nvcsr

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.schwabfunds.com/prospectus.


Total Return for the Report Period


Schwab Short-Term Bond Market Fund^tm (Ticker Symbol: SWBDX)			4.92%

Barclays Capital U.S. Government/Credit: 1-5 Years Index			5.34%
Fund Category: Morningstar Short-Term Bond			5.84%

Performance Details			pages 6-7



Schwab^® Premier Income Fund (Ticker Symbol: SWIIX)			11.16%

Barclays Capital U.S. Aggregate Intermediate Bond Index			8.25%
Fund Category: Morningstar Intermediate-Term Bond			11.36%

Performance Details			pages 8-9



Schwab Total Bond Market Fund^tm (Ticker Symbol: SWLBX)			8.76%

Barclays Capital U.S. Aggregate Bond Index			9.18%
Fund Category: Morningstar Intermediate-Term Bond			11.36%

Performance Details			pages 10-11



Schwab GNMA Fund^tm (Ticker Symbol: SWGSX)			7.00%

Barclays Capital GNMA Index			7.96%
Fund Category: Morningstar Intermediate Government			7.89%

Performance Details			pages 12-13



Schwab Inflation Protected Fund^tm (Ticker Symbol: SWRSX)			9.93%

Barclays Capital U.S. TIPS Index			10.52%
Fund Category: Morningstar Inflation Protected Bond			10.14%

Performance Details			pages 14-15



Minimum Initial Investment¹			$ 100

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

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

Source for category information: Morningstar, Inc.


¹	Please see prospectus for further detail and eligibility requirements.

2 Schwab Taxable Bond Funds

From the President

Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the funds covered in this report.

Dear Shareholder,

We are pleased to provide you with this annual report to shareholders for the Schwab Bond Funds. The content covers the 12-month period ending August 31, 2010, and includes information about the performance and management of the five taxable bond funds.

For the reporting period, the Schwab Premier Income Fund was the strongest performer among the bond funds in this report. The remaining funds also had positive performance, but trailed their respective comparative indices. For additional information about the performance of each fund, please refer to the managers’ discussion on the following pages of this report.

While exposure to bond funds can be an important component of a diversified portfolio, there are also inherent risks. A key risk in today’s markets is interest rate risk and the inverse relationship between interest rates and bond prices. During the period under review, interest rates fell to all-time lows, resulting in an increase in the price of bonds. Conversely, interest rate increases would likely cause bond prices to fall, which could cause a decrease in the value of the funds.

At Schwab, we encourage our investors to periodically review their portfolios, and when needed, make changes so that they are consistent with their tolerance for risk and aligned with their investment goals. If you have any questions about the Schwab Bond Funds or other Schwab funds, we are always available at 1-800-435-4000, and additional resources may be found on schwab.com.

Thank you for investing with us.

Sincerely,

Schwab Taxable Bond Funds 3

The Investment Environment

The bond market posted solid returns for the 12-month reporting period amid challenging economic conditions marked by slow economic growth, high unemployment, and a weak housing market. Fixed income securities performed well in this environment, with yields dropping substantially during the period. Events such as the European sovereign debt crisis and volatile equity markets contributed to investor uncertainty, resulting in a shift towards bonds. The Federal Reserve (the Fed) continued its efforts to combat unemployment, encourage lending, and boost spending by holding interest rates near zero. Additional policy actions by the Fed included security purchases of U.S. Treasury and Agency bonds, as well as mortgage-backed securities (MBS). The Fed ended its announced program for purchasing MBS at the end of March 2010, and its purchases totaled approximately $1.25 trillion.

Major economic indicators, such as Gross Domestic Product (GDP), unemployment, and housing continued to be weak. GDP growth, the output of goods and services produced by labor and property located in the United States, declined from 3.7% in the first quarter of 2010 to 1.7% in the second quarter. Existing home sales declined during the period, dropping from a high of 6.49 million units in November 2009 to a low of 3.84 million units in July 2010. Unemployment remained elevated throughout the period, ranging from 9.5% to 10.1%.

The Fed’s monetary policy influenced the level of short-term yields and returns, which remained low during the period. For example, U.S. Treasury securities maturing in one to three years returned 2.7%. In contrast, long-term U.S. Treasury securities maturing in 20 or more years returned 16.9%. Much of this return occurred in the second half of the period as slow economic growth, falling inflation, and a flight-to-quality led investors to favor long-term Treasury securities.

Other sectors of the taxable bond market also experienced solid performance during the period. Lower-rated bonds outperformed higher-rated bonds. The Barclay’s Capital U.S. Aggregate Bond Index, which measures performance among the major investment grade sectors of the bond market, returned 9.2%. Among the rating categories within that index, those securities with the highest ratings of AAA returned 7.8%, while those in the lowest investment grade rating category of BBB returned 16.0%. The Barclay’s Capital High Yield Index of corporate bonds generated a total return of 21.5% during the period. Both investment grade and high-yield corporate bonds performed well as investors were attracted to stable corporate fundamentals and the additional yield that the sector offered relative to U.S. Treasury securities.

The commercial mortgage-backed securities (CMBS) sector outperformed other benchmark sectors, including U.S. Treasury securities, despite negative headlines about commercial real estate. CMBS yield spreads were the widest relative to U.S. Treasury securities at the beginning of the period and experienced the largest narrowing relative to U.S. Treasuries by the end of the period. The result was a return of 23.3% for the period, as measured by the Barclay’s Capital CMBS Index.

Yields of U.S. Treasury Securities: Effective Yields of Three-Month, Two-Year and Ten-Year Treasuries

Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth, waning investor interest in bonds, an increase in the issuance of bonds, or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down.

Data source: Bloomberg L.P.

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.

4 Schwab Taxable Bond Funds

Schwab Short-Term Bond Market Fund™

The Schwab Short-Term Bond Market Fund seeks high current income by tracking the performance of the Barclays Capital U.S. Government/Credit: 1-5 Year Index. The fund returned 4.92% for the 12-month period that ended August 31, 2010, while its comparative index returned 5.34%. The fund uses the index as a guide in structuring the fund’s portfolio and selecting its investments. During the reporting period, sector allocations between the fund and the index were aligned, thereby reducing the difference in performance between the two.

The major sectors of the index, which consist of U.S. Treasuries, U.S. agencies, traditional corporate bonds, and credit sensitive securities from non-corporate issuers, posted positive total returns for the period, as declining yields led to security price appreciation. The 1-5 year Corporate Bond sector, which represented 20.2% of the index, posted positive total return of 8.6% during the period, outperforming U.S. Treasuries of similar maturity. Corporate bondholders benefited from improving company fundamentals and a low interest rate environment.

The 1-5 year Treasury sector, which represented 55.5% of the index, returned 4.5%. The strong performance of Treasuries was driven by a flight-to-quality as fears escalated about the European banking system. In the face of continued slow economic growth, the Federal Reserve maintained a policy of low interest rates. Investors favored intermediate maturity Treasuries which offered higher yield, resulting in strong performance in this sector. For instance, 3-5 year Treasuries returned 7.4% for the period, outperforming the 1-3 year Treasury sector which posted a 2.7% return during the period.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


U.S. Government and Government Agencies		71.7%
Corporate Bonds		20.6%
Foreign Securities		6.9%
Other investment Companies		0.6%
Municipal Bonds		0.2%


By Credit Quality ²


AAA		76.7%
AA		5.1%
A		11.9%
BBB		5.5%
BB		0.1%
Short-Term Ratings		0.7%


By Maturity³


0-6 months		0.2%
7-18 months		14.7%
19-30 months		31.3%
More than 30 months		53.8%

Weighted Average Maturity³		2.7 yrs
Weighted Average Effective Duration		2.6 yrs

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

6 Schwab Taxable Bond Funds

Schwab Short-Term Bond Market Fund^tm

Performance Summary as of 8/31/10

August 31, 2000 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment¹

Average Annual Total Returns^1,2,3


Fund and Inception Date	1 Year			5 Years			10 Years

Fund: Schwab Short-Term Bond Market Fund^tm (11/5/91)		4.92	%		2.00	%		3.48	%
Barclays Capital U.S. Government/Credit: 1-5 Years Index		5.34	%		5.12	%		5.31	%
Fund Category: Morningstar Short-Term Bond		5.84	%		3.77	%		4.03	%

Fund Expense Ratios⁴: Net 0.55%; Gross 0.62%

Style Assessment⁵

Yields¹


30-Day SEC Yield³		0.53%


30-Day SEC Yield-No Waiver⁶		0.44%


12-Month Distribution Yield³		1.91%

All total returns 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		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. 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.
⁵		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁶		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.

Schwab Taxable Bond Funds 7

Schwab^® Premier Income Fund

The Schwab Premier Income Fund seeks high current income and may also seek capital appreciation. The fund returned 11.16% for the 12-month period that ended August 31, 2010, while its comparative index, the Barclays Capital U.S. Aggregate Intermediate Bond Index returned 8.25%. Falling interest rates and the narrowing of yield spreads on corporate bonds and mortgage securities contributed to the positive total return for the fund and the index. The 10-year Treasury fell from a yield of 3.40% on August 31, 2009 to 2.47% at the end of the period.

Non-benchmark allocations to the asset-backed and non-agency mortgage-backed securities sectors were the top contributors to the fund’s outperformance relative to the index. These positions represented approximately 18% of fund net assets at the beginning of the period. The fund favored these sectors due to the advisor’s evaluation of the underlying fundamental credit quality of the individual securities and attractive valuations relative to other market sectors, specifically government agency-backed mortgage securities.

The fund also maintained an overweight position to investment and non-investment grade corporate bonds during the period, as this sector continued offering relative value versus U.S. Treasury securities. In particular, the fund was overweight corporate bonds in the Financials and Industrials sub-sectors. The corporate bond market posted positive total returns in the period which contributed to performance. The fund was underweight the Sovereign sub-sector, which detracted from the fund’s performance. As fears of contagion from European sovereign issuers such as Spain and Greece eased toward the end of the period, valuations improved and the fund’s performance was negatively impacted given the underweight to the sub-sector.

During the period, the fund invested in futures contracts referencing U.S. Treasury securities in order to manage the fund’s interest rate exposure. These investments ranged from 1% to 12% of fund net assets.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


Corporate Bonds		35.3%
Mortgage-Backed Securities		33.9%
U.S. Government and Government Agencies		23.5%
Asset-Backed Obligations		2.8%
Commercial Mortgage Backed Securities		2.8%
Other Investment Companies		1.0%
Preferred Stock		0.3%
Foreign Securities		0.3%
Commercial Paper & Other Corporate Obligations		0.1%


By Credit Quality ²


AAA		58.9%
AA		7.0%
A		5.8%
BBB		16.4%
BB		8.3%
B		2.4%
CCC		0.2%
Short-Term Ratings		1.0%


By Maturity³


0-6 months		20.5%
7-18 months		3.8%
19-30 months		4.3%
More than 30 months		71.4%

Weighted Average Maturity³		3.5 yrs
Weighted Average Effective Duration		2.9 yrs

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

8 Schwab Taxable Bond Funds

Schwab^® Premier Income Fund

Performance Summary as of 8/31/10

October 31, 2007 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment^1,7

Average Annual Total Returns^1,2,3,7


Fund and Inception Date	1 Year			Since Inception

Fund: Schwab^® Premier Income Fund (10/31/07)		11.16	%		7.84	%
Barclays Capital U.S. Aggregate Intermediate Bond Index		8.25	%		7.00	%
Fund Category: Morningstar Intermediate-Term Bond		11.36	%		6.53	%

Expense Ratios⁴: Net 0.63%; Gross 0.65%

Style Assessment⁵

Yields¹


30-Day SEC Yield³		2.65%


30-Day SEC Yield–No Waiver⁶		2.64%


12-Month Distribution Yield³		5.13%


¹		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. 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.
⁵		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁶		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.
⁷		On August 10, 2009, the Investor Share class, Select Share class and Institutional Share class of the fund were combined into a single class of shares of the fund. The performance and financial history of the fund is that of the fund’s former Institutional Shares. Accordingly, the past performance shown is that of the fund’s former Institutional Shares.

Schwab Taxable Bond Funds 9

Schwab Total Bond Market Fund™

The Schwab Total Bond Market Fund seeks high current income by tracking the performance of the Barclays Capital U.S. Aggregate Bond Index. The fund returned 8.76% for the 12-month period that ended August 31, 2010, while its comparative index returned 9.18%. The fund uses the index as a guide in structuring the portfolio and selecting its investments. During the reporting period, sector allocations between the fund and the index were aligned, thereby reducing the difference in performance between the two.

The combination of price appreciation due to lower yields and coupon income produced a positive total return for the fund and the index. Also contributing to performance were the strong returns of corporate bonds, mortgage-backed securities (MBS), and commercial mortgage-backed securities (CMBS).

Prices in the MBS sector, representing 33.1% of the index at the end of the period, were supported by the Federal Reserve’s (the Fed) ongoing intervention in the bond markets and its role as the largest buyer of agency MBS and agency debt. The sector returned 7.0% during the period, which outperformed U.S. Treasury securities of similar maturity. The Fed ended its program for purchasing MBS at the end of March 2010, and its purchases totaled approximately $1.25 trillion.

The U.S. Treasury sector, which represented 33.0% of the index at the end of the period, returned 8.1%. The Fed maintained the target federal funds rate of 0.00%–0.25%, which served to keep short-term interest rates low. Within the Treasury sector, securities maturing in 20 or more years returned 16.9%. Slow economic growth, low inflation, and risk aversion led investors to favor longer-term U.S. Treasury securities. In addition, the Fed’s decision late in the period to reinvest proceeds from MBS principal repayments into longer-term Treasury securities provided further demand for the sector.

The corporate bond sector, which represented 18.5% of the index, returned 13.5% during the period, which also outperformed U.S. Treasury securities of similar maturity. Corporate bondholders benefited from sound company fundamentals and a low interest rate environment.

The CMBS sector, representing approximately 3% of the index, returned 23.3% for the period. The sector continued to outperform other index sectors, including U.S. Treasury securities, despite negative headlines about commercial real estate.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


U.S. Government and Government Agencies		38.8%
Mortgage-Backed Securities		33.3%
Corporate Bonds		17.9%
Foreign Securities		3.8%
Commercial Mortgage Backed Securities		3.1%
Other Investment Companies		2.1%
Municipal Bonds		0.7%
Asset-Backed Obligations		0.3%


By Credit Quality ²


AAA		77.2%
AA		4.3%
A		8.9%
BBB		7.2%
BB		0.2%
Short-Term Ratings		2.2%


By Maturity³


0-1 Year		2.8%
2-10 Years		57.1%
11-20 Years		6.2%
21-30 Years		33.9%

Weighted Average Maturity³		5.7 yrs
Weighted Average Effective Duration		3.9 yrs

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

10 Schwab Taxable Bond Funds

Schwab Total Bond Market Fund^tm

Performance Summary as of 8/31/10

August 31, 2000 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment¹

Average Annual Total Returns^1,2,3


Fund and Inception Date	1 Year			5 Years			10 Years

Fund: Schwab Total Bond Market Fund^tm (3/5/93)		8.76	%		3.24	%		4.99	%
Barclays Capital U.S. Aggregate Bond Index		9.18	%		5.96	%		6.47	%
Fund Category: Morningstar Intermediate-Term Bond		11.36	%		5.12	%		5.84	%

Expense Ratios⁴: Net 0.55%; Gross 0.63%

Style Assessment⁵

Yields¹


30-Day SEC Yield³		2.38%


30-Day SEC Yield-No Waiver⁶		2.37%


12-Month Distribution Yield³		3.29%


¹		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. Schwab and the investment adviser have agreed to advance the fund certain litigation expenses to the extent necessary to maintain these expense limitations (excluding amounts paid in connection with judgments and settlements) in connection with certain legal matters. These advances are subject to repayment by the fund to Schwab and the investment adviser to the extent the litigation expenses are subsequently paid or reimbursed to the fund by its insurance carriers. For actual ratios during the period, refer to the financial highlights section of the financial statements.
⁵		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁶		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.

Schwab Taxable Bond Funds 11

Schwab GNMA Fund™

The Schwab GNMA Fund seeks high current income consistent with preservation of capital. The fund returned 7.00% for the 12-month period that ended August 31, 2010, while its comparative index, the Barclays Capital GNMA Index returned 7.96%.

Falling interest rates and strong performance of mortgage-backed securities (MBS) relative to U.S Treasury securities resulted in a positive total return for the fund and the index. Prices for MBS were supported during the period by the Federal Reserve’s (the Fed) ongoing intervention in the bond markets and its role as the largest buyer of agency MBS and agency debt, including GNMA securities. The Fed ended its program for purchasing MBS at the end of March 2010. At that time, the Fed had purchased approximately $1.25 trillion of MBS, including $114 billion of GNMA securities.

The largest contributors to the GNMA index return were lower coupon MBS. For instance, GNMA 30-year MBS with coupons lower than 5% returned 9.7% during the period. At the beginning of the period, the fund was underweight coupons lower than 5% and overweight coupons from 5.0% to 6.5%. Throughout the period, the fund increased its exposure to higher coupon MBS. Overall, the fund’s underweight position to lower coupon securities detracted from performance.

During the period, the fund held as much as 20.2% of net assets in To Be Announced (TBA) positions, which are MBS that settle on a forward date.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


Mortgage-Backed Securities		91.3%
U.S. Government Securities		8.6%
Other Investment Companies		0.1%


By Credit Quality ²


AAA		99.9%
Short-Term Ratings		0.1%


By Maturity³


0-6 Months		11.7%
7-18 Months		4.4%
19-30 Months		7.7%
More than 30 Months		76.2%

Weighted Average Maturity³		3.4 yrs
Weighted Average Effective Duration		2.4 yrs

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

12 Schwab Taxable Bond Funds

Schwab GNMA Fund^tm

Performance Summary as of 8/31/10

March 3, 2003 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment^1,7

Average Annual Total Returns^1,2,3,7


Fund and Inception Date	1 Year			5 Years			Since Inception

Fund: Schwab GNMA Fund^tm (3/3/03)		7.00	%		5.92	%		4.87	%
Barclays Capital GNMA Index		7.96	%		6.45	%		5.49	%
Fund Category: Morningstar Intermediate Government		7.89	%		5.24	%		4.31	%

Fund Expense Ratios⁴: Net 0.57%; Gross 0.70%

Style Assessment⁵

Yields¹


30-Day SEC Yield³		2.80%


30-Day SEC Yield-No Waiver⁶		2.70%


12-Month Distribution Yield³		3.38%


¹		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. Fund expense ratios include acquired fund fees and expenses (AFFE) of 0.02% in connection with the fund’s investment in the State Street Institutional Liquid Reserves Fund. For actual ratios during the period, refer to the financial highlights section of the financial statements.
⁵		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁶		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.
⁷		On August 10, 2009, the Investor Share class and Select Share class of the fund were combined into a single class of shares of the fund. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance shown is that of the fund’s former Select Shares.

Schwab Taxable Bond Funds 13

Schwab Inflation Protected Fund™

The Schwab Inflation Protected Fund seeks to provide total return and inflation protection. The fund returned 9.93% for the 12-month period that ended August 31, 2010, while its comparative index, the Barclays Capital U.S. Treasury Inflation-Protected Securities index returned 10.52%. The combination of lower yields, interest income, and inflation adjustments contributed to the positive total return for the fund and index.

Consistent with the index, the fund focused its investments in Treasury Inflation-Protected Securities (TIPS). The fund’s duration was similar to the index throughout the period. Due to concerns about the threat of deflation in the near term, the fund maintained an underweight position in short and intermediate maturity TIPS. In contrast, the fund was overweight longer maturity TIPS, with the longer term view that the Federal Reserve’s policy actions could lead to higher inflation expectations which should benefit longer maturity TIPS more than shorter maturity TIPS.

Although all TIPS had positive returns during the period, TIPS with longer-dated maturities outperformed short- to intermediate-term maturity TIPS during most of the period. Consequently, the fund’s bias towards longer-dated maturities contributed to performance. This was especially true during the second half of the reporting period when the fund shifted to an overweight in the 20-year and longer maturity range, and the fund was able to recover some of the underperformance seen during the first half of the period when shorter-dated maturities outperformed.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


U.S. Government Securities		99.3%
Other Investment Companies		0.7%


By Credit Quality²


AAA		99.3%
Short-Term Ratings		0.7%


By Maturity³


2-10 Years		67.0%
11-20 Years		29.1%
21-30 Years		3.9%

Weighted Average Maturity³		8.9 yrs
Weighted Average Effective Duration		7.9 yrs

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

14 Schwab Taxable Bond Funds

Schwab Inflation Protected Fund^tm

Performance Summary as of 8/31/10

March 31, 2006 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment^1,7

Average Annual Total Returns^1,2,3,7


Fund and Inception Date	1 Year			3 Years			Since Inception

Fund: Schwab Inflation Protected Fund^tm (3/31/06)		9.93	%		6.32	%		5.79	%
Barclays Capital U.S. TIPS Index		10.52	%		7.17	%		6.62	%
Fund Category: Morningstar Inflation Protected Bond		10.14	%		6.04	%		5.53	%

Fund Expense Ratios⁴: Net 0.50%; Gross 0.63%

Style Assessment⁵

Yields¹


30-Day SEC Yield³		-0.77%


30-Day SEC Yield-No Waiver⁶		-0.85%


12-Month Distribution Yield³		1.34%


¹		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. 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.
⁵		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁶		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.
⁷		On August 10, 2009, the Investor Share class and Select Share class of the fund were combined into a single class of shares of the fund. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance shown is that of the fund’s former Select Shares.

Schwab Taxable Bond Funds 15

Fund Expenses (Unaudited)

Examples for a $1,000 Investment

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

The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning March 1, 2010 and held through August 31, 2010.

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 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 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. Therefore, the hypothetical return lines of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, 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 Period ²
	(Annualized)		at 3/01/10		at 8/31/10		3/01/10–8/31/10

Schwab Short-Term Bond Market Fund^tm
Actual Return		0.55%	$	1,000	$	1,026.40	$	2.81
Hypothetical 5% Return		0.55%	$	1,000	$	1,022.43	$	2.80


Schwab^® Premier Income Fund
Actual Return		0.62%	$	1,000	$	1,046.30	$	3.20
Hypothetical 5% Return		0.62%	$	1,000	$	1,022.08	$	3.16


Schwab Total Bond Market Fund^tm
Actual Return		0.54%	$	1,000	$	1,056.70	$	2.80
Hypothetical 5% Return		0.54%	$	1,000	$	1,022.48	$	2.75


Schwab GNMA Fund^tm
Actual Return		0.55%	$	1,000	$	1,043.20	$	2.83
Hypothetical 5% Return		0.55%	$	1,000	$	1,022.43	$	2.80


Schwab Inflation Protected Fund^tm
Actual Return		0.50%	$	1,000	$	1,055.00	$	2.59
Hypothetical 5% Return		0.50%	$	1,000	$	1,022.68	$	2.55


¹		Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights, which covers a 12-month period.
²		Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

16 Schwab Taxable Bond Funds

Schwab Short-Term Bond Market Fund

Portfolio Holdings as of August 31, 2010

This section shows all the securities in the fund’s portfolio and their values 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.schwabfunds.com/prospectus.

For fixed rate obligations, the rate shown is the interest rate (the rate established when the obligation was issued) and the maturity date shown is the stated legal maturity. For variable-rate obligations, the rate shown is the rate as of the report date, and the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity.


				Cost		Value
Holdings by Category				($)		($)

	71	.5%	U.S. Government and Government Agencies		180,422,684		184,777,039
	6	.9%	Foreign Securities		17,174,331		17,742,978
	20	.6%	Corporate Bonds		50,043,723		53,106,284
	0	.2%	Municipal Bonds		407,172		424,643
	0	.6%	Other Investment Company		1,673,018		1,673,018
	0	.0%	Short-Term Investment		99,929		99,947


	99	.8%	Total Investments		249,820,857		257,823,909
	0	.2%	Other Assets and Liabilities, Net				422,316


	100	.0%	Net Assets				258,246,225


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

U.S. Government and Government Agencies 71.5% of net assets

U.S. Government Agency Guaranteed 3.2%
Citigroup Funding, Inc., (FDIC Insured)
1.88%, 10/22/12 (d)		2,000,000		2,050,006
JPMorgan Chase & Co., (FDIC Insured)
3.13%, 12/01/11 (d)		1,000,000		1,033,803
State Street Capital Trust III, (FDIC Insured)
2.15%, 04/30/12 (d)		3,000,000		3,083,925
The Goldman Sachs Group, Inc., (FDIC Insured)
3.25%, 06/15/12 (d)		1,000,000		1,046,067
Wells Fargo & Co., (FDIC Insured)
3.00%, 12/09/11 (d)		1,000,000		1,032,824

				8,246,625

U.S. Government Agency Securities 14.1%
Fannie Mae
1.25%, 06/22/12		1,000,000		1,011,959
1.75%, 08/10/12		2,000,000		2,043,274
1.50%, 09/25/12 (b)		500,000		502,727
1.88%, 10/29/12 (b)		2,000,000		2,003,806
3.25%, 04/09/13		1,000,000		1,064,635
1.00%, 09/23/13		2,500,000		2,505,525
2.75%, 02/05/14		1,250,000		1,321,689
2.63%, 11/20/14		2,000,000		2,115,266
3.13%, 01/21/15 (b)		1,000,000		1,009,330
Federal Farm Credit Bank
3.50%, 10/03/11		500,000		517,025
4.50%, 10/17/12		1,000,000		1,080,685
1.63%, 03/07/13 (b)		250,000		250,049
Federal Home Loan Bank
3.63%, 09/16/11		1,000,000		1,035,198
1.00%, 12/28/11		500,000		503,790
1.85%, 12/21/12 (b)		1,500,000		1,505,020
3.38%, 02/27/13		500,000		532,003
1.88%, 06/21/13		1,000,000		1,028,848
3.63%, 10/18/13		2,500,000		2,711,217
5.50%, 08/13/14		2,000,000		2,328,498
Freddie Mac
1.13%, 12/15/11		1,000,000		1,009,136
1.35%, 06/29/12 (b)		2,000,000		2,001,442
1.13%, 07/27/12		2,000,000		2,020,052
2.13%, 09/21/12		2,000,000		2,059,658
1.80%, 02/25/13 (b)		500,000		502,831
3.75%, 06/28/13		1,000,000		1,082,726
1.40%, 11/18/13 (b)		500,000		502,596
3.00%, 07/28/14		2,000,000		2,137,564

				36,386,549

U.S. Treasury Obligations 54.2%
U.S. Treasury Notes
1.00%, 09/30/11		6,975,000		7,026,224
1.00%, 10/31/11		3,300,000		3,325,265
4.63%, 10/31/11		1,000,000		1,050,156
1.75%, 11/15/11		1,000,000		1,016,914
0.75%, 11/30/11		2,350,000		2,361,475
1.00%, 12/31/11		5,600,000		5,646,816
0.88%, 01/31/12		2,800,000		2,819,578
4.88%, 02/15/12		3,000,000		3,196,407
1.38%, 04/15/12		1,000,000		1,015,821
1.00%, 04/30/12		4,000,000		4,037,348
4.50%, 04/30/12		1,000,000		1,068,086
0.75%, 05/31/12		1,400,000		1,407,386
1.88%, 06/15/12		1,500,000		1,538,555
0.63%, 06/30/12		1,275,000		1,278,936
0.63%, 07/31/12		2,750,000		2,758,709
4.63%, 07/31/12		2,500,000		2,700,685
1.75%, 08/15/12		1,750,000		1,793,955
4.38%, 08/15/12		1,000,000		1,077,110
4.13%, 08/31/12		1,000,000		1,072,969
1.38%, 09/15/12		6,300,000		6,412,222
4.25%, 09/30/12		1,000,000		1,078,438
1.38%, 10/15/12		3,800,000		3,869,468
3.88%, 10/31/12		1,000,000		1,073,516
1.38%, 11/15/12		3,950,000		4,022,210
3.38%, 11/30/12		1,000,000		1,064,922
1.13%, 12/15/12		2,000,000		2,025,938
3.63%, 12/31/12		1,000,000		1,072,031
1.38%, 01/15/13		2,100,000		2,139,539
1.38%, 02/15/13		2,500,000		2,547,265
2.75%, 02/28/13		1,500,000		1,581,915
3.13%, 04/30/13		1,200,000		1,280,719
3.38%, 06/30/13		1,000,000		1,077,031
1.00%, 07/15/13		2,650,000		2,673,392
3.38%, 07/31/13		1,000,000		1,078,906
0.75%, 08/15/13		3,000,000		3,004,218
4.25%, 08/15/13		2,000,000		2,210,156
3.13%, 08/31/13		1,000,000		1,072,500
3.13%, 09/30/13		1,000,000		1,073,281

18 See financial notes

Schwab Short-Term Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
4.25%, 11/15/13		2,000,000		2,224,376
2.00%, 11/30/13		1,000,000		1,039,219
1.50%, 12/31/13		1,000,000		1,022,969
1.75%, 01/31/14		1,000,000		1,030,469
4.00%, 02/15/14		1,000,000		1,108,203
1.88%, 02/28/14		1,000,000		1,034,531
1.75%, 03/31/14		2,000,000		2,060,470
1.88%, 04/30/14		2,300,000		2,378,704
2.25%, 05/31/14		3,500,000		3,669,533
2.63%, 06/30/14		4,250,000		4,513,632
2.63%, 07/31/14		2,810,000		2,984,967
2.38%, 08/31/14		2,475,000		2,603,972
2.38%, 09/30/14		3,100,000		3,262,025
2.38%, 10/31/14		1,500,000		1,577,812
2.25%, 01/31/15		6,425,000		6,720,653
2.38%, 02/28/15		4,500,000		4,732,726
2.50%, 04/30/15		3,600,000		3,806,719
2.13%, 05/31/15		2,500,000		2,599,817
1.88%, 06/30/15		2,350,000		2,414,992
1.75%, 07/31/15		2,750,000		2,808,014

				140,143,865

Total U.S. Government and Government Agencies
(Cost $180,422,684)				184,777,039




Foreign Securities 6.9% of net assets

Foreign Agencies 2.4%


Canada 0.4%
Export Development Canada
1.75%, 09/24/12		1,000,000		1,022,246


Germany 0.9%
Kreditanstalt Fuer Wiederaufbau
2.00%, 01/17/12 (e)		2,100,000		2,142,147
2.63%, 03/03/15 (e)		225,000		236,317

				2,378,464


Mexico 0.2%
Petroleos Mexicanos
4.88%, 03/15/15 (b)		500,000		531,250


Republic of Korea 0.8%
Export-Import Bank of Korea
5.50%, 10/17/12		1,000,000		1,066,634
8.13%, 01/21/14		400,000		471,958
Korea Development Bank
8.00%, 01/23/14		400,000		470,814

				2,009,406


Sweden 0.1%
Svensk Exportkredit AB
3.25%, 09/16/14		150,000		159,442

				6,100,808

Foreign Local Government 0.7%


Canada 0.7%
Province of British Columbia Canada
4.30%, 05/30/13		450,000		492,854
Province of Ontario Canada
4.10%, 06/16/14		1,175,000		1,293,763

				1,786,617

Sovereign 1.0%


Brazil 0.1%
Federative Republic of Brazil
10.25%, 06/17/13		250,000		312,000


Canada 0.4%
Canada Government International Bond
2.38%, 09/10/14		900,000		943,474


Italy 0.3%
Republic of Italy
2.13%, 10/05/12		400,000		403,801
3.13%, 01/26/15		350,000		358,814

				762,615


Mexico 0.2%
Mexico (United Mexican States)
6.63%, 03/03/15		350,000		410,375


Panama 0.0%
Republic of Panama
7.25%, 03/15/15		100,000		118,300

				2,546,764

Supranational 2.8%
Asian Development Bank
4.25%, 10/20/14		700,000		783,015
European Investment Bank
2.63%, 11/15/11		1,700,000		1,745,023
1.75%, 09/14/12		1,000,000		1,022,561
2.88%, 01/15/15		250,000		264,953
2.75%, 03/23/15		215,000		226,926
Inter-American Development Bank
3.00%, 04/22/14		1,111,000		1,186,078
International Bank for Reconstruction & Development
1.75%, 07/15/13		1,500,000		1,542,249
Nordic Investment Bank
3.63%, 06/17/13		500,000		537,984

				7,308,789

Total Foreign Securities
(Cost $17,174,331)				17,742,978




Corporate Bonds 20.6% of net assets

Finance 9.0%


Banking 6.4%
American Express Bank FSB
5.50%, 04/16/13		1,000,000		1,088,110
Bank of America Corp.
4.88%, 01/15/13		500,000		526,371
4.50%, 04/01/15		300,000		311,207
Bank of Nova Scotia
3.40%, 01/22/15		275,000		292,803
Barclays Bank PLC
5.20%, 07/10/14		300,000		330,314
Citigroup, Inc.
5.50%, 04/11/13		1,000,000		1,062,379
5.13%, 05/05/14		700,000		738,231
4.70%, 05/29/15		150,000		153,959
Countrywide Financial Corp.
5.80%, 06/07/12		1,000,000		1,064,019

See financial notes 19

Schwab Short-Term Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
Credit Suisse USA, Inc.
3.45%, 07/02/12		500,000		518,079
5.50%, 08/15/13		500,000		551,002
Deutsche Bank AG
4.88%, 05/20/13		500,000		540,109
Goldman Sachs Capital II
5.79%, 12/01/10, 12/31/49 (a)(b)		500,000		404,375
JPMorgan Chase & Co.
4.75%, 05/01/13		1,500,000		1,627,021
Morgan Stanley
4.75%, 04/01/14		550,000		566,872
4.10%, 01/26/15		300,000		306,461
6.00%, 04/28/15		500,000		545,731
PNC Funding Corp.
4.25%, 09/21/15		400,000		427,753
Royal Bank of Canada
2.63%, 12/15/15		350,000		360,982
The Bank of New York Mellon Corp.
2.95%, 06/18/15		500,000		523,676
The Goldman Sachs Group, Inc.
5.45%, 11/01/12		100,000		107,233
5.25%, 10/15/13		500,000		541,524
3.70%, 08/01/15		725,000		734,768
US Bancorp
2.00%, 06/14/13		500,000		512,150
Wells Fargo & Co.
5.25%, 10/23/12		1,500,000		1,613,977
5.00%, 11/15/14		500,000		539,055
Westpac Banking Corp.
2.25%, 11/19/12		200,000		203,555
4.20%, 02/27/15		200,000		214,019

				16,405,735


Brokerage 0.1%
BlackRock, Inc.
2.25%, 12/10/12 (b)		250,000		256,339
Nomura Holdings, Inc.
5.00%, 03/04/15		100,000		107,467

				363,806


Finance Company 1.2%
CME Group, Inc.
5.40%, 08/01/13 (b)		250,000		279,347
General Electric Capital Corp.
3.50%, 08/13/12		500,000		519,877
4.80%, 05/01/13		1,400,000		1,511,343
HSBC Finance Corp.
7.00%, 05/15/12		750,000		810,166
5.00%, 06/30/15		93,000		100,421

				3,221,154


Insurance 1.0%
Allstate Life Global Funding Trusts
5.38%, 04/30/13		300,000		331,388
Berkshire Hathaway Finance Corp.
4.63%, 10/15/13 (b)		1,000,000		1,099,621
Coventry Health Care, Inc.
6.30%, 08/15/14 (b)		250,000		266,838
MetLife, Inc.
2.38%, 02/06/14 (b)		400,000		401,905
Prudential Financial, Inc.
3.63%, 09/17/12		400,000		415,273

				2,515,025


Real Estate Investment Trust 0.3%
Simon Property Group LP
4.20%, 02/01/15 (b)		700,000		748,943

				23,254,663

Industrial 10.0%


Basic Industry 1.2%
ArcelorMittal S.A.
3.75%, 08/05/15 (b)		200,000		198,522
BHP Billiton Finance (USA) Ltd.
5.50%, 04/01/14		400,000		450,404
Comcast Corp.
5.30%, 01/15/14 (b)		150,000		167,093
International Paper Co.
5.30%, 04/01/15 (b)		100,000		108,099
Praxair, Inc.
4.38%, 03/31/14 (b)		150,000		164,807
Rio Tinto Finance (USA) Ltd.
8.95%, 05/01/14 (b)		400,000		491,029
The Dow Chemical Co.
7.60%, 05/15/14 (b)		300,000		349,970
5.90%, 02/15/15 (b)		500,000		554,148
Vale Inco Ltd.
7.75%, 05/15/12 (b)		500,000		547,424

				3,031,496


Capital Goods 1.1%
Caterpillar Financial Services Corp.
2.75%, 06/24/15		225,000		235,190
CRH America, Inc.
5.30%, 10/15/13 (b)		350,000		375,583
General Electric Co.
5.00%, 02/01/13		800,000		867,478
John Deere Capital Corp.
4.90%, 09/09/13		500,000		552,468
Northrop Grumman Corp.
3.70%, 08/01/14 (b)		500,000		534,686
Tyco International Finance S.A.
8.50%, 01/15/19 (b)		200,000		267,600

				2,833,005


Communications 1.9%
AT&T, Inc.
6.70%, 11/15/13 (b)		1,000,000		1,159,055
CBS Corp.
8.20%, 05/15/14 (b)		450,000		537,694
Cellco Partnership / Verizon Wireless
5.55%, 02/01/14 (b)		500,000		566,264
DIRECTV Holdings LLC
6.38%, 06/15/15 (b)		250,000		260,000
NBC Universal, Inc.
3.65%, 04/30/15 (b)(c)		250,000		262,506
New Cingular Wireless Services, Inc.
8.13%, 05/01/12 (b)		400,000		446,401
Telefonica Emisiones S.A.U.
3.73%, 04/27/15 (b)		200,000		207,017
Time Warner Cable, Inc.
3.50%, 02/01/15 (b)		250,000		260,525
Time Warner Entertainment Co. LP
10.15%, 05/01/12		100,000		113,903
Verizon Communications, Inc.
5.25%, 04/15/13 (b)		1,100,000		1,214,949

				5,028,314

20 See financial notes

Schwab Short-Term Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)


Consumer Cyclical 0.9%
CVS Caremark Corp.
5.75%, 08/15/11 (b)		500,000		522,795
McDonald’s Corp.
4.30%, 03/01/13 (b)		300,000		325,298
Nordstrom, Inc.
6.75%, 06/01/14 (b)		108,000		126,539
PACCAR, Inc.
6.38%, 02/15/12 (b)		500,000		537,218
Time Warner, Inc.
3.15%, 07/15/15 (b)		390,000		401,252
Wal-Mart Stores, Inc.
3.20%, 05/15/14		450,000		480,420

				2,393,522


Consumer Non-Cyclical 2.6%
Abbott Laboratories
5.15%, 11/30/12 (b)		750,000		822,858
Anheuser-Busch InBev Worldwide, Inc.
3.00%, 10/15/12 (b)		500,000		516,173
Bottling Group LLC
6.95%, 03/15/14 (b)		500,000		593,402
Clorox Co.
5.00%, 03/01/13 (b)		500,000		546,231
Coca-Cola Enterprises, Inc.
8.50%, 02/01/12		500,000		550,567
General Mills, Inc.
6.00%, 02/15/12 (b)		190,000		203,607
Kraft Foods, Inc.
2.63%, 05/08/13		500,000		516,303
McKesson Corp.
6.50%, 02/15/14 (b)		200,000		229,712
Medco Health Solutions, Inc.
6.13%, 03/15/13 (b)		250,000		277,207
Medtronic, Inc.
3.00%, 03/15/15 (b)		165,000		174,505
Pfizer, Inc.
5.35%, 03/15/15 (b)		500,000		577,053
Procter & Gamble Co.
1.38%, 08/01/12 (b)		250,000		253,266
Reynolds American, Inc.
7.25%, 06/01/13 (b)		400,000		450,348
Safeway, Inc.
6.25%, 03/15/14 (b)		250,000		288,563
Thermo Fisher Scientific, Inc.
2.15%, 12/28/12 (b)		200,000		203,824
Watson Pharmaceuticals, Inc.
5.00%, 08/15/14 (b)		500,000		549,260

				6,752,879


Energy 1.2%
Apache Corp.
6.00%, 09/15/13 (b)		450,000		505,960
Baker Hughes, Inc.
6.50%, 11/15/13 (b)		225,000		258,610
BP Capital Markets PLC
3.13%, 03/10/12		250,000		250,524
5.25%, 11/07/13		200,000		207,727
Chevron Corp.
3.95%, 03/03/14 (b)		100,000		109,185
ConocoPhillips Australia Funding Co.
5.50%, 04/15/13 (b)		500,000		555,188
Husky Energy, Inc.
5.90%, 06/15/14 (b)		100,000		111,752
Occidental Petroleum Corp.
7.00%, 11/01/13 (b)		225,000		265,049
Shell International Finance BV
4.00%, 03/21/14 (b)		500,000		542,404
Statoilhydro A.S.A.
3.88%, 04/15/14 (b)		50,000		54,043
Valero Energy Corp.
6.88%, 04/15/12 (b)		100,000		107,732

				2,968,174


Technology 0.8%
Agilent Technologies, Inc.
2.50%, 07/15/13 (b)		200,000		203,646
Hewlett-Packard Co.
2.95%, 08/15/12 (b)		300,000		311,876
6.13%, 03/01/14 (b)		300,000		347,236
International Business Machines Corp.
6.50%, 10/15/13 (b)		500,000		582,291
Oracle Corp.
3.75%, 07/08/14 (b)		100,000		108,888
Xerox Corp.
5.65%, 05/15/13 (b)		500,000		546,586

				2,100,523


Transportation 0.3%
Burlington Northern Santa Fe Corp.
7.00%, 02/01/14 (b)		200,000		234,432
Canadian National Railway Co.
6.38%, 10/15/11 (b)		400,000		424,923

				659,355

				25,767,268

Utilities 1.6%


Electric 1.2%
Consumers Energy Co.
5.38%, 04/15/13 (b)		500,000		547,065
Dominion Resources, Inc.
5.15%, 07/15/15 (b)		140,000		158,848
Duke Energy Carolinas LLC
5.75%, 11/15/13 (b)		500,000		570,658
National Rural Utilities Cooperative Finance Corp.
2.63%, 09/16/12 (b)		500,000		516,232
Pacific Gas & Electric Co.
6.25%, 12/01/13 (b)		500,000		574,373
Southern California Edison Co.
5.75%, 03/15/14 (b)		600,000		689,308

				3,056,484


Natural Gas 0.4%
Energy Transfer Partners LP
8.50%, 04/15/14 (b)		200,000		236,334
Enterprise Products Operating LLC
9.75%, 01/31/14 (b)		125,000		153,348
Kinder Morgan Energy Partners LP
7.13%, 03/15/12 (b)		250,000		269,401
Plains All American Pipeline LP
3.95%, 09/15/15 (b)		100,000		104,374
TransCanada PipeLines Ltd.
3.40%, 06/01/15 (b)		250,000		264,412

				1,027,869

				4,084,353

Total Corporate Bonds
(Cost $50,043,723)				53,106,284

See financial notes 21

Schwab Short-Term Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

Municipal Bonds 0.2% of net assets

Fixed-Rate Obligations 0.2%
Yale Univ
Medium-Term Notes Series B
2.90%, 10/15/14 (b)		400,000		424,643

Total Municipal Bonds
(Cost $407,172)				424,643



	Number		Value
Security	of Shares		($)

Other Investment Company 0.6% of net assets

Money Fund 0.6%
State Street Institutional Liquid Reserves Fund - Institutional Class		1,673,018		1,673,018

Total Other Investment Company
(Cost $1,673,018)				1,673,018



	Face
Issuer	Amount		Value
Rate, Maturity Date*	($)		($)

Short-Term Investment 0.0% of net assets

U.S. Treasury Obligation 0.0%
US Treasury Bills
0.19%, 01/13/11		100,000		99,947

Total Short-Term Investment
(Cost $99,929)				99,947



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $249,945,591, and the unrealized appreciation and depreciation were $7,888,204 and ($9,886), respectively, with a net unrealized appreciation of $7,878,318.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.
(a)		Variable-rate security.
(b)		Callable security.
(c)		Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $262,506 or 0.1% of net assets.
(d)		This debt is guaranteed under the FDIC Temporary Liquidity Guarantee Program, and the FDIC has stated that this debt is backed by the full faith and credit of the United States.
(e)		Guaranteed by the Republic of Germany.

22 See financial notes

Schwab Short-Term Bond Market Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10			9/1/08 -8/31/09
Net investment income		$4,899,462		$9,142,796
Net realized gains (losses)		6,218,796		(27,720,112	)
Net unrealized gains	+	864,581		14,568,561

Increase (decrease) in net assets from operations		11,982,839		(4,008,755	)

Distributions to shareholders

Distributions from net investment income		$4,899,461		$9,142,674

Transactions in Fund Shares


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares sold			9,736,251		$87,998,380			8,563,229		$76,228,842
Shares reinvested			355,548		3,211,487			742,214		6,621,905
Shares redeemed	+		(11,222,849	)	(101,212,302	)		(17,234,012	)	(154,182,942	)

Net transactions in fund shares			(1,131,050	)	($10,002,435	)		(7,928,569	)	($71,332,195	)

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			29,232,292		$261,165,282			37,160,861		$345,648,906
Total decrease	+		(1,131,050	)	(2,919,057	)		(7,928,569	)	(84,483,624	)

End of period			28,101,242		$258,246,225			29,232,292		$261,165,282


Net investment income not yet distributed / Distribution in excess of net investment income					$—					($1	)

See financial notes 25

Schwab Premier Income Fund

Portfolio Holdings as of August 31, 2010

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


				Cost		Value
Holdings by Category				($)		($)

	36	.0%	Corporate Bonds		157,077,283		165,163,653
	2	.9%	Asset-Backed Obligations		13,632,920		13,204,624
	34	.5%	Mortgage-Backed Securities		155,532,705		158,326,739
	2	.8%	Commercial Mortgage Backed Securities		11,835,214		12,975,644
	23	.9%	U.S. Government and Government Agencies		105,486,818		109,601,222
	0	.3%	Foreign Securities		1,491,672		1,587,522
	0	.4%	Preferred Stock		1,535,625		1,604,531
	1	.0%	Other Investment Company		4,703,291		4,703,291
	0	.1%	Short-Term Investments		349,845		349,887


	101	.9%	Total Investments		451,645,373		467,517,113
	(1	.9)%	Other Assets and Liabilities, Net				(8,801,577	)


	100	.0%	Net Assets				458,715,536


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

Corporate Bonds 36.0% of net assets

Finance 15.8%


Banking 10.0%
Bank of America Corp.
4.50%, 04/01/15		1,500,000		1,556,035
5.63%, 10/14/16 (h)		500,000		533,625
Bank of Tokyo-Mitsubishi UFJ Ltd.
7.40%, 06/15/11		5,000,000		5,213,300
Barclays Bank PLC
6.75%, 05/22/19 (h)		500,000		592,201
Bear Stearns & Co., Inc.
7.25%, 02/01/18 (h)		750,000		910,679
Citigroup, Inc.
5.25%, 02/27/12 (h)		750,000		784,458
8.50%, 05/22/19 (h)		300,000		367,423
5.38%, 08/09/20		1,000,000		1,011,152
CoBank ACB
7.88%, 04/16/18 (c)(h)		1,000,000		1,149,231
Credit Suisse
4.38%, 08/05/20		1,000,000		1,007,576
HSBC Bank PLC
1.05%, 11/12/10, 08/12/13 (a)(c)		3,500,000		3,498,733
4.13%, 08/12/20 (c)		1,000,000		1,017,346
JPMorgan Chase & Co.
6.30%, 04/23/19		500,000		575,583
Merrill Lynch & Co., Inc.
0.70%, 10/25/10, 07/25/11 (a)		1,500,000		1,498,371
Morgan Stanley
2.88%, 11/15/10, 05/14/13 (a)		1,500,000		1,516,462
4.75%, 04/01/14		500,000		515,338
6.00%, 05/13/14		200,000		218,142
6.00%, 04/28/15		500,000		545,731
7.30%, 05/13/19 (b)		500,000		569,234
Rabobank Nederland
11.00%, 06/30/19, 06/29/49 (a)(b)(c)		500,000		656,250
Republic New York Corp.
0.94%, 01/31/11, 01/27/12 (a)(b)		2,500,000		2,485,272
Royal Bank of Scotland Group PLC
6.38%, 02/01/11		2,351,000		2,383,665
Svenska Handelsbanken AB
1.54%, 09/14/10, 09/14/12 (a)(c)		1,250,000		1,255,767
The Goldman Sachs Group, Inc.
3.70%, 08/01/15		800,000		810,778
5.38%, 03/15/20		500,000		517,003
UBS Preferred Funding Trust I
8.62%, 10/01/10, 10/29/49 (a)(b)		7,000,000		7,014,546
US Bank NA
6.30%, 02/04/14		1,000,000		1,146,219
Wachovia Bank NA
4.80%, 11/01/14		500,000		538,917
Wells Fargo & Co.
3.63%, 04/15/15		1,000,000		1,047,617
Westpac Banking Corp.
0.82%, 10/21/10, 10/21/11 (a)(c)		1,000,000		999,752
3.00%, 08/04/15		4,000,000		4,050,084

				45,986,490


Brokerage 0.5%
BlackRock, Inc.
5.00%, 12/10/19 (b)		500,000		552,360
Jefferies Group, Inc.
8.50%, 07/15/19 (b)		500,000		581,004
Nomura Holdings, Inc.
5.00%, 03/04/15		300,000		322,399
6.70%, 03/04/20		900,000		1,029,706

				2,485,469


Finance Company 2.3%
General Electric Capital Corp.
5.72%, 08/22/11 (b)		2,000,000		2,034,556
International Lease Finance Corp.
4.88%, 09/01/10		1,000,000		1,000,000
5.63%, 09/15/10		3,250,000		3,266,250
SLM Corp.
0.74%, 09/15/10, 03/15/11 (a)		4,250,000		4,209,004

				10,509,810


Insurance 2.1%
Coventry Health Care, Inc.
5.88%, 01/15/12 (h)		3,500,000		3,641,841
Highmark, Inc.
6.80%, 08/15/13 (b)(c)		1,000,000		1,091,641
Lincoln National Corp.
6.25%, 02/15/20 (b)		350,000		393,141
MetLife, Inc.
1.67%, 11/08/10, 08/06/13 (a)		1,250,000		1,256,394

See financial notes 27

Schwab Premier Income Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
4.75%, 02/08/21 (b)		250,000		261,940
ZFS Finance USA Trust I
6.15%, 12/15/10, 12/15/65 (a)(b)(c)(h)		2,000,000		1,950,000
ZFS Finance USA Trust III
1.69%, 09/15/10, 12/15/65 (a)(b)(c)		1,000,000		941,250

				9,536,207


Real Estate Investment Trust 0.9%
Digital Realty Trust LP
5.88%, 02/01/20 (b)(c)(h)		1,000,000		1,061,975
Kimco Realty Corp.
4.30%, 02/01/18 (b)(g)		750,000		746,662
Senior Housing Properties Trust
6.75%, 04/15/20 (b)		1,500,000		1,558,125
Ventas Realty LP
6.50%, 06/01/16 (b)		500,000		515,950

				3,882,712

				72,400,688

Industrial 17.4%


Basic Industry 1.2%
Airgas, Inc.
7.13%, 10/01/18 (b)(c)(h)		1,000,000		1,103,750
Alcoa, Inc.
6.75%, 07/15/18 (b)		1,000,000		1,077,504
Rio Tinto Finance (USA) Ltd.
9.00%, 05/01/19 (b)(h)		1,000,000		1,368,704
The Dow Chemical Co.
7.60%, 05/15/14 (b)(h)		500,000		583,284
8.55%, 05/15/19 (b)(h)		1,000,000		1,255,505

				5,388,747


Capital Goods 1.4%
Allied Waste North America, Inc.
6.88%, 06/01/17 (b)		1,000,000		1,105,254
BAE Asset Systems 2001 Asset Trust
6.66%, 09/15/13 (c)		1,205,654		1,302,107
Ball Corp.
7.13%, 09/01/16 (b)		250,000		269,375
Bombardier Inc.
8.00%, 11/15/14 (b)(c)(h)		2,000,000		2,100,000
John Deere Capital Corp.
2.95%, 03/09/15		500,000		527,369
L-3 Communications Corp.
4.75%, 07/15/20 (b)		850,000		897,678
Tyco International Finance S.A.
8.50%, 01/15/19 (b)		100,000		133,800

				6,335,583


Communications 5.0%
AT&T, Inc.
6.70%, 11/15/13 (b)(h)		400,000		463,622
2.50%, 08/15/15 (b)		250,000		252,958
British Sky Broadcasting Group PLC
9.50%, 11/15/18 (b)(c)(h)		500,000		692,542
CBS Corp.
8.20%, 05/15/14 (b)(h)		500,000		597,438
5.75%, 04/15/20 (b)		500,000		556,373
DIRECTV Holdings LLC
6.38%, 06/15/15 (b)		1,250,000		1,300,000
NBC Universal, Inc.
5.15%, 04/30/20 (b)(c)		1,000,000		1,078,440
News America Holdings, Inc.
9.25%, 02/01/13 (h)		500,000		586,189
News America, Inc.
7.25%, 05/18/18		650,000		801,739
Qwest Corp.
3.79%, 09/15/10, 06/15/13 (a)		3,000,000		3,090,000
8.38%, 05/01/16 (b)		500,000		585,000
Sprint Capital Corp.
7.63%, 01/30/11 (b)		4,850,000		4,947,000
Telecom Italia Capital S.A.
1.13%, 10/18/10, 07/18/11 (a)(b)		1,000,000		992,331
6.20%, 07/18/11 (b)		4,350,000		4,516,866
Telefonica Emisiones, S.A.U.
6.42%, 06/20/16 (b)		1,000,000		1,153,927
Time Warner Entertainment Co. LP
10.15%, 05/01/12		480,000		546,732
Verizon Communications, Inc.
8.75%, 11/01/18 (b)		500,000		674,997

				22,836,154


Consumer Cyclical 2.8%
CVS Caremark Corp.
5.88%, 01/10/28 (b)		1,767,648		1,851,509
DR Horton, Inc.
7.88%, 08/15/11		1,000,000		1,040,000
Expedia, Inc.
5.95%, 08/15/20 (b)(c)		250,000		256,563
Ford Motor Credit Co. LLC
9.75%, 09/15/10		2,000,000		2,003,404
Historic TW, Inc.
6.88%, 06/15/18		350,000		424,426
Host Hotels & Resorts LP
7.13%, 11/01/13 (b)		690,000		703,800
International Game Technology
5.50%, 06/15/20 (b)		500,000		532,856
PACCAR, Inc.
6.88%, 02/15/14 (b)		200,000		234,286
Royal Caribbean Cruises Ltd.
8.75%, 02/02/11		3,750,000		3,843,750
Time Warner, Inc.
4.70%, 01/15/21 (b)		1,000,000		1,051,594
Viacom, Inc.
6.25%, 04/30/16 (b)		1,000,000		1,167,025

				13,109,213


Consumer Non-Cyclical 4.8%
Anheuser-Busch InBev Worldwide, Inc.
1.27%, 09/26/10, 03/26/13 (a)		7,750,000		7,761,679
DaVita, Inc.
7.25%, 03/15/15 (b)		1,000,000		1,038,750
Fresenius Medical Care Capital Trust IV
7.88%, 06/15/11		1,000,000		1,035,000
Medco Health Solutions, Inc.
6.13%, 03/15/13 (b)(h)		500,000		554,414
Newell Rubbermaid, Inc.
4.70%, 08/15/20 (b)		750,000		787,485
PepsiCo, Inc.
7.90%, 11/01/18 (b)		500,000		669,831
Reynolds American, Inc.
1.24%, 09/15/10, 06/15/11 (a)(b)		3,000,000		3,005,649
7.63%, 06/01/16 (b)		2,200,000		2,584,439
Stater Brothers Holdings
8.13%, 06/15/12 (b)		3,000,000		3,022,500
Teva Pharmaceutical Finance III LLC
0.94%, 09/19/10, 12/19/11 (a)		1,000,000		1,003,844

28 See financial notes

Schwab Premier Income Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
Watson Pharmaceuticals, Inc.
6.13%, 08/15/19 (b)		500,000		588,526

				22,052,117


Energy 0.9%
Anadarko Petroleum Corp.
6.38%, 09/15/17 (b)		500,000		495,441
Apache Corp.
6.90%, 09/15/18 (b)(h)		100,000		125,583
Baker Hughes, Inc.
6.50%, 11/15/13 (b)(h)		100,000		114,938
7.50%, 11/15/18 (b)(h)		100,000		128,169
ConocoPhillips
4.60%, 01/15/15 (b)		1,500,000		1,684,653
Husky Energy, Inc.
7.25%, 12/15/19 (b)		250,000		308,878
Statoil ASA
3.13%, 08/17/17 (b)		1,000,000		1,033,652
Weatherford International Ltd.
9.63%, 03/01/19 (b)		250,000		328,518

				4,219,832


Technology 0.6%
Oracle Corp.
3.88%, 07/15/20 (b)(c)		1,000,000		1,064,984
Seagate HDD Cayman
6.88%, 05/01/20 (b)(c)		1,000,000		985,000
Seagate Technology International
10.00%, 05/01/14 (b)(c)		500,000		586,250

				2,636,234


Transportation 0.7%
Burlington Northern Santa Fe Corp.
7.00%, 02/01/14 (b)(h)		100,000		117,216
Delta Air Lines, Inc.
7.57%, 11/18/10 (b)		2,750,000		2,777,500
Union Pacific Corp.
5.75%, 11/15/17 (b)		200,000		233,544

				3,128,260

				79,706,140

Utilities 2.8%


Electric 0.7%
Dominion Resources, Inc.
4.75%, 12/15/10 (b)		425,000		430,074
Nevada Power Co.
6.50%, 04/15/12 (b)(h)		1,000,000		1,080,216
7.13%, 03/15/19 (b)		500,000		617,968
Nisource Finance Corp.
10.75%, 03/15/16 (b)		400,000		524,674
Pacific Gas & Electric Co.
8.25%, 10/15/18 (b)		500,000		660,945

				3,313,877


Natural Gas 2.1%
CenterPoint Energy Resources Corp.
6.00%, 05/15/18 (b)(h)		708,000		795,808
Energy Transfer Partners LP
8.50%, 04/15/14 (b)(h)		500,000		590,834
Enterprise Products Operating LLC
9.75%, 01/31/14 (b)(h)		100,000		122,678
8.38%, 08/01/16, 08/01/66 (a)(b)		500,000		515,596
Ferrellgas Partners LP
9.13%, 10/01/17 (b)		1,000,000		1,075,000
Kinder Morgan Energy Partners LP
5.63%, 02/15/15 (b)(h)		300,000		335,156
Kinder Morgan Finance
5.35%, 01/05/11 (b)		4,500,000		4,578,750
Plains All American Pipeline LP
3.95%, 09/15/15 (b)		1,150,000		1,200,302
TransCanada PipeLines Ltd.
3.40%, 06/01/15 (b)		500,000		528,824

				9,742,948

				13,056,825

Total Corporate Bonds
(Cost $157,077,283)				165,163,653




Asset-Backed Obligations 2.9% of net assets


ACE Securities Corp.
Series 2003-HS1 Class M3
4.01%, 09/27/10, 06/25/33 (a)(b)(h)		1,500,000		984,030
Aegis Asset Backed Securities Trust
Series 2006-1 Class A1
0.34%, 09/27/10, 01/25/37 (a)(b)(h)		10,034		10,018
Ameriquest Mortgage Securities, Inc.
Series 2003-11 Class M5
3.51%, 09/27/10, 01/25/34 (a)(b)(h)		107,941		16,152
Amortizing Residential Collateral Trust
Series 2002-BC7 Class M1
1.06%, 09/27/10, 10/25/32 (a)(b)(h)		458,868		318,918
Asset Backed Funding Certificates
Series 2005-HE1 Class M2
0.70%, 09/27/10, 03/25/35 (a)(b)(h)		400,000		183,725
Bear Stearns Asset Backed Securities
Series 2005-HE3 Class M1
0.69%, 09/27/10, 03/25/35 (a)(b)(h)		29,963		29,749
Citigroup Mortgage Loan Trust, Inc.
Series 2004-OPTI Class M5
1.31%, 09/27/10, 10/25/34 (a)(b)		1,559,043		908,354
Series 2004-OPTI Class M6
1.34%, 09/27/10, 10/25/34 (a)(b)(h)		1,566,337		435,062
Countrywide Loan
Series 2002-3 Class M2
2.29%, 09/27/10, 01/25/32 (a)(b)(h)		175,593		74,035
First Franklin Mortgage Loan
Series 2002-FF1 Class M1
1.31%, 09/27/10, 04/25/32 (a)(b)(h)		1,051,045		481,340
Long Beach Mortgage Loan Trust
Series 2004-1 Class M6
2.36%, 09/27/10, 02/25/34 (a)(b)(h)		545,410		259,298
Series 2004-2 Class M2
1.34%, 09/27/10, 06/25/34 (a)(b)		770,584		549,702
Morgan Stanley ABS Capital I
Series 2004-NC8 Class M4
1.26%, 09/27/10, 09/25/34 (a)(b)		279,956		148,854
Morgan Stanley Dean Witter Capital I
Series 2002-AM3 Class M2
3.26%, 09/27/10, 02/25/33 (a)(b)(h)		893,198		409,148
Option One Mortgage Loan Trust
Series 2002-1 Class M1
1.39%, 09/27/10, 02/25/32 (a)(b)(h)		106,502		63,509
Series 2002-4 Class M2
1.96%, 09/27/10, 07/25/32 (a)(b)(h)		305,728		266,255
Series 2003-2 Class M1
1.24%, 09/27/10, 04/25/33 (a)(b)(h)		1,240,242		548,032

See financial notes 29

Schwab Premier Income Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
Series 2005-1 Class M2
0.80%, 09/27/10, 02/25/35 (a)(b)		1,273,105		375,639
Park Place Securities, Inc.
Series 2004-WCW1 Class M1
0.89%, 09/27/10, 09/25/34 (a)(b)(h)		1,973,367		1,947,073
Series 2004-MHQ1 Class M1
0.96%, 09/27/10, 12/25/34 (a)(b)(h)		893,307		875,476
Series 2005-WLL1 Class M1
0.68%, 09/27/10, 03/25/35 (a)(b)(h)		2,000,000		1,937,972
Structured Asset Securities Corp.
Series 1998-2 Class M1
1.36%, 09/27/10, 02/25/28 (a)(b)(h)		941,543		906,651
Series 2005-2XS Class 1A5A
4.72%, 09/01/10, 02/25/35 (a)(b)(h)		1,688,407		1,475,632

Total Asset-Backed Obligations
(Cost $13,632,920)				13,204,624




Mortgage-Backed Securities 34.5% of net assets

Collateralized Mortgage Obligations 5.7%
ABN Amro Mortgage Corp.
Series 2003-2 Class 2A1
0.76%, 09/01/10, 03/25/18 (a)(b)(h)		2,503,674		2,411,089
Series 2003-9 Class A1
4.50%, 08/25/18 (b)		190,969		196,844
Banc of America Alternative Loan Trust
Series 2005-2 Class CB
5.50%, 03/25/35 (b)(e)(h)		5,762,660		834,719
Series 2005-5 Class CB
5.50%, 06/25/35 (b)(e)(h)		3,103,148		438,981
Banc of America Mortgage Securities, Inc.
Series 2004-4 Class 2A1
5.50%, 05/25/34 (b)(h)		687,870		701,097
Chase Mortgage Finance Corp.
Series 2003-S13 Class A16
5.00%, 11/25/33 (b)(h)		1,991,753		2,069,011
Countrywide Alternative Loan Trust
Series 2004-29CB Class A6
4.00%, 01/25/35 (b)(h)		73,271		72,367
CS First Boston Mortgage Securities Corp.
Series 2003-23 Class 7A1
5.00%, 09/25/18 (b)(h)		2,628,961		2,689,796
Series 2004-7 Class 6A1
5.25%, 10/25/19 (b)(h)		2,612,558		2,680,168
Series 2004-1 Class 1A1
5.75%, 02/25/34 (b)		615,466		616,812
GSAA Home Equity Trust
Series 2004-NC1 Class AF6
4.76%, 09/01/10, 11/25/33 (a)(b)(h)		1,601,455		1,563,245
Impac CMB Trust
Series 2004-5 Class 1A1
0.98%, 09/27/10, 10/25/34 (a)(b)(h)		437,692		369,014
MASTR Asset Securitization Trust
Series 2003-6 Class 9A1
4.25%, 07/25/33 (b)(h)		117,358		116,130
Series 2003-10 Class 3A1
5.50%, 11/25/33 (b)		1,197,549		1,227,244
Series 2003-11 Class 6A8
0.76%, 09/25/10, 12/25/33 (a)(b)		1,093,958		1,003,588
Residential Accredit Loans, Inc.
Series 2002-QS18 Class M1
5.50%, 12/25/17 (b)		172,253		133,340
Series 2003-QS1 Class A2
5.75%, 01/25/33 (b)		474,704		478,918
Residential Asset Securitization Trust
Series 2003-A1 Class A1
4.25%, 03/25/33 (b)		1,312,060		1,347,743
Structured Asset Securities Corp.
Series 2004-3 Class 3A1
5.50%, 03/25/19 (b)		297,905		301,238
Series 2005-6 Class 4A1
5.00%, 05/25/35 (b)		1,588,648		1,566,460
WAMU Mortgage Pass-Through Certificates
Series 2003-S10 Class A5
5.00%, 10/25/18 (b)		389,856		391,274
Series 2003-S9 Class A6
5.25%, 10/25/33 (b)		3,000,000		3,060,873
Series 2004-S3 Class 1A1
5.00%, 07/25/34 (b)		2,114,264		2,136,769

				26,406,720

U.S. Government Agency Mortgages 28.8%
Fannie Mae
4.86%, 11/01/12		373,920		392,346
6.00%, 02/01/15 to 11/01/34		8,286,863		9,028,333
9.75%, 07/01/16		3,185		3,515
7.00%, 11/15/16 to 01/01/35		827,176		935,024
4.50%, 08/01/18 to 09/01/19		807,393		851,359
6.50%, 12/01/19 to 08/01/26		768,168		837,128
4.50%, 11/01/20 (e)(h)		7,538,023		641,195
6.50%, 07/01/21 (h)		64,818		72,088
5.50%, 10/01/22 to 05/01/27		5,464,363		5,896,599
5.00%, 08/01/23 to 07/01/35		11,439,380		12,274,934
6.00%, 07/01/37 (h)		8,690,337		9,374,413
Fannie Mae TBA
4.50%, 09/01/40		1,500,000		1,575,468
5.00%, 09/01/40		1,000,000		1,062,032
5.50%, 09/01/40		500,000		534,687
6.00%, 09/01/40		500,000		538,359
Freddie Mac
3.50%, 05/01/11 (h)		22,286		22,565
4.50%, 01/01/13 to 06/01/19		201,166		213,762
4.50%, 07/01/13 to 09/01/15 (h)		22,851		23,600
6.50%, 10/01/13 to 04/01/26		910,611		1,004,739
6.50%, 03/01/16 (h)		471,499		509,264
5.00%, 05/15/16 to 12/15/23 (b)		71,014		71,448
6.00%, 06/01/16 to 08/01/22		715,035		786,313
5.50%, 02/01/23 to 10/01/33		19,107,613		20,626,449
5.00%, 01/01/24		1,648,445		1,755,370
5.50%, 05/15/26 (b)		30,797		31,071
Freddie Mac TBA
6.00%, 09/01/40		4,000,000		4,299,376
Ginnie Mae
7.63%, 08/15/28		180,969		209,147
7.38%, 09/15/28 to 02/15/30		465,944		532,528
7.13%, 02/15/29 to 03/15/29		292,347		331,917
7.00%, 04/15/29 to 05/15/29		375,851		430,098
7.25%, 04/15/29		92,137		105,010
5.50%, 02/15/33 to 08/20/34		21,336,566		23,228,995
5.00%, 02/20/33 to 11/15/34		29,681,803		32,121,824
Ginnie Mae TBA
4.50%, 09/01/40		1,000,000		1,061,719

30 See financial notes

Schwab Premier Income Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
5.00%, 09/01/40		500,000		537,344

				131,920,019

Total Mortgage-Backed Securities
(Cost $155,532,705)				158,326,739




Commercial Mortgage Backed Securities 2.8% of net assets


Banc of America Commercial Mortgage, Inc.
Series 2006-1 Class A2
5.33%, 09/01/10, 09/10/45 (a)(b)		605,000		611,217
Bear Stearns Commercial Mortgage Securities
Series 2005-PW10 Class A4
5.41%, 09/01/10, 12/11/40 (a)(b)(h)		3,230,000		3,520,438
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1 Class A3
5.40%, 09/01/10, 07/15/44 (a)(b)(h)		2,905,000		3,139,341
Greenwich Capital Commercial Funding Corp.
Series 2007-GG9 Class A4
5.44%, 03/10/39 (b)		2,050,000		2,151,047
JP Morgan Chase Commercial Mortgage Securities Corp.
Series 2003-ML1A Class A1
3.97%, 03/12/39 (b)		127,325		130,820
Series 2005-LDP5 Class A2
5.20%, 12/15/44 (b)(h)		1,875,000		1,945,808
Series 2006-LDP9 Class A2S
5.30%, 05/15/47 (b)		94,000		96,794
Series 2007-LD12 Class A2
5.83%, 02/15/51 (b)		550,000		576,313
LB-UBS Commercial Mortgage Trust
Series 2006-C3 Class A3
5.69%, 09/11/10, 03/15/32 (a)(b)(h)		760,000		803,866

Total Commercial Mortgage Backed Securities
(Cost $11,835,214)				12,975,644




U.S. Government and Government Agencies 23.9% of net assets

U.S. Government Agency Guaranteed 0.9%
Bank of America Corp., (FDIC Insured)
2.10%, 04/30/12 (f)(h)		4,000,000		4,101,216

U.S. Government Agency Securities 4.9%
Fannie Mae
1.50%, 09/25/12 (b)		5,000,000		5,027,265
2.63%, 11/20/14		1,000,000		1,057,633
5.38%, 06/12/17		3,000,000		3,602,307
Federal Farm Credit Bank
1.38%, 06/25/13		3,000,000		3,048,993
3.00%, 09/22/14		1,000,000		1,068,015
Federal Home Loan Bank
5.00%, 11/17/17		3,000,000		3,554,853
Freddie Mac
2.20%, 12/17/13 (b)		5,000,000		5,003,790

				22,362,856

U.S. Treasury Obligations 18.1%
U.S. Treasury Notes
1.38%, 02/15/13		4,000,000		4,075,624
1.75%, 04/15/13		2,000,000		2,058,434
1.00%, 07/15/13		5,000,000		5,044,135
2.75%, 10/31/13		3,900,000		4,143,446
2.63%, 07/31/14		4,000,000		4,249,064
2.38%, 09/30/14		1,850,000		1,946,692
2.38%, 10/31/14		4,000,000		4,207,500
1.75%, 07/31/15		2,750,000		2,808,014
3.25%, 07/31/16		6,500,000		7,089,570
3.25%, 12/31/16		15,000,000		16,316,025
2.38%, 07/31/17		15,300,000		15,770,949
3.63%, 02/15/20		2,275,000		2,504,099
3.50%, 05/15/20		10,000,000		10,897,660
2.63%, 08/15/20		2,000,000		2,025,938

				83,137,150

Total U.S. Government and Government Agencies
(Cost $105,486,818)				109,601,222




Foreign Securities 0.3% of net assets

Foreign Agencies 0.2%


Mexico 0.2%
Petroleos Mexicanos
4.88%, 03/15/15 (b)		500,000		531,250
5.50%, 01/21/21 (b)(c)		500,000		524,424

				1,055,674

Foreign Local Government 0.1%


Canada 0.1%
Province of British Columbia Canada
2.85%, 06/15/15		500,000		531,848

Total Foreign Securities
(Cost $1,491,672)				1,587,522



	Number		Value
Security	of Shares		($)

Preferred Stock 0.4% of net assets


HJ Heinz Finance Co. (c)		15		1,604,531

Total Preferred Stock
(Cost $1,535,625)				1,604,531




Other Investment Company 1.0% of net assets

Money Fund 1.0%
State Street Institutional Liquid Reserves Fund - Institutional Class		4,703,291		4,703,291

Total Other Investment Company
(Cost $4,703,291)				4,703,291

See financial notes 31

Schwab Premier Income Fund

Portfolio Holdings continued


	Face
Issuer	Amount		Value
Rate, Maturity Date*	($)		($)

Short-Term Investments 0.1% of net assets

U.S. Treasury Obligations 0.1%
U.S. Treasury Bills
0.15%, 09/02/10 (d)		100,000		100,000
0.18%, 12/23/10 (d)		150,000		149,935
0.21%, 12/30/10 (d)		100,000		99,952

Total Short-Term Investments
(Cost $349,845)				349,887



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $451,681,166 and the unrealized appreciation and depreciation were $19,024,750 and ($3,188,803), respectively, with a net unrealized appreciation of $15,835,947.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.
(a)		Variable-rate security.
(b)		Callable security.
(c)		Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $24,920,536 or 5.4% of net assets.
(d)		All or a portion of this security is held as collateral for futures contracts.
(e)		Security represents right to receive monthly interest payments on an underlying pool of mortgages or assets. Principal shown is the outstanding par amount of the pool held as of the end of the period.
(f)		This debt is guaranteed under the FDIC Temporary Liquidity Guarantee Program, and the FDIC has stated that this debt is backed by the full faith and credit of the United States.
(g)		Delayed-delivery security.
(h)		All or a portion of this security is held as collateral for delayed-delivery securities.

In addition to the above, the fund held the following at 08/31/10.

Contract

Unrealized

Number of

Value

Gains

Contracts

($)

Futures Contract

5 Years, Long, U.S. Treasury Note, expires 12/31/10

190

22,860,859

144,901

32 See financial notes

Schwab Premier Income Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10			9/1/08 -8/31/09
Net investment income		$17,397,189		$15,837,880
Net realized gains (losses)		10,608,966		(8,374,461	)
Net unrealized gains	+	10,492,456		7,099,893

Increase in net assets from operations		38,498,611		14,563,312

Distributions to shareholders¹

Distribution from net investment income
Investor Shares		—		3,563,204
Select Shares		—		8,223,869
Institutional Shares	+	18,843,689		3,966,540

Total distributions from net investment income		$18,843,689		$15,753,613

Transactions in Fund Shares¹


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares Sold
Investor Shares			—		$—			1,475,907		$13,935,674
Select Shares			—		—			2,665,497		25,307,297
Institutional Shares	+		25,684,971		260,256,067			23,045,950		224,336,072

Total shares sold			25,684,971		$260,256,067			27,187,354		$263,579,043


Shares Reinvested
Investor Shares			—		$—			244,028		$2,308,327
Select Shares			—		—			523,855		4,954,124
Institutional Shares	+		923,928		9,385,591			161,286		1,551,611

Total shares reinvested			923,928		$9,385,591			929,169		$8,814,062


Shares Redeemed
Investor Shares			—		$—			(7,598,542	)	($73,698,815	)
Select Shares			—		—			(17,312,078	)	(167,782,615	)
Institutional Shares	+		(8,996,159	)	(91,344,205	)		(1,524,111	)	(14,560,234	)

Total shares redeemed			(8,996,159	)	($91,344,205	)		(26,434,731	)	($256,041,664	)

Net transactions in fund shares			17,612,740		$178,297,453			1,681,792		$16,351,441

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			26,367,939		$260,763,161			24,686,147		$245,602,021
Total increase	+		17,612,740		197,952,375			1,681,792		15,161,140

End of period			43,980,679		$458,715,536			26,367,939		$260,763,161


Net investment income not yet distributed					$—					$238,629


¹		Effective August 10, 2009, all outstanding Investor Shares (5,867,514 shares valued at $57,276,916) and Select Shares (12,951,452 shares valued at $126,408,759) were converted into Institutional Shares.

See financial notes 35

Schwab Total Bond Market Fund™

Financial Statements

Financial Highlights


	9/1/09–			9/1/08–			9/1/07–			9/1/06–			9/1/05–
	8/31/10			8/31/09			8/31/08			8/31/07			8/31/06


Per-Share Data ($)

Net asset value at beginning of period		8.96			9.16			9.72			9.76			10.10

Income (loss) from investment operations:
Net investment income (loss)		0.29			0.37			0.48			0.51			0.47
Net realized and unrealized gains (losses)		0.48			(0.20	)		(0.56	)		(0.04	)		(0.31	)

Total from investment operations		0.77			0.17			(0.08	)		0.47			0.16
Less distributions:
Distributions from net investment income		(0.31	)		(0.37	)		(0.48	)		(0.51	)		(0.47	)
Distributions from net realized gains		—			—			—			—			(0.03	)

Total distributions		(0.31	)		(0.37	)		(0.48	)		(0.51	)		(0.50	)

Net asset value at end of period		9.42			8.96			9.16			9.72			9.76

Total return (%)		8.76			2.04			(0.91	)		4.90			1.66

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.55			0.55			0.52			0.53			0.53
Gross operating expenses		0.58	¹		0.63			0.52			0.53			0.53
Net investment income (loss)		3.21			4.18			5.03			5.16			4.68
Portfolio turnover rate		155			472			433			311			221
Net assets, end of period ($ x 1,000,000)		929			912			1,260			1,534			1,233

¹ The ratio of gross operating expenses would have been 0.55%, if certain non-routine expenses (litigation fees) had not been incurred.

36 See financial notes

Schwab Total Bond Market Fund

Portfolio Holdings as of August 31, 2010

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


				Cost		Value
Holdings by Category				($)		($)

	33	.9%	Mortgage-Backed Securities		300,106,698		315,036,242
	18	.3%	Corporate Bonds		153,291,282		169,681,418
	39	.6%	U.S. Government and Government Agencies		347,981,183		367,797,416
	3	.1%	Commercial Mortgage Backed Securities		25,897,208		29,027,211
	0	.3%	Asset-Backed Obligations		2,656,433		2,823,048
	3	.8%	Foreign Securities		33,507,175		35,601,558
	0	.7%	Municipal Bonds		5,980,039		6,340,584
	2	.1%	Other Investment Company		19,951,931		19,951,931
	0	.0%	Short-Term Investments		199,966		199,973


	101	.8%	Total Investments		889,571,915		946,459,381
	(1	.8)%	Other Assets and Liabilities, Net				(17,012,745	)


	100	.0%	Net Assets				929,446,636


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

Mortgage-Backed Securities 33.9% of net assets

U.S. Government Agency Mortgages 33.9%
Fannie Mae
5.50%, 12/01/13 to 03/01/35 (f)		21,121,080		22,854,071
5.00%, 12/01/17 to 12/01/39		29,702,847		31,673,892
4.50%, 04/01/18 to 12/01/39		34,948,304		36,883,934
4.00%, 07/01/18 (f)		1,512,869		1,614,654
4.00%, 06/01/19 to 04/01/39		16,321,732		17,023,020
5.00%, 07/01/23 to 06/01/36 (f)		9,933,965		10,650,842
5.50%, 07/01/23 to 09/01/38		25,793,701		27,686,565
6.00%, 09/01/24 to 12/01/37		21,931,440		23,712,490
6.50%, 08/01/26 to 11/01/37		5,456,060		5,967,171
6.50%, 02/01/32 to 11/01/37 (f)		3,197,753		3,541,348
2.05%, 09/01/10, 03/01/34 (a)		1,381,005		1,431,727
2.39%, 09/01/10, 03/01/35 (a)		1,284,332		1,322,576
3.63%, 09/01/10, 08/01/35 (a)(f)		3,439,503		3,494,399
7.00%, 04/01/37		2,183,582		2,431,613
Fannie Mae TBA
4.50%, 09/01/25 to 09/01/40		5,000,000		5,255,467
4.00%, 09/01/40		500,000		517,891
5.00%, 09/01/40		3,000,000		3,186,096
5.50%, 09/01/40		1,000,000		1,069,375
Freddie Mac
6.00%, 04/01/15 to 12/01/32 (f)		3,247,665		3,542,153
4.50%, 05/01/19 to 02/01/40		17,978,566		18,997,937
5.00%, 06/01/23 to 04/01/40		12,904,773		13,765,331
4.00%, 07/01/24 to 08/01/29		4,616,906		4,854,291
6.00%, 05/01/32 to 10/01/38		4,008,089		4,362,216
5.53%, 09/01/10, 05/01/37 (a)		881,777		935,553
5.53%, 09/01/10, 11/01/37 (a)		3,217,673		3,406,129
5.50%, 10/01/38 to 10/01/39		1,918,631		2,050,253
Freddie Mac TBA
4.50%, 09/01/40		1,000,000		1,049,062
5.00%, 09/01/40		500,000		530,625
6.00%, 09/01/40		1,000,000		1,074,844
Ginnie Mae
5.00%, 10/20/21 to 04/20/40		15,217,997		16,427,709
4.50%, 05/15/24 to 02/20/40		14,435,948		15,366,693
7.50%, 03/15/32 (f)		456,176		541,528
6.00%, 05/15/32 to 08/15/38		4,715,506		5,154,716
5.50%, 04/15/33 to 11/15/38		9,004,668		9,771,807
7.00%, 06/15/33 (f)		437,547		504,332
6.50%, 10/20/37 to 08/15/39		2,140,290		2,353,194
4.00%, 06/20/39 to 07/20/39		1,391,091		1,451,282
Ginnie Mae TBA
4.50%, 09/01/40		3,000,000		3,185,157
5.00%, 09/01/40		3,500,000		3,761,408
6.00%, 09/01/40		1,500,000		1,632,891

Total Mortgage-Backed Securities
(Cost $300,106,698)				315,036,242




Corporate Bonds 18.3% of net assets

Finance 6.5%


Banking 4.3%
American Express Bank
7.00%, 03/19/18		250,000		299,589
American Express Bank FSB
5.50%, 04/16/13		750,000		816,082
Bank of America Corp.
4.50%, 03/15/15		200,000		207,471
5.63%, 10/14/16		1,100,000		1,173,974
6.00%, 10/15/36		1,200,000		1,223,041
Barclays Bank PLC
5.00%, 09/22/16		1,000,000		1,086,542
BB&T Capital Trust IV
6.82%, 06/12/37, 06/12/77 (a)(b)		700,000		681,625
Bear Stearns & Co., Inc.
5.70%, 11/15/14		500,000		563,458
7.25%, 02/01/18		1,250,000		1,517,797
Citigroup, Inc.
6.38%, 08/12/14		1,750,000		1,916,483
6.00%, 08/15/17		2,000,000		2,146,520
8.50%, 05/22/19		200,000		244,948
Countrywide Financial Corp.
6.25%, 05/15/16		1,000,000		1,073,464
Credit Suisse USA, Inc.
5.50%, 05/01/14		1,500,000		1,661,752
5.30%, 08/13/19		750,000		825,564
Deutsche Bank AG
3.88%, 08/18/14		1,000,000		1,066,481
Goldman Sachs Capital II
5.79%, 06/01/12, 12/29/49 (a)(b)		1,500,000		1,213,125

See financial notes 37

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
HSBC Bank USA
5.88%, 11/01/34		1,000,000		1,071,350
JPMorgan Chase & Co.
5.38%, 10/01/12		1,000,000		1,081,254
6.00%, 01/15/18		350,000		398,052
4.95%, 03/25/20		1,000,000		1,058,480
6.40%, 05/15/38		250,000		303,660
Merrill Lynch & Co., Inc.
5.45%, 02/05/13		2,000,000		2,136,024
Morgan Stanley
4.75%, 04/01/14		1,200,000		1,236,811
6.00%, 05/13/14		300,000		327,214
6.00%, 04/28/15		750,000		818,596
5.45%, 01/09/17 (b)		750,000		788,530
7.30%, 05/13/19 (b)		500,000		569,234
7.25%, 04/01/32 (b)		100,000		119,450
PNC Funding Corp.
4.25%, 09/21/15		600,000		641,630
Royal Bank of Canada
2.63%, 12/15/15		650,000		670,394
Royal Bank of Scotland Group PLC
5.05%, 01/08/15		1,000,000		982,131
The Bank of New York Mellon Corp.
2.95%, 06/18/15		500,000		523,676
The Goldman Sachs Group, Inc.
3.70%, 08/01/15		1,000,000		1,013,473
5.63%, 01/15/17		250,000		262,365
5.95%, 01/15/27 (b)		750,000		748,771
6.75%, 10/01/37 (b)		750,000		768,367
UBS AG
3.88%, 01/15/15		500,000		517,171
US Bancorp
2.00%, 06/14/13		500,000		512,150
US Bank NA
6.30%, 02/04/14		500,000		573,110
Wachovia Bank NA
4.88%, 02/01/15		500,000		538,297
Wells Fargo & Co.
4.38%, 01/31/13		1,000,000		1,067,108
5.63%, 12/11/17		1,500,000		1,696,531
Wells Fargo Capital X
5.95%, 12/15/36 (b)		450,000		435,870
Westpac Banking Corp.
2.10%, 08/02/13		500,000		506,201
4.20%, 02/27/15		1,000,000		1,070,095

				40,153,911


Brokerage 0.1%
BlackRock, Inc.
5.00%, 12/10/19 (b)		250,000		276,180
Jefferies Group, Inc.
5.50%, 03/15/16 (b)		250,000		265,411
Nomura Holdings, Inc.
5.00%, 03/04/15		100,000		107,466
6.70%, 03/04/20		100,000		114,412
TD Ameritrade Holding Co.
4.15%, 12/01/14 (b)		400,000		422,273

				1,185,742


Finance Company 0.8%
CME Group, Inc.
5.40%, 08/01/13 (b)		350,000		391,086
General Electric Capital Corp.
3.50%, 08/13/12		1,500,000		1,559,629
5.00%, 01/08/16		2,000,000		2,186,578
5.40%, 02/15/17		500,000		546,789
6.75%, 03/15/32 (b)		500,000		566,989
6.88%, 01/10/39		200,000		234,886
HSBC Finance Capital Trust IX
5.91%, 11/30/15, 11/30/35 (a)(b)		500,000		456,875
HSBC Finance Corp.
7.00%, 05/15/12		500,000		540,110
4.75%, 07/15/13		500,000		529,715

				7,012,657


Insurance 1.0%
Aetna, Inc.
3.95%, 09/01/20 (b)		750,000		743,561
Allstate Life Global Funding Trusts
5.38%, 04/30/13 (f)		700,000		773,240
American International Group, Inc.
5.60%, 10/18/16		1,000,000		976,250
Berkshire Hathaway, Inc.
3.20%, 02/11/15 (b)		1,600,000		1,691,151
Chubb Corp.
6.00%, 05/11/37 (b)		495,000		574,328
CIGNA Corp.
6.35%, 03/15/18 (b)		400,000		469,317
CNA Financial Corp.
7.35%, 11/15/19 (b)		700,000		781,748
Lincoln National Corp.
6.25%, 02/15/20 (b)		150,000		168,489
MetLife, Inc.
4.75%, 02/08/21 (b)		500,000		523,880
Protective Life Corp.
7.38%, 10/15/19 (b)		500,000		570,474
Prudential Financial, Inc.
4.75%, 09/17/15		1,000,000		1,073,883
6.63%, 12/01/37		150,000		172,382
Travelers Co., Inc.
5.90%, 06/02/19 (b)		400,000		463,198
UnitedHealth Group, Inc.
5.80%, 03/15/36 (b)		250,000		267,925

				9,249,826


Real Estate Investment Trust 0.3%
Duke Realty LP
5.95%, 02/15/17 (b)		500,000		536,706
HCP, Inc.
6.70%, 01/30/18 (b)		500,000		550,214
Kimco Realty Corp.
4.30%, 02/01/18 (b)(e)		250,000		248,887
ProLogis
5.75%, 04/01/16 (b)		300,000		292,734
Simon Property Group LP
5.75%, 12/01/15 (b)(f)		900,000		1,021,085

				2,649,626

				60,251,762

Industrial 9.7%


Basic Industry 0.9%
Alcoa, Inc.
5.55%, 02/01/17 (b)		1,000,000		1,022,231
ArcelorMittal
7.00%, 10/15/39 (b)		500,000		514,490
Barrick Gold Corp.
6.95%, 04/01/19 (b)		500,000		628,795
BHP Billiton Finance (USA) Ltd.
5.50%, 04/01/14		700,000		788,208

38 See financial notes

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
EI Du Pont de Nemours & Co.
4.75%, 03/15/15 (b)		900,000		1,010,695
International Paper Co.
7.30%, 11/15/39 (b)		500,000		565,227
Praxair, Inc.
4.38%, 03/31/14 (b)		350,000		384,550
Rio Tinto Finance (USA) Ltd.
8.95%, 05/01/14 (b)		1,250,000		1,534,464
The Dow Chemical Co.
5.90%, 02/15/15 (b)		500,000		554,148
8.55%, 05/15/19 (b)		600,000		753,303
9.40%, 05/15/39 (b)		100,000		142,382
Vale Overseas Ltd.
6.88%, 11/10/39 (b)		250,000		287,541

				8,186,034


Capital Goods 0.9%
Allied Waste North America, Inc.
6.88%, 06/01/17 (b)		500,000		552,627
Boeing Capital Corp.
3.25%, 10/27/14 (b)		900,000		960,658
Boeing Co.
6.88%, 03/15/39 (b)		200,000		265,836
Caterpillar Financial Services Corp.
5.85%, 09/01/17		1,000,000		1,167,219
CRH America, Inc.
5.30%, 10/15/13 (b)		700,000		751,165
General Electric Co.
5.00%, 02/01/13		500,000		542,174
5.25%, 12/06/17		1,300,000		1,460,572
Honeywell International, Inc.
5.00%, 02/15/19 (b)		525,000		607,305
John Deere Capital Corp.
4.90%, 09/09/13 (f)		500,000		552,467
L-3 Communications Corp.
4.75%, 07/15/20 (b)		150,000		158,414
Lockheed Martin Corp.
4.25%, 11/15/19 (b)		250,000		273,996
5.50%, 11/15/39 (b)		250,000		281,790
Tyco International Finance S.A.
8.50%, 01/15/19 (b)		200,000		267,600
United Technologies Corp.
6.13%, 02/01/19 (b)		250,000		310,827
5.70%, 04/15/40 (b)		500,000		591,041

				8,743,691


Communications 2.1%
America Movil, S.A.B. de CV
5.00%, 10/16/19 (b)(c)		500,000		541,203
AT&T Corp.
8.00%, 11/15/31 (b)		1,000,000		1,374,618
AT&T, Inc.
4.95%, 01/15/13 (b)		1,000,000		1,090,127
2.50%, 08/15/15 (b)		250,000		252,958
CBS Corp.
5.75%, 04/15/20 (b)		500,000		556,373
Cellco Partnership / Verizon Wireless
5.55%, 02/01/14 (b)		750,000		849,396
Comcast Cable Communications Holdings
8.38%, 03/15/13		150,000		174,389
Comcast Corp.
5.70%, 05/15/18 (b)		1,000,000		1,140,504
6.50%, 11/15/35 (b)		600,000		689,335
DIRECTV Holdings LLC
6.38%, 06/15/15 (b)		500,000		520,000
Discovery Communications, Inc.
5.63%, 08/15/19 (b)		500,000		564,020
France Telecom S.A.
4.38%, 07/08/14 (b)		1,000,000		1,106,437
Grupo Televisa S.A.
6.63%, 03/18/25 (b)		500,000		569,883
NBC Universal, Inc.
3.65%, 04/30/15 (b)(c)		500,000		525,012
New Cingular Wireless Services, Inc.
8.75%, 03/01/31 (b)		500,000		729,530
News America Holdings, Inc.
9.25%, 02/01/13		250,000		293,095
News America, Inc.
6.15%, 03/01/37 (b)		650,000		714,854
Pacific Bell Telephone Co.
7.13%, 03/15/26		1,500,000		1,821,327
Telecom Italia Capital S.A.
7.18%, 06/18/19 (b)		1,000,000		1,154,333
Telefonica Emisiones S.A.U.
5.88%, 07/15/19 (b)		1,000,000		1,136,185
Time Warner Cable, Inc.
5.85%, 05/01/17 (b)		500,000		571,036
6.75%, 06/15/39 (b)		250,000		294,464
Verizon Communications, Inc.
8.75%, 11/01/18 (b)		1,250,000		1,687,492
Vodafone Group PLC
4.63%, 07/15/18 (b)		1,000,000		1,067,944

				19,424,515


Consumer Cyclical 1.0%
CVS Caremark Corp.
3.25%, 05/18/15 (b)		500,000		521,866
4.75%, 05/18/20 (b)		500,000		537,607
Expedia, Inc.
5.95%, 08/15/20 (b)(c)		250,000		256,563
Historic TW, Inc.
6.88%, 06/15/18		500,000		606,323
Home Depot, Inc.
5.88%, 12/16/36 (b)		500,000		535,664
Lowe’s Cos., Inc.
5.40%, 10/15/16 (b)		750,000		891,124
McDonald’s Corp.
5.00%, 02/01/19 (b)		500,000		579,680
6.30%, 03/01/38 (b)		100,000		129,844
PACCAR, Inc.
6.88%, 02/15/14 (b)		800,000		937,145
Target Corp.
3.88%, 07/15/20 (b)		1,000,000		1,050,210
6.35%, 11/01/32 (b)		250,000		307,646
The Walt Disney Co.
5.63%, 09/15/16 (b)		500,000		599,154
Viacom, Inc.
6.88%, 04/30/36 (b)		750,000		895,500
Wal-Mart Stores, Inc.
4.55%, 05/01/13		750,000		822,196
6.20%, 04/15/38		250,000		309,225

				8,979,747


Consumer Non-Cyclical 2.4%
Abbott Laboratories
4.13%, 05/27/20 (b)		500,000		543,854
6.00%, 04/01/39 (b)		250,000		305,105
Amgen, Inc.
5.70%, 02/01/19 (b)		1,000,000		1,207,217
Anheuser-Busch Cos., Inc.
6.80%, 08/20/32 (b)		1,050,000		1,273,882

See financial notes 39

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
Anheuser-Busch InBev Worldwide, Inc.
3.00%, 10/15/12 (b)		400,000		412,938
Bottling Group LLC
6.95%, 03/15/14 (b)		400,000		474,722
5.13%, 01/15/19 (b)		500,000		577,084
Coca-Cola Enterprises, Inc.
8.50%, 02/01/12		250,000		275,284
4.50%, 08/15/19 (b)		750,000		841,160
Diageo Capital PLC
7.38%, 01/15/14 (b)		750,000		887,380
Express Scripts, Inc.
6.25%, 06/15/14 (b)		500,000		576,874
General Mills, Inc.
6.00%, 02/15/12 (b)		250,000		267,904
5.70%, 02/15/17 (b)		500,000		596,438
GlaxoSmithKline Capital, Inc.
4.85%, 05/15/13 (b)		550,000		604,611
6.38%, 05/15/38 (b)		100,000		127,352
Kraft Foods, Inc.
4.13%, 02/09/16		1,000,000		1,071,140
6.88%, 01/26/39		300,000		372,817
Mead Johnson Nutrition Co.
3.50%, 11/01/14 (b)		500,000		526,823
5.90%, 11/01/39 (b)		300,000		346,021
Medco Health Solutions, Inc.
6.13%, 03/15/13 (b)(f)		1,000,000		1,108,827
Merck & Co., Inc.
5.00%, 06/30/19 (b)		750,000		872,052
Newell Rubbermaid, Inc.
4.70%, 08/15/20 (b)		250,000		262,495
PepsiCo, Inc.
7.90%, 11/01/18 (b)		500,000		669,831
Pfizer, Inc.
5.35%, 03/15/15 (b)		1,000,000		1,154,107
7.20%, 03/15/39 (b)		500,000		700,822
Philip Morris International, Inc.
4.50%, 03/26/20		500,000		546,497
Procter & Gamble Co.
1.38%, 08/01/12 (b)		750,000		759,799
Reynolds American, Inc.
7.25%, 06/01/13 (b)		500,000		562,935
6.75%, 06/15/17 (b)		600,000		673,863
7.25%, 06/15/37 (b)		150,000		159,891
Safeway, Inc.
6.25%, 03/15/14 (b)		250,000		288,563
7.25%, 02/01/31 (b)		150,000		185,790
Teva Pharmaceutical Finance Co. LLC
5.55%, 02/01/16 (b)		350,000		407,441
6.15%, 02/01/36 (b)		650,000		801,155
The Kroger Co.
3.90%, 10/01/15 (b)		250,000		270,682
5.40%, 07/15/40 (b)		100,000		105,921
Watson Pharmaceuticals, Inc.
5.00%, 08/15/14 (b)		300,000		329,556
6.13%, 08/15/19 (b)		500,000		588,526
Zimmer Holdings, Inc.
5.75%, 11/30/39 (b)		700,000		794,858

				22,532,217


Energy 1.3%
Anadarko Petroleum Corp.
6.38%, 09/15/17 (b)		500,000		495,442
6.45%, 09/15/36 (b)		200,000		173,969
Apache Corp.
6.90%, 09/15/18 (b)		400,000		502,331
5.10%, 09/01/40 (b)		500,000		517,615
Baker Hughes, Inc.
6.50%, 11/15/13 (b)		100,000		114,938
7.50%, 11/15/18 (b)		400,000		512,674
BP Capital Markets PLC
5.25%, 11/07/13		500,000		519,318
ConocoPhillips
6.00%, 01/15/20 (b)		1,500,000		1,827,354
Devon Energy Corp.
6.30%, 01/15/19 (b)		300,000		361,542
Encana Corp.
6.63%, 08/15/37 (b)		500,000		601,822
Hess Corp.
7.30%, 08/15/31 (b)		500,000		610,039
Husky Energy, Inc.
7.25%, 12/15/19 (b)		250,000		308,879
Marathon Oil Corp.
5.90%, 03/15/18 (b)		500,000		578,451
Nexen, Inc.
6.20%, 07/30/19 (b)		500,000		578,324
Occidental Petroleum Corp.
7.00%, 11/01/13 (b)		250,000		294,499
Shell International Finance BV
5.20%, 03/22/17 (b)		1,000,000		1,150,895
Statoil ASA
2.90%, 10/15/14 (b)		500,000		522,412
5.10%, 08/17/40 (b)		250,000		270,638
Suncor Energy, Inc.
6.50%, 06/15/38 (b)		500,000		584,251
Transocean, Inc.
6.00%, 03/15/18 (b)		500,000		500,766
Valero Energy Corp.
10.50%, 03/15/39 (b)		200,000		287,105
Weatherford International Ltd.
9.63%, 03/01/19 (b)		250,000		328,518
XTO Energy, Inc.
6.75%, 08/01/37 (b)(f)		300,000		418,635

				12,060,417


Technology 0.7%
Agilent Technologies, Inc.
6.50%, 11/01/17 (b)		1,000,000		1,161,687
Cisco Systems, Inc.
4.45%, 01/15/20 (b)		500,000		551,286
Hewlett-Packard Co.
6.13%, 03/01/14 (b)		850,000		983,834
International Business Machines Corp.
7.63%, 10/15/18 (b)		1,000,000		1,339,063
Microsoft Corp.
4.20%, 06/01/19		500,000		561,989
Oracle Corp.
3.75%, 07/08/14 (b)		800,000		871,103
5.38%, 07/15/40 (b)(c)		350,000		380,859
Xerox Corp.
5.65%, 05/15/13 (b)(f)		500,000		546,586
6.35%, 05/15/18 (b)		400,000		458,770

				6,855,177


Transportation 0.4%
Burlington Northern Santa Fe Corp.
7.00%, 02/01/14 (b)		450,000		527,473
5.65%, 05/01/17 (b)		700,000		807,183
Union Pacific Corp.
5.75%, 11/15/17 (b)		850,000		992,560

40 See financial notes

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
United Parcel Service, Inc.
6.20%, 01/15/38 (b)		750,000		940,464

				3,267,680

				90,049,478

Utilities 2.1%


Electric 1.5%
Appalachian Power Co.
7.95%, 01/15/20 (b)		600,000		785,018
Dominion Resources, Inc.
5.25%, 08/01/33 (b)		1,000,000		1,120,631
Duke Energy Carolinas LLC
4.30%, 06/15/20 (b)		1,000,000		1,109,116
Exelon Generation Co., LLC
5.20%, 10/01/19 (b)		900,000		1,000,768
Florida Power Corp.
4.55%, 04/01/20 (b)		750,000		839,243
National Rural Utilities Cooperative Finance Corp.
3.88%, 09/16/15 (b)		1,000,000		1,081,117
Nevada Power Co.
7.13%, 03/15/19 (b)		750,000		926,951
Nisource Finance Corp.
10.75%, 03/15/16 (b)		500,000		655,843
Ohio Edison Co.
8.25%, 10/15/38 (b)		500,000		718,155
Pacific Gas & Electric Co.
8.25%, 10/15/18 (b)		500,000		660,945
5.80%, 03/01/37 (b)		600,000		693,395
Pacificorp
6.00%, 01/15/39 (b)		1,000,000		1,209,644
San Diego Gas & Electric Co.
4.50%, 08/15/40 (b)		750,000		761,145
Southern California Edison Co.
5.75%, 03/15/14 (b)		1,500,000		1,723,271
4.50%, 09/01/40 (b)		750,000		753,695

				14,038,937


Natural Gas 0.6%
Energy Transfer Partners LP
9.00%, 04/15/19 (b)		500,000		626,402
Enterprise Products Operating LP
6.30%, 09/15/17 (b)		650,000		751,373
Kinder Morgan Energy Partners LP
7.13%, 03/15/12 (b)		200,000		215,520
6.85%, 02/15/20 (b)		500,000		591,528
6.95%, 01/15/38 (b)		500,000		573,434
Plains All American Pipeline LP
3.95%, 09/15/15 (b)		250,000		260,935
Sempra Energy
6.15%, 06/15/18 (b)		700,000		833,057
Southern Natural Gas Co.
5.90%, 04/01/17 (b)(c)(f)		650,000		718,944
TransCanada PipeLines Ltd.
6.50%, 08/15/18 (b)		325,000		398,625
6.20%, 10/15/37 (b)		325,000		371,423

				5,341,241

				19,380,178

Total Corporate Bonds
(Cost $153,291,282)				169,681,418




U.S. Government and Government Agencies 39.6% of net assets

U.S. Government Agency Guaranteed 1.1%
JPMorgan Chase & Co., (FDIC Insured)
3.13%, 12/01/11 (d)		3,500,000		3,618,310
Morgan Stanley, (FDIC Insured)
2.25%, 03/13/12 (d)		2,500,000		2,565,303
Wells Fargo & Co., (FDIC Insured)
3.00%, 12/09/11 (d)		4,000,000		4,131,296

				10,314,909

U.S. Government Agency Securities 6.4%
Fannie Mae
1.75%, 08/10/12		3,000,000		3,064,911
1.50%, 09/25/12 (b)		1,000,000		1,005,453
1.88%, 10/29/12 (b)		3,000,000		3,005,709
3.25%, 04/09/13		2,000,000		2,129,270
1.00%, 09/23/13		2,500,000		2,505,525
2.75%, 02/05/14		2,000,000		2,114,702
3.00%, 10/29/14 (b)		3,000,000		3,012,666
4.38%, 10/15/15 (f)		3,000,000		3,401,208
5.38%, 06/12/17		1,000,000		1,200,769
6.63%, 11/15/30 (f)		1,500,000		2,092,510
Federal Farm Credit Bank
3.50%, 10/03/11		500,000		517,025
4.50%, 10/17/12		1,000,000		1,080,685
1.63%, 03/07/13 (b)		250,000		250,049
4.88%, 01/17/17		500,000		581,124
Federal Home Loan Bank
3.63%, 09/16/11		1,000,000		1,035,198
1.00%, 12/28/11		1,500,000		1,511,372
1.13%, 05/18/12		2,000,000		2,019,468
1.75%, 08/22/12		1,000,000		1,021,798
1.85%, 12/21/12 (b)		1,000,000		1,003,347
3.38%, 02/27/13		1,000,000		1,064,006
3.63%, 10/18/13		1,500,000		1,626,730
5.50%, 08/13/14		1,000,000		1,164,249
5.38%, 05/18/16		1,000,000		1,195,371
5.00%, 11/17/17		1,000,000		1,184,951
5.50%, 07/15/36		500,000		623,449
Freddie Mac
1.13%, 12/15/11		1,000,000		1,009,136
2.13%, 09/21/12		3,000,000		3,089,487
1.80%, 02/25/13 (b)		2,000,000		2,011,324
1.63%, 04/15/13		1,000,000		1,020,981
3.75%, 06/28/13		2,000,000		2,165,452
1.40%, 11/18/13 (b)		2,000,000		2,010,382
3.00%, 07/28/14		2,500,000		2,671,955
4.75%, 11/17/15		2,000,000		2,305,666
4.88%, 06/13/18		1,000,000		1,173,817
6.25%, 07/15/32		1,000,000		1,364,403
Tennessee Valley Authority
4.65%, 06/15/35		1,000,000		1,088,632

				59,322,780

U.S. Treasury Obligations 32.1%
U.S. Treasury Bonds
7.25%, 05/15/16		1,000,000		1,312,031
6.25%, 08/15/23 (f)		1,000,000		1,365,938
6.00%, 02/15/26 (f)		6,000,000		8,210,628
6.13%, 11/15/27		1,000,000		1,401,094

See financial notes 41

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
5.50%, 08/15/28		1,000,000		1,319,063
5.25%, 11/15/28		1,000,000		1,285,000
5.25%, 02/15/29 (f)		5,000,000		6,428,125
6.25%, 05/15/30		1,000,000		1,440,781
5.38%, 02/15/31		2,000,000		2,623,750
4.50%, 02/15/36		4,400,000		5,192,686
4.75%, 02/15/37		1,000,000		1,227,656
5.00%, 05/15/37		1,000,000		1,275,000
4.38%, 02/15/38		1,000,000		1,157,344
4.50%, 05/15/38		1,000,000		1,180,781
3.50%, 02/15/39		1,500,000		1,491,797
4.25%, 05/15/39		1,500,000		1,694,532
4.50%, 08/15/39		800,000		940,875
4.63%, 02/15/40		700,000		839,891
4.38%, 05/15/40		4,450,000		5,134,882
U.S. Treasury Notes
1.00%, 09/30/11		2,500,000		2,518,360
4.50%, 09/30/11		3,000,000		3,135,705
1.00%, 10/31/11		3,000,000		3,022,968
1.75%, 11/15/11		3,000,000		3,050,742
0.75%, 11/30/11		2,000,000		2,009,766
1.13%, 12/15/11		2,000,000		2,019,610
1.00%, 12/31/11		3,900,000		3,932,604
0.88%, 01/31/12		7,500,000		7,552,440
1.38%, 02/15/12		2,000,000		2,028,750
4.88%, 02/15/12		2,000,000		2,130,938
1.38%, 03/15/12		2,000,000		2,030,548
1.00%, 03/31/12		1,500,000		1,514,006
1.38%, 04/15/12		6,700,000		6,806,001
1.00%, 04/30/12		1,500,000		1,514,006
1.38%, 05/15/12		5,000,000		5,079,495
1.88%, 06/15/12		2,000,000		2,051,406
1.75%, 08/15/12		1,250,000		1,281,396
4.38%, 08/15/12		2,000,000		2,154,220
1.38%, 09/15/12		5,000,000		5,089,065
1.38%, 10/15/12		4,900,000		4,989,577
1.38%, 11/15/12		4,400,000		4,480,436
4.00%, 11/15/12		1,000,000		1,077,578
1.13%, 12/15/12		9,500,000		9,623,205
1.38%, 01/15/13		2,300,000		2,343,304
1.38%, 02/15/13		4,500,000		4,585,077
3.88%, 02/15/13		1,000,000		1,082,031
1.38%, 03/15/13		10,700,000		10,907,323
2.50%, 03/31/13		1,000,000		1,049,219
1.75%, 04/15/13		4,850,000		4,991,702
3.13%, 04/30/13		1,000,000		1,067,266
1.38%, 05/15/13		575,000		586,188
3.50%, 05/31/13		1,000,000		1,079,453
3.38%, 06/30/13		1,000,000		1,077,031
1.00%, 07/15/13		3,000,000		3,026,481
3.38%, 07/31/13		2,000,000		2,157,812
4.25%, 08/15/13		2,000,000		2,210,156
3.13%, 08/31/13		2,000,000		2,145,000
3.13%, 09/30/13		2,000,000		2,146,562
2.75%, 10/31/13		1,745,000		1,853,926
4.25%, 11/15/13		2,000,000		2,224,376
2.00%, 11/30/13		2,000,000		2,078,438
1.50%, 12/31/13		2,000,000		2,045,938
1.75%, 01/31/14		1,000,000		1,030,469
4.00%, 02/15/14		1,000,000		1,108,203
1.88%, 02/28/14		1,000,000		1,034,531
1.75%, 03/31/14		1,000,000		1,030,235
1.88%, 04/30/14		1,000,000		1,034,219
4.75%, 05/15/14		1,000,000		1,141,719
2.25%, 05/31/14		700,000		733,907
2.63%, 06/30/14		850,000		902,726
2.63%, 07/31/14		2,000,000		2,124,532
4.25%, 08/15/14		1,000,000		1,125,781
2.38%, 08/31/14		2,575,000		2,709,183
4.25%, 11/15/14		4,000,000		4,525,312
2.13%, 11/30/14		1,300,000		1,354,133
2.63%, 12/31/14		1,530,000		1,625,028
2.25%, 01/31/15		1,050,000		1,098,317
4.00%, 02/15/15		3,000,000		3,370,782
2.50%, 04/30/15		4,300,000		4,546,915
4.13%, 05/15/15		1,000,000		1,132,110
2.13%, 05/31/15		2,000,000		2,079,854
1.88%, 06/30/15		400,000		411,062
4.25%, 08/15/15		1,000,000		1,140,391
4.50%, 11/15/15		1,000,000		1,158,750
4.50%, 02/15/16		1,000,000		1,158,360
2.63%, 02/29/16		5,000,000		5,289,845
2.38%, 03/31/16		1,000,000		1,043,985
2.63%, 04/30/16		1,000,000		1,056,953
5.13%, 05/15/16		1,000,000		1,196,094
3.25%, 05/31/16		1,000,000		1,090,781
3.25%, 06/30/16		1,000,000		1,090,469
3.25%, 07/31/16		2,000,000		2,181,406
4.88%, 08/15/16		1,000,000		1,185,781
3.00%, 08/31/16		2,100,000		2,258,649
3.00%, 09/30/16		2,000,000		2,149,844
3.13%, 10/31/16		3,000,000		3,245,391
4.63%, 11/15/16		1,000,000		1,172,969
2.75%, 11/30/16		3,000,000		3,175,782
3.25%, 12/31/16		2,000,000		2,175,470
3.13%, 01/31/17		3,700,000		3,996,289
3.25%, 03/31/17		2,000,000		2,175,312
3.13%, 04/30/17		9,500,000		10,258,518
4.50%, 05/15/17		3,000,000		3,501,798
2.38%, 07/31/17		3,250,000		3,350,038
4.75%, 08/15/17		1,000,000		1,186,953
4.25%, 11/15/17		3,000,000		3,468,282
3.50%, 02/15/18		1,000,000		1,104,610
3.88%, 05/15/18		1,000,000		1,130,703
4.00%, 08/15/18		2,000,000		2,278,906
3.75%, 11/15/18		3,000,000		3,359,532
2.75%, 02/15/19		1,500,000		1,559,180
3.63%, 08/15/19		3,000,000		3,308,673
3.38%, 11/15/19		7,000,000		7,561,645
3.63%, 02/15/20		6,000,000		6,604,218
2.63%, 08/15/20		4,100,000		4,153,173

				298,159,727

Total U.S. Government and Government Agencies
(Cost $347,981,183)				367,797,416




Commercial Mortgage Backed Securities 3.1% of net assets


Banc of America Commercial Mortgage, Inc.
Series 2005-3 Class AJ
4.77%, 09/01/10, 07/10/43 (a)(b)		1,100,000		963,995
Series 2006-1 Class A2
5.33%, 09/10/45 (b)		4,000,000		4,041,105
Series 2006-3 Class AM
6.01%, 09/01/10, 07/10/44 (a)(b)		800,000		698,053
Series 2007-1 Class A4
5.45%, 01/15/49 (b)		1,700,000		1,774,220

42 See financial notes

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)
Bear Stearns Commercial Mortgage Securities
Series 2005-PW10 Class A4
5.41%, 12/11/40 (b)		4,000,000		4,359,675
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1 Class A3
5.40%, 09/01/10, 07/15/44 (a)(b)		4,200,000		4,538,807
Credit Suisse Mortgage Capital Certificates
Series 2006-C1 Class AM
5.73%, 09/01/10, 02/15/39 (a)(b)		650,000		641,968
Series 2007-C5 Class A3
5.69%, 09/01/10, 09/15/40 (a)(b)		315,000		327,726
GE Capital Commercial Mortgage Corp.
Series 2007-C1 Class AAB
5.48%, 12/10/49 (b)		135,000		143,477
Greenwich Capital Commercial Funding Corp.
Series 2007-GG9 Class A4
5.44%, 03/10/39 (b)		3,000,000		3,147,874
GS Mortgage Securities Corp II
Series 2006-GG6 Class A4
5.55%, 09/01/10, 04/10/38 (a)(b)		1,100,000		1,181,002
JP Morgan Chase Commercial Mortgage Securities Corp.
Series 2005-LDP5 Class AJ
5.48%, 09/01/10, 12/15/44 (a)(b)		1,025,000		928,708
Series 2006-LDP9 Class A2S
5.30%, 05/15/47 (b)		1,000,000		1,029,728
Series 2007-LD12 Class A2
5.83%, 02/15/51 (b)		75,000		78,588
Series 2007-LD12 Class A3
6.19%, 09/01/10, 02/15/51 (a)(b)		2,000,000		2,101,727
LB-UBS Commercial Mortgage Trust
Series 2005-C3 Class AJ
4.84%, 07/15/40 (b)		241,000		214,240
Merrill Lynch Mortgage Trust
Series 2005-LC1 Class AM
5.44%, 09/01/10, 01/12/44 (a)(b)		700,000		715,601
Morgan Stanley Capital I
Series 2007-IQ14 Class AAB
5.65%, 09/01/10, 04/15/49 (a)(b)		2,000,000		2,140,717

Total Commercial Mortgage Backed Securities
(Cost $25,897,208)				29,027,211




Asset-Backed Obligations 0.3% of net assets


Chase Issuance Trust
Series 2007-A17 Class A
5.12%, 10/15/14 (b)(f)		1,400,000		1,526,101
Series 2008-A4 Class A4
4.65%, 03/15/15 (b)		700,000		763,695
Nissan Auto Receivables Owner Trust
Series 2008-B Class A4
5.05%, 11/17/14 (b)(f)		500,000		533,252

Total Asset-Backed Obligations
(Cost $2,656,433)				2,823,048




Foreign Securities 3.8% of net assets

Foreign Agencies 1.2%


Canada 0.1%
Export Development Canada
1.75%, 09/24/12		1,000,000		1,022,246


Cayman Islands 0.1%
Petrobras International Finance Co.
5.75%, 01/20/20 (b)		1,000,000		1,076,877


Germany 0.6%
Kreditanstalt Fuer Wiederaufbau
2.00%, 01/17/12 (g)		1,000,000		1,020,070
3.50%, 03/10/14 (g)		3,250,000		3,518,307
4.00%, 01/27/20 (g)		350,000		387,115

				4,925,492


Mexico 0.2%
Petroleos Mexicanos
4.88%, 03/15/15 (b)		1,000,000		1,062,500
5.50%, 01/21/21 (b)(c)		850,000		891,520

				1,954,020


Republic of Korea 0.2%
Export-Import Bank of Korea
8.13%, 01/21/14		500,000		589,947
4.13%, 09/09/15		500,000		525,040
Korea Development Bank
8.00%, 01/23/14		500,000		588,518

				1,703,505

				10,682,140

Foreign Local Government 0.4%


Canada 0.4%
Province of Ontario Canada
4.10%, 06/16/14		2,500,000		2,752,688
4.40%, 04/14/20		1,000,000		1,119,337
Province of Quebec Canada
7.50%, 09/15/29		150,000		222,075

				4,094,100

Sovereign 1.1%


Brazil 0.4%
Brazilian Government International Bond
6.00%, 01/17/17 (b)		1,300,000		1,504,750
8.88%, 04/15/24		1,100,000		1,578,500
7.13%, 01/20/37		400,000		520,000

				3,603,250


Canada 0.2%
Canada Government International Bond
2.38%, 09/10/14		1,500,000		1,572,456


Italy 0.1%
Republic of Italy
3.13%, 01/26/15		850,000		871,407
6.88%, 09/27/23		250,000		310,871

				1,182,278


Mexico 0.3%
United Mexican States
5.95%, 03/19/19 (b)		1,500,000		1,736,250
5.13%, 01/15/20 (b)		1,000,000		1,090,000
6.75%, 09/27/34		250,000		313,125

				3,139,375


Panama 0.0%
Republic of Panama
7.25%, 03/15/15		150,000		177,450

See financial notes 43

Schwab Total Bond Market Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)


Peru 0.1%
Peruvian Government International Bond
7.13%, 03/30/19		500,000		622,500

				10,297,309

Supranational 1.1%
European Investment Bank
1.75%, 09/14/12		5,250,000		5,368,445
Inter-American Development Bank
3.00%, 04/22/14		2,000,000		2,135,154
3.88%, 09/17/19		1,800,000		2,000,954
International Bank for Reconstruction & Development
2.00%, 04/02/12		1,000,000		1,023,456

				10,528,009

Total Foreign Securities
(Cost $33,507,175)				35,601,558




Municipal Bonds 0.7% of net assets

Fixed-Rate Obligations 0.7%
Bay Area Toll Auth
San Francisco Bay Area Toll Bridge RB Series 2009F2
6.26%, 04/01/49		1,050,000		1,193,125
California
GO Bonds
7.50%, 04/01/34		1,500,000		1,685,460
7.55%, 04/01/39		500,000		568,460
East Bay Municipal Utility District
Water System RB (Build America Bonds) Series 2010
5.87%, 06/01/40		850,000		983,671
Illinois
GO Bonds (Pension Funding) Series 2003
5.10%, 06/01/33		1,000,000		848,260
Yale Univ
Medium-Term Notes Series B
2.90%, 10/15/14 (b)		1,000,000		1,061,608

Total Municipal Bonds
(Cost $5,980,039)				6,340,584



	Number		Value
Security	of Shares		($)

Other Investment Company 2.1% of net assets

Money Fund 2.1%
State Street Institutional Liquid Reserves Fund - Institutional Class		19,951,931		19,951,931

Total Other Investment Company
(Cost $19,951,931)				19,951,931



	Face
Issuer	Amount		Value
Rate, Maturity Date*	($)		($)

Short-Term Investments 0.0% of net assets

U.S. Treasury Obligations 0.0%
U.S. Treasury Bills
0.11%, 09/02/10		100,000		100,000
0.14%, 11/26/10		100,000		99,973

Total Short-Term Investments
(Cost $199,966)				199,973



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $890,064,020 and the unrealized appreciation and depreciation were $56,614,272 and ($218,911), respectively, with a net unrealized appreciation of $56,395,361.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.
(a)		Variable-rate security.
(b)		Callable security.
(c)		Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $3,314,101 or 0.4% of net assets.
(d)		This debt is guaranteed under the FDIC Temporary Liquidity Guarantee Program, and the FDIC has stated that this debt is backed by the full faith and credit of the United States.
(e)		Delayed-delivery security.
(f)		All or a portion of this security is held as collateral for delayed-delivery securities.
(g)		Guaranteed by the Republic of Germany.

44 See financial notes

Schwab Total Bond Market Fund

Statement of

Operations

For September 1, 2009 through August 31, 2010.



Investment Income

Interest (net of foreign withholding taxes of $255)		$35,002,583
Dividends		43,605
Securities on loan	+	2,901

Total investment income		35,049,089

Expenses

Investment adviser and administrator fees		2,450,711
Shareholder service fees		2,316,060
Legal fees*		256,552
Portfolio accounting fees		113,578
Shareholder reports		43,281
Custodian fees		40,339
Professional fees		39,071
Transfer agent fees		35,646
Registration fees		25,220
Trustees’ fees		15,362
Interest expense		668
Other expenses	+	41,860

Total expenses		5,378,348
Expense reduction by adviser and Schwab	−	267,349
Custody credits	−	128

Net expenses	−	5,110,871

Net investment income		29,938,218

Realized and Unrealized Gains (Losses)

Net realized gains on investments		23,928,396
Net realized gains on futures contracts	+	78,566

Net realized gains		24,006,962
Net unrealized gains on investments		24,464,752
Net unrealized losses on futures contracts	+	(426	)

Net unrealized gains	+	24,464,326

Net realized and unrealized gains		48,471,288

Increase in net assets resulting from operations		$78,409,506


*		Includes legal fees and expenses and the proposed settlement incurred by the fund in connection with the litigation matter discussed in items 4 and 10 of the Financial Notes.

46 See financial notes

Schwab Total Bond Market Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10			9/1/08 -8/31/09
Net investment income		$29,938,218		$42,162,864
Net realized gains (losses)		24,006,962		(95,234,660	)
Net unrealized gains	+	24,464,326		64,794,496

Increase in net assets from operations		78,409,506		11,722,700

Distributions to shareholders

Distributions from net investment income		$31,723,102		$42,722,105

Transactions in Fund Shares


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares sold			24,671,289		$223,833,277			20,626,594		$181,308,258
Shares reinvested			2,610,322		23,793,138			3,241,836		28,473,813
Shares redeemed	+		(30,375,732	)	(277,320,780	)		(59,621,692	)	(526,294,791	)

Net transactions in fund shares			(3,094,121	)	($29,694,365	)		(35,753,262	)	($316,512,720	)

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			101,789,245		$912,454,597			137,542,507		$1,259,966,722
Total increase (decrease)	+		(3,094,121	)	16,992,039			(35,753,262	)	(347,512,125	)

End of period			98,695,124		$929,446,636			101,789,245		$912,454,597

See financial notes 47

Schwab GNMA Fund

Portfolio Holdings as of August 31, 2010

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

Cost

Value

Holdings by Category

($)

108

.4%

Mortgage-Backed Securities

610,079,943

626,854,846

.2%

U.S. Government Security

59,130,554

59,138,296

.1%

Other Investment Company

343,131

118

.7%

Total Investments

669,553,628

686,336,273

(18

.7)%

Other Assets and Liabilities, Net

(108,251,868

)

100

.0%

Net Assets

578,084,405


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

Mortgage-Backed Securities 108.4% of net assets

Collateralized Mortgage Obligations 0.0%
Vendee Mortgage Trust
Series 1995-3 Class 1Z
7.25%, 09/15/25 (b)		77,114		90,501

U.S. Government Agency Mortgages 108.4%
Fannie Mae
5.45%, 12/01/31 to 07/01/32		404,723		439,487
5.49%, 09/01/29 to 09/01/31		256,242		278,344
5.50%, 09/01/14 to 09/01/17		953,952		1,024,545
5.81%, 12/01/31 to 01/01/32		219,587		240,298
6.00%, 03/01/22		879,712		968,300
6.10%, 02/01/29		44,458		49,094
6.50%, 04/01/31		257,185		283,619
7.17%, 11/01/30		30,347		34,398
Fannie Mae Grantor Trust
6.50%, 07/25/42 (b)		146,619		165,133
7.00%, 01/25/44 (b)		167,948		194,715
Fannie Mae REMICS
7.00%, 09/25/22		203,619		236,444
7.00%, 01/25/42 (b)		969,350		1,125,813
Fannie Mae Whole Loan
6.50%, 02/25/44 (b)		169,977		191,683
7.00%, 10/25/42 (b)		95,120		110,280
Freddie Mac
5.50%, 01/01/17 to 02/01/24		7,761,212		8,381,705
Freddie Mac REMICS
4.00%, 09/15/16 to 03/15/19 (b)		1,086,651		1,090,626
4.13%, 08/15/12 (b)		292,402		293,831
4.50%, 11/15/25 (b)		9,804		9,912
5.00%, 12/15/17 (b)		1,244,053		1,256,770
5.50%, 06/15/25 to 03/15/29 (b)		291,133		292,728
6.00%, 04/15/27 (b)		65,522		65,506
6.50%, 03/15/14 (b)(c)		294,525		23,042
Ginnie Mae
2.88%, 10/01/10, 12/20/30 (a)		67,236		69,194
3.00%, 10/01/10, 04/20/37 (a)		402,379		413,477
3.00%, 10/01/10, 02/20/32 (a)		46,043		47,367
3.38%, 10/01/10, 06/20/27 (a)		278,418		286,643
3.38%, 10/01/10, 05/20/29 (a)		130,126		133,971
3.38%, 10/01/10, 04/20/32 (a)		30,172		31,063
3.50%, 10/01/10, 02/20/16 (a)		63,712		65,746
3.50%, 02/20/34 (b)		3,043,795		3,109,582
3.63%, 10/01/10, 07/20/24 (a)		70,024		72,396
3.63%, 10/01/10, 08/20/31 (a)		31,951		33,034
3.63%, 10/01/10, 07/20/32 (a)		85,438		88,332
4.00%, 10/17/29 to 02/20/32 (b)		628,877		657,259
4.00%, 10/20/33		60,185		62,727
4.13%, 10/01/10, 08/20/33 (a)		91,890		95,317
4.25%, 06/16/24 (b)		78,490		80,589
4.50%, 12/15/17 to 12/20/39		41,611,624		44,409,013
4.50%, 10/20/34 (b)		139,430		145,395
5.00%, 11/15/17 to 04/20/40		171,565,225		185,624,300
5.00%, 02/20/29 to 02/20/33 (b)		12,319,058		12,532,746
5.45%, 07/15/31 to 02/15/33		8,179,288		8,906,924
5.49%, 10/20/28 to 08/15/32		5,746,319		6,260,742
5.50%, 09/20/13 to 07/15/38		116,627,109		126,961,753
5.50%, 08/20/15 to 07/20/31 (b)		6,001,147		6,136,663
5.81%, 06/20/31 to 02/20/32		836,976		918,696
5.90%, 07/15/31 to 05/15/32		521,667		573,196
6.00%, 02/20/12 to 11/15/39		59,020,000		64,479,773
6.00%, 12/20/17 to 06/16/18 (b)		2,759,800		2,801,811
6.05%, 09/15/31		133,359		147,093
6.10%, 07/20/28 to 09/15/31		2,852,030		3,165,002
6.15%, 04/20/29 to 04/20/30		1,871,977		2,083,243
6.25%, 10/20/28 to 03/20/30		2,661,141		2,973,519
6.50%, 12/20/11 to 10/20/37		16,726,871		18,621,520
7.00%, 05/15/11 to 04/15/39		5,248,964		5,886,490
7.10%, 12/15/30		66,753		75,808
7.17%, 04/20/30 to 03/20/31		685,856		777,747
7.50%, 04/15/11 to 11/15/37		568,862		649,317
8.00%, 10/15/11 to 02/15/30		86,167		100,561
8.50%, 08/20/25 to 01/20/30		20,839		24,167
9.00%, 09/20/15 to 09/20/30		587,672		660,053
13.00%, 07/20/14		27		30
Ginnie Mae TBA
4.50%, 09/01/40		71,000,000		75,382,049
5.00%, 09/01/40		24,000,000		25,792,512
5.50%, 09/01/40		6,000,000		6,494,064
6.00%, 09/01/40		2,000,000		2,177,188

				626,764,345

Total Mortgage-Backed Securities
(Cost $610,079,943)				626,854,846

See financial notes 49

Schwab GNMA Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

U.S. Government Security 10.2% of net assets

U.S. Treasury Obligation 10.2%
U.S. Treasury Note
0.88%, 12/31/10		59,000,000		59,138,296

Total U.S. Government Securities
(Cost $59,130,554)				59,138,296



	Number		Value
Security	of Shares		($)

Other Investment Company 0.1% of net assets

Money Fund 0.1%
State Street Institutional Liquid Reserves Fund - Institutional Class		343,131		343,131

Total Other Investment Company
(Cost $343,131)				343,131



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $669,564,751 and the unrealized appreciation and depreciation were $16,890,807 and ($119,285), respectively, with a net unrealized appreciation of $16,771,522.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.
(a)		Variable-rate security.
(b)		Callable security.
(c)		Security represents right to receive monthly interest payments on an underlying pool of mortgages or assets. Principal shown is the outstanding par amount of the pool held as of the end of the period.

50 See financial notes

Schwab GNMA Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10			9/1/08 -8/31/09
Net investment income		$11,189,291		$6,057,572
Net realized gains		5,900,060		2,376,507
Net unrealized gains	+	11,690,782		4,713,544

Increase in net assets from operations		28,780,133		13,147,623

Distributions to shareholders¹

Distribution from net investment income
Investor Shares		—		1,997,765
Select Shares	+	14,494,193		4,784,862

Total distributions from net investment income		$14,494,193		$6,782,627

Transactions in Fund Shares¹


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares Sold
Investor Shares			—		$—			9,098,156		$89,995,741
Select Shares	+		48,018,891		490,165,068			29,924,002		296,885,847

Total shares sold			48,018,891		$490,165,068			39,022,158		$386,881,588


Shares Reinvested
Investor Shares			—		$—			156,921		$1,550,093
Select Shares	+		1,025,231		10,479,597			329,524		3,262,493

Total shares reinvested			1,025,231		$10,479,597			486,445		$4,812,586


Shares Redeemed
Investor Shares			—		$—			(12,106,881	)	($120,437,620	)
Select Shares	+		(21,217,556	)	(216,138,074	)		(8,573,008	)	(84,781,880	)

Total shares redeemed			(21,217,556	)	($216,138,074	)		(20,679,889	)	($205,219,500	)

Net transactions in fund shares			27,826,566		$284,506,591			18,828,714		$186,474,674

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			27,769,607		$279,291,874			8,940,893		$86,452,204
Total increase	+		27,826,566		298,792,531			18,828,714		192,839,670

End of period			55,596,173		$578,084,405			27,769,607		$279,291,874


¹		Effective August 10, 2009 all outstanding Investor Shares (9,547,868 shares valued at $95,169,330) were converted into Select Shares.

See financial notes 53

Schwab Inflation-Protected Fund™

Financial Statements

Financial Highlights


	9/1/09–			9/1/08–			9/1/07–			9/1/06–			3/31/06²–
	8/31/10			8/31/09¹			8/31/08			8/31/07			8/31/06


Per-Share Data ($)

Net asset value at beginning of period		10.05			10.35			9.90			10.01			10.00

Income (loss) from investment operations:
Net investment income (loss)		0.23	³		0.03	³		0.63			0.45			0.30
Net realized and unrealized gains (losses)		0.77			(0.20	)		0.45			(0.11	)		0.01

Total from investment operations		1.00			(0.17	)		1.08			0.34			0.31
Less distributions:
Distributions from net investment income		(0.15	)		(0.02	)		(0.63	)		(0.45	)		(0.30	)
Distributions from net realized gains		—			(0.07	)		(0.00	)⁴		—			—
Return of capital		—			(0.04	)		—			—			—

Total distributions		(0.15	)		(0.13	)		(0.63	)		(0.45	)		(0.30	)

Net asset value at end of period		10.90			10.05			10.35			9.90			10.01

Total return (%)		9.93			(1.54	)		11.02			3.51			3.11	⁵

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.50			0.50			0.50			0.50			0.36	⁶
Gross operating expenses		0.62			0.59			0.59			0.71			0.76	⁶
Net investment income (loss)		2.16			0.30			6.50			5.16			7.06	⁶
Portfolio turnover rate		67			78			63			35			2	⁵
Net assets, end of period ($ x 1,000,000)		204			278			259			119			44

¹ Effective on August 10, 2009 all outstanding Investor Shares were converted into Select Shares. The figures in the Financial Highlights reflect only the remaining share class.

² Commencement of operations.

³ Calculated based on the average shares outstanding during the period.

⁴ Amount less than $0.01.

⁵ Not annualized.

⁶ Annualized.

54 See financial notes

Schwab Inflation-Protected Fund

Portfolio Holdings as of August 31, 2010

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

Cost

Value

Holdings by Category

($)

.8%

U.S. Government Securities

185,992,348

201,709,852

.6%

Other Investment Company

1,320,177

.4%

Total Investments

187,312,525

203,030,029

.6%

Other Assets and Liabilities, Net

1,129,629

100

.0%

Net Assets

204,159,658


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

U.S. Government Securities 98.8% of net assets

U.S. Treasury Obligations 98.8%
U.S. Treasury Inflation Protected Securities
3.38%, 01/15/12		2,148,230		2,251,614
2.00%, 04/15/12		5,467,525		5,652,481
3.00%, 07/15/12		9,092,250		9,647,023
0.63%, 04/15/13		5,414,063		5,538,418
1.88%, 07/15/13		8,010,832		8,480,219
2.00%, 01/15/14		8,700,066		9,282,562
1.25%, 04/15/14		5,664,725		5,929,375
2.00%, 07/15/14		7,227,312		7,765,408
1.63%, 01/15/15		8,846,935		9,380,511
0.50%, 04/15/15		3,520,335		3,592,118
1.88%, 07/15/15		7,003,875		7,548,314
2.00%, 01/15/16		7,110,974		7,727,631
2.50%, 07/15/16		6,745,813		7,577,443
2.38%, 01/15/17		5,944,730		6,634,414
2.63%, 07/15/17		5,205,915		5,944,910
1.63%, 01/15/18		5,202,350		5,574,641
1.38%, 07/15/18		5,054,050		5,334,787
2.13%, 01/15/19		5,076,200		5,640,135
1.88%, 07/15/19		5,614,730		6,131,459
1.38%, 01/15/20		6,047,880		6,320,035
1.25%, 07/15/20		2,998,440		3,088,627
2.38%, 01/15/25		10,488,276		12,049,225
2.00%, 01/15/26		6,688,160		7,346,529
2.38%, 01/15/27		5,404,315		6,221,718
1.75%, 01/15/28		5,462,415		5,775,652
3.63%, 04/15/28		7,277,418		9,751,172
2.50%, 01/15/29		5,330,010		6,272,756
3.88%, 04/15/29		8,154,408		11,322,526
3.38%, 04/15/32		2,087,617		2,815,673
2.13%, 02/15/40		4,538,123		5,112,476

Total U.S. Government Securities
(Cost $185,992,348)				201,709,852



	Number		Value
Security	of Shares		($)

Other Investment Company 0.6% of net assets

Money Fund 0.6%
State Street Institutional Liquid Reserves Fund - Institutional Class		1,320,177		1,320,177

Total Other Investment Company
(Cost $1,320,177)				1,320,177



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $188,200,101, and the unrealized appreciation and depreciation were $14,837,524 and ($7,596), respectively, with a net unrealized appreciation of $14,829,928.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.

See financial notes 55

Schwab Inflation-Protected Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10			9/1/08 -8/31/09
Net investment income		$5,725,207		$465,959
Net realized gains (losses)		8,707,019		(12,097,965	)
Net unrealized gains	+	10,649,045		2,588,675

Increase (decrease) in net assets from operations		25,081,271		(9,043,331	)

Distributions to shareholders¹

Distribution from net investment income
Investor Shares		—		91,775
Select Shares	+	2,711,720		370,495

Total distributions from net investment income		2,711,720		462,270


Distribution from net realized gains
Investor Shares		—		360,926
Select Shares	+	—		1,606,217

Total distributions from net realized gains		—		1,967,143


Return of capital
Investor Shares		—		266,855
Select Shares	+	—		1,234,862

Total return of capital		—		1,501,717

Total distributions		$2,711,720		$3,931,130

Transactions in Fund Shares¹


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares Sold
Investor Shares			—		$—			2,340,610		$22,923,432
Select Shares	+		11,952,055		125,486,861			15,758,112		154,732,080

Total shares sold			11,952,055		$125,486,861			18,098,722		$177,655,512


Shares Reinvested
Investor Shares			—		$—			63,726		$612,607
Select Shares	+		187,445		2,008,689			120,196		1,158,740

Total shares reinvested			187,445		$2,008,689			183,922		$1,771,347


Shares Redeemed
Investor Shares			—		$—			(8,114,631	)	($79,761,243	)
Select Shares	+		(21,123,162	)	(224,149,704	)		(13,154,238	)	(126,110,100	)

Total shares redeemed			(21,123,162	)	($224,149,704	)		(21,268,869	)	($205,871,343	)

Net transactions in fund shares			(8,983,662	)	($96,654,154	)		(2,986,225	)	($26,444,484	)

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			27,706,692		$278,444,261			30,692,917		$317,863,206
Total decrease	+		(8,983,662	)	(74,284,603	)		(2,986,225	)	(39,418,945	)

End of period			18,723,030		$204,159,658			27,706,692		$278,444,261


Net investment income not yet distributed / Distribution in excess of net investment income					$3,013,486					($1	)


¹		Effective August 10, 2009, all outstanding Investor Shares (5,227,505 shares valued at $51,861,550) were converted into Select Shares.

58 See financial notes

Schwab Bond Funds

Financial Notes

1. Business Structure of the Funds:

Each of the funds discussed in this report is a series of Schwab Investments (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 Investments (organized October 26, 1990)		Schwab Tax-Free Bond Fund
Schwab Short-Term Bond Market Fund		Schwab California Tax-Free Bond Fund
Schwab Premier Income Fund		Schwab Tax-Free YieldPlus Fund
Schwab Total Bond Market Fund		Schwab California Tax-Free YieldPlus Fund
Schwab GNMA Fund		Schwab 1000 Index Fund
Schwab Inflation Protected Fund		Schwab Global Real Estate Fund
Schwab YieldPlus Fund

Each fund in this report offers one share class. Shares are bought and sold (subject to a redemption fee, see Note 8) at closing net asset value (“NAV”), which is the price for all outstanding shares of a fund. 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 may also keep certain assets in segregated accounts, as required by securities laws.

2. Significant Accounting Policies:

The following is a summary of the significant accounting policies the funds use in their preparation of financial statements. The accounting policies are in conformity with the accounting principles generally accepted in the United States of America (“GAAP”).

(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:


	•	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.

	•	Securities for which no quoted value is available: The Board of Trustees has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable. For example, the fund may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures.

	•	Futures Contracts: valued at their settlement prices as of the close of their exchanges.

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

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

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (level 3 measurements). If the funds determine that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value.

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

The three levels of the fair value hierarchy are as follows:


	•	Level 1— quoted prices in active markets for identical securities — Investments whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. The funds do not adjust the quoted price for such investments, even in situations where the funds hold a large position and a sale could reasonably impact the quoted price.

	•	Level 2— other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) — Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include certain U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage products, less liquid listed equities, and state, municipal and provincial obligations.

	•	Level 3— significant unobservable inputs (including the funds’ own assumption in determining the fair value of investments) — Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3 prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may significantly impact the resulting fair value and therefore the funds’ results of operations.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the inputs used to value the funds’ investments as of August 31, 2010:

Schwab Short-Term Bond Market Fund


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total*

U.S. Government and Government Agencies(a)		$—		$184,777,039		$—		$184,777,039
Foreign Securities(a)		—		17,742,978		—		17,742,978
Corporate Bonds(a)		—		53,106,284		—		53,106,284
Municipal Bonds(a)		—		424,643		—		424,643
Other Investment Company(a)		1,673,018		—		—		1,673,018
Short-Term Investment(a)		—		99,947		—		99,947

Total		$1,673,018		$256,150,891		$—		$257,823,909


*		The fund had no Other Financial Investments.
(a)		As categorized in Portfolio Holdings.

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

Schwab Premier Income Fund


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total

Corporate Bonds(a)		$—		$155,699,810		$—		$155,699,810
Industrial
Capital Goods		—		5,033,476		1,302,107		6,335,583
Transportation		—		350,760		2,777,500		3,128,260
Asset-Backed Obligations		—		13,204,624		—		13,204,624
Mortgage-Backed Securities(a)		—		158,326,739		—		158,326,739
Commercial Mortgage Backed Securities		—		12,975,644		—		12,975,644
U.S. Government and Government Agencies(a)		—		109,601,222		—		109,601,222
Foreign Securities(a)		—		1,587,522		—		1,587,522
Preferred Stock		1,604,531		—		—		1,604,531
Other Investment Company(a)		4,703,291		—		—		4,703,291
Short-Term Investments(a)		—		349,887		—		349,887

Total		$6,307,822		$457,129,684		$4,079,607		$467,517,113

Other Financial Instruments
Futures Contracts*		$144,901		$—		$—		$144,901


*		Futures contracts are not included in Investments and are valued at the unrealized appreciation or depreciation.
(a)		As categorized in Portfolio Holdings.

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:


	Balance							Change in											Balance
	as of		Accrued			Realized		Unrealized			Net			Gross		Gross			as of
	August 31,		Discounts			Gain		Gain			Purchases			Transfers		Transfers			August 31,
Investments in Securities	2009		(Premiums)			(Loss)		(Loss)			(Sales)			in		out			2010

Asset-Backed Obligations		$1,541,677		$35,659			$537,042		($279,317	)		($1,459,421	)		$—		($375,640	)		$—
Corporate Bonds
Finance		1,330,000		1,928			277,658		(69,586	)		(1,540,000	)		—		—			—
Industrial		2,500,000		(24,832	)		12,310		97,251			2,598,627			—		(1,103,749	)		4,079,607

Total		$5,371,677		$12,755			$827,010		($251,652	)		($400,794	)		$—		($1,479,389	)		$4,079,607

All net realized and change in unrealized gains (losses) in the tables above are reflected on the accompanying statements of operations. Changes in net unrealized gains (losses) for Level 3 investments held by the Schwab Premier Income Fund at August 31, 2010 are $10,286.

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

Schwab Total Bond Market Fund


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total*

Mortgage-Backed Securities(a)		$—		$315,036,242		$—		$315,036,242
Corporate Bonds(a)		—		169,681,418		—		169,681,418
U.S. Government and Government Agencies(a)		—		367,797,416		—		367,797,416
Commercial Mortgage Backed Securities		—		29,027,211		—		29,027,211
Asset-Backed Obligations		—		2,823,048		—		2,823,048
Foreign Securities(a)		—		35,601,558		—		35,601,558
Municipal Bonds(a)		—		6,340,584		—		6,340,584
Other Investment Company(a)		19,951,931		—		—		19,951,931
Short-Term Investments(a)		—		199,973		—		199,973

Total		$19,951,931		$926,507,450		$—		$946,459,381


*		The fund had no Other Financial Instruments.
(a)		As categorized in Portfolio Holdings.

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:


	Balance							Change in										Balance
	as of		Accrued		Realized			Unrealized		Net			Gross		Gross			as of
	August 31,		Discounts		Gain			Gain		Purchases			Transfers		Transfers			August 31,
Investments in Securities	2009		(Premiums)		(Loss)			(Loss)		(Sales)			in		out			2010

Corporate Bonds
Finance		$1,248,750		$469		($239,507	)		$500,163		($1,053,000	)		$—		($456,875	)		$—

Total		$1,248,750		$469		($239,507	)		$500,163		($1,053,000	)		$—		($456,875	)		$—

Schwab GNMA Fund


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total*

Mortgage-Backed Securities(a)		$—		$626,854,846		$—		$626,854,846
U.S. Government Security(a)		—		59,138,296		—		59,138,296
Other Investment Company(a)		343,131		—		—		343,131

Total		$343,131		$685,993,142		$—		$686,336,273


*		The fund had no Other Financial Investments.
(a)		As categorized in Portfolio Holdings.

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

Schwab Inflation Protected Fund


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total*

U.S. Government Securities(a)		$—		$201,709,852		$—		$201,709,852
Other Investment Company(a)		1,320,177		—		—		1,320,177

Total		$1,320,177		$201,709,852		$—		$203,030,029


*		The fund had no Other Financial Investments.
(a)		As categorized in Portfolio Holdings.

In January 2010, the Financial Accounting Standards Board issued new guidance requiring reporting entities to make new disclosures about amounts and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements as well as inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3, and information on purchases, sales, issuances and settlements of Level 3 securities on a gross basis. The new and revised disclosures are required to be implemented for annual and interim periods beginning after December 15, 2009, except for the disclosures surrounding purchases, sales, issuances and settlements of Level 3 fair value measurements on a gross basis, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.

The funds have adopted the new guidance for the period ended August 31, 2010. There were no significant transfers between Level 1 and Level 2 for the period ended August 31, 2010. Management is currently evaluating the impact of the adoption of the other provisions of the new guidance on the funds’ financial statements.

The funds entered into U.S. Treasury futures contracts (“futures”) from September 1, 2009 through August 31, 2010. The funds invested in futures contracts to help manage the effects of interest rate changes. The fair value and variation margin for any futures contracts held at August 31, 2010 and the realized/unrealized gains (losses) on futures contracts held during the period ended August 31, 2010 are presented on the face of the Portfolio Holdings, Statement of Assets and Liabilities and Statement of Operations, respectively. Refer to Financial Note 2(b) for the funds’ accounting policies with respect to futures contracts and Financial Note 3 for disclosures concerning the risks of investing in futures contracts. During the period, the monthly average market values of futures contracts held by the funds and the monthly average number of futures contracts were as follows:


	Market		Number of
	Values		Contracts

Schwab Short-Term Bond Market Fund		$4,006,703		26
Schwab Premier Income Fund		23,024,329		174
Schwab Total Bond Market Fund		1,197,428		9
Schwab Inflation Protected Fund		499,740		4

(b) Portfolio Investments:

Derivatives: The funds may invest in futures contracts in order to reduce the effects of uninvested cash on performance or for other reasons. Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date.

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. Subsequent payments (“variation margin”) are made or received by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized gains or losses until the contract is closed, at which time the gains and losses are realized. Futures are traded publicly on exchanges, and their market value changes daily.

Inflation-Indexed Bonds: The Schwab Inflation Protected Bond Fund invests in inflation-indexed bonds. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted to the rate of inflation. The interest rate on these

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

bonds is generally fixed at issuance at a rate lower than typical bonds. Over the life of an inflation-indexed bond, however, interest will be paid based on a principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond will be included as interest income on the Statement of Operations, even though investors do not receive their principal until maturity.

TBAs: The funds 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.

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 cash, U.S. government securities, U.S. government agency securities or other 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 or sale price under the agreement.

Delayed-delivery: The funds may buy securities on a delayed-delivery basis. In these transactions, a 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, a fund could end up paying more for the security than its market value at the time of settlement. The funds have set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis.

Securities Lending: Under the Securities Lending Program, a fund (the “Lender”) may make short-term loans of their securities to another party (the “Borrower”) to generate additional revenue from their portfolio. The Borrower provides cash, U.S. government securities or letters of credit as collateral against the loans in an amount at least equal to 100% of the market value of the loaned securities.

The cash collateral of securities loaned is invested in registered 2a-7 money market portfolios. The investments of collateral are mark-to-market daily and the value of the collateral must be at least 100% of the market value of the loan securities each day. If the value of the collateral falls below 100%, it will be adjusted the following day.

(c) Security Transactions:

Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset backed securities are recorded as adjustments to interest income.

(d) Investment Income:

Interest income is recorded as it accrues. If a fund buys a debt security at a discount (less than 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:

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

(f) Distributions to Shareholders:

The Schwab Short Term Bond Fund, Schwab Premier Income Fund, Schwab Total Bond Fund and the Schwab GNMA Fund declare distributions from net investment income every day they are open for business. These distributions, which are substantially equal to the funds’ net investment income for that day, are paid out to shareholders once a month. The Schwab Inflation Protected Fund declares and pays distributions from net investment income quarterly. All the funds declare distributions from net realized capital gains, if any, once a year.

Schwab Bond Funds

Financial Notes (continued)

2. Significant Accounting Policies (continued):

(g) Custody Credit:

Certain funds have an arrangement with their custodian bank, State Street Bank and Trust Company, under which the funds receive a credit for their uninvested cash balance to offset their 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 to 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 and these differences may be material.

(i) Federal Income Taxes:

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

(j) Indemnification:

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

3. Risk Factors:

The funds invest mainly in corporate bonds, mortgage-backed and asset-backed securities, government or municipal obligations, and other debt securities. These investments may involve certain risks, as discussed in the funds’ prospectus, including, but not limited to, those described below:

Market risk. Bond markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of a shareholder’s investment in the fund will fluctuate, which means that the shareholder could lose money.

Interest rate risk. Interest rates will rise and fall over time. During periods when interest rates are low, a fund’s yield and total return also may be low. The longer the fund’s duration, the more sensitive to interest rate movements its share price is likely to be.

Credit risk. The funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the funds to lose money or underperform. The funds could lose money if the issuer or guarantor of a portfolio investment fails to make timely principal or interest payments or otherwise honor its obligations.

Liquidity risk. A particular investment may be difficult to purchase or sell. The funds may be unable to sell a security at an advantageous time or price.

Prepayment and extension risk. The funds investments are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause a fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price.

Foreign investment risk. The funds’ investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

Schwab Bond Funds

Financial Notes (continued)

3. Risk Factors (continued):

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

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

Please refer to the funds’ prospectus for a more complete description of the principal risks of investing in the funds.

4. Affiliates and Affiliated Transactions:

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

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

Schwab

Short-Term Bond

Premier

Total Bond

Schwab

Inflation

Average Daily Net Assets

Market Fund

Income Fund

Market Fund

GNMA Fund

Protected Fund

First $500 million

0.30%

Over $500 million

0.22%

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

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

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit (“expense limitation”) the total annual fund operating expenses, excluding interest, taxes and certain non-routine expenses for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the funds’ Board of Trustees. The expense limitation as a percentage of average daily net assets is as follows:

Schwab

Short-Term Bond

Premier

Total Bond

Schwab

Inflation

Market Fund

Income Fund

Market Fund

GNMA Fund

Protected Fund

0.55%

0.63%

0.55%

0.50%

For the Schwab Total Bond Market Fund, the Legal fees and expenses related to the class action discussed in Financial Note Item 10 were non-routine expenses, however, the adviser agreed to include these legal fees and expenses within the cap for this reporting period, subject to reimbursement by the fund to the extent the fund is reimbursed, in whole or in part, by its insurance carrier for these legal fees and expenses. To the extent that the fund was not reimbursed for these legal fees and expenses by its insurance carrier, the adviser continued to include these legal fees and expenses within the expense cap. To the extent that these legal fees and expenses caused the fund’s total annual operating expenses to exceed the expense cap, the fund has been reimbursed by the adviser.

Schwab Bond Funds

Financial Notes (continued)

4. Affiliates and Affiliated Transactions (continued):

For the period ended August 31, 2010 the fund incurred $256,552 in legal expenses related to the class action noted above of which $231,703 was waived subject to recoupment in accordance with the provisions noted above. From the commencement of the class action lawsuit through August 31, 2010 the fund has incurred a total of $1,054,454 in legal expense of which $1,004,948 is subject to recoupment in accordance with the provisions noted above.

Certain Schwab Funds may own shares of other Schwab Funds. The table below reflects the percentage of each fund in this report owned by other Schwab Funds as of August 31, 2010.


	Schwab		Schwab		Schwab		Schwab
	Short-Term Bond		Premier		Total Bond		Inflation
	Market Fund		Income Fund		Market Fund		Protected Fund

Schwab MarketTrack Growth Portfolio		—%		—%		9.5%		—%
Schwab MarketTrack Balanced Portfolio		—%		—%		16.3%		—%
Schwab MarketTrack Conservative Portfolio		—%		—%		11.0%		—%
Schwab MarketTrack Growth Portfolio II		—%		—%		0.6%		—%
Schwab Target 2010 Fund		3.3%		0.9%		1.5%		1.1%
Schwab Target 2015 Fund		0.9%		0.2%		0.6%		0.5%
Schwab Target 2020 Fund		2.1%		1.0%		4.4%		2.7%
Schwab Target 2025 Fund		—%		0.2%		0.9%		0.5%
Schwab Target 2030 Fund		—%		0.6%		3.5%		1.6%
Schwab Target 2035 Fund		—%		0.1%		0.4%		0.2%
Schwab Target 2040 Fund		—%		0.5%		1.3%		0.5%
Schwab Monthly Income Fund — Moderate Payout		0.8%		0.9%		0.4%		—%
Schwab Monthly Income Fund — Enhanced Payout		3.5%		4.8%		2.0%		—%
Schwab Monthly Income Fund — Maximum Payout		3.9%		5.1%		2.0%		—%
Schwab Balanced Fund		—%		—%		3.3%		—%

The funds may engage in 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. For the year ended August 31, 2010, each fund’s total aggregate security transactions with other Schwab Funds were as follows:


Schwab Short-Term Bond Market Fund			$—
Schwab Premier Income Fund			2,064,252
Schwab Total Bond Market Fund			2,064,252
Schwab GNMA Fund			—
Schwab Inflation Protected Fund			—

Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions with other 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. The funds had no interfund borrowing or lending activity during the period.

5. Board of Trustees:

Trustees may include people who are officers and/or directors of the investment adviser or Charles Schwab & Co., Inc. 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.

Schwab Bond Funds

Financial Notes (continued)

6. Borrowing from Banks:

The funds may borrow money from banks and custodians. The funds covered in this report have custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company, an uncommitted line of credit of $100 million with Bank of America, N.A. (excluding Schwab Total Bond Market Fund) 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. The funds also pay an annual fee to State Street Bank and Trust Company for the committed line of credit.

There were no borrowings from the lines of credit for the funds during the period. However, the funds utilized their overdraft facility and incurred interest expense, which is disclosed in the Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds rate.

7. Purchases and Sales/Maturities of Investment Securities:

For the period ended August 31, 2010, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:


	Purchases of Long-Term
	U.S. Government		Purchases of Other		Total Purchases of
	Securities Transactions*		Long-Term Securities		Long-Term Securities

Schwab Short-Term Bond Market Fund		$359,527,391		$75,004,982		$434,532,373
Schwab Premier Income Fund		533,924,658		293,252,700		827,177,358
Schwab Total Bond Market Fund		1,177,758,428		252,063,579		1,429,822,007
Schwab GNMA Fund		1,483,638,249		—		1,483,638,249
Schwab Inflation Protected Fund		174,339,646		—		174,339,646


	Sales/Maturities of
	Long-Term U.S. Government		Sales/Maturities of		Total Sales/Maturities of
	Securities Transactions*		Other Long-Term Securities		Long-Term Securities

Schwab Short-Term Bond Market Fund		$354,932,278		$87,553,061		$442,485,339
Schwab Premier Income Fund		438,901,243		202,692,137		641,593,380
Schwab Total Bond Market Fund		1,166,787,537		268,965,067		1,435,752,604
Schwab GNMA Fund		1,143,332,292		—		1,143,332,292
Schwab Inflation Protected Fund		265,963,205		—		265,963,205


*		Includes securities guaranteed by U.S. Government Agencies.

8. Redemption Fee:

The Premier Income Fund may impose a short-term redemption fee on any fund shares that are redeemed or exchanged by a shareholder within a specified number of days of the purchase date. 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 $14,618 and $7,354, respectively.

Schwab Bond Funds

Financial Notes (continued)

9. Federal Income Taxes:

As of August 31, 2010, the components of distributable earnings on a tax-basis were as follows:


	Schwab			Schwab			Schwab						Schwab
	Short-Term Bond			Premier			Total Bond			Schwab			Inflation
	Market Fund			Income Fund			Market Fund			GNMA Fund			Protected Fund

Undistributed ordinary income		$114,292			$728,151			$598,242			$2,357,021			$3,013,487
Undistributed long-term capital gains		—			—			—			6,058			—
Unrealized appreciation		7,888,204			19,024,750			56,614,272			16,890,807			14,837,524
Unrealized depreciation		(9,886	)		(3,188,803	)		(218,911	)		(119,285	)		(7,596	)

Net unrealized appreciation/ (depreciation)		7,878,318			15,835,947			56,395,361			16,771,522			14,829,928

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.

Net investment income and realized capital gains and losses may differ for financial statement and tax purposes primarily due to differing treatments of paydown gains and losses and amortization of bond discounts and premiums.

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of August 31, 2010, the following funds had capital loss carry forwards available to offset future net capital gains before the expiration dates:


	Schwab		Schwab		Schwab				Schwab
	Short-Term Bond		Premier		Total Bond		Schwab		Inflation
Expiration Date	Market Fund		Income Fund		Market Fund		GNMA Fund		Protected Fund

August 31, 2014		$5,711,125		$—		$3,579,624		$—		$—
August 31, 2015		8,715,595		—		11,929,634		—		—
August 31, 2016		2,401,090		—		5,729,394		—		—
August 31, 2017		30,633,553		1,954,931		106,929,838		—		2,614,015
August 31, 2018		15,464,000		—		33,497,705		—		—

Total		$62,925,363		$1,954,931		$161,666,195		$—		$2,614,015

For tax purposes, net realized capital losses occurring after October 31, may be deferred and treated as occurring on the first day of following fiscal year. As of August 31, 2010, capital losses utilized and capital losses deferred for each fund were as follows:

Schwab

Short-Term Bond

Premier

Total Bond

Schwab

Inflation

Market Fund

Income Fund

Market Fund

GNMA Fund

Protected Fund

Deferred capital losses

$—

$322,843

$—

Capital losses utilized

—

2,892,132

—

874,022

840,660

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


	Schwab		Schwab		Schwab				Schwab
	Short-Term Bond		Premier		Total Bond		Schwab		Inflation
	Market Fund		Income Fund		Market Fund		GNMA Fund		Protected Fund

Current period distributions
Ordinary income		$4,899,461		$18,843,689		$31,723,102		$14,494,193		$2,711,720
Long-term capital gains		—		—		—		—		—
Return of capital		—		—		—		—		—
Prior period distributions
Ordinary income		$9,142,674		$15,753,613		$42,722,105		$6,782,627		$1,625,112
Long-term capital gains		—		—		—		—		804,301
Return of capital		—		—		—		—		1,501,717

Schwab Bond Funds

Financial Notes (continued)

9. Federal Income Taxes (continued):

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, and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the funds for financial reporting purposes. The funds 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, which are mainly due to differing treatments of paydown gains and losses and amortization of bond discounts and premiums, may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of August 31, 2010, the funds made the following reclassifications:


	Schwab		Schwab			Schwab						Schwab
	Short-Term Bond		Premier			Total Bond			Schwab			Inflation
	Market Fund		Income Fund			Market Fund			GNMA Fund			Protected Fund

Capital shares		$—		$—			$—			$—			$—
Undistributed net investment income		—		1,207,871			1,784,884			3,304,902			—
Net realized capital gains and losses		—		(1,207,871	)		(1,784,884	)		(3,304,902	)		—

As of August 31, 2010, management has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) 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 August 31, 2010, the funds did not incur any interest or penalties. The Schwab Short-Term Bond Market Fund, Schwab Total Bond Market Fund, Schwab GNMA Fund are not subject to examination by U.S. federal tax authorities for tax years before 2006 and by state tax authorities for tax years before 2005. The Schwab Inflation Protected Fund is not subject to examination by U.S. federal and state tax authorities for tax years before 2006. The Schwab Premier Income Fund is not subject to examination by U.S. federal and state tax authorities for tax years before 2007.

10. Other:

On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund. The lawsuit, which alleged violations of state law and federal securities law in connection with the fund’s investment policy, named the trust, the fund, CSIM and Charles Schwab & Co., Inc. (“Schwab”) as defendants. Allegations included that the fund deviated from its benchmark and improperly invested more than 25% of fund assets in collateralized mortgage obligations (CMOs) and mortgage-backed securities without obtaining a shareholder vote. A first amended complaint filed on March 2, 2009, named the trust and CSIM as defendants and added a claim for violation of California Business and Professions Code Sec. 17200. On April 27, 2009, the court issued a stay of proceedings while defendants appealed the court’s February 19, 2009 decision refusing to dismiss plaintiffs’ federal securities law claim. A hearing on the appeal was held on April 12, 2010, before the U.S. Court of Appeals for the Ninth Circuit. On August 12, 2010, the Ninth Circuit ruled in favor of the defendants and dismissed plaintiffs’ federal securities law claim. On September 28, 2010, plaintiffs filed a second amended complaint alleging state law claims asserted in the prior complaint; plaintiffs did not, however, reassert claims for violations of federal securities law or California Business and Professions Code Sec. 17200. This complaint names the trust, CSIM and current and former trustees and officers of the fund as defendants. Plaintiffs seek unspecified compensatory and rescission damages, disgorgement of fees, injunctive relief, and attorneys’ fees and costs.

On September 3, 2010, a second class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the fund. The lawsuit, which alleges violations of California Business and Professions Code Sec. 17200 in connection with the fund’s deviation from of its benchmark and concentration in mortgage-backed securities, names the trust, CSIM and Schwab as defendants, and seeks restitution and disgorgement of management or other fees.

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of:

Schwab Short-Term Bond Market Fund

Schwab Premier Income Fund

Schwab Total Bond Market Fund

Schwab GNMA Fund

Schwab Inflation Protected 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 Short-Term Bond Market Fund, Schwab Premier Income Fund, Schwab Total Bond Market Fund, Schwab GNMA Fund and Schwab Inflation Protected Fund (five of the portfolios constituting Schwab Investments, hereafter referred to as the “Funds”) at August 31, 2010, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the 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 August 31, 2010 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

October 19, 2010

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 investment advisory agreement.

The Board of Trustees (the “Board” or the “Trustees”, as appropriate) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Investments (the “Trust”) and Charles Schwab Investment Management, Inc. (“CSIM”) (the “Agreement”) with respect to existing funds in the Trust, including Schwab Short-Term Bond Market Fund, Schwab Premier Income Fund, Schwab Total Bond Market Fund, Schwab GNMA Fund and Schwab Inflation Protected Fund (the “Funds”), and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the Funds that the Board reviews during the course of each year, including information that relates to Fund operations and Fund performance. The Independent Trustees receive advice from independent counsel to the Independent Trustees, including a memorandum regarding the responsibilities of trustees for the approval of investment advisory agreements. In addition, the Independent Trustees meet in executive session outside the presence of Fund management and participate in question and answer sessions with representatives of CSIM.

The Board, including a majority of the Independent Trustees, considered information specifically relating to its consideration of the continuance of the Agreement with respect to the Funds at meetings held on April 28, 2010, and June 3, 2010, and approved the renewal of the Agreement with respect to the Funds for an additional one year term at the meeting held on June 3, 2010. The Board’s approval of the Agreement with respect to the Funds 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 Trustees also considered information provided by CSIM relating to each Fund’s portfolio management team, portfolio strategy and risk oversight structure, and internal investment guidelines. The Trustees also considered investments in CSIM’s mutual fund infrastructure, 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 with respect to the Funds.

Fund Performance. The Board considered Fund performance in determining whether to renew the Agreement with respect to the Funds. Specifically, the Trustees considered each Fund’s performance relative to a peer category of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, if applicable, and market trends. As part of this review, the Trustees considered the composition

of the peer category, selection criteria and the reputation of the third party who prepared the 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 with respect to the Funds.

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 CSIM’s contractual commitment to keep each Fund’s expense cap for so long as CSIM serves as the adviser to such Fund. The Trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts and offshore funds, 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 with respect to the Funds.

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 with respect to the Funds 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. 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 with respect to the Funds.

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 the existing contractual investment advisory fee schedules relating to the Funds that, in each case, 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 about the trustees and officers for Schwab Investments which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 84 funds.

The address for all trustees and officers is 211 Main Street, San Francisco, CA 94105. 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 Served¹)	During the Past Five Years	the Trustee	Other Directorships

Mariann Byerwalter 1960 Trustee (Trustee of Schwab Investments since 2000.)	Chairman of JDN Corporate Advisory LLC.	73	Director, Redwood Trust, Inc. (1998 – present) Director, PMI Group Inc. (2001 – 2009) Director, Excelsior Funds (2006 – 2007)


John F. Cogan 1947 Trustee (Trustee of Schwab Investments since 2008.)	Senior Fellow: The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow Stanford Institute for Economic Policy Research; Professor of Public Policy, Stanford University (Sept. 1994 – present).	73	Director, Gilead Sciences, Inc. (2005 – present) Director, Monaco Coach Corporation (2005 – 2009)


William A. Hasler 1941 Trustee (Trustee of Schwab Investments since 2000.)	Dean Emeritus, Haas School of Business, University of California, Berkeley (July 1998 – present).	73	Director, Ditech Networks Corporation (1997 – present) Director, TOUSA (1998 – present) Director, Mission West Properties (1998 – present) Director, Globalstar, Inc. (2009 – present) Director, Harris-Stratex Networks (2001 – present) Director, Aphton Corp. (1991 – 2007) Director, Solectron Corporation (1998 – 2007) Director, Genitope Corporation (2000 – 2009) Director, Excelsior Funds (2006 – 2007)


Gerald B. Smith 1950 Trustee (Trustee of Schwab Investments since 2000.)	Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (1990 – present).	73	Lead Independent Director, Board of Cooper Industries (2002 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – present) Director, Oneok, Inc (2009 – present)


Donald R. Stephens 1938 Trustee (Trustee of Schwab Investments since 1990.)	Managing Partner, D.R. Stephens & Company (investments) (1973 – present).	73	None

Independent Trustees (continued)


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 Served¹)	During the Past Five Years	the Trustee	Other Directorships

Joseph H. Wender 1944 Trustee (Trustee of Schwab Investments since 2008.)	Senior Consultant, Goldman Sachs & Co., Inc. (Jan. 2008- present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present); Senior Director, Chairman of the Finance Committee, GSC Group (July 2005 – Dec. 2007); General Partner, Goldman Sachs & Co., Inc. (Oct. 1982 – June 2005).	73	Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present)


Michael W. Wilsey 1943 Trustee (Trustee of Schwab Investments since 1990.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	73	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. Schwab²1937 Chairman and Trustee (Chairman and Trustee of Schwab Investments since 1990.)	Chairman and Director, 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.	73	None


Walter W. Bettinger II²1960 Trustee (Trustee of Schwab Investments since 2008.)	As of October 2008, President and Chief Executive Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation. Since October 2008, Director, The Charles Schwab Corporation. Since May 2008, Director, Charles Schwab & Co., Inc. and Schwab Holdings, Inc. Since 2006, Director, Charles Schwab Bank. From 2004 through 2007, Executive Vice President and President, Schwab Investor Services. From 2004 through 2005, Executive Vice President and Chief Operating Officer, Individual Investor Enterprise, and from 2002 through 2004, Executive Vice President, Corporate Services. Until October 2008, President and Chief Operating Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation.	84	None

Officers of the Trust


Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served³)		Principal Occupations During the Past Five Years

Randall W. Merk 1954 President and Chief Executive Officer (Officer of Schwab Investments since 2004.)		Executive Vice President and President, Investment Management Services, Charles Schwab & Co., Inc. (August 2004 – present); Executive Vice President, Charles Schwab & Co., Inc. (2002 – present); Director, President and Chief Executive Officer, Charles Schwab Investment Management, Inc. (August 2007 – present); Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC (Sept. 2002 – present); President and Chief Executive Officer, Schwab Strategic Trust (Oct. 2009 – present); Trustee (June 2006 – Dec. 2009), President and Chief Executive Officer (July 2007 – March 2008, July 2010 – present), Laudus Trust and Laudus Institutional Trust; President and Chief Executive Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds Trust (June 2006 – June 2007).


George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Investments since 2004.)		Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc. (November 2004 – present); Treasurer and Chief Financial Officer, Laudus Trust and Laudus Institutional Trust (2006 – present); Treasurer and Principal Financial Officer, Schwab Strategic Trust (Oct. 2009 – present); Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present); Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust (June 2006 – June 2007).


Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Investments since 1998.)		Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc. (July 2000 – present); Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc. (June 1998 – present); Vice President and Assistant Clerk, Laudus Trust and Laudus Institutional Trust (Jan. 2010 – present); Chief Legal Officer and Secretary, Schwab Strategic Trust (Oct. 2009 – present); Chief Legal Officer and Secretary, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust (June 2006 – June 2007).


Catherine MacGregor 1964 Vice President (Officer of Schwab Investments since 2005.)		Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 2007 – present) of Laudus Trust and Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).


Michael Haydel 1972 Vice President (Officer of Schwab Investments since 2006.)		Vice President, Asset Management Client Services, Charles Schwab & Co., Inc. (2004 – present); Vice President (Sept. 2005 – present), Anti-Money Laundering Officer (Oct. 2005 – Feb. 2009), Laudus Trust, Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).


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, provided that any trustee who serves on both Schwab Funds and Laudus Funds retires from both boards when first required to retire by either board. 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		Mr. Schwab and Mr. Bettinger are Interested Trustees because they are employees of Schwab and/or the investment adviser. In addition to their employment with Schwab and/or the investment adviser, Messrs. Schwab and Bettinger also own stock of The Charles Schwab Corporation.
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

agency discount notes Notes issued by federal agencies—known as Government Sponsored Enterprises, or GSEs—at a discount to their value at maturity. An agency discount note is a short-term investment offering a high degree of credit quality.

Alternative Minimum Tax (AMT) A federal income tax designed to limit the extent to which high-income taxpayers (including individuals, estates, trusts and corporations) can benefit from certain deductions and exemptions. For example, some types of income that are exempt from regular federal income tax are not exempt from the AMT.

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

asset-backed securities Bond or other debt securities that represent ownership in a pool of assets such as credit card debt.

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

average rate The average rate of interest paid annually by the fixed-income securities in a fund or portfolio.

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.

call An early repayment of a bond’s principal by the issuer, usually done because the issuer is able to refinance its bond debt at a lower rate.

call protection A term used in reference to a bond that cannot be called by the issuer before maturity, or at least for many years from the present date. A bond that offers call protection can more reliably be expected to provide a given yield over a given number of years than a bond that could be called (assuming both bonds are of the same credit quality).

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.

certificate of participation A municipal bond that is repaid from an annual budget appropriation rather than being backed by the full faith and credit of the issuer.

coupon, coupon rate The annual rate of interest paid until maturity by the issuer of a debt security.

credit-enhanced securities Securities that are backed by the credit of an entity other than the issuer (such as a financial institution). Credit enhancements, which can equal up to 100% of the security’s value, are designed to help lower the risk of default on a security and may also make the security more liquid.

credit quality The capacity of an issuer to make its interest and principal payments. See chart below.

credit risk The risk that a bond issuer may be unable to pay interest or principal to its bondholders.

discount rate The implied rate on a debt security that does not pay interest but is bought at a discount and redeemed at face value when it matures.

dividend Money from earnings that is distributed to shareholders as a given amount per share.

duration A measure of a bond’s sensitivity to interest rates. Calculations of duration generally take into account the investment’s yield, interest payments, maturity date and call features. Like maturity, duration is expressed in years, but is more accurate than maturity in determining the effect of interest rate movements on a bond investment’s price. The duration of a portfolio equals the market value weighted average of the duration of the bonds held in the portfolio.

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.

Credit Ratings

Most major bond issuers arrange with a recognized independent rating organization, such as Standard & Poor’s (S&P) or Moody’s Investors Service, to rate the creditworthiness of their bonds. The spectrum of these ratings is divided into two major categories: investment grade and below investment grade (sometimes called “junk bonds”). Bonds rated below investment grade range from those that are considered to have some vulnerability to default to those that appear on the brink of default or are in default.

effective maturity Takes into account maturity shortening features, such as the interest rate reset date or demand features, instead of the final maturity date.

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.

final maturity The date on which the principal amount must be paid.

general obligation bonds Municipal bonds that are secured by the issuer’s full faith and credit, which typically is backed by the power of the issuer to levy taxes.

interest Payments to bondholders (usually made twice a year) as compensation for loaning the bond principal to the issuer.

interest rate risk The risk that a bond’s value will fluctuate if market interest rates change or are expected to change. Bond prices tend to move in the opposite direction of interest rates: when interest rates rise, bond prices tend to fall.

liquidity-enhanced security A security that when tendered is paid from funds advanced by an entity other than the issuer (such as a large financial institution). Liquidity enhancements are often used on variable-rate securities where the portfolio manager has an option to tender the securities prior to their final maturity.

market risk Those elements of risk that are common to all securities in an asset class, and therefore cannot be significantly reduced by diversification within the asset class. Also known as “systemic risk.”’

maturity (see also “effective maturity” and “final maturity”) The date a bond is scheduled to be “retired” and its principal amount returned to the bond holders. Maturity of Investments will generally be determined using portfolio securities’ final maturity dates. However, for certain securities, maturity will be determined using securities’ effective maturity date. Except as discussed below, the effective maturity date for a security subject to a put or demand feature is the demand date, unless the security is a variable-rate or floating-rate security. If it is a variable-rate security, its effective maturity date is the earlier of its demand date or next interest rate change date. For variable-rate securities not subject to a put or demand feature and floating-rate securities, the effective maturity date is the next interest rate change date. The effective maturity of mortgage-backed and certain other asset-backed securities (as used in determining Weighted Average Maturity) are determined on an “expected life” basis by the investment adviser. Additional information relating to maturity is contained in the Schwab Bond Funds’ Statement of additional information.

mortgage-backed securities Bond or other debt securities that represent ownership in a pool of mortgage loans.

muni, municipal bonds, municipal securities Debt securities issued by a state, its counties, municipalities, authorities and other subdivisions, or the territories and possessions of the United States and the District of Columbia, including their subdivisions, agencies and instrumentalities and corporations. These securities may be issued to obtain money for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, public utilities, schools, streets, and water and sewer works.

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.

prepayment risk The risk that a mortgage-backed security may be paid off early, typically because interest rates have fallen and the homeowners who hold the underlying mortgages have refinanced those mortgages at lower rates. In this type of situation, the investor who held the mortgage-backed security will usually have to settle for a lower rate when reinvesting the principal.

restricted securities Securities that are subject to contractual restrictions on resale. These securities are often purchased in private placement transactions.

revenue bonds Municipal bonds that are issued to finance public works projects and are secured by revenue generated by the project (such as water and sewer fees) rather than the full faith and credit of the issuer.

section 4(2)/144A securities Securities exempt from registration under Section 4(2) of the Securities Act of 1933. These securities may be sold only to qualified institutional buyers under Securities Act Rule 144A.

taxable-equivalent yield The yield an investor would need to get from a taxable investment in order to match the yield paid by a given tax-exempt investment, once the effect of all applicable taxes is taken into account. For example, if your tax rate were 25%, a tax-exempt investment paying 4.5% would have a taxable-equivalent yield for you of 6.0% (4.5% ¸ [1 − 0.25%] = 6.0%).

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.

weighted average credit quality The asset-weighted overall credit quality for a bond portfolio. Charles Schwab Investment Management, Inc. (CSIM) calculates this characteristic. The fund itself has not been rated by an independent credit rating agency. The calculation excludes unrated securities, derivatives and short-term securities. Weighted average credit quality is subject to change over time.

weighted average duration Expresses the measureable change in the value of a security in response to a change in interest rates. The formula calculates the effect that a 1% change in interest rates will have on the price of a bond.

weighted average maturity For mutual funds, the maturity of all the debt securities in its portfolio, calculated as a weighted average. As a rule, the longer a fund’s weighted average maturity, the greater its interest rate risk. Money funds are required to maintain a weighted average maturity of no more than 90 days.

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

yield to maturity The annualized rate of return a bondholder could expect if the bond were held to maturity. In addition to interest payments, yield to maturity also factors in any difference between a bond’s current price and its principal amount, or face value.

PRIVACY NOTICE
THIS IS NOT PART OF THE SHAREHOLDER REPORT

A Commitment to Your Privacy

Your Privacy Is Not for Sale

At The Charles Schwab Corporation and its affiliates and subsidiaries (“Schwab,” “us,” or “we”), we’re committed to protecting the privacy of information we maintain about you. Below are details about our commitment, including the types of information we collect, how we use and share that information, and your ability to limit certain information sharing. This Privacy Notice applies to customers; retirement, other employee benefit, or stock option plan participants (“participants” includes beneficiaries under the plan and certain other employees); and other consumers with whom we have a relationship, as well as to former customers and participants. Throughout this Privacy Notice (for the purposes of this Privacy Notice only), “customers” includes retirement plan participants and other consumers with whom we have a relationship, unless specifically noted otherwise. The information we collect and how we may use it may vary depending upon the product, service, or Schwab affiliate involved. For example, Schwab may have an agreement or policy with investment advisors, employers, or plan sponsors that further limits the sharing of your personal information.

How We Collect Information About You

We collect personal information about you in a number of ways.


•	APPLICATION AND REGISTRATION INFORMATION.

We collect personal information from you when you open an account, enroll in one of our services, or participate in a Schwab promotion. We may also receive personal information from your employer or retirement or other employee benefit plan sponsor where Schwab has been hired to provide services to your company’s benefit, stock option, or similar plan. We may also collect information about you from third parties such as consumer reporting agencies to verify your identity, employment, or creditworthiness, or to better understand your financial needs. The information we collect may include personal information, including your Social Security number, as well as details about your interests, investments, and investment experience.


•	TRANSACTION AND EXPERIENCE INFORMATION.

Once your account has been opened, we collect and maintain personal information about your account activity, including your transactions, balances, positions, and history. This information allows us to administer your account and provide the services you or your employer or plan sponsor have requested.


•	WEBSITE USAGE.

When you visit our websites, we may use devices known as “cookies,” graphic interchange format files (GIFs), or other similar web tools to enhance your web experience. These tools help us to recognize you, maintain your web session, and provide a more personalized experience. To learn more, please click the Privacy link on the Schwab website(s) you use.

How We Share and Use Your Information

We may share your information with outside companies and other third parties in certain circumstances, including:


•	To help us process transactions for your account;

•	When we use other companies to provide services for us, such as printing and mailing your account statements;

•	When we believe that disclosure is required or permitted under law (for example, to cooperate with regulators or law enforcement, resolve consumer disputes, perform credit/authentication checks, or for risk control).

Certain Schwab affiliates and subsidiaries may also enter into a joint-marketing agreement with another financial institution in order to provide you with a Schwab-branded financial product or service.

State Laws

We will comply with state laws that apply to the disclosure or use of information about you.

Safeguarding Your Information — Security Is a Partnership

We take precautions to ensure the information we collect about you is protected, and is accessed only by authorized individuals who are trained regarding Schwab’s privacy and information safeguarding practices. Schwab maintains physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information. To learn more about our security measures and the measures you need to take, please click the Privacy link on the Schwab website(s) you use.

Contact Us

To change your privacy preferences, provide us with updated information, report suspected fraud or identity theft, or for any other questions, please call the number below.

Schwab Funds^® direct investors: 1-800-407-0256

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.schwabfunds.com/prospectus, 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.schwabfunds.com/prospectus or the SEC’s website at http://www.sec.gov.

The Schwab Funds Family^®

Stock 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

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 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^® 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 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.

Performance at a Glance


Total Return for the Report Period


Schwab YieldPlus Fund^® (Ticker Symbol: SWYSX)			1.38%

Barclays Capital U.S. Short Treasury: 9-12 Months Index¹			0.76%
Fund Category: Morningstar Ultrashort Bond			3.16%

Performance Details			pages 6-7



Minimum Initial Investment²			$ 100

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

Source for category information: Morningstar, Inc.


¹	While the fund may invest in debt instruments that are subject to credit risk (please see the discussion of credit risk in the principal risk section of the prospectus), the Barclays Capital U.S. Short Treasury 9-12 Months Index includes only U.S. Treasury securities. U.S. Treasury securities are direct obligations of the U.S. government and are backed by the full faith and credit of the United States and are, therefore, considered free of credit risk.

²	Please see prospectus for further detail and eligibility requirements.

2 Schwab YieldPlus Fund

From the President

Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the fund covered in this report.

Dear Shareholder,

We are pleased to provide you with this annual report to shareholders for the Schwab YieldPlus Fund^®. The content covers the 12-month period ending August 31, 2010, and includes information about the performance and management of the fund.

After two years of substantial underperformance, for this reporting period, the Schwab YieldPlus Fund outperformed its comparative index. For additional information about the performance of the fund, please refer to the managers’ discussion on the following pages of this report.

At Schwab, we encourage our investors to periodically review their portfolios, and when needed, make changes so that they are consistent with their tolerance for risk and aligned with their investment goals. If you have any questions about the Schwab YieldPlus Fund^® or other Schwab funds, we are always available at 1-800-435-4000, and additional resources may be found on schwab.com.

Thank you for investing with us.

Sincerely,

Schwab YieldPlus Fund 3

The Investment Environment

Yields of U.S. Treasury Securities: Effective Yields of Three-Month, Two-Year and Ten-Year Treasuries

Data source: Bloomberg L.P.

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.

4 Schwab YieldPlus Fund

Schwab YieldPlus Fund^®

The Schwab YieldPlus Fund seeks high current income with minimal changes in share price. The fund returned 1.38% for the 12-month period that ended August 31, 2010, while its comparative index, the Barclays Capital U.S. Short Treasury: 9-12 Months Index returned 0.76%. The combination of price appreciation due to decreasing yields and interest income produced a positive total return for the fund and the index.

During the period, the fund maintained an underweight position in U.S. Treasuries relative to the index. For example, the fund held 36% of its net assets in U.S. Treasury securities at the end of the report period. The fund allocated the balance of its assets to other sectors that offered higher yields than those available from U.S. Treasuries, which led to the fund’s outperformance relative to the index. These included allocations to the U.S. Agency sector and both investment grade and high-yield corporate bonds. Throughout the period, the fund maintained a high level of liquidity to meet ongoing fund redemptions.

As of 8/31/10:

Portfolio Composition % of Investments

These tables show three different views of the fund’s portfolio: by type of security, credit quality of the security and remaining maturity.


By Security Type¹


U.S. Government and Government Agencies		41.9%
Corporate Bonds		33.9%
Commercial Paper & Other Corporate Obligations		24.1%
Other Investment Companies		0.1%


By Credit Quality ²


AAA		66.0%
AA		10.7%
A		7.7%
BBB		13.5%
BB		1.5%
B		0.5%
Short-Term Ratings		0.1%


By Maturity³


0-6 months		44.4%
7-18 months		55.1%
19-30 months		0.5%

Weighted Average Maturity³		0.6 yr
Weighted Average Effective Duration		0.6 yr

Portfolio holdings may have changed since the report date.


¹		The percentage differs from the Portfolio Holdings because the above calculation is based on a percentage of total investments, whereas the calculation in the Portfolio Holdings is based on a percentage of total net assets.
²		Based on ratings from Moody’s. Where Moody’s ratings are not available, Standard & Poor’s ratings are used. The fund may use different ratings provided by other ratings agencies for purposes of determining compliance with the fund’s investment policies. The fund has not been rated by an independent credit rating agency.
³		As shown in the Portfolio Holdings, see Glossary for definition of maturity.

6 Schwab YieldPlus Fund

Schwab YieldPlus Fund^®

Performance Summary as of 8/31/10

August 31, 2000 – August 31, 2010
Performance of a Hypothetical
$10,000 Investment^1,8

Average Annual Total Returns^1,2,3,8


Fund and Inception Date	1 Year			5 Years			10 Years

Fund: Schwab YieldPlus Fund^® (10/1/99)		1.38	%		-9.26	%		-3.00	%
Barclays Capital U.S. Short Treasury: 9-12 Months Index ⁴		0.76	%		3.42	%		3.32	%
Fund Category: Morningstar Ultrashort Bond		3.16	%		2.34	%		2.87	%

Fund Expense Ratios⁵: Net 0.44%; Gross 3.48%

Style Assessment⁶

Yields¹


30-Day SEC Yield³		0.44%


30-Day SEC Yield–No Waiver⁷		0.05%


12-Month Distribution Yield³		0.96%


¹		Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
²		Source for category information: Morningstar, Inc.
³		Fund expenses may have been partially absorbed by CSIM and Schwab. Without these reductions, the total return/yield may have been lower.
⁴		While the fund may invest in debt instruments that are subject to credit risk (please see the discussion of credit risk in the principal risk section of the prospectus), the Barclays Capital U.S. Short Treasury: 9-12 Months Index includes only U.S. Treasury securities. U.S. Treasury securities are direct obligations of the U.S. government and are backed by the full faith and credit of the United States and are, therefore, considered free of credit risk.
⁵		As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. Fund Expense Ratios include acquired fund fees and expenses (AFFE) of 0.01% in connection with the fund’s investment in the State Street Institutional Liquid Reserves Fund. Schwab and the investment adviser have agreed to advance the fund certain litigation expenses to the extent necessary to maintain these expense limitations (excluding amounts paid in connection with judgments and settlements) in connection with certain legal matters. These advances are subject to repayment by the fund to Schwab and the investment adviser to the extent the litigation expenses are subsequently paid or reimbursed to the fund by its insurance carriers. For actual ratios during the period, refer to the financial highlights section of the financial statements.
⁶		Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund’s portfolio as of 8/31/10 and is not a precise indication of risk or performance–past, present or future. Definitions of style assessments: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower.
⁷		Yield if fund expenses had not been partially absorbed by CSIM and Schwab.
⁸		On August 10, 2009, the Investor Share class and Select Share class of the fund were combined into a single class of shares of the fund. The performance and financial history of the fund is that of the fund’s former Select Shares. Accordingly, the past performance shown is that of the fund’s former Select Shares.

Schwab YieldPlus Fund 7

Fund Expenses (Unaudited)

Examples for a $1,000 Investment


					Ending
			Beginning		Account Value		Expenses Paid
	Expense Ratio¹		Account Value		(Net of Expenses)		During Period²
	(Annualized)		at 3/01/10		at 8/31/10		3/01/10–8/31/10

Schwab YieldPlus Fund^®
Actual Return		0.43%	$	1,000	$	1,002.20	$	2.17
Hypothetical 5% Return		0.43%	$	1,000	$	1,023.04	$	2.19


¹		Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights, which covers a 12-month period.
²		Expenses for the fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year.

8 Schwab YieldPlus Fund

Schwab YieldPlus Fund^®

Financial Statements

Financial Highlights


	9/1/09–			9/1/08–			9/1/07–			9/1/06–			9/1/05–
	8/31/10			8/31/09¹			8/31/08			8/31/07			8/31/06


Per-Share Data ($)

Net asset value at beginning of period		4.81			6.19			9.41			9.66			9.68

Income (loss) from investment operations:
Net investment income (loss)		0.05			0.23			0.40			0.52			0.46
Net realized and unrealized gains (losses)		0.02			(1.38	)		(3.20	)		(0.24	)		(0.02	)

Total from investment operations		0.07			(1.15	)		(2.80	)		0.28			0.44
Less distributions:
Distributions from net investment income		(0.05	)		(0.23	)		(0.42	)		(0.53	)		(0.46	)

Net asset value at end of period		4.83			4.81			6.19			9.41			9.66

Total return (%)		1.38			(18.72	)		(30.67	)		2.85			4.69

Ratios/Supplemental Data (%)

Ratios to average net assets:
Net operating expenses		0.43			0.43			0.42			0.43			0.43
Gross operating expenses		25.92	²		3.34	³		0.44			0.43			0.43
Net investment income (loss)		0.97			4.50			5.47			5.42			4.80
Portfolio turnover rate		104			81			83			188			54
Net assets, end of period ($ x 1,000,000)		159			219			350			9,552			7,319

¹ Effective on August 10, 2009 all outstanding Investor Shares were converted into Select Shares. The figures in the Financial Highlights reflect only the remaining share class.

² The ratio of gross operating expenses would have been 0.69%, if certain non-routine expenses (litigation fees) had not been incurred.

³ The ratio of gross operating expenses would have been 0.54%, if certain non-routine expenses (litigation fees) had not been incurred.

See financial notes 9

Schwab YieldPlus Fund

Portfolio Holdings as of August 31, 2010

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


				Cost		Value
Holdings by Category				($)		($)

	41	.9%	U.S. Government and Government Agencies		66,370,727		66,770,454
	34	.0%	Corporate Bonds		54,005,745		54,115,171
	0	.1%	Other Investment Company		165,433		165,433
	24	.2%	Short-Term Investments		38,472,408		38,478,466


	100	.2%	Total Investments		159,014,313		159,529,524
	(0	.2)%	Other Assets and Liabilities, Net				(329,677	)


	100	.0%	Net Assets				159,199,847


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)

U.S. Government and Government Agencies 41.9% of net assets

U.S. Government Agency Guaranteed 3.2%
Regions Bank, (FDIC Insured)
3.25%, 12/09/11 (d)		5,000,000		5,177,305

U.S. Government Agency Securities 22.1%
Fannie Mae
0.88%, 01/12/12		10,000,000		10,053,690
1.00%, 11/23/11		10,000,000		10,076,730
Federal Home Loan Bank
0.80%, 05/06/11		15,000,000		15,063,585

				35,194,005

U.S. Treasury Obligations 16.6%
U.S. Treasury Notes
4.88%, 07/31/11		6,000,000		6,251,484
1.13%, 06/30/11		20,000,000		20,147,660

				26,399,144

Total U.S. Government and Government Agencies
(Cost $66,370,727)				66,770,454




Corporate Bonds 34.0% of net assets

Finance 19.0%


Banking 14.5%
Australia & New Zealand Banking Group Ltd.
0.82%, 10/21/10, 10/21/11 (a)(c)		3,500,000		3,512,460
Capital One Financial Corp.
5.70%, 09/15/11		1,000,000		1,041,343
Deutsche Bank AG
0.82%, 10/19/10, 01/19/12 (a)		2,000,000		1,988,324
Goldman Sachs Group, Inc.
0.93%, 10/07/10, 10/07/11 (a)		2,000,000		1,997,908
HSBC Bank PLC
1.05%, 11/12/10, 08/12/13 (a)(c)		1,500,000		1,499,457
Morgan Stanley
6.75%, 04/15/11 (b)		1,500,000		1,555,896
2.88%, 11/15/10, 05/14/13 (a)		500,000		505,488
Santander Holdings USA, Inc.
4.80%, 09/01/10		2,000,000		2,000,000
Svenska Handelsbanken AB
1.54%, 09/14/10, 09/14/12 (a)(c)		4,000,000		4,018,456
UBS Preferred Funding Trust I
8.62%, 10/01/10, 10/29/49 (a)(b)		1,000,000		1,002,078
Westpac Banking Corp.
0.82%, 10/21/10, 10/21/11 (a)(c)		4,000,000		3,999,008

				23,120,418


Finance Company 2.0%
HSBC Finance Corp.
5.70%, 06/01/11		1,090,000		1,127,591
International Lease Finance Corp.
5.63%, 09/15/10		750,000		753,750
SLM Corp.
0.74%, 09/15/10, 03/15/11 (a)		1,250,000		1,237,942

				3,119,283


Insurance 1.2%
Metropolitan Life Global Funding I
1.03%, 10/12/10, 04/10/12 (a)(c)		2,000,000		2,000,008


Real Estate Investment Trust 1.3%
Westfield Capital Corp Ltd.
4.38%, 11/15/10 (b)(c)		2,000,000		2,014,316

				30,254,025

Industrial 9.8%


Communications 3.0%
Telecom Italia Capital S.A.
6.20%, 07/18/11 (b)		1,150,000		1,194,114
Telefonica Europe BV
7.75%, 09/15/10 (b)		1,500,000		1,502,370
Vodafone Group plc
0.88%, 09/15/10, 06/15/11 (a)		2,000,000		2,003,674

				4,700,158


Consumer Cyclical 1.7%
PACCAR Financial Corp.
0.75%, 09/07/10, 04/05/13 (a)		2,000,000		2,004,106
Royal Caribbean Cruises Ltd.
8.75%, 02/02/11		750,000		768,750

				2,772,856

10 See financial notes

Schwab YieldPlus Fund

Portfolio Holdings continued


	Face
Security	Amount		Value
Rate, Maturity Dates*	($)		($)


Consumer Non-Cyclical 3.3%
Anheuser-Busch InBev Worldwide, Inc.
1.27%, 09/26/10, 03/26/13 (a)		1,250,000		1,251,883
Heinz (H.J.) Finance Co.
6.63%, 07/15/11 (b)		1,000,000		1,049,013
Molson Coors Capital Finance ULC
4.85%, 09/22/10 (b)		825,000		826,972
Reynolds American, Inc.
1.24%, 09/15/10, 06/15/11 (a)(b)		1,000,000		1,001,883
The Kroger Co.
6.80%, 04/01/11 (b)		1,124,000		1,162,622

				5,292,373


Technology 1.3%
International Business Machines Corp.
0.48%, 11/04/10, 11/04/11 (a)		2,000,000		2,003,412


Transportation 0.5%
Delta Air Lines, Inc.
7.57%, 11/18/10 (b)		750,000		757,500

				15,526,299

Utilities 5.2%


Electric 4.3%
Columbus Southern Power Co.
0.94%, 09/16/10, 03/16/12 (a)		500,000		500,602
Dominion Resources, Inc.
4.75%, 12/15/10 (b)		1,000,000		1,011,938
Georgia Power Co.
0.86%, 09/15/10, 03/15/13 (a)(b)		500,000		500,495
Nisource Finance Corp.
7.88%, 11/15/10 (b)		1,400,000		1,417,958
Southern Co.
0.92%, 10/21/10, 10/21/11 (a)		3,500,000		3,514,962

				6,945,955


Natural Gas 0.9%
Kinder Morgan Finance
5.35%, 01/05/11 (b)		500,000		508,750
Williams Cos., Inc.
2.53%, 10/01/10 (a)(c)		880,000		880,142

				1,388,892

				8,334,847

Total Corporate Bonds
(Cost $54,005,745)				54,115,171



	Number		Value
Security	of Shares		($)

Other Investment Company 0.1% of net assets

Money Fund 0.1%
State Street Institutional Liquid Reserves Fund - Institutional Class		165,433		165,433

Total Other Investment Company
(Cost $165,433)				165,433



	Face
Issuer	Amount		Value
Rate, Maturity Date*	($)		($)

Short-Term Investments 24.2% of net assets

U.S. Government Agency Security 3.2%
Fannie Mae
0.00%, 12/22/10 (e)		5,000,000		4,997,820

U.S. Treasury Obligations 21.0%
U.S. Treasury Bills
0.14%, 10/21/10		5,000,000		4,999,066
0.20%, 12/23/10		12,000,000		11,994,840
0.20%, 03/10/11		14,000,000		13,987,442
0.24%, 10/14/10		2,500,000		2,499,298

				33,480,646

Total Short-Term Investments
(Cost $38,472,408)				38,478,466



End of Investments.

At 08/31/10, the tax basis cost of the fund’s investments was $159,014,313, and the unrealized appreciation and depreciation were $541,682 and ($26,471), respectively, with a net unrealized appreciation of $515,211.


*		For variable-rate obligations the first maturity date shown is the next interest rate change date. The second maturity date shown is the final legal maturity. See Glossary for definition of maturity.
(a)		Variable-rate security.
(b)		Callable security.
(c)		Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $17,923,847 or 11.3% of net assets.
(d)		This debt is guaranteed under the FDIC Temporary Liquidity Guarantee Program, and the FDIC has stated that this debt is backed by the full faith and credit of the United States.
(e)		Zero Coupon Bond.

See financial notes 11

Schwab YieldPlus Fund

Statement of

Operations

For September 1, 2009 through August 31, 2010.



Investment Income

Interest		$2,586,273
Dividends	+	36,993

Total investment income		2,623,266

Expenses

Investment adviser and administrator fees		561,413
Shareholder service fees		456,506
Legal fees*		47,210,176
Shareholder reports		65,644
Registration fees		46,704
Trustees’ fees		45,874
Portfolio accounting fees		45,650
Professional fees		33,311
Transfer agent fees		26,781
Custodian fees		2,540
Interest expense		32
Other expenses	+	13,843

Total expenses		48,508,474
Expense reduction by adviser and Schwab**	−	47,696,574
Custody credits	−	56

Net expenses	−	811,844

Net investment income		1,811,422

Realized and Unrealized Gains (Losses)

Net realized losses on investments		(7,068,204	)
Net unrealized gains on investments	+	7,942,660

Net realized and unrealized gains		874,456

Increase in net assets resulting from operations		$2,685,878


*		Includes legal fees and expenses and the proposed settlement incurred by the fund in connection with the litigation matter discussed in items 4 and 9 of the Financial Notes.
**		Includes legal fees and expenses and the proposed settlement already reimbursed to the adviser as discussed in items 4 and 9 of the Financial Notes.

See financial notes 13

Schwab YieldPlus Fund

Statement of

Changes in Net Assets

For the current and prior report periods.



Operations


9/1/09 -8/31/10				9/1/08 -8/31/09
Net investment income		$1,811,422			$13,159,910
Net realized losses		(7,068,204	)		(123,186,786	)
Net unrealized gains	+	7,942,660			40,408,350

Increase (decrease) in net assets from operations		2,685,878			(69,618,526	)

Distributions to shareholders¹

Distribution from net investment income
Investor Shares		—			3,804,404
Select Shares	+	1,811,422			9,361,553

Total distributions from net investment income		$1,811,422			$13,165,957

Transactions in Fund Shares¹


		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		VALUE			SHARES		VALUE
Shares Sold
Investor Shares			—		$—			377,912		$1,998,785
Select Shares	+		3,342,168		16,185,842			16,621,097		80,200,399

Total shares sold			3,342,168		$16,185,842			16,999,009		$82,199,184


Shares Reinvested
Investor Shares			—		$—			605,875		$3,178,810
Select Shares	+		287,962		1,393,120			1,309,848		6,897,683

Total shares reinvested			287,962		$1,393,120			1,915,723		$10,076,493


Shares Redeemed
Investor Shares			—		$—			(22,483,319	)	($113,277,904	)
Select Shares	+		(16,158,205	)	(78,094,993	)		(29,034,151	)	(161,106,266	)

Total shares redeemed			(16,158,205	)	($78,094,993	)		(51,517,470	)	($274,384,170	)

Net transactions in fund shares			(12,528,075	)	($60,516,031	)		(32,602,738	)	($182,108,493	)

Shares Outstanding and Net Assets

		9/1/09 -8/31/10					9/1/08 -8/31/09
			SHARES		NET ASSETS			SHARES		NET ASSETS
Beginning of period			45,463,327		$218,841,422			78,066,065		$483,734,398
Total decrease	+		(12,528,075	)	(59,641,575	)		(32,602,738	)	(264,892,976	)

End of period			32,935,252		$159,199,847			45,463,327		$218,841,422


¹		Effective August 10, 2009, all outstanding Investor Shares (14,159,927 shares valued at $67,442,318) were converted into Select Shares.

14 See financial notes

Schwab YieldPlus Fund

Financial Notes

1. Business Structure of the Fund:

Schwab YieldPlus Fund is a series of Schwab Investments (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 Investments (organized October 26, 1990)		Schwab Tax-Free Bond Fund
Schwab YieldPlus Fund		Schwab California Tax-Free Bond Fund
Schwab Short-Term Bond Market Fund		Schwab Tax-Free YieldPlus Fund
Schwab Premier Income Fund		Schwab California Tax-Free YieldPlus Fund
Schwab Total Bond Market Fund		Schwab 1000 Index Fund
Schwab GNMA Fund		Schwab Global Real Estate Fund
Schwab Inflation Protected Fund

Schwab YieldPlus Fund offers one share class. Shares are bought and sold at closing net asset value (“NAV”), which is the price for all outstanding shares of the fund. 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 may also keep certain assets in segregated accounts, as required by securities laws.

2. Significant Accounting Policies:

The following is a summary of the significant accounting policies the fund uses in its preparation of financial statements. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

(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:


	•	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.

	•	Securities for which no quoted value is available: The Board of Trustees has adopted procedures to fair value the fund’s securities when market prices are not “readily available” or are unreliable. For example, the fund may fair value a security when a security is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is closed during regular market hours. The fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Board of Trustees regularly reviews fair value determinations made by the fund pursuant to the procedures.

	•	Futures Contracts: valued at their settlement prices as of the close of their exchanges.

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

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

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (level 3 measurements). If the fund determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value.

Schwab YieldPlus Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

The three levels of the fair value hierarchy are as follows:


	•	Level 1 — quoted prices in active markets for identical securities — Investments whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. The fund does not adjust the quoted price for such investments, even in situations where the fund holds a large position and a sale could reasonably impact the quoted price.

	•	Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) — Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include certain U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage products, less liquid listed equities, and state, municipal and provincial obligations.

	•	Level 3 — significant unobservable inputs (including the fund’s own assumption in determining the fair value of investments) — Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When observable prices are not available for these securities, the fund uses one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the fund in estimating the value of Level 3 prices may include the original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3 prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the fund in the absence of market information. Assumptions used by the fund due to the lack of observable inputs may significantly impact the resulting fair value and therefore the fund’s results of operations.


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total*

U.S. Government and Government Agencies(a)		$—		$66,770,454		$—		$66,770,454
Corporate Bonds(a)		—		53,357,671		—		53,357,671
Industrial
Transportation		—		—		757,500		757,500
Other Investment Company(a)		165,433		—		—		165,433
Short-Term Investments(a)		—		38,478,466		—		38,478,466

Total		$165,433		$158,606,591		$757,500		$159,529,524


*		The fund had no Other Financial Instruments.
(a)		As categorized in Portfolio Holdings.

Schwab YieldPlus Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:

Asset Valuation Inputs


	Balance								Change in										Balance
	as of		Accrued			Realized			Unrealized			Net			Gross		Gross		as of
	August 31,		Discounts			Gain			Appreciation			Purchases			Transfers		Transfers		August 31,
Investments in Securities	2009		(Premiums)			(Loss)			(Depreciation)			(Sales)			In		Out		2010

Asset-Backed Obligations		$11,383,000		$15			($7,999,880	)		$8,616,865			($12,000,000	)		$—		$—		$—
Corporate Bonds
Industrial		1,500,000		(3,463	)		16,665			(28,427	)		(727,275	)		—		—		757,000

		$12,883,000		($3,448	)		($7,983,215	)		$8,588,438			($12,727,275	)		$—		$—		$757,000

All net realized and change in unrealized gains (losses) in the table above are reflected in the accompanying statements of operations changes in net unrealized gains (losses) for Level 3 investment held by the fund at August 31, 2010 are ($11,642).

(b) Portfolio Investments:

TBAs: 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.

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

The fund’s repurchase agreements are fully collateralized by cash, U.S. government securities, U.S. government agency securities or other 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 or sale price under the agreement.

Delayed-delivery: The fund may buy securities on a delayed-delivery basis. In these transactions, the fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security’s value falls before settlement occurs, the fund could end up paying more for the security than its market value at the time of settlement. The fund has set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis.

(c) Security Transactions:

Schwab YieldPlus Fund

Financial Notes (continued)

2. Significant Accounting Policies (continued):

(d) Investment Income:

Interest income is recorded as it accrues. If the fund buys a debt security at a discount (less than 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:

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

(f) Distributions to Shareholders:

The fund declares distributions from net investment income, if any, every day it is open for business. These distributions, which are substantially equal to the fund’s net investment income for that day, are paid out to shareholders once a month. The fund makes distributions from net realized capital gains, if any, once a year.

(g) Custody Credit:

Certain funds have an arrangement with their custodian bank, State Street Bank and Trust Company, 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 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 the fund to be remote.

3. Risk Factors:

The fund primarily invests in investment-grade bonds (high and certain medium quality, AAA to BBB- or the unrated equivalent as determined by the investment adviser). These investments may involve certain risks, as discussed in the funds’ prospectus, including, but not limited to, those described below:

Management risk. As with all actively managed funds, the strategies of the fund’s investment adviser may not achieve their desired results. Poor stock selection or a focus on securities in a particular sector may cause the fund to underperform its benchmark or other funds with a similar investment objective.

Schwab YieldPlus Fund

Financial Notes (continued)

3. Risk Factors (continued):

Interest rate risk. Interest rates will rise and fall over time. During periods when interest rates are low, the fund’s yield and total return also may be low. The longer the fund’s duration, the more sensitive to interest rate movements its share price is likely to be.

Credit risk. The fund is subject to the risk that a decline in the credit quality of a portfolio investment could cause the fund to lose money or underperform. The fund could lose money if the issuer or guarantor of a portfolio investment fails to make timely principal or interest payments or otherwise honor its obligations.

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

Prepayment and extension risk. The fund’s investments are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the fund to hold securities paying lower-than-market rates of interest, which could hurt the fund’s yield or share price.

Foreign investment risk. The fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

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

Please refer to the fund’s prospectus for a more complete description of the principal risks of investing in the fund.

4. Affiliates and Affiliated Transactions:

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

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


Average Daily Net Assets

First $500 million			0.30%
Over $500 million			0.22%

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

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

Schwab YieldPlus Fund

Financial Notes (continued)

4. Affiliates and Affiliated Transactions (continued):

Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the fund to limit total annual fund operating expenses to 0.43%, excluding interest, taxes and certain non-routine expenses for so long as CSIM serves as the investment adviser to the fund, which may only be amended or terminated with the approval of the fund’s Board of Trustees.

The legal fees and proposed settlements related to the litigation matters discussed in Financial Note Item 9 were non-routine expenses. However, the adviser agreed to include these legal fees and expenses within the cap for this reporting period, subject to reimbursement by the fund to the extent the fund is reimbursed, in whole or in part, by its insurance carrier for these legal fees and expenses. To the extent that the fund was not reimbursed for these legal fees and expenses by its insurance carrier, the adviser continued to include these legal fees and expenses within the expense cap. To the extent that these legal fees and expenses caused the fund’s total annual operating expenses to exceed the expense cap, the fund has been reimbursed by the adviser.

For the period ended August 31, 2010 the fund incurred $8,378,788 in legal expense related to the litigation matters. In addition, the fund paid $38,829,570 in a proposed settlement of the federal and state claims noted in Financial Note Item 9. Both the legal expense and proposed settlement were waived by the adviser subject to recoupment in accordance with the provisions noted above. From the commencement of the class action lawsuit through August 31, 2010, the fund has incurred a total of $55,475,358 in legal fees and proposed settlement charges of which $50,000,000 has been reimbursed by its insurance carrier and which was recouped in accordance with the provisions noted above. No further insurance reimbursements related to these litigation matters is expected and no further amounts are expected to be recouped.

The fund may engage in 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 August 31, 2010, the fund had no security transactions with other Schwab Funds.

Pursuant to an exemptive order issued by the SEC, the fund may enter into interfund borrowing and lending transactions with other 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. The fund had no interfund borrowings or lending activity during the period.

5. Board of Trustees:

6. Borrowing from Banks:

The fund may borrow money from banks and custodians. The fund covered in this report has custodian overdraft facilities 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 was no borrowing from the line of credit for the fund during the period. However, the fund utilized its overdraft facility and incurred interest expense, which is disclosed in the Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds rate.

Schwab YieldPlus Fund

Financial Notes (continued)

7. Purchases and Sales/Maturities of Investment Securities:

For the period ended August 31, 2010, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:


Purchases of Long-Term
U.S. Government		Purchases of Other		Total Purchases of
Securities Transactions*		Long-Term Securities		Long-Term Securities

	$71,409,222		$90,958,653		$162,367,875


Sales/Maturities of
Long-Term U.S. Government		Sales/Maturities of		Total Sales/Maturities of
Securities Transactions*		Other Long-Term Securities		Long-Term Securities

	$85,236,126		$92,116,627		$177,352,753


*		Includes securities guaranteed by U.S. Government Agencies.

8. Federal Income Taxes:

As of August 31, 2010, the components of distributable earnings on a tax-basis were as follows:


Undistributed ordinary income	$21,885
Undistributed long-term capital gains	—
Unrealized appreciation	541,682
Unrealized depreciation	(26,471	)

Net unrealized appreciation/(depreciation)	515,211

Capital loss carry forwards may be used to offset future realized capital gains for federal income tax purposes. As of August 31, 2010, the fund had capital loss carry forwards available to offset future net capital gains before the expiration dates:


Expiration Date

August 31, 2011			$47,204,149
August 31, 2012			7,223,024
August 31, 2013			7,728,082
August 31, 2014			—
August 31, 2015			8,206,981
August 31, 2016			112,644,944
August 31, 2017			1,476,568,764
August 31, 2018			113,449,273

Total			$1,773,025,217

For tax purposes, net realized capital losses occurring after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. As of August 31, 2010, the fund had no deferred realized net capital losses and did not utilize any capital losses to offset capital gains.

Schwab YieldPlus Fund

Financial Notes (continued)

8. Federal Income Taxes (continued):

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


Current Period Distributions
Ordinary income			$1,811,422
Long-term capital gains			—
Return of capital			—

Prior Period Distributions
Ordinary income			$13,165,957
Long-term capital gains			—
Return of capital			—

The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of August 31, 2010, the fund made the following reclassifications:


Capital shares	($286,529	)
Undistributed net investment income	—
Net realized capital gains and losses	286,529

The reclassification is related to the capital losses of $286,529 expired as of August 31, 2010.

9. Other:

The Schwab YieldPlus Fund is the subject of consolidated class action litigation and regulatory investigations. The fund is designed to invest in a variety of fixed income instruments, including corporate bonds, asset-backed securities, mortgage-backed securities and other fixed income investments. The credit crisis that began in mid-2007 led to a decline in the value of a majority of fixed income investments market wide. As a result, certain clients who chose to invest in the fund experienced a decline in their investments, leading to the litigation.

Nine class action lawsuits were filed between March and May 2008 on behalf of investors in the YieldPlus Fund alleging violations of state law and federal securities law in connection with the fund’s investment policy, disclosures and marketing. These cases were consolidated in a single action on July 3, 2008, in the U.S. District Court for the Northern District of California. Specific allegations include changes to the investment policy of the fund regarding limits on positions in mortgage-backed securities without obtaining a shareholder vote; inadequate disclosure of the risks associated with fund investments in mortgage-backed securities and fund risk management; inaccurate reporting of the fund’s weighted-average duration; and failure to disclose redemptions of positions in the fund by other Schwab investment funds. The lawsuit seeks unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, and costs and attorneys’ fees. Defendants named in the lawsuit include the fund itself, the trust, CSIM, Charles Schwab & Co., Inc. (“Schwab”), The Charles Schwab Corporation, Charles R. Schwab, Randall W. Merk (current president of the fund), and current and former trustees and officers of the fund and/or Schwab. On February 4, 2009, the court denied defendants’ motion to dismiss plaintiffs’ federal law claims and dismissed all but one state law claim. On August 21, 2009, the court certified two classes of plaintiffs for purposes of the federal law claims and a single class of plaintiffs for purposes of the remaining state law claim.

On March 30, 2010, the court granted plaintiffs’ motion for summary judgment holding defendants liable for plaintiffs’ state law claim regarding changes to the investment policy of the fund, which plaintiffs alleged were made without shareholder approval in violation of Section 13(a) of the Investment Company Act of 1940. On April 5, 2010, defendants filed a motion for interlocutory appeal of this ruling, which the court denied at a hearing on April 26, 2010. On April 8, 2010, the court issued an

Schwab YieldPlus Fund

Financial Notes (continued)

9. Other (continued):

order denying defendants’ motion for summary judgment on plaintiffs’ federal law claims. On April 23, 2010, the fund and several of the other defendants entered into a settlement agreement with plaintiffs, and without admitting liability, agreed to a total of $200 million to resolve plaintiffs’ federal law claims. On May 14, 2010, the fund and several of the other defendants entered into a settlement agreement with plaintiffs, and without admitting liability, agreed to resolve plaintiffs’ state law claim for $35 million. The settlement agreements were preliminarily approved by the court on May 26, 2010, and remain subject to final court approval. On October 14, 2010, the court issued an opinion holding that federal securities law class members resident outside of California would not be precluded under the preliminary settlement agreements from bringing a further claim under California law against the defendants. The fund is reviewing the court’s opinion in order to determine its implications for the tentative settlement. For the year ended August 31, 2010, the fund expensed $38,829,570 in connection with the lawsuit, reflecting the preliminary settlements, all of which was reimbursed by the fund’s insurance company. The fund will continue to evaluate any further litigation expense pending final resolution of the litigation; actual liability could be higher or lower than the amount expensed.

On March 2, 2010, in the Superior Court of California for the County of San Francisco, a shareholder derivative lawsuit was filed on behalf of the fund. Defendants named in the lawsuit include the trust, CSIM, Schwab, Charles R. Schwab, Randall W. Merk and current and former trustees and officers of the fund and/or Schwab. Specific allegations include changes to the investment policy of the fund regarding limits on positions in mortgage-backed securities without properly notifying shareholders and without obtaining a shareholder vote. On March 11, 2010, the parties agreed to enter into a stay of the shareholder derivative lawsuit pending the resolution of the parallel class action lawsuit.

Separately, the fund has been responding to investigations by federal and state regulators regarding these matters. On October 14, 2009, the trust received a Wells notice from the staff of the Securities and Exchange Commission (“SEC”) regarding the staff’s preliminary determination to recommend the filing of a civil enforcement action against the trust, CSIM, Schwab, and the president of the fund (the “Schwab Parties”) for possible violations of the securities laws with respect to the fund. On October 27, 2009, the trust also received a Wells notice from FINRA regarding a preliminary determination to recommend disciplinary action against the Schwab Parties for possible violation of securities laws and FINRA rules with respect to the fund. The Schwab Parties have responded to the notices to explain why they believe enforcement charges are unwarranted, and have been in discussions with the SEC and FINRA staff and state regulators regarding potential settlement of civil regulatory charges. Given the status of those discussions, the Schwab Parties are unable to predict whether a settlement with the SEC or other regulators is probable, or to estimate the range of any potential liability, and therefore has not established a reserve in connection therewith. Although the Schwab Parties believe they have strong defenses if enforcement proceedings were instituted, any adverse judgment could result in the imposition of disgorgement, penalties, and other monetary and injunctive relief against the Schwab Parties.

10. Subsequent Events:

Management has determined there are no other subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of:

Schwab YieldPlus 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 YieldPlus Fund (one of the portfolios constituting Schwab Investments, hereafter referred to as the “Fund”) at August 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2010 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

October 21, 2010

Investment Advisory Agreement Approval

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

The Board, including a majority of the Independent Trustees, considered information specifically relating to its consideration of the continuance of the Agreement with respect to the Fund at meetings held on April 28, 2010, and June 3, 2010, and approved the renewal of the Agreement with respect to the Fund for an additional one year term at the meeting held on June 3, 2010. The Board’s approval of the Agreement with respect to the Fund 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 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;

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 Trustees also considered information provided by CSIM relating to the Fund’s portfolio management team, portfolio strategy and risk oversight structure, and internal investment guidelines. The Trustees also considered investments in CSIM’s mutual fund infrastructure, 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 the vast majority 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 with respect to the Fund.

Fund Performance. The Board considered Fund performance in determining whether to renew the Agreement with respect to the Fund. Specifically, the Trustees considered the Fund’s performance relative to a peer category of other mutual funds and an appropriate index/benchmark, in light of total return, yield, and market trends. As part of this review, the Trustees considered the composition of the peer category, selection criteria and the reputation of the third party who prepared the 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. With respect to recent performance, the Trustees took into account the recent unusual

market conditions and the impact of heavy shareholder redemptions on 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 with respect to the Fund.

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 group and comparison 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 CSIM’s contractual commitment to keep the Fund’s expense cap for so long as CSIM serves as the adviser to the Fund. The Trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts and offshore funds, 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 with respect to the Fund.

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 Fund, such as whether, by virtue of its management of the Fund, 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 with respect to the Fund under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to the Fund by CSIM and its affiliates. 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 with respect to the Fund.

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 the existing contractual investment advisory fee schedule relating to the Fund that includes 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

The tables below give information about the trustees and officers for Schwab Investments 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, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 84 funds.

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 Served¹)	During the Past Five Years	the Trustee	Other Directorships

Mariann Byerwalter 1960 Trustee (Trustee of Schwab Investments since 2000.)	Chairman of JDN Corporate Advisory LLC.	73	Director, Redwood Trust, Inc. (1998 – present) Director, PMI Group Inc. (2001 – 2009) Director, Excelsior Funds (2006 – 2007)


John F. Cogan 1947 Trustee (Trustee of Schwab Investments since 2008.)	Senior Fellow: The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow Stanford Institute for Economic Policy Research; Professor of Public Policy, Stanford University (Sept. 1994 – present).	73	Director, Gilead Sciences, Inc. (2005 – present) Director, Monaco Coach Corporation (2005 – 2009)


William A. Hasler 1941 Trustee (Trustee of Schwab Investments since 2000.)	Dean Emeritus, Haas School of Business, University of California, Berkeley (July 1998 – present).	73	Director, Ditech Networks Corporation (1997 – present) Director, TOUSA (1998 – present) Director, Mission West Properties (1998 – present) Director, Globalstar, Inc. (2009 – present) Director, Harris-Stratex Networks (2001 – present) Director, Aphton Corp. (1991 – 2007) Director, Solectron Corporation (1998 – 2007) Director, Genitope Corporation (2000 – 2009) Director, Excelsior Funds (2006 – 2007)


Gerald B. Smith 1950 Trustee (Trustee of Schwab Investments since 2000.)	Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (1990 – present).	73	Lead Independent Director, Board of Cooper Industries (2002 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – present) Director, Oneok, Inc (2009 – present)


Donald R. Stephens 1938 Trustee (Trustee of Schwab Investments since 1990.)	Managing Partner, D.R. Stephens & Company (investments) (1973 – present).	73	None

Independent Trustees (continued)


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 Served¹)	During the Past Five Years	the Trustee	Other Directorships

Joseph H. Wender 1944 Trustee (Trustee of Schwab Investments since 2008.)	Senior Consultant, Goldman Sachs & Co., Inc. (Jan. 2008- present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present); Senior Director, Chairman of the Finance Committee, GSC Group (July 2005 – Dec. 2007); General Partner, Goldman Sachs & Co., Inc. (Oct. 1982 – June 2005).	73	Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present)


Michael W. Wilsey 1943 Trustee (Trustee of Schwab Investments since 1990.)	Chairman and Chief Executive Officer, Wilsey Bennett, Inc. (real estate investment and management, and other investments).	73	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. Schwab²1937 Chairman and Trustee (Chairman and Trustee of Schwab Investments since 1990.)	Chairman and Director, 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.	73	None


Walter W. Bettinger II²1960 Trustee (Trustee of Schwab Investments since 2008.)	As of October 2008, President and Chief Executive Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation. Since October 2008, Director, The Charles Schwab Corporation. Since May 2008, Director, Charles Schwab & Co., Inc. and Schwab Holdings, Inc. Since 2006, Director, Charles Schwab Bank. From 2004 through 2007, Executive Vice President and President, Schwab Investor Services. From 2004 through 2005, Executive Vice President and Chief Operating Officer, Individual Investor Enterprise, and from 2002 through 2004, Executive Vice President, Corporate Services. Until October 2008, President and Chief Operating Officer, Charles Schwab & Co., Inc. and The Charles Schwab Corporation.	84	None

Officers of the Trust


Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time Served³)		Principal Occupations During the Past Five Years

Randall W. Merk 1954 President and Chief Executive Officer (Officer of Schwab Investments since 2004.)		Executive Vice President and President, Investment Management Services, Charles Schwab & Co., Inc. (August 2004 – present); Executive Vice President, Charles Schwab & Co., Inc. (2002 – present); Director, President and Chief Executive Officer, Charles Schwab Investment Management, Inc. (August 2007 – present); Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC (Sept. 2002 – present); President and Chief Executive Officer, Schwab Strategic Trust (Oct. 2009 – present); Trustee (June 2006 – Dec. 2009), President and Chief Executive Officer (July 2007 – March 2008, July 2010 – present), Laudus Trust and Laudus Institutional Trust; President and Chief Executive Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds Trust (June 2006 – June 2007).


George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Investments since 2004.)		Senior Vice President and Chief Financial Officer, Charles Schwab Investment Management, Inc. (November 2004 – present); Treasurer and Chief Financial Officer, Laudus Trust and Laudus Institutional Trust (2006 – present); Treasurer and Principal Financial Officer, Schwab Strategic Trust (Oct. 2009 – present); Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present); Treasurer, Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust (June 2006 – June 2007).


Koji E. Felton 1961 Secretary and Chief Legal Officer (Officer of Schwab Investments since 1998.)		Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment Management, Inc. (July 2000 – present); Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc. (June 1998 – present); Vice President and Assistant Clerk, Laudus Trust and Laudus Institutional Trust (Jan. 2010 – present); Chief Legal Officer and Secretary, Schwab Strategic Trust (Oct. 2009 – present); Chief Legal Officer and Secretary, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust (June 2006 – June 2007).


Catherine MacGregor 1964 Vice President (Officer of Schwab Investments since 2005.)		Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 2007 – present) of Laudus Trust and Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).


Michael Haydel 1972 Vice President (Officer of Schwab Investments since 2006.)		Vice President, Asset Management Client Services, Charles Schwab & Co., Inc. (2004 – present); Vice President (Sept. 2005 – present), Anti-Money Laundering Officer (Oct. 2005 – Feb. 2009), Laudus Trust, Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).


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, provided that any trustee who serves on both Schwab Funds and Laudus Funds retires from both boards when first required to retire by either board. 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		Mr. Schwab and Mr. Bettinger are Interested Trustees because they are employees of Schwab and/or the investment adviser. In addition to their employment with Schwab and/or the investment adviser, Messrs. Schwab and Bettinger also own stock of The Charles Schwab Corporation.
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.