 0.30%.

As of 10/31/08:

Statistics


Number of Holdings	4

Weighted Average

Market Cap


($ x 1,000,000)	$64,973


Price/Earnings Ratio (P/E)	12.9


Price/Book Ratio (P/B)	1.8


Portfolio Turnover Rate	267%

Asset Class Weightings % of Investments


Equity Funds - Domestic	60.0%


Fixed - Income Funds	37.3%


Short-Term Investments	2.7%


Total	100.0%

Top Holdings % of Net Assets¹


Schwab Core Equity Fund	53.1%


Schwab Total Bond Market Fund	37.3%

Laudus Small-Cap MarketMasters


Fund, Select Shares	6.9%


Fixed Income Clearing Corp.	2.7%


Total	100.0%

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.


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

6 Schwab Balanced Fund

Schwab Balanced Fund^tm

Performance Summary as of 10/31/08

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

Average Annual Total Returns^1,2


Fund and Inception Date	1 Year		5 Years		10 Years


Fund: Schwab Balanced Fund^tm (11/18/96)		-23.56%		1.60%		3.69%
Benchmark: Balanced Blended Index		-22.96%		1.73%		2.53%
Fund Category: Morningstar Moderate Allocation		-28.91%		0.75%		2.17%

Fund Expense Ratios³: Net 0.69%; Gross 0.93%

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. From June 3, 2002 to February 28, 2008, the fund used a manager of managers strategy, and therefore its performance during this time does not reflect the fund’s current multi-fund strategy and may have been different if it did.


¹	Fund 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.

²	Source for category information: Morningstar, Inc.

³	As stated in the 2/28/08 prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.69%. Net Expense: Expenses reduced by a contractual fee waiver in effect through at least 2/27/09. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements.

Schwab Balanced Fund 7

Fund Expenses (Unaudited)

Examples for a $1,000 Investment


					Ending
			Beginning		Account Value		Expenses Paid
	Expense Ratio^1,2		Account Value		(Net of Expenses)		During Period^3,4
	(Annualized)		at 5/1/08		at 10/31/08		5/1/08 - 10/31/08



Schwab Balanced Fund^tm
Actual Return		0.00%	$	1,000	$	822.40	$	0.00
Hypothetical 5% Return		0.00%	$	1,000	$	1,025.14	$	0.00


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

²	Six-month annualized expense ratio is less than 0.01.

³	Expenses for each share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year.

⁴	Effective February 28, 2008. Schwab and the investment adviser have agreed to limit the “net operating expenses” (excluding interest, taxes and certain non-routine expenses) to 0.00%, through 2/27/09; does not include expenses of underlying funds in which the fund invests.

8 Schwab Balanced Fund

Schwab Balanced Fund^tm

Financial Statements

Financial Highlights


	11/1/07-			11/1/06-			11/1/05-			11/1/04-			11/1/03-
	10/31/08¹			10/31/07			10/31/06			10/31/05			10/31/04


Per—Share Data ($)

Net asset value at beginning of period		13.86			13.39			12.85			11.88			11.07

Income (loss) from investment operations:
Net investment income (loss)		0.20	²		0.25	²		0.25	²		0.15			0.08
Net realized and unrealized gains (losses)		(3.26	)²		1.06	²		0.83	²		0.91			0.86

Total from investment operations		(3.06	)		1.31			1.08			1.06			0.94
Less distributions:
Distributions from net investment income		(0.29	)		(0.24	)		(0.16	)		(0.09	)		(0.13	)
Distributions from net realized gains		(0.69	)		(0.60	)		(0.38	)		—			—

Total distributions		(0.98	)		(0.84	)		(0.54	)		(0.09	)		(0.13	)

Net asset value at end of period		9.82			13.86			13.39			12.85			11.88

Total return (%)		(23.56	)		10.24			8.59			8.92			8.59

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.36			1.02	³		1.03	³		1.10			1.10
Gross operating expenses		0.53			1.27			1.26			1.27			1.32
Net investment income (loss)		1.81			1.84			1.90			1.14			0.68
Portfolio turnover rate		267			244			244			283			242
Net assets, end of period ($ x 1,000,000)		85			112			122			130			130

¹ Effective on February 28, 2008, all outstanding Select Shares were converted into Investor Shares. The figures in the Financial Highlights reflect only the remaining share class.

² Calculated based on average shares outstanding during the period.

³ The ratio of net operating expenses would have been 1.10% for both periods ended 10/31/06 and 10/31/07, respectively, if custody credits and dividend and interest expenses on short sales had not been included.

See financial notes 9

Schwab Balanced Fund

Portfolio Holdings as of October 31, 2008

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

Cost

Value

Holdings by Category

($ x 1,000)

.3%

Other Investment Companies

102,928

82,601

.7%

Short-Term Investment

2,280

100

.0%

Total Investments

105,208

84,881

.0%

Other Assets and Liabilities

(40

)

100

.0%

Net Assets

84,841


	Number		Value
Security	of Shares		($ x 1,000)


Other Investment Companies 97.3% of net assets
Laudus Small-Cap MarketMasters Fund, Select Shares (a) *		662,831		5,873
Schwab Core Equity Fund (a)		3,356,644		45,080
Schwab Total Bond Market Fund (a)		3,688,621		31,648

Total Other Investment Companies (Cost $102,928)				82,601



	Face/Maturity
Issuer	Amount		Value
Rate, Maturity Date	($ x 1,000)		($ x 1,000)


Short-Term Investment 2.7% of net assets


Repurchase Agreement 2.7%
Fixed Income Clearing Corp. Fully collateralized by Federal National Mortgage Association with a value of $2,326. 0.03%, issued 10/31/08, due 11/03/08		2,280		2,280

Total Short-Term Investment (Cost $2,280)				2,280


End of Investments.

(All dollar amounts are x 1,000)

At 10/31/08, the tax basis cost of the fund’s investments was $105,661, and the unrealized appreciation and depreciation were $0 and ($20,780), respectively, with a net depreciation of ($20,780).


*		Non-income producing security.
(a)		Issuer is affiliated with the fund’s adviser.

In addition to the above, the fund held the following at

10/31/08. All numbers are x 1,000

Currency

Amount of

Currency

Amount of

Expiration

to be

Currency to be

to be

Currency to be

Unrealized

Date

Received

Delivered

Gains / Losses

Forward Foreign Currency Contracts

11/05/2008

RUB

276

USD

)

11/05/2008

USD

RUB

276

Net unrealized gains/
(losses)on Forward Foreign Currency Contracts

—

10 See financial notes

Schwab Balanced Fund

Statement of

Assets and Liabilities

As of October 31, 2008. All numbers are x 1,000 except NAV.




Assets
Investments, at value (cost $105,208)		$84,881
Cash		1
Receivables:
Dividends		155
Fund shares sold		25
Due from investment adviser		3
Unrealized gains on forward foreign currency contracts		1
Prepaid expenses	+	1


Total assets		85,067


Liabilities
Payables:
Investments bought		156
Fund shares redeemed		7
Unrealized losses on forward foreign currency contracts		1
Accrued expenses	+	62


Total liabilities		226


Net Assets
Total assets		85,067
Total liabilities	−	226


Net assets		$84,841
Net Assets by Source
Capital received from investors		100,833
Net investment income not yet distributed		2,062
Net realized capital gains		2,273
Net unrealized capital losses		(20,327	)

Net Asset Value (NAV)


		Shares
Net Assets	¸	Outstanding	=	NAV

$84,841		8,636			$9.82

See financial notes 11

Schwab Balanced Fund

Statement of

Operations

For November 1, 2007 through October 31, 2008. All numbers are x 1,000.




Investment Income
Dividends received from unaffiliated investments (net of foreign withholding taxes of $4)		$409
Dividends received from affiliated underlying funds		1,268
Interest	+	856


Total investment income		2,533


Net Realized Gains and Losses
Net realized gains on investments		556
Net realized losses on short sales		(516	)
Net realized gains on foreign currency transactions		297
Net realized losses on written option contracts		(497	)
Net realized gains on futures contracts		916
Net realized gains on swap agreements	+	2,404


Net realized gains		3,160


Net Unrealized Gains and Losses
Net unrealized losses on investments		(33,993	)
Net unrealized losses on short sales		(11	)
Net unrealized gains on foreign currency translations		121
Net unrealized losses on written option contracts		(14	)
Net unrealized gains on futures contracts		195
Net unrealized losses on swap agreements	+	(234	)


Net unrealized losses		(33,936	)


Expenses
Investment adviser and administrator fees		323
Transfer agent and shareholder service fees:
Investor Shares		84
Select Shares¹		16
Portfolio accounting fees		55
Shareholder reports		52
Professional fees		47
Custodian fees		32
Registration fees		26
Interest expense		9
Trustees’ fees		8
Other expenses	+	8


Total expenses		660
Expense reduction by adviser and Schwab	−	205
Custody credits	−	1


Net expenses		454


Increase (Decrease) in Net Assets from Operations
Total investment income		2,533
Net expenses	−	454


Net investment income		2,079
Net realized gains		3,160
Net unrealized losses	+	(33,936	)


Decrease in net assets from operations		($28,697	)


¹	Effective on February 28, 2008, all outstanding Select Shares were converted into Investor Shares.

12 See financial notes

Schwab Balanced Fund

Statements of

Changes in Net Assets

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




Operations


		11/1/07-10/31/08			11/1/06-10/31/07
Net investment income			$2,079			$2,745
Net realized gains			3,160			7,306
Net unrealized gains (losses)	+		(33,936	)		4,412


Increase (Decrease) in net assets from operations			(28,697	)		14,463


Distributions to Shareholders
Distributions from net investment income
Investor Shares			2,272			2,110
Select Shares	+		573			541


Total distributions from net investment income			2,845			2,651


Distributions from net realized gains
Investor Shares			5,482			5,431
Select Shares	+		1,276			1,254


Total distributions from net realized gains			6,758			6,685

Total distributions			$9,603			$9,336

Transactions in Fund Shares¹


		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			VALUE			SHARES			VALUE


Shares Sold
Investor Shares			2,660			$31,962			616			$8,271
Select Shares	+		125			1,558			375			5,047


Total shares sold			2,785			$33,520			991			$13,318


Shares Reinvested
Investor Shares			593			$7,378			555			$7,169
Select Shares	+		132			1,638			127			1,635


Total shares reinvested			725			$9,016			682			$8,804


Shares Redeemed
Investor Shares			(2,719	)		($31,898	)		(2,169	)		($29,082	)
Select Shares	+		(2,242	)		(27,365	)		(623	)		(8,345	)


Total shares redeemed			(4,961	)		($59,263	)		(2,792	)		($37,427	)

Net transactions in fund shares			(1,451	)		($16,727	)		(1,119	)		($15,305	)


Shares Outstanding and Net Assets
		11/1/07-10/31/08						11/1/06-10/31/07
		SHARES			NET ASSETS			SHARES			NET ASSETS
Beginning of period			10,087			$139,868			11,206			$150,046
Total decrease	+		(1,451	)		(55,027	)		(1,119	)		(10,178	)


End of period			8,636			$84,841			10,087			$139,868


Net investment income not yet distributed						$2,062						$2,312


¹	Effective on February 28, 2008, all outstanding Select Shares (1,906 shares valued at $23,077) were converted into Investor Shares.

See financial notes 13

Schwab Balanced Fund

Financial Notes

1. Business Structure of the Funds

Schwab Balanced Fund is a series of Schwab Capital Trust (the “trust”), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”). 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 Balanced 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 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 Target 2010 Fund Schwab Target 2015 Fund Schwab Target 2020 Fund Schwab Target 2025 Fund Schwab Target 2030 Fund Schwab Target 2035 Fund Schwab Target 2040 Fund Schwab Retirement Income Fund Schwab Fundamental US Large Company Index Fund Schwab Fundamental US Small-Mid Company Index Fund Schwab Fundamental International Large Company Index Fund Schwab Fundamental International Small-Mid Company Index Fund Schwab Fundamental Emerging Markets Index Fund Schwab Monthly Income Fund—Moderate Payout Schwab Monthly Income Fund—Enhanced Payout Schwab Monthly Income Fund—Maximum Payout Schwab International Core Equity Fund

Effective February 28, 2008, the Schwab Viewpoints Fund was renamed the Schwab Balanced Fund and has become a single class “fund of funds” which seeks to achieve its investment objective by investing in a diversified group of other Schwab and/or Laudus Funds, but also may invest in other mutual funds, including exchange traded funds. In addition, the fund may purchase individual securities to maintain its allocations. The fund bears its share of allocable expenses of the underlying funds in which it invests. The financial statements of the fund should be read in conjunction with the underlying funds’ financial statements.

The fund offers one share class. Shares are bought and sold (subject to a redemption fee, see Note 9) at net asset value, or closing 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 authorize the issuance of as many shares as necessary.

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 may keep certain assets in segregated accounts, as required by securities law.

2. Significant Accounting Policies:

The following is a summary of the significant accounting policies the fund uses 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:


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

	•	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 valuation date exchange rate.

Schwab Balanced Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):


	•	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 values adjusted for changes in value that may occur between the close of a foreign exchange and the time at which fund’s shares are priced. The Board of Trustees regularly reviews fair value determinations made by the fund 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.

	•	Futures and Forwards: 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).

	•	Swap agreements: swaps are valued either based on a model that constructs swap yield curves using market data in order to calculate proceeds, or swaps are valued 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, which approximates market value.

(b) Portfolio Investments:

Futures Contract: The fund 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 the 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, the 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.

Forward Currency Contract: The 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 foreign currency 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 Statement 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.

Schwab Balanced Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

The fund’s repurchase agreements will be fully collateralized by U.S. government securities or U.S. government agency 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 its market value is at least equal to the repurchase price under the agreement.

Swap Agreements: The fund may enter into swap agreements. In an interest rate swap, a fund and counterparty agree to swap payments that are based on two different interest rates.

The counterparty is typically a large financial institution, and the terms of the swap are specified in advance. For example, the fund may agree that for six months it will pay the counterparty the equivalent of the interest on a given amount invested at LIBOR (the London Interbank Offered Rate). In exchange, the counterparty might agree to pay the fund the equivalent of the same amount invested in a certain bond index during this same six month period.

A 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 a 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.

Swap agreements carry certain risks. Because the net gains or losses stemming from a swap agreement depend on the movements of one rate relative to another, the fund could experience unanticipated losses if one or both rates failed to behave as expected. The fund also could lose money in an interest rate swap or a credit default swap if the counterparty failed to honor the terms of the swap agreement.

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 the 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.

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 sets aside sufficient securities as collateral for those securities bought on a delayed-delivery basis.

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.

(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 Statement of Operations.

Options purchased are recorded as assets to the extent of premium paid and written options are recorded as liabilities to the extent of premiums 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

Schwab Balanced Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

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.

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. The fund does not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.

When the 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 of the contract, and records a realized gain or loss accordingly. The fund records the daily change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).

(d) Investment Income:

Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the fund records certain foreign security dividends on the day it learns of the ex-dividend date.

Interest income is recorded as it accrues. If the fund buys a debt security at a discount (that is, for less than its face value) or a premium (more than face value), it amortizes the discount or premium from the current date up to maturity. 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 date), then the fund amortizes the premium to the security’s call date and price, rather than the maturity date and price.

(e) Expenses:

(f) Distributions to Shareholders:

The fund makes distributions from net investment income and net realized capital gains once a year.

(g) Custody Credit:

The 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:

(i) Federal Income Taxes:

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

(j) Indemnification:

Under the fund’s organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the fund. In addition, in the normal course of business the fund enters into contracts with its vendors and others that provide general indemnifications. The fund’s maximum exposure under these arrangements is unknown

Schwab Balanced Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

as this would involve future claims that may be made against the fund. However, based on experience, the fund expects the risk of loss to be remote.

(k) Accounting Pronouncements:

In March 2008, the FASB issued Statements of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires enhanced disclosures about the fund derivative and hedging activities. Management is currently evaluating the impact of the adoption of SFAS No. 161 on the fund financial statement disclosures.

3. Risk Factors

The fund’s investments in underlying funds involve certain risks including, but not limited to, those described below:

The prices of common stocks and other equity-type securities held by the fund may decline in response to certain events, including those directly involving issuers of these securities; adverse conditions affecting the general economy; overall market declines; world political, social, and economic instability; and currency fluctuations.

The values of, and income generated by, most debt securities held by the fund may be affected by changing interest rates and by changes in the effective maturities and credit ratings of these securities. For example, the values of debt securities in the fund portfolio generally will decline when interest rates rise and increase when interest rates fall. In addition, falling interest rates may cause an issuer to redeem, “call” or refinance a security before its stated maturity, which may result in the fund having to reinvest the proceeds in lower yielding securities.

Investments in securities issued by entities based outside the United States may be subject to the risks described above to a greater extent and may also be affected by currency controls; different accounting, auditing, financial reporting, and legal standards and practices in some countries; expropriation; changes in tax policy; greater market volatility; differing securities market structures; higher transaction costs; and various administrative difficulties, such as delays in clearing and setting portfolio transactions or in receiving payment of dividends. These risks may be heightened in connection with investments in developing countries.


4.	Affiliates and Affiliated Transactions:

(All dollar amounts are x 1,000)

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 transfer agent and shareholder services agent.

Effective February 28, 2008, the investment advisor discontinued the fee for its advisory and administrative services. However, the underlying funds pay fees to the investment adviser for advisory and administrative services and to Schwab for transfer agent and shareholder services. The fund is not charged such fees directly. These fees are included in the net asset value of the underlying funds. CSIM and Schwab have made agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses to 0.00%, through February 27, 2009.

Schwab Balanced Fund

Financial Notes (continued)


4.	Affiliates and Affiliated Transactions (continued): (All dollar amounts are x 1,000)

Prior to February 28, 2008, for its advisory and administrative services to the fund, the investment adviser was 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%
$500 million to $1 billion			0.75%
Over $1 billion			0.725%

Prior to February 28, 2008, for its transfer agent and shareholder services, Schwab was 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%

Also prior to February 28, 2008, CSIM and Schwab made additional agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses as follows:


Investor Shares			1.10%
Select Shares			0.95%

The fund 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. During the year ended October 31, 2008, the fund’s total security transactions with other Schwab Funds was $12,148.

The fund may engage in certain transactions involving related parties. Pursuant to an exemptive order issued by the SEC, the fund may invest in other related funds. As of October 31, 2008, the percentages of shares of other related funds owned by the Balanced Fund are:


Schwab Active Equity Funds:
Core Equity Fund			3.1%
Laudus MarketMasters Funds:
Small-Cap MarketMasters Fund			1.8%
Schwab Bond Funds:
Total Bond Market Fund			3.0%

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 by the fund during the period.

5. Board of Trustees:

6. Borrowing from Banks:

The fund may borrow money from banks and custodians. The fund may obtain temporary bank loans through the trusts to which it belongs, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The fund covered in this report has custodian overdraft facilities, a committed line of credit of $150 million with State Street Corp., an uncommitted

Schwab Balanced Fund

Financial Notes (continued)

6. Borrowing from Banks (continued):

line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman. The fund pays interest on the amounts it borrows at rates that are negotiated periodically. There were no borrowings from the line of credit by the fund during the period. However, the fund utilized its overdraft facility and incurred interest expense, which is disclosed in the Statement of Operations.


7.	Purchases and Sales of Investment Securities:

(All dollar amounts are x 1,000)

For the period ended October 31, 2008, purchases and sales of securities (excluding short-term obligations and securities sold short) were as follows:


Purchases of
Long-Term U.S.		Purchases of other		Total Purchase of
Government		Long-Term		Long-Term
Securities Transactions*		Securities		Securities

	$173,095		$142,849		$315,944


Sales/Maturities of
Long-Term U.S.		Sales/Maturities of		Total Sales/Maturities
Government		other Long-Term		of Long-Term
Securities Transactions*		Securities		Securities

	$215,466		$125,149		$340,615

* Includes securities guaranteed by U.S. Government Agencies.


8.	Options Written:

(All dollar amounts are x 1,000)

For the period ended October 31, 2008, the fund’s swaptions and option activity was as follows:


Options Written	Notional Amount			Premiums

Beginning of Period		13,400			$277
Options Written		6,400			154
Options Closed		(19,800	)		(415	)
Options Expired		(—	)		(16	)
Options Exercised		—			—

End of Period		—			$—


9.	Redemption Fee:

(All dollar amounts are x 1,000)

The fund charges a 2.00% redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods are $4 and $6, respectively.

Schwab Balanced Fund

Financial Notes (continued)


10.	Federal Income Taxes:

(All dollar amounts are x 1,000)

As of October 31, 2008, the components of distributable earnings on a tax-basis were as follows:


Undistributed ordinary income	$2,062
Undistributed long-term capital gains	2,727
Unrealized appreciation	—
Unrealized depreciation	(20,780	)
Other unrealized appreciation/(depreciation)	—

Net unrealized appreciation/(depreciation)	($20,780	)

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 periods were:


	Current Period		Prior Period

Ordinary income		$4,039		$2,651
Long-term capital gains		5,564		6,685
Return of capital		—		—


Capital Shares	$—
Undistributed net investment income	516
Net realized capital gains and losses	(516	)

As of October 31, 2008, management has reviewed the tax positions for open tax periods, as applicable to the fund, and has determined that no provision for income tax is required in the fund’s financial statements. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year ended October 31, 2008, the fund did not incur any interest or penalties. The fund is not subject to examination by U.S. federal tax authorities for tax years before 2004 and by state tax authorities for the tax years before 2003.

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of:
Schwab Balanced Fund (formerly 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 Balanced Fund (formerly Schwab Viewpoints Fund, one of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Fund”) at October 31, 2008, the results of its operations for the year then ended, the changes in its net assets and its 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 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, 2008 by correspondence with the transfer agent, custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
December 12, 2008

Other Federal Tax Information: (unaudited)

(All dollar amounts are x 1,000)

For corporate shareholders, 21.05% percentage of the fund’s dividend distributions paid during the fiscal year ended October 31, 2008, qualify for the corporate dividends received deduction.

For the fiscal year ended October 31, 2008, the fund designates $1,662 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 2009 via IRS form 1099 of the amounts for use in preparing their 2008 income tax return.

For the fiscal year ended October 31, 2008, the fund hereby designates $5,564 as a capital gain dividend.

Investment Advisory Agreement Approval

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

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

3. the 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 the 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 fund grows 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 fund and the resources of CSIM and its affiliates dedicated to the fund. 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 investments in CSIM’s mutual fund infrastructure and the fact that Schwab’s wide range of products, services, and channel alternatives such as free advice, investment and research tools, Internet access, and an array of account features that benefit the fund and its 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 many of the fund’s shareholders are also brokerage clients of Schwab. 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 fund and the resources of CSIM and its affiliates dedicated to the fund supported renewal of the Agreement.

Fund Performance. The Board considered fund performance in determining whether to renew the Agreement. Specifically, the Trustees considered the fund’s performance relative to a peer group and peer category of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, when applicable, and market trends. As part of this review, the Trustees considered the composition of the peer group and peer category, selection criteria and the reputation of the third party who prepared the peer group and peer category analysis. In evaluating the performance of the fund, the Trustees considered both risk and shareholder

risk expectations for the fund and the appropriateness of the benchmark used to compare the performance of the 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 fund supported renewal of the Agreement.

Fund Expenses. With respect to the fund’s expenses, the Trustees considered the rate of compensation called for by the Agreement, and the 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 fund are reasonable and supported renewal of the Agreement.

CSIM and its affiliates. The Board also considered information relating to changes to CSIM’s business operations 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 the 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 existing contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. Based on this evaluation the Board concluded, within the context of its full deliberations, that the fund obtains 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, approved the continuation of the Agreement with respect to the fund and concluded that the compensation under the Agreement with respect to the fund 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.

Trustees and Officers


Independent Trustees
Name, Year of Birth,		Number of
and Position(s) with		Portfolios in
the trust; (Terms of		Fund Complex
office, and length of	Principal Occupations	Overseen by
Time Served⁽¹⁾)	During the Past Five Years	the Trustee		Other Directorships



Mariann Byerwalter 1960 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman of JDN Corporate Advisory LLC.		84	Board 1–Director, Redwood Trust, Inc. Board 2–Director, PMI Group, Inc.


John F. Cogan 1947 Trustee (Trustee of Schwab Capital Trust since 2008.)	Senior Fellow: The Hoover Institution at Stanford University; Stanford Institute for Economic Policy Research; Professor of Public Policy, Stanford University		69	Board 1–Director, Gilead Sciences, Inc. Board 2–Director, Monaco Coach Corporation Board 3–Director, Venture Lending and Leasing, Inc.


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).		84	Board 1–Director, Mission West Properties Board 2–Director, TOUSA Board 3–Director, Harris-Stratex Networks Board 4–Director, Genitope Corp. Board 5– Director, Ditech Networks Board 6–Director, Rubicon Limited


Gerald B. Smith 1950 Trustee (Trustee of Schwab Capital Trust since 2000.)	Chairman, Chief Executive Officer and founder of Smith Graham & Co.(investment advisors).		69	Board 1–Board of Cooper Industries Board 2–Chairman of the Audit Committee of Oneok Partners LP


Donald R. Stephens 1938 Trustee (Trustee of Schwab Capital Trust since 1989.)	Managing Partner, D. R. Stephens & Company (investments).		69	None.


Joseph H. Wender 1944 Trustee (Trustee of Schwab Capital Trust since 2008.)	Senior Managing Director, Chairman of the Finance Committee, GSC Group; General Partner, Goldman Sachs & Co., until June 2005.		69	Board 1–Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals


Michael W. Wilsey 1943 Trustee (Trustee of Schwab Capital Trust since 1989.)	Chairman, Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).		69	None.


Interested Trustees
Name, Year of Birth,		Number of
and Position(s) with		Portfolios in
the trust; (Terms of		Fund Complex
office, and length of	Principal Occupations	Overseen by
Time Served )	During the Past Five Years	the Trustee		Other Directorships



Charles R. Schwab⁽²⁾1937 Chairman and Trustee (Chairman and Trustee of Schwab Capital Trust since 1989.)	Chairman, The Charles Schwab Corporation, Charles Schwab & Co., Inc., 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, Schwab Holdings, Inc.; Through June 2007, Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until October 2008, Chief Executive Officer, The Charles Schwab Corporation, Charles Schwab & Co., Inc.		69	None.


Walter W. Bettinger II⁽²⁾1960 Trustee (Trustee of Schwab Capital Trust since 2008.)	As of October 2008, Chief Executive Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation; President and Chief Operating Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation; Director, Charles Schwab Bank; Executive Vice President and President – Schwab Investor Services, The Charles Schwab Corporation; Executive Vice President and President – Schwab Investor Services, Charles Schwab & Co., Inc.; Chairman and President, Schwab Retirement Plan Services, Inc.; President and Chief Executive Officer, The Charles Schwab Trust Company, Director, Charles Schwab Bank, N.A., Schwab Retirement Plan Services, and Schwab Retirement Technologies.		69	None.


Officers of the Trust
Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served⁽³⁾)		Principal Occupations During the Past Five Years



Randall W. Merk 1954 President and Chief Executive Officer (Officer of Schwab Capital Trust since 2007.)		Executive Vice President and President, Investment Management Services, Charles Schwab & Co., Inc,; Executive Vice President, Charles Schwab & Co., Inc. (2002-present); President and Chief Executive Officer, Charles Schwab Investment Management, Inc. (2007-present); 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.


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 Institutional Trust; Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. Through June 2007, 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. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co. Inc.


Officers of the Trust continued
Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served⁽³⁾)		Principal Occupations During the Past Five Years


Jeffrey Mortimer 1963 Senior Vice President and Chief Investment Officer (Officer of Schwab Capital Trust since 2004.)		Senior Vice President and Chief Investment Officer, Charles Schwab Investment Management, Inc.; President, CEO and Chief Investment Officer, Laudus Trust and Laudus Institutional Trust. Prior to March 31, 2008, Vice President and Chief Investment Officer, Laudus Trust and Laudus Institutional 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 Institutional Trust. Through June 2007, Chief Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust.


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. Through June 2007, Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds Trust.


Catherine MacGregor 1964 Vice President (Officer of Schwab Capital Trust since 2005.)		Vice President, Charles Schwab & Co., Inc. and Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Institutional Trust; since 2006, Chief Counsel, Laudus Trust and Laudus Institutional Trust. Until July 2005, Senior Associate, Paul Hastings Janofsky & Walker LLP.


Cathy Sabo 1964 Vice President (Officer of Schwab Capital Trust since 2005.)		Vice President-Compliance, Charles Schwab Investment Management, Inc., Laudus Trust and Laudus Institutional 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 Institutional 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 20 years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: 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 Bettinger also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Bettinger 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 of the other officers serves at the pleasure of the Board.