N-CSRS 1 f22869nvcsrs.txt FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-8314 Schwab Annuity Portfolios ----------------------------------------------- (Exact name of registrant as specified in charter) 101 Montgomery Street, San Francisco, California 94104 ------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Evelyn Dilsaver Schwab Annuity Portfolios 101 Montgomery Street, San Francisco, California 94104 ----------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (415) 627-7000 Date of fiscal year end: December 31 Date of reporting period: June 30, 2006 ITEM 1: REPORT(s) TO SHAREHOLDERS. [CHARLES SCHWAB LOGO] MONEY MARKET SCHWAB MONEY MARKET PORTFOLIO(TM) MONEY MARKET SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2006 An investor should consider a fund's investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund's prospectus. Please call 1-888-311-4887 for a prospectus. Please read the prospectus carefully before you invest. PROXY VOTING POLICIES, PROCEDURES AND RESULTS A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's website at www.sec.gov. MANAGEMENT'S DISCUSSION for the six months ended June 30, 2006 [PHOTO OF KAREN WIGGAN] KAREN WIGGAN, a vice president of the investment adviser and senior portfolio manager, is responsible for the overall management of the portfolio. She joined the firm in 1987 and has worked in fixed income portfolio management since 1991. THE INVESTMENT ENVIRONMENT AND THE FUND After a volatile six months in the domestic markets, equity and fixed income funds ended the period with mixed returns. Several key issues dominated market discussions throughout the period, including slowing economic growth, inflation fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile crude oil prices. The markets remained in a steady growth mode over the first quarter of 2006 and ended the period on a positive note. Volatility was up during the second quarter of the year, but remained lower than its historical norm. During the six-month report period, oil prices hit new record highs and the Fed continued to raise short-term interest rates to curb inflationary pressures, boosting its Fed Funds target rate four consecutive times during the six-month period and bringing the benchmark rate up to 5.25%. This was the 17th rate hike over the past two years. Rising sharply in the second half of the report period, crude oil prices peaked in April at around $75 per barrel while domestic gasoline prices were above $3 a gallon. In recent months, crude oil prices climbed back in response to declining crude inventories and geopolitical concerns. Despite the volatility in energy prices, gains in productivity have remained strong and corporate earnings continue to rise. Reasonable valuations, a solid earnings season, and expectations that monetary policy tightening will soon come to an end, helped support the markets. Additionally, job and income growth remained positive, though they slowed during the report period. Moderate inflationary expectations and large foreign capital inflows helped to contain increases in long-term interest rates. As noted above, the Fed continued its tightening cycle throughout the period, raising its Fed Funds target 0.25% at each of its four meetings. At the end of the six-month report period, the benchmark rate was up to 5.25%. As the Fed raised rates, the yield curve flattened and had brief periods of inversion. Historically, economic slowdowns or recessions have followed the inversion of the yield curve. Nonetheless, higher short-term rates succeeded in moving money fund yields higher, making them a more attractive investment vehicle. Following a strong start to 2006, economic growth has moderated over the past six months. Rising interest rates have led to volatility in the equities markets and have weighed down bond returns. Meanwhile, money market funds enticed investors as the rise in short-term interest rates offered yields that have not been seen in years. The mixed messages that arose from the slowing economy and rising inflation have left investors puzzled about the direction of the Fed policy. The June 29 Federal Open Market Committee (FOMC) policy statement did little to alleviate uncertainty, as the Fed acknowledged slower growth while expressing concern about inflation risks. IN THIS MARKET ENVIRONMENT, OUR STRATEGY WAS TO POSITION THE FUND FOR A CONTINUED RISE IN INTEREST RATES. The fund continued to maintain a shorter weighted average maturity (WAM) by focusing on shorter-term discount notes. Keeping the WAM short provided the flexibility to adapt and respond to the changes in rising money market rates. During the six-month reporting period, the supply of agency discount notes continued to decline. This was due to a reduced demand for short-term funding from the various government sponsored enterprises (GSEs). Nothing in this report represents a recommendation of a security by the investment adviser. Manager views and portfolio holdings may have changed since the report date. Schwab Money Market Portfolio 1 MANAGEMENT'S DISCUSSION continued PERFORMANCE AND PORTFOLIO FACTS as of 6/30/06 SEVEN-DAY YIELDS 1 The seven-day yields are calculated using standard SEC formulas. The effective yield includes the effect of reinvesting daily dividends. Please remember that money market fund yields fluctuate. -------------------------------------------------------------------------------- SEVEN-DAY YIELD 4.66% -------------------------------------------------------------------------------- SEVEN-DAY EFFECTIVE YIELD 4.77% --------------------------------------------------------------------------------
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. STATISTICS Money funds must maintain a dollar-weighted average maturity of no longer than 90 days, and cannot invest in any security whose effective maturity is longer than 397 days (approximately 13 months). -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 41 days -------------------------------------------------------------------------------- CREDIT QUALITY OF HOLDINGS % of portfolio 100% Tier 1 --------------------------------------------------------------------------------
AN INVESTMENT IN A MONEY FUND IS NEITHER INSURED NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH MONEY FUNDS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A MONEY FUND. Portfolio holdings may have changed since the report date. 1 Portfolio yields do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the yields would be less than those shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. 2 Schwab Money Market Portfolio PORTFOLIO 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 January 1, 2006 and held through June 30, 2006. ACTUAL RETURN lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value / $1,000 = 8.6), then multiply the result by the number given for your fund 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. If these transactional costs were included, your costs would have been higher.
ENDING BEGINNING ACCOUNT VALUE EXPENSES EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2 (Annualized) at 1/1/06 at 6/30/06 1/1/06-6/30/06 ------------------------------------------------------------------------------------------------------------------------------------ SCHWAB MONEY MARKET PORTFOLIO Actual Return 0.46% $1,000 $1,021.01 $2.31 Hypothetical 5% Return 0.46% $1,000 $1,022.51 $2.31
1 Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights. 2 Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 181 days of the period, and divided by 365 days of the fiscal year. Schwab Money Market Portfolio 3 SCHWAB MONEY MARKET PORTFOLIO FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00 1.00 ------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.02 0.03 0.01 0.01 0.01 0.04 ------------------------------------------------------------------------------ Less distributions: Dividends from net investment income (0.02) (0.03) (0.01) (0.01) (0.01) (0.04) ------------------------------------------------------------------------------ Net asset value at end of period 1.00 1.00 1.00 1.00 1.00 1.00 ------------------------------------------------------------------------------ Total return (%) 2.10 1 2.75 0.90 0.74 1.31 3.72 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.46 2 0.47 0.46 0.44 0.48 0.49 Gross operating expenses 0.47 2 0.47 0.46 0.44 0.48 0.50 Net investment income 4.20 2 2.74 0.89 0.75 1.31 3.55 Net assets, end of period ($ x 1,000,000) 161 133 116 141 215 204
* Unaudited. 1 Not annualized. 2 Annualized. 4 See financial notes. SCHWAB MONEY MARKET PORTFOLIO PORTFOLIO HOLDINGS as of June 30, 2006 (Unaudited) This section shows all the securities in the fund's portfolio and their value as of the report date. The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund's most recent Form N-Q is also available by visiting Schwab's website at www.schwab.com/schwabfunds. For fixed rate obligations, the rate shown is the effective yield at the time of purchase, except for U.S. Treasury notes, for which the rate shown is the interest rate (the rate established when the obligation was issued). For variable-rate obligations, the rate shown is the rate as of the report date and the maturity date shown is the next interest rate change date.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) -------------------------------------------------------------------------------- 93.4% FEDERAL AGENCY SECURITIES 150,447 150,447 6.9% OTHER INVESTMENTS 11,080 11,080 -------------------------------------------------------------------------------- 100.3% TOTAL INVESTMENTS 161,527 161,527 (0.3)% OTHER ASSETS AND LIABILITIES (496) -------------------------------------------------------------------------------- 100.0% NET ASSETS 161,031
ISSUER FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) FEDERAL AGENCY SECURITIES 93.4% of net assets DISCOUNT NOTES 93.4% -------------------------------------------------------------------------------- FANNIE MAE 4.86%, 07/05/06 2,000 1,999 5.00%, 07/12/06 3,000 2,995 4.93%, 07/17/06 1,240 1,237 4.97%, 07/19/06 1,774 1,770 4.98%, 07/19/06 2,000 1,995 4.96%, 07/26/06 1,000 997 4.99%, 07/26/06 1,900 1,893 4.99%, 07/26/06 1,000 997 5.21%, 07/26/06 1,000 996 5.00%, 08/02/06 1,178 1,173 5.01%, 08/02/06 1,071 1,066 5.08%, 08/16/06 1,000 994 5.27%, 08/16/06 6,190 6,149 5.25%, 08/21/06 2,970 2,948 5.30%, 08/23/06 4,000 3,969 5.16%, 09/01/06 1,670 1,655 5.17%, 09/06/06 2,000 1,981 5.33%, 09/13/06 2,900 2,869 5.35%, 09/13/06 1,000 989 FEDERAL FARM CREDIT BANK 4.98%, 07/05/06 3,000 2,998 5.08%, 07/14/06 4,000 3,993 5.17%, 07/25/06 3,000 2,990 4.96%, 07/26/06 2,000 1,993 5.17%, 07/26/06 5,000 4,982 5.18%, 07/28/06 1,548 1,542 4.89%, 08/07/06 1,185 1,179 4.99%, 08/11/06 1,000 994 5.33%, 10/16/06 1,000 984 FEDERAL HOME LOAN BANK 4.97%, 07/07/06 2,000 1,998 4.90%, 07/14/06 3,512 3,506 4.91%, 07/14/06 2,500 2,496 4.92%, 07/19/06 2,000 1,995 4.95%, 07/19/06 1,000 998 4.98%, 07/19/06 1,060 1,057 5.25%, 08/02/06 1,075 1,070 5.01%, 08/04/06 3,000 2,986 5.26%, 08/16/06 1,118 1,111 5.24%, 08/18/06 2,000 1,986 5.26%, 08/25/06 1,500 1,488 5.16%, 09/08/06 5,000 4,951 5.17%, 09/13/06 2,000 1,979
See financial notes. 5 SCHWAB MONEY MARKET PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
ISSUER FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) 5.23%, 09/13/06 5,000 4,947 5.27%, 09/15/06 4,768 4,716 FREDDIE MAC 4.86%, 07/03/06 1,129 1,129 5.00%, 07/11/06 1,000 999 4.95%, 07/18/06 1,000 998 4.88%, 07/25/06 1,355 1,351 4.90%, 07/25/06 2,000 1,994 4.97%, 07/25/06 2,216 2,209 5.21%, 07/31/06 1,900 1,892 4.94%, 08/04/06 1,095 1,090 4.95%, 08/04/06 1,070 1,065 5.23%, 08/08/06 2,700 2,685 5.25%, 08/08/06 1,000 995 5.27%, 08/22/06 1,000 992 5.27%, 08/30/06 1,123 1,113 5.29%, 09/05/06 6,445 6,383 5.30%, 09/05/06 1,565 1,550 5.33%, 09/05/06 3,000 2,971 5.23%, 09/18/06 1,067 1,055 5.33%, 09/19/06 2,550 2,520 5.22%, 11/14/06 2,000 1,961 TENNESSEE VALLEY AUTHORITY 4.94%, 07/06/06 3,000 2,998 5.03%, 07/20/06 3,000 2,992 5.18%, 08/03/06 4,000 3,981 5.25%, 09/14/06 6,000 5,935 5.25%, 09/14/06 2,000 1,978 ----------- 150,447 -----------
ISSUER MATURITY AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) OTHER INVESTMENTS 6.9% of net assets REPURCHASE AGREEMENTS 6.9% -------------------------------------------------------------------------------- CREDIT SUISSE FIRST BOSTON L.L.C. Tri-Party Repurchase Agreement Collateralized by U.S. Treasury Securities with a value of $11,305 4.50%, issued 06/30/06, due 07/03/06 11,084 11,080
END OF INVESTMENTS. At 06/30/06, the cost of the fund's investments was $161,527. 6 See financial notes. SCHWAB MONEY MARKET PORTFOLIO Statement of ASSETS AND LIABILITIES As of June 30, 2006; unaudited. All numbers x 1,000 except NAV. ASSETS -------------------------------------------------------------------------------- Investments, at cost and value $150,447 Repurchase agreements, at cost and value 11,080 Receivables: Fund shares sold 668 Interest + 1 ------------ TOTAL ASSETS 162,196 LIABILITIES -------------------------------------------------------------------------------- Payables: Dividends to shareholders 301 Fund shares redeemed 824 Investment adviser and administrator fees 5 Trustees' fees 3 Accrued expenses + 32 ------------ TOTAL LIABILITIES 1,165 NET ASSETS -------------------------------------------------------------------------------- TOTAL ASSETS 162,196 TOTAL LIABILITIES - 1,165 ------------ NET ASSETS $161,031 NET ASSETS BY SOURCE Capital received from investors 161,044 Net realized capital losses (13) NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $161,031 161,078 $1.00
See financial notes. 7 SCHWAB MONEY MARKET PORTFOLIO Statement of OPERATIONS For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000. INVESTMENT INCOME -------------------------------------------------------------------------------- Interest $3,126 EXPENSES -------------------------------------------------------------------------------- Investment adviser and administrator fees 255 Trustees' fees 11 Custodian fees 7 Portfolio accounting fees 10 Professional fees 4 Shareholder reports 23 Other expenses + 2 --------- Total expenses 312 Custody credits - 1 --------- NET EXPENSES 311 INCREASE IN NET ASSETS FROM OPERATIONS -------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 3,126 NET EXPENSES - 311 NET INVESTMENT INCOME 2,815 --------- INCREASE IN NET ASSETS FROM OPERATIONS $2,815
8 See financial notes. SCHWAB MONEY MARKET PORTFOLIO Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers x 1,000. Figures for current period are unaudited.
OPERATIONS -------------------------------------------------------------------------------- 1/1/06-6/30/06 1/1/05-12/31/05 Net investment income $2,815 $3,417 ------------------------------------ INCREASE IN NET ASSETS FROM OPERATIONS 2,815 3,417 DISTRIBUTIONS PAID -------------------------------------------------------------------------------- Dividends from net investment income 2,815 3,417 TRANSACTIONS IN FUND SHARES* -------------------------------------------------------------------------------- Shares sold 153,488 150,665 Shares reinvested 2,526 3,417 Shares redeemed +(128,029) (137,096) ------------------------------------ NET TRANSACTIONS IN FUND SHARES 27,985 16,986 NET ASSETS -------------------------------------------------------------------------------- Beginning of period 133,046 116,060 Total increase +27,985 16,986 ------------------------------------ END OF PERIOD $161,031 $133,046
* Transactions took place at $1.00 per share; figures for share quantities are the same as for dollars. See financial notes. 9 SCHWAB MONEY MARKET PORTFOLIO FINANCIAL NOTES, unaudited. Unless stated, all dollar amounts are x 1,000. 1. BUSINESS STRUCTURE OF THE FUND Schwab Money Market Portfolio is a series of Schwab Annuity Portfolios, a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the fund in this report, which is highlighted: SCHWAB ANNUITY PORTFOLIOS Organized January 21, 1994 SCHWAB MONEY MARKET PORTFOLIO Schwab MarketTrack Growth Portfolio II Schwab S&P 500 Index Portfolio Schwab Money Market Portfolio offers one share class. Shares are bought and sold at $1.00 per share. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary. The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies the fund uses in its operations and in the preparation of financial statements: (A) SECURITY VALUATION: The fund values the securities in its portfolio at amortized cost, which approximates market value. (B) PORTFOLIO INVESTMENTS: DELAYED-DELIVERY: The fund may buy securities on a delayed-delivery basis. In these transactions, the fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security's value falls before settlement occurs, the fund could end up paying more for the security than its market value at the time of settlement. The fund has set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis. 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. Any repurchase agreements with due dates later than seven days from issue dates may be subject to seven day put features for liquidity purposes. 10 SCHWAB MONEY MARKET PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The fund's repurchase agreements will be fully collateralized by U.S. government securities. All collateral is held by the fund's custodian (or, with tri-party agreements, the agent's bank) and is monitored daily to ensure that its market value is at least equal to the repurchase price under the agreement. (C) SECURITY TRANSACTIONS: Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved. (D) INCOME, EXPENSES AND DISTRIBUTIONS: Interest income is recorded as it accrues. If the fund buys a debt security at a discount (that is, for less than face value) or a premium (more than face value), it amortizes the discount or premium from the current date to maturity. 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. Expenses that are specific to a fund are charged directly to that 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. The fund declares dividends every day it is open for business. These dividends, which are equal to a fund's net investment income for that day, are paid out to the insurance company separate accounts once a month. The fund may make distributions from any net realized capital gains once a year. The fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund also keeps certain assets in segregated accounts, as may be required by securities law. (E) BORROWING: The fund may borrow money from banks and custodians. The fund may obtain temporary bank loans through the trust to which the fund belongs to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with PNC Bank, N.A., and Bank of America, N.A., respectively. The fund pays interest on the amounts it borrows at rates that are negotiated periodically. There was no borrowing for the fund during the period. (F) ACCOUNTING ESTIMATES: The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It's possible that once the results are known, they may turn out to be different from these estimates. (G) INDEMNIFICATION: Under the fund's organizational documents, its officers and trustees are indemnified against certain liability 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 be remote. 11 SCHWAB MONEY MARKET PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 3. AFFILIATES AND AFFILIATED TRANSACTIONS Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is the trust's shareholder services agent and transfer agent. For its advisory and administrative services to the fund, the investment adviser is entitled to receive an annual fee payable monthly based on the fund's average daily net assets described as follows:
AVERAGE DAILY NET ASSETS ------------------------ First $1 billion 0.38% Over $1 billion 0.35% Over $10 billion 0.32% Over $20 billion 0.30% Over $40 billion 0.27%
Schwab does not charge the fund for transfer agent and shareholder services fees. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses to 0.50% through April 29, 2007. The fund may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. For the period ended June 30, 2006, 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 within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for the fund during the period. Trustees may include people who are officers and/ or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such "interested persons" who may serve on a trust's board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in the fund's Statement of Operations. 4. 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 the participating insurance company separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax. As of December 31, 2005, the fund had no undistributed earnings on a tax basis. 12 SCHWAB MONEY MARKET PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 4. FEDERAL INCOME TAXES (CONTINUED) As of December 31, 2005, the fund had capital loss carry forwards available to offset future net capital gains before the expiration date:
EXPIRE 2006 $3 2007 9 2008 1 --- TOTAL $13 ---
The tax-basis components of distributions for the fiscal year ended December 31, 2005 were: From ordinary income $3,417 From long-term capital gains -- From 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 December 31, 2005, the fund made the following reclassifications: Capital received from investors ($1) Net realized capital losses $1
13 INVESTMENT ADVISORY AGREEMENT APPROVAL The Investment Company Act of 1940 (the "1940 Act") requires that initial approval of, as well as the continuation of, a fund's investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or "interested persons" of any party (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund's trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the "SEC") takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement. Consistent with these responsibilities, the Board of Trustees (the "Board") calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with respect to existing funds in the Trust, including the Schwab Money Market Portfolio, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM's affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM. The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board's approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including: 1. the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds; 2. each fund's investment performance and how it compared to that of certain other comparable mutual funds; 3. each fund's expenses and how those expenses compared to those of certain other comparable mutual funds; 4. the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. ("Schwab"), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and 5. the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors. 14 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 considered the role of unaffiliated insurance companies in the distribution of the funds. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered Schwab's excellent reputation as a full service brokerage firm and its overall financial condition, and how this affects the success of the funds. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement. FUND PERFORMANCE. The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund's performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, when applicable, and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement. FUND EXPENSES. With respect to the funds' expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund's net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM's and Schwab's historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts 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, and the unique insurance dedicated distribution arrangements of the funds as compared to other funds managed by CSIM. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement. PROFITABILITY. With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management's profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the Funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also con- 15 sidered information relating to changes to CSIM's cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM's profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement. ECONOMIES OF SCALE. The trustees considered the existence of any economies of scale and whether those are passed along to a fund's shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM's agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab's commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale. In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees' deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment. 16 TRUSTEES AND OFFICERS The tables below give information about the trustees and officers for The Schwab Annuity Portfolios, which includes the fund covered in this report. The "Fund Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ MARIANN BYERWALTER Chairman of JDN Corporate Advisory 98 Board 1--Director, Redwood Trust, Inc. 1960 LLC. From 1996 to 2001, Vice Board 2--Director, PMI Group, Inc. Trustee President for Business Affairs and (Trustee of The Schwab Chief Financial Officer of Stanford Annuity Portfolios since University, and in 2001, Special 2000.) Advisor to the President of Stanford University. ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. DORWARD Chief Executive Officer, Dorward & 57 None. 1931 Associates (corporate management, Trustee marketing and communications con- (Trustee of The Schwab sulting firm). From 1996-1999, Annuity Portfolios since Executive Vice President and 1989.) Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising. ------------------------------------------------------------------------------------------------------------------------------------ WILLIAM A. HASLER Retired. Dean Emeritus, Haas School 98 Board 1--Director, Aphton Corp. 1941 of Business, University of California, Board 2--Director, Mission West Properties Trustee Berkeley. Until February 2004, Co- Board 3--Director, TOUSA (Trustee of The Schwab Chief Executive Officer, Aphton Corp. Board 4--Director, Stratex Networks Annuity Portfolios since (bio-pharmaceuticals). Prior to August Board 5--Director, Genitope Corp. 2000.) 1998, Dean of the Haas School of Board 6--Director & Non-Executive Business, University of California, Chairman, Solectron Corp. Berkeley (higher education). Board 7--Director, Ditech Communications Corp.
17 INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ ROBERT G. HOLMES Chairman, Chief Executive Officer 57 None. 1931 and Director, Semloh Financial, Inc. Trustee (international financial services and (Trustee of The Schwab investment advisory firm). Annuity Portfolios since 1989.) ------------------------------------------------------------------------------------------------------------------------------------ GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries 1950 Officer and founder of Smith Board 2--Chairman of the Audit Trustee Graham & Co. (investment advisors). Committee of Northern Border Partners, (Trustee of The Schwab M.L.P. Annuity Portfolios since 2000.) ------------------------------------------------------------------------------------------------------------------------------------ DONALD R. STEPHENS Managing Partner, D.R. Stephens & 57 None. 1938 Company (investments). Prior to Trustee 1996, Chairman and Chief (Trustee of The Schwab Executive Officer of North American Annuity Portfolios since Trust (real estate investment trust). 1989.) ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL W. WILSEY Chairman and Chief Executive 57 None. 1943 Officer, Wilsey Bennett, Inc. (real Trustee estate investment and management, (Trustee of The Schwab and other investments). Annuity Portfolios since 1989.)
18 INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ CHARLES R. SCHWAB 2 Chairman, Chief Executive Officer 57 None. 1937 and Director, The Charles Schwab Chairman and Trustee Corporation, Charles Schwab & Co., (Chairman and Trustee Inc.; Chairman and Director, Charles of The Schwab Annuity Schwab Investment Management, Portfolios since 1989.) Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation. ------------------------------------------------------------------------------------------------------------------------------------ RANDALL W. MERK 2 Executive Vice President and 98 None. 1954 President, Schwab Financial Trustee Products, Charles Schwab & Co., (Trustee of The Schwab Inc.; Director, Charles Schwab Asset Annuity Portfolios since Management (Ireland) Limited and 2005.) Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.
19 OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment 1955 Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President President and Chief Executive Officer and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; (Officer of The Schwab Annuity President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Portfolios since 2004.) Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation. ------------------------------------------------------------------------------------------------------------------------------------ STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab 1955 Investment Management, Inc.; Chief Investment Officer, The Charles Schwab Senior Vice President and Chief Trust Company. Investment Officer (Officer of The Schwab Annuity Portfolios since 1991.) ------------------------------------------------------------------------------------------------------------------------------------ GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment 1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Treasurer and Principal Financial Officer Insurance Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior (Officer of The Schwab Annuity Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Portfolios since 2004.) Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles 1959 Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Senior Vice President and Chief Portfolio Manager, Charles Schwab Investment Management, Inc. Investment Officer--Fixed Income (Officer of The Schwab Annuity Portfolios since 2004.) ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab 1963 Investment Management, Inc.; Vice President and Chief Investment Officer, Senior Vice President and Chief Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President Investment Officer--Equities and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc. (Officer of The Schwab Annuity Portfolios since 2004.)
20 OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment 1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Chief Compliance Officer and AML Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Officer Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and (Officer of The Schwab Annuity Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Portfolios since 2002.) Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab 1961 Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Secretary and Chief Legal Officer Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable (Officer of The Schwab Annuity Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Portfolios since 1998.) Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independ- ent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser. 3 The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board. 21 [CHARLES SCHWAB LOGO] LARGE-CAP BLEND SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM) BALANCED SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2006 An investor should consider a fund's investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund's prospectus. Please call 1-888-311-4887 for a prospectus. Please read the prospectus carefully before you invest. PROXY VOTING POLICIES, PROCEDURES AND RESULTS A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's website at www.sec.gov. The industry/sector classification of the fund's portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc. MANAGEMENT'S DISCUSSION for the six months ended June 30, 2006 [PHOTO OF LARRY MANO] LARRY MANO, a vice president and senior portfolio manager of the investment adviser, is responsible for the overall management of the portfolio. Prior to joining the firm in 1998, he worked for 20 years in equity management. [PHOTO OF TOM BROWN] TOM BROWN, an associate portfolio manager of the investment adviser, is a day-to-day manager of the equity portions of the portfolio. He joined Schwab in 1995, became a trader in 1999, and was named to his current position in 2004. THE INVESTMENT ENVIRONMENT AND THE FUND After a volatile six months in the domestic markets, equity and fixed income funds ended the period with mixed returns. Several key issues dominated market discussions throughout the period, including slowing economic growth, inflation fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile crude oil prices. The markets remained in a steady growth mode over the first quarter of 2006 and ended the period on a positive note. Volatility was up during the second quarter of the year, but remained lower than its historical norm. During the six-month report period, oil prices hit new record highs and the Fed continued to raise short-term interest rates to curb inflationary pressures, boosting its Fed Funds target rate four consecutive times during the six-month period and bringing the benchmark rate up to 5.25%. This was the 17th rate hike over the past two years. Rising sharply in the second half of the report period, crude oil prices peaked in April at around $75 per barrel while domestic gasoline prices were above $3 a gallon. In recent months, crude oil prices climbed back in response to declining crude inventories and geopolitical concerns. Despite the volatility in energy prices, gains in productivity have remained strong and corporate earnings continue to rise. Reasonable valuations, a solid earnings season, and expectations that monetary policy tightening will soon come to an end, helped support the markets. Additionally, job and income growth remained positive, though they slowed during the report period. Moderate inflationary expectations and large foreign capital inflows helped to contain increases in long-term interest rates. As noted above, the Fed continued its tightening cycle throughout the period, raising its Fed Funds target 0.25% at each of its four meetings. As the Fed raised rates, the yield curve flattened and had brief periods ASSET CLASS PERFORMANCE COMPARISON % returns during the report period This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below. 2.21% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S. Treasury obligations -0.72% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market 2.71% S&P 500(R) INDEX: measures U.S. large-cap stocks 8.21% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks 10.16% MSCI EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East [LINE GRAPH]
THREE-MONTH LEHMAN BROTHERS RUSSELL MSCI U.S. TREASURY BILLS U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R) (T-BILLS) BOND INDEX INDEX INDEX INDEX 31-Dec-05 0.00 0.00 0.00 0.00 0.00 6-Jan-06 0.05 0.26 3.02 3.90 5.12 13-Jan-06 0.12 0.52 3.22 5.26 4.71 20-Jan-06 0.21 0.57 1.13 4.70 2.71 27-Jan-06 0.28 0.04 2.94 8.82 5.74 3-Feb-06 0.36 -0.02 1.41 7.65 4.74 10-Feb-06 0.43 -0.22 1.70 6.61 3.97 17-Feb-06 0.52 0.13 3.38 8.69 4.02 24-Feb-06 0.60 0.16 3.61 9.54 5.79 3-Mar-06 0.69 -0.27 3.49 9.84 5.51 10-Mar-06 0.77 -0.50 3.07 8.06 5.22 17-Mar-06 0.86 0.01 5.18 11.03 8.89 24-Mar-06 0.94 0.08 4.84 12.19 8.69 31-Mar-06 1.03 -0.65 4.21 13.94 9.40 7-Apr-06 1.11 -0.98 4.31 12.62 11.15 14-Apr-06 1.19 -1.23 3.82 11.89 9.88 21-Apr-06 1.30 -0.86 5.62 15.03 13.93 28-Apr-06 1.41 -0.83 5.61 13.92 14.62 5-May-06 1.47 -0.98 6.85 16.51 17.90 12-May-06 1.56 -1.32 4.15 10.67 16.70 20-May-05 1.66 -0.72 2.24 7.72 10.49 27-May-05 1.75 -0.65 3.33 8.78 11.01 3-Jun-05 1.84 -0.26 4.03 9.98 11.98 10-Jun-05 1.93 -0.22 1.17 4.62 5.52 17-Jun-05 2.02 -0.86 1.14 3.42 4.84 24-Jun-05 2.12 -1.32 0.60 2.99 5.34 30-Jun-06 2.21 -0.72 2.71 8.21 10.16
These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Remember that past performance is not an indication of future results. Data source: Charles Schwab & Co., Inc. Source of Sector Classification: S&P and MSCI. Schwab MarketTrack Growth Portfolio II 1 MANAGEMENT'S DISCUSSION continued [PHOTO OF MATTHEW HASTINGS] MATTHEW HASTINGS, CFA, a vice president and senior portfolio manager of the investment adviser, has day-to-day responsibility for the co-management of the bond and cash portions of the portfolio. He joined the firm in 1999 and has worked in fixed-income and asset management since 1996. [PHOTO OF STEVEN HUNG] STEVEN HUNG, a director and portfolio manager of the investment adviser, has day-to-day responsibility for the co-management for the bond and cash portions of the portfolio. He joined the firm in 1998 and has worked in fixed-income asset management since 1999. of inversion. Historically, economic slowdowns or recessions have followed the inversion of the yield curve. Following a strong start to 2006, economic growth has moderated over the past six months. Despite rising interest rates and soaring energy prices, the S&P 500 Index 1 posted gains of 2.71% for the six-month period ending June 30, 2006 while the Russell 2000 Index also displayed a positive return of 8.21%. As improving fundamentals and attractive valuations have strengthened investor interest in emerging markets, the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index also had an impressive return of 10.16% for the six-month period. Although performance of the bond markets was sluggish, as measured by the Lehman Brothers U.S. Aggregate Bond Index, which was down 0.72% for the six-month period, these types of results are not unusual. When the economy is strong and job growth is robust, investors normally expect to see more inflation, which generally leads to higher interest rates and lower bond prices. Rising interest rates have led to volatility in the equities markets and have weighed down bond returns. Meanwhile, money market funds enticed investors as the rise in short-term interest rates offered yields that have not been seen in years. The mixed messages that arose from the slowing economy and rising inflation have left investors puzzled about the direction of the Fed policy. The June 29 Federal Open Market Committee (FOMC) policy statement did little to alleviate uncertainty, as the Fed acknowledged slower growth while expressing concern about inflation risks. THE SCHWAB MARKETTRACK GROWTH PORTFOLIO II incorporates a mix of different asset classes. Accordingly, its returns over a given period will reflect a blend of the returns of those asset classes, and will depend on their relative weightings within the portfolio. By spreading its exposure over various asset classes, The MarketTrack Growth Portfolio II is designed to provide more stable returns while seeking to reduce risk over various market cycles. The portfolio was up 4.38% for the six-month period, compared to a 4.14% return for its benchmark, the Growth Composite Index. The portfolio has an 80% target stock allocation that is divided amongst large-cap, small-cap, and international stocks. The 20% target allocation to fixed income, which includes 5% cash, is designed to reduce volatility and risk over the long term. In this report period, due to the volatility in the equity markets, the fund benefited from its allocation to larger-capitalization stocks and the fixed income portion of the portfolio. Past performance does not indicate future results. Source of Sector Classification: S&P and MSCI. Small company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk. All portfolio 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. The portfolio's share price and principal values change and when you sell your shares they may be worth more or less than what you paid for them. 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. Portfolio returns do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio's returns would have been lower. 1 Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R) are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the fund. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the fund. 2 Schwab MarketTrack Growth Portfolio II SCHWAB MARKETTRACK GROWTH PORTFOLIO II PERFORMANCE as of 6/30/06 AVERAGE ANNUAL TOTAL RETURNS 1, 2 This chart compares performance of the portfolio with a benchmark and the portfolio's Morningstar category. [BAR CHART]
Benchmark: Fund Category: GROWTH COMPOSITE MORNINGSTAR PORTFOLIO INDEX LARGE-CAP BLEND 6 MONTHS 4.38% 4.14% 1.42% 1 YEAR 10.85% 11.23% 7.46% 5 YEARS 4.88% 5.52% 1.00% SINCE INCEPTION: 11/1/96 7.57% 7.71% n/a
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1, 2 This graph shows performance since inception of a hypothetical $10,000 investment in the portfolio, compared with a similar investment in a benchmark and two additional indices. $20,239 PORTFOLIO $20,495 GROWTH COMPOSITE INDEX $20,991 S&P 500(R) INDEX $17,560 LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX [LINE GRAPH]
GROWTH LEHMAN BROTHERS COMPOSITE S&P 500(R) U.S. AGGREGATE PORTFOLIO INDEX INDEX BOND INDEX 01-Nov-96 $10,000 $10,000 $10,000 $10,000 30-Nov-96 $10,490 $10,505 $10,756 $10,171 31-Dec-96 $10,420 $10,394 $10,543 $10,076 31-Jan-97 $10,670 $10,662 $11,201 $10,108 28-Feb-97 $10,710 $10,700 $11,289 $10,133 31-Mar-97 $10,460 $10,409 $10,826 $10,020 30-Apr-97 $10,780 $10,718 $11,472 $10,171 31-May-97 $11,420 $11,331 $12,169 $10,267 30-Jun-97 $11,940 $11,790 $12,714 $10,390 31-Jul-97 $12,650 $12,423 $13,725 $10,670 31-Aug-97 $12,200 $11,944 $12,957 $10,579 30-Sep-97 $12,880 $12,530 $13,665 $10,736 31-Oct-97 $12,520 $12,117 $13,209 $10,892 30-Nov-97 $12,730 $12,341 $13,820 $10,942 31-Dec-97 $12,977 $12,521 $14,058 $11,052 31-Jan-98 $13,037 $12,703 $14,214 $11,194 28-Feb-98 $13,779 $13,421 $15,239 $11,185 31-Mar-98 $14,199 $13,917 $16,019 $11,223 30-Apr-98 $14,320 $14,052 $16,181 $11,281 31-May-98 $14,019 $13,837 $15,903 $11,388 30-Jun-98 $14,240 $14,170 $16,548 $11,485 31-Jul-98 $13,959 $14,020 $16,373 $11,509 31-Aug-98 $12,285 $12,400 $14,009 $11,697 30-Sep-98 $12,696 $12,856 $14,907 $11,971 31-Oct-98 $13,478 $13,690 $16,119 $11,907 30-Nov-98 $14,079 $14,362 $17,095 $11,975 31-Dec-98 $14,673 $15,036 $18,080 $12,011 31-Jan-99 $14,921 $15,378 $18,836 $12,096 28-Feb-99 $14,395 $14,933 $18,250 $11,884 31-Mar-99 $14,807 $15,418 $18,980 $11,950 30-Apr-99 $15,405 $15,997 $19,715 $11,988 31-May-99 $15,127 $15,604 $19,249 $11,883 30-Jun-99 $15,735 $16,206 $20,318 $11,845 31-Jul-99 $15,621 $15,983 $19,684 $11,795 31-Aug-99 $15,518 $15,908 $19,585 $11,789 30-Sep-99 $15,467 $15,722 $19,048 $11,926 31-Oct-99 $16,095 $16,451 $20,254 $11,970 30-Nov-99 $16,569 $16,899 $20,666 $11,969 31-Dec-99 $17,553 $17,964 $21,883 $11,911 31-Jan-00 $16,777 $17,283 $20,785 $11,872 29-Feb-00 $17,176 $17,644 $20,391 $12,015 31-Mar-00 $17,975 $18,449 $22,385 $12,174 30-Apr-00 $17,376 $17,675 $21,712 $12,139 31-May-00 $16,965 $17,222 $21,267 $12,133 30-Jun-00 $17,598 $17,869 $21,792 $12,385 31-Jul-00 $17,232 $17,529 $21,452 $12,498 31-Aug-00 $18,108 $18,366 $22,784 $12,679 30-Sep-00 $17,442 $17,695 $21,581 $12,759 31-Oct-00 $17,254 $17,408 $21,491 $12,843 30-Nov-00 $16,245 $16,286 $19,797 $13,054 31-Dec-00 $16,707 $16,625 $19,894 $13,296 31-Jan-01 $17,045 $17,054 $20,601 $13,513 28-Feb-01 $15,872 $15,854 $18,722 $13,631 31-Mar-01 $15,150 $15,014 $17,535 $13,699 30-Apr-01 $16,064 $15,955 $18,897 $13,641 31-May-01 $16,097 $15,950 $19,024 $13,723 30-Jun-01 $15,951 $15,670 $18,562 $13,775 31-Jul-01 $15,754 $15,515 $18,380 $14,084 31-Aug-01 $15,172 $14,909 $17,229 $14,246 30-Sep-01 $14,022 $13,833 $15,837 $14,411 31-Oct-01 $14,360 $14,159 $16,139 $14,712 30-Nov-01 $15,060 $14,886 $17,377 $14,509 31-Dec-01 $15,303 $15,051 $17,530 $14,416 31-Jan-02 $14,962 $14,799 $17,274 $14,533 28-Feb-02 $14,773 $14,659 $16,941 $14,674 31-Mar-02 $15,350 $15,167 $17,578 $14,431 30-Apr-02 $14,997 $14,788 $16,513 $14,711 31-May-02 $14,867 $14,741 $16,391 $14,836 30-Jun-02 $14,184 $14,022 $15,224 $14,965 31-Jul-02 $13,112 $13,093 $14,038 $15,146 31-Aug-02 $13,206 $13,168 $14,129 $15,402 30-Sep-02 $12,193 $12,125 $12,593 $15,651 31-Oct-02 $12,829 $12,805 $13,701 $15,579 30-Nov-02 $13,418 $13,384 $14,508 $15,575 31-Dec-02 $12,940 $12,892 $13,657 $15,897 31-Jan-03 $12,567 $12,592 $13,299 $15,911 28-Feb-03 $12,387 $12,433 $13,099 $16,131 31-Mar-03 $12,411 $12,468 $13,226 $16,118 30-Apr-03 $13,314 $13,342 $14,316 $16,252 31-May-03 $14,072 $14,030 $15,071 $16,554 30-Jun-03 $14,252 $14,219 $15,264 $16,521 31-Jul-03 $14,481 $14,423 $15,532 $15,966 31-Aug-03 $14,794 $14,715 $15,835 $16,071 30-Sep-03 $14,818 $14,766 $15,667 $16,497 31-Oct-03 $15,528 $15,472 $16,554 $16,344 30-Nov-03 $15,769 $15,676 $16,700 $16,383 31-Dec-03 $16,431 $16,368 $17,575 $16,550 31-Jan-04 $16,686 $16,653 $17,898 $16,682 29-Feb-04 $16,881 $16,904 $18,147 $16,863 31-Mar-04 $16,808 $16,834 $17,873 $16,989 30-Apr-04 $16,406 $16,478 $17,592 $16,547 31-May-04 $16,552 $16,616 $17,833 $16,481 30-Jun-04 $16,906 $16,911 $18,179 $16,575 31-Jul-04 $16,382 $16,440 $17,578 $16,739 31-Aug-04 $16,431 $16,535 $17,648 $17,059 30-Sep-04 $16,759 $16,805 $17,838 $17,105 31-Oct-04 $17,064 $17,114 $18,111 $17,249 30-Nov-04 $17,819 $17,809 $18,845 $17,111 31-Dec-04 $18,332 $18,380 $19,486 $17,268 31-Jan-05 $17,938 $18,038 $19,010 $17,377 28-Feb-05 $18,308 $18,405 $19,409 $17,274 31-Mar-05 $17,987 $18,105 $19,066 $17,186 30-Apr-05 $17,605 $17,813 $18,704 $17,418 31-May-05 $18,074 $18,263 $19,298 $17,606 30-Jun-05 $18,258 $18,427 $19,325 $17,703 31-Jul-05 $18,850 $18,980 $20,044 $17,542 31-Aug-05 $18,875 $19,004 $19,862 $17,767 30-Sep-05 $19,047 $19,226 $20,023 $17,584 31-Oct-05 $18,690 $18,893 $19,688 $17,445 30-Nov-05 $19,220 $19,458 $20,433 $17,521 31-Dec-05 $19,390 $19,681 $20,439 $17,688 31-Jan-06 $20,139 $20,348 $20,980 $17,690 28-Feb-06 $20,126 $20,346 $21,037 $17,748 31-Mar-06 $20,488 $20,691 $21,298 $17,574 30-Apr-06 $20,801 $21,019 $21,583 $17,542 31-May-06 $20,214 $20,463 $20,962 $17,523 30-Jun-06 $20,239 $20,495 $20,991 $17,560
All portfolio and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. The portfolio's share price and principal values change, and when you sell your shares, they may be worth more or less than what you paid for them. Past performance does not indicate future results. Performance results less than one year are not annualized. 1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio's returns would have been lower. Portfolio returns do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the returns would be less than those shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. 2 The Growth Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 60% Dow Jones Wilshire 5000 Composite IndexSM, 20% MSCI EAFE(R) Index, 15% Lehman Brothers U.S. Aggregate Bond Index, and 5% Morningstar 3-Month T-Bill Index. Schwab MarketTrack Growth Portfolio II 3 SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO FACTS as of 6/30/06 STYLE ASSESSMENT 1 [GRAPHIC]
INVESTMENT STYLE Value Blend Growth MARKET CAP Large / / /X/ / / Medium / / / / / / Small / / / / / /
STATISTICS NUMBER OF HOLDINGS 507 -------------------------------------------------------------------------------- WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $60,516 -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO (P/E) 19.0 -------------------------------------------------------------------------------- PRICE/BOOK RATIO (P/B) 2.6 -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 2 32% --------------------------------------------------------------------------------
TOP HOLDINGS 3
% OF SECURITY NET ASSETS -------------------------------------------------------------------------------- (1) SCHWAB INSTITUTIONAL SELECT(R) S&P 500 FUND 23.8% -------------------------------------------------------------------------------- (2) SCHWAB INTERNATIONAL INDEX FUND(R), Select Shares(R) 21.1% -------------------------------------------------------------------------------- (3) SCHWAB SMALL-CAP INDEX FUND(R), Select Shares 20.5% -------------------------------------------------------------------------------- (4) SCHWAB TOTAL BOND MARKET FUND(TM) 14.8% -------------------------------------------------------------------------------- (5) SCHWAB VALUE ADVANTAGE MONEY FUND(R), Select Shares 0.7% -------------------------------------------------------------------------------- (6) EXXON MOBIL CORP. 0.5% -------------------------------------------------------------------------------- (7) GENERAL ELECTRIC CO. 0.4% -------------------------------------------------------------------------------- (8) CITIGROUP, INC. 0.3% -------------------------------------------------------------------------------- (9) BANK OF AMERICA CORP. 0.3% -------------------------------------------------------------------------------- (10) MICROSOFT CORP. 0.3% -------------------------------------------------------------------------------- TOTAL 82.7%
ASSET CLASS WEIGHTINGS % of Investments This chart shows the portfolio's asset class composition as of the report date. [PIE CHART] 37.6% LARGE-CAP STOCKS 21.0% INTERNATIONAL STOCKS 20.4% SMALL-CAP STOCKS 14.7% BONDS 6.3% SHORT-TERM INVESTMENTS Portfolio holdings may have changed since the report date. Source of Sector Classification: S&P and MSCI. 1 Source: Morningstar, Inc. This style assessment is the result of evaluating the stock portion of the portfolio based on a ten-factor model for value and growth characteristics. The portfolio's market capitalization placement is determined by the geometric mean of its holdings' market capitalizations. The assessment reflects the portfolio as of 6/30/06, which may have changed since then, and is not a precise indication of risk or performance--past, present, or future. 2 Not annualized. 3 This list is not a recommendation of any security by the investment adviser. 4 Schwab MarketTrack Growth Portfolio II PORTFOLIO 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 January 1, 2006 and held through June 30, 2006. ACTUAL RETURN lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value / $1,000 = 8.6), then multiply the result by the number given for your fund 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. If these transactional costs were included, your costs would have been higher.
ENDING BEGINNING ACCOUNT VALUE EXPENSES EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2 (Annualized) at 1/1/06 at 6/30/06 1/1/06-6/30/06 ------------------------------------------------------------------------------------------------------------------------ SCHWAB MARKETTRACK GROWTH PORTFOLIO II Actual Return 0.50% $1,000 $1,043.79 $2.53 Hypothetical 5% Return 0.50% $1,000 $1,022.32 $2.51
1 Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights. 2 Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 181 days of the period, and divided by 365 days of the fiscal year. Schwab MarketTrack Growth Portfolio II 5 SCHWAB MARKETTRACK GROWTH PORTFOLIO II FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 15.53 14.87 13.49 10.75 12.99 14.81 ------------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.08 0.24 0.21 0.16 0.17 0.18 Net realized and unrealized gains or losses 0.60 0.62 1.35 2.74 (2.17) (1.43) ------------------------------------------------------------------------- Total income or loss from investment operations 0.68 0.86 1.56 2.90 (2.00) (1.25) Less distributions: Dividends from net investment income -- (0.20) (0.18) (0.16) (0.20) (0.35) Distributions from net realized gains -- -- -- -- (0.04) (0.22) ------------------------------------------------------------------------- Total distributions -- (0.20) (0.18) (0.16) (0.24) (0.57) ------------------------------------------------------------------------- Net asset value at end of period 16.21 15.53 14.87 13.49 10.75 12.99 ------------------------------------------------------------------------- Total return (%) 4.38 2 5.77 11.58 26.97 (15.44) (8.40) RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 1 0.50 3 0.48 0.50 0.50 0.50 0.50 Gross operating expenses 1 0.70 3 0.68 0.69 0.87 1.00 0.82 Net investment income 0.98 3 1.66 1.52 1.70 1.59 1.67 Portfolio turnover rate 32 5 8 10 30 13 Net assets, end of period ($ x 1,000,000) 39 37 34 30 20 22
* Unaudited. 1 The expense incurred by underlying funds in which the portfolio invests are not included in this ratio. The income received by the portfolio from underlying funds is reduced by those expenses. 2 Not annualized. 3 Annualized. 6 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS as of June 30, 2006 (Unaudited) This section shows all the securities in the fund's portfolio by industry classification and their value, as of the report date. The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund's most recent Form N-Q is also available by visiting Schwab's website at www.schwab.com/schwabfunds.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) -------------------------------------------------------------------------------- 14.0% COMMON STOCK 3,048 5,471 80.7% OTHER INVESTMENT COMPANIES 27,041 31,515 5.6% SHORT-TERM INVESTMENTS 2,155 2,155 0.1% U.S. GOVERNMENT SECURITIES 45 45 -------------------------------------------------------------------------------- 100.4% TOTAL INVESTMENTS 32,289 39,186 (0.4)% OTHER ASSETS AND LIABILITIES (148) -------------------------------------------------------------------------------- 100.0% NET ASSETS 39,038
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) COMMON STOCK 14.0% of net assets AUTOMOBILES & COMPONENTS 0.1% -------------------------------------------------------------------------------- Cooper Tire & Rubber Co. 30 -- Ford Motor Co. 882 6 General Motors Corp. 266 8 Harley-Davidson, Inc. 127 7 Johnson Controls, Inc. 90 8 The Goodyear Tire & Rubber Co. * 84 1 ----------- 30 BANKS 1.1% -------------------------------------------------------------------------------- AmSouth Bancorp 163 4 Bank of America Corp. 2,196 106 BB&T Corp. 253 11 Comerica, Inc. 78 4 Compass Bancshares, Inc. 59 3 Countrywide Financial Corp. 285 11 Fannie Mae 457 22 Fifth Third Bancorp 262 10 First Horizon National Corp. 60 2 Freddie Mac 326 19 Golden West Financial Corp. 122 9 Huntington Bancshares, Inc. 118 3 KeyCorp 191 7 M&T Bank Corp. 37 4 Marshall & Ilsley Corp. 106 5 MGIC Investment Corp. 42 3 National City Corp. 260 9 North Fork Bancorp, Inc. 226 7 PNC Financial Services Group, Inc. 138 10 Regions Financial Corp. 215 7 Sovereign Bancorp, Inc. 176 4 SunTrust Banks, Inc. 175 13 Synovus Financial Corp. 149 4 U.S. Bancorp 851 26 Wachovia Corp. 766 41 Washington Mutual, Inc. 469 21 Wells Fargo & Co. 791 53 Zions Bancorp 50 4 ----------- 422 CAPITAL GOODS 1.3% -------------------------------------------------------------------------------- 3M Co. 357 29 American Power Conversion Corp. 72 1 American Standard Cos., Inc. 85 4 Caterpillar, Inc. 317 24 Cooper Industries Ltd., Class A 44 4 Cummins, Inc. 22 3 Danaher Corp. 112 7 Deere & Co. 113 9 Dover Corp. 97 5 Eaton Corp. 71 5 Emerson Electric Co. 194 16 Fluor Corp. 42 4 General Dynamics Corp. 189 12 General Electric Co. 4,931 163 Goodrich Corp. 59 2 Honeywell International, Inc. 393 16 Illinois Tool Works, Inc. 196 9 Ingersoll-Rand Co., Class A 154 7 ITT Industries, Inc. 88 4 L-3 Communications Holdings, Inc. 58 4 Lockheed Martin Corp. 169 12 Masco Corp. 196 6 Navistar International Corp. * 30 1 Northrop Grumman Corp. 165 11 Paccar, Inc. 81 7 Pall Corp. 60 2 Parker Hannifin Corp. 56 4
See financial notes. 7 SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Raytheon Co. 212 9 Rockwell Automation, Inc. 83 6 Rockwell Collins, Inc. 82 5 Textron, Inc. 62 6 The Boeing Co. 377 31 Tyco International Ltd. 952 26 United Technologies Corp. 479 30 W.W. Grainger, Inc. 37 3 ----------- 487 COMMERCIAL SERVICES & SUPPLIES 0.1% -------------------------------------------------------------------------------- Allied Waste Industries, Inc. * 114 1 Avery Dennison Corp. 53 3 Cendant Corp. 477 8 Cintas Corp. 66 3 Equifax, Inc. 62 2 H&R Block, Inc. 155 4 Monster Worldwide, Inc. * 60 3 Pitney Bowes, Inc. 108 5 R.R. Donnelley & Sons Co. 103 3 Robert Half International, Inc. 82 3 Waste Management, Inc. 260 9 ----------- 44 CONSUMER DURABLES & APPAREL 0.2% -------------------------------------------------------------------------------- Brunswick Corp. 45 1 Centex Corp. 59 3 Coach, Inc. * 180 5 D.R. Horton, Inc. 128 3 Eastman Kodak Co. 134 3 Fortune Brands, Inc. 70 5 Harman International Industries, Inc. 32 3 Hasbro, Inc. 85 2 Jones Apparel Group, Inc. 55 2 KB Home 37 2 Leggett & Platt, Inc. 87 2 Lennar Corp., Class A 64 3 Liz Claiborne, Inc. 50 2 Mattel, Inc. 182 3 Newell Rubbermaid, Inc. 128 3 Nike, Inc., Class B 89 7 Pulte Homes, Inc. 102 3 Snap-On, Inc. 27 1 The Black & Decker Corp. 36 3 The Stanley Works 35 2 VF Corp. 42 3 Whirlpool Corp. 36 3 ----------- 64 CONSUMER SERVICES 0.2% -------------------------------------------------------------------------------- Apollo Group, Inc., Class A * 67 3 Carnival Corp. 204 9 Darden Restaurants, Inc. 63 3 Harrah's Entertainment, Inc. 88 6 Hilton Hotels Corp. 155 4 International Game Technology 158 6 Marriott International, Inc., Class A 152 6 McDonald's Corp. 593 20 Starbucks Corp. * 360 14 Starwood Hotels & Resorts Worldwide, Inc. 103 6 Wendy's International, Inc. 55 3 YUM! Brands, Inc. 130 7 ----------- 87 DIVERSIFIED FINANCIALS 1.1% -------------------------------------------------------------------------------- American Express Co. 584 31 Ameriprise Financial, Inc. 118 5 Capital One Financial Corp. 142 12 CIT Group, Inc. 95 5 Citigroup, Inc. 2,360 114 E*TRADE Financial Corp. * 197 5 Federated Investors, Inc., Class B 40 1 Franklin Resources, Inc. 72 6 Janus Capital Group, Inc. 102 2 JPMorgan Chase & Co. 1,648 69 Legg Mason, Inc. 59 6 Lehman Brothers Holdings, Inc. 350 23 Mellon Financial Corp. 197 7 Merrill Lynch & Co., Inc. 434 30 Moody's Corp. 116 6 Morgan Stanley 507 32 Northern Trust Corp. 87 5 SLM Corp. 197 10 State Street Corp. 157 9 T. Rowe Price Group, Inc. 126 5 The Bank of New York Co., Inc. 64 12 The Bear Stearns Cos., Inc. 56 8 The Charles Schwab Corp. (a) 487 8 The Goldman Sachs Group, Inc. 206 31 ----------- 442 ENERGY 1.4% -------------------------------------------------------------------------------- Anadarko Petroleum Corp. 220 11 Apache Corp. 156 11
8 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Baker Hughes, Inc. 161 13 BJ Services Co. 154 6 Chesapeake Energy Corp. 176 5 ChevronTexaco Corp. 1,052 65 ConocoPhillips 779 51 Devon Energy Corp. 210 13 El Paso Corp. 310 5 EOG Resources, Inc. 114 8 Exxon Mobil Corp. 2,888 177 Halliburton Co. 244 18 Hess Corp. 111 6 Kerr-McGee Corp. 108 7 Kinder Morgan, Inc. 49 5 Marathon Oil Corp. 173 14 Murphy Oil Corp. 79 4 Nabors Industries, Ltd. * 149 5 National-Oilwell Varco, Inc. * 82 5 Noble Corp. 64 5 Occidental Petroleum Corp. 203 21 Rowan Cos., Inc. 52 2 Schlumberger Ltd. 558 36 Sunoco, Inc. 64 4 Transocean, Inc. * 154 12 Valero Energy Corp. 294 20 Weatherford International, Ltd. * 166 8 Williams Cos., Inc. 282 7 XTO Energy, Inc. 171 8 ----------- 552 FOOD & STAPLES RETAILING 0.3% -------------------------------------------------------------------------------- Costco Wholesale Corp. 223 13 CVS Corp. 385 12 Safeway, Inc. 212 5 Supervalu, Inc. 96 3 Sysco Corp. 293 9 The Kroger Co. 343 8 Wal-Mart Stores, Inc. 1,181 57 Walgreen Co. 477 21 Whole Foods Market, Inc. 66 4 Winn-Dixie Stores, Inc. * 100 -- ----------- 132 FOOD, BEVERAGE & TOBACCO 0.7% -------------------------------------------------------------------------------- Altria Group, Inc. 986 72 Anheuser-Busch Cos., Inc. 366 17 Archer-Daniels-Midland Co. 309 13 Brown-Forman Corp., Class B 40 3 Campbell Soup Co. 88 3 Coca-Cola Enterprises, Inc. 144 3 ConAgra Foods, Inc. 245 5 Constellation Brands, Inc., Class A * 94 2 Dean Foods Co. * 65 2 General Mills, Inc. 168 9 H.J. Heinz Co. 158 6 Kellogg Co. 118 6 McCormick & Co., Inc. 63 2 Molson Coors Brewing Co., Class B 25 2 PepsiCo, Inc. 782 47 Reynolds American, Inc. 40 5 Sara Lee Corp. 358 6 The Coca-Cola Co. 973 42 The Hershey Co. 84 5 The Pepsi Bottling Group, Inc. 63 2 Tyson Foods, Inc., Class A 99 1 UST, Inc. 78 4 Wm. Wrigley Jr. Co., Class A 105 5 ----------- 262 HEALTH CARE EQUIPMENT & SERVICES 0.6% -------------------------------------------------------------------------------- Aetna, Inc. 268 11 AmerisourceBergen Corp. 98 4 Bausch & Lomb, Inc. 26 1 Baxter International, Inc. 305 11 Becton Dickinson & Co. 118 7 Biomet, Inc. 118 4 Boston Scientific Corp. * 544 9 C.R. Bard, Inc. 50 4 Cardinal Health, Inc. 199 13 Caremark Rx, Inc. 212 11 CIGNA Corp. 58 6 Coventry Health Care, Inc. * 75 4 Express Scripts, Inc. * 70 5 HCA, Inc. 194 8 Health Management Associates, Inc., Class A 114 2 Hospira, Inc. * 77 3 Humana, Inc. * 78 4 IMS Health, Inc. 95 2 Laboratory Corp. of America Holdings * 60 4 Manor Care, Inc. 38 2 McKesson Corp. 144 7 Medco Health Solutions, Inc. * 145 8 Medtronic, Inc. 570 27
See financial notes. 9 SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Patterson Cos., Inc. * 66 2 Quest Diagnostics 76 4 St. Jude Medical, Inc. * 173 6 Stryker Corp. 139 6 Tenet Healthcare Corp. * 223 1 UnitedHealth Group, Inc. 640 29 WellPoint, Inc. * 311 23 Zimmer Holdings, Inc. * 118 7 ----------- 235 HOUSEHOLD & PERSONAL PRODUCTS 0.3% -------------------------------------------------------------------------------- Alberto-Culver Co., Class B 36 2 Avon Products, Inc. 213 7 Clorox Co. 72 4 Colgate-Palmolive Co. 242 15 Kimberly-Clark Corp. 218 13 Procter & Gamble Co. 1,555 87 The Estee Lauder Cos., Inc., Class A 57 2 ----------- 130 INSURANCE 0.7% -------------------------------------------------------------------------------- ACE Ltd. 152 8 AFLAC, Inc. 235 11 Ambac Financial Group, Inc. 49 4 American International Group, Inc. 1,227 72 AON Corp. 153 5 Cincinnati Financial Corp. 83 4 Genworth Financial, Inc., Class A 179 6 Lincoln National Corp. 134 8 Loews Corp. 195 7 Marsh & McLennan Cos., Inc. 258 7 MBIA, Inc. 64 4 Metlife, Inc. 357 18 Principal Financial Group, Inc. 132 7 Prudential Financial, Inc. 234 18 SAFECO Corp. 59 3 The Allstate Corp. 304 17 The Chubb Corp. 190 9 The Hartford Financial Services Group, Inc. 144 12 The Progressive Corp. 375 10 The St. Paul Travelers Cos., Inc. 328 15 Torchmark Corp. 50 3 UnumProvident Corp. 142 3 XL Capital Ltd., Class A 83 5 ----------- 256 MATERIALS 0.4% -------------------------------------------------------------------------------- Air Products & Chemicals, Inc. 106 7 Alcoa, Inc. 411 13 Allegheny Technologies, Inc. 40 3 Ashland, Inc. 34 2 Ball Corp. 50 2 Bemis Co. 50 2 E.I. du Pont de Nemours & Co. 434 18 Eastman Chemical Co. 39 2 Ecolab, Inc. 87 3 Freeport-McMoran Copper & Gold, Inc., Class B 88 5 Hercules, Inc. * 54 1 International Flavors & Fragrances, Inc. 38 1 International Paper Co. 233 8 Louisiana-Pacific Corp. 51 1 MeadWestvaco Corp. 86 2 Monsanto Co. 127 11 Newmont Mining Corp. 210 11 Nucor Corp. 146 8 Pactiv Corp. * 68 2 Phelps Dodge Corp. 97 8 PPG Industries, Inc. 79 5 Praxair, Inc. 152 8 Rohm & Haas Co. 69 3 Sealed Air Corp. 39 2 Sigma-Aldrich Corp. 39 3 Temple-Inland, Inc. 53 2 The Dow Chemical Co. 456 18 United States Steel Corp. 52 4 Vulcan Materials Co. 48 4 Weyerhaeuser Co. 116 7 ----------- 166 MEDIA 0.5% -------------------------------------------------------------------------------- CBS Corp., Class B 995 27 Clear Channel Communications, Inc. 244 7 Comcast Corp., Class A * 1,010 33 Dow Jones & Co., Inc. 28 1 Gannett Co., Inc. 112 6 Interpublic Group of Cos., Inc. * 204 2 McGraw-Hill Cos., Inc. 173 9 Meredith Corp. 20 1 New York Times Co., Class A 74 2 News Corp., Class A 1,134 22 Omnicom Group, Inc. 84 7 The E.W. Scripps Co., Class A 41 2
10 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) The McClatchy Co., Class A 16 1 The Walt Disney Co. 911 27 Time Warner, Inc. 2,130 37 Tribune Co. 123 4 Univision Communications, Inc., Class A * 105 3 Viacom, Inc., Class B * 365 13 ----------- 204 PHARMACEUTICALS & BIOTECHNOLOGY 1.1% -------------------------------------------------------------------------------- Abbott Laboratories 728 32 Allergan, Inc. 71 8 Amgen, Inc. * 552 36 Applera Corp. - Applied Biosystems Group 87 3 Barr Pharmaceuticals, Inc. * 50 2 Biogen Idec, Inc. * 162 8 Bristol-Myers Squibb Co. 925 24 Eli Lilly & Co. 534 30 Fisher Scientific International, Inc. * 59 4 Forest Laboratories, Inc. * 155 6 Genzyme Corp. * 122 7 Gilead Sciences, Inc. * 218 13 Johnson & Johnson 1,407 84 King Pharmaceuticals, Inc. * 115 2 MedImmune, Inc. * 120 3 Merck & Co., Inc. 1,033 38 Millipore Corp. * 25 2 Mylan Laboratories, Inc. 104 2 PerkinElmer, Inc. 62 1 Pfizer, Inc. (b) 3,480 82 Schering-Plough Corp. 701 13 Thermo Electron Corp. * 77 3 Waters Corp. * 49 2 Watson Pharmaceuticals, Inc. * 49 1 Wyeth 635 28 ----------- 434 REAL ESTATE 0.1% -------------------------------------------------------------------------------- Apartment Investment & Management Co., Class A 46 2 Archstone-Smith Trust 100 5 Boston Properties, Inc. 43 4 Equity Office Properties Trust 174 6 Equity Residential 137 6 Kimco Realty Corp. 100 4 Plum Creek Timber Co., Inc. 88 3 ProLogis 115 6 Public Storage, Inc. 40 3 Simon Property Group, Inc. 86 7 Vornado Realty Trust 57 6 ----------- 52 RETAILING 0.5% -------------------------------------------------------------------------------- Amazon.com, Inc. * 146 6 AutoNation, Inc. * 70 2 AutoZone, Inc. * 27 2 Bed, Bath & Beyond, Inc. * 132 4 Best Buy Co., Inc. 192 11 Big Lots, Inc. * 88 2 Circuit City Stores, Inc. 73 2 Dillard's, Inc. 30 1 Dollar General Corp. 150 2 eBay, Inc. * 544 16 Family Dollar Stores, Inc. 74 2 Federated Department Stores, Inc. 256 9 Genuine Parts Co. 81 3 Home Depot, Inc. 1,004 36 J.C. Penney Co., Inc. 109 7 Kohl's Corp. * 164 10 Limited Brands, Inc. 165 4 Lowe's Cos., Inc. 368 22 Nordstrom, Inc. 103 4 Office Depot, Inc. * 139 5 OfficeMax, Inc. 34 1 RadioShack Corp. 11 -- Sears Holdings Corp. * 48 8 Staples, Inc. 343 8 Target Corp. 416 20 The Gap, Inc. 270 5 The Sherwin-Williams Co. 53 3 The TJX Cos., Inc. 217 5 Tiffany & Co. 68 2 ----------- 202 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.4% -------------------------------------------------------------------------------- Advanced Micro Devices, Inc. * 227 5 Altera Corp. * 171 3 Analog Devices, Inc. 174 5 Applied Materials, Inc. 749 12 Applied Micro Circuits Corp. * 221 1 Broadcom Corp., Class A * 208 6 Freescale Semiconductor, Inc., Class B * 195 6 Intel Corp. 2,782 53 KLA-Tencor Corp. 95 4
See financial notes. 11 SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Linear Technology Corp. 144 5 LSI Logic Corp. * 186 2 Maxim Integrated Products, Inc. 151 5 Micron Technology, Inc. * 318 5 National Semiconductor Corp. 159 4 Novellus Systems, Inc. * 64 1 NVIDIA Corp. * 161 3 PMC - Sierra, Inc. * 88 1 Teradyne, Inc. * 94 1 Texas Instruments, Inc. 756 23 Xilinx, Inc. 164 4 ----------- 149 SOFTWARE & SERVICES 0.7% -------------------------------------------------------------------------------- Adobe Systems, Inc. * 283 9 Affiliated Computer Services, Inc., Class A * 55 3 Autodesk, Inc. * 110 4 Automatic Data Processing, Inc. 274 13 BMC Software, Inc. * 101 2 CA, Inc. 215 5 Citrix Systems, Inc. * 85 3 Computer Sciences Corp. * 89 4 Compuware Corp. * 182 1 Convergys Corp. * 67 1 Electronic Arts, Inc. * 143 6 Electronic Data Systems Corp. 243 6 First Data Corp. 362 16 Fiserv, Inc. * 88 4 Google, Inc., Class A * 96 40 Intuit, Inc. * 83 5 Microsoft Corp. (b) 4,203 98 Novell, Inc. * 185 1 Oracle Corp. * 1,783 26 Parametric Technology Corp. * 53 1 Paychex, Inc. 159 6 Sabre Holdings Corp., Class A 63 1 Symantec Corp. * 492 8 Unisys Corp. * 162 1 VeriSign, Inc. * 116 3 Yahoo! Inc. * 597 20 ----------- 287 TECHNOLOGY HARDWARE & EQUIPMENT 0.9% -------------------------------------------------------------------------------- ADC Telecommunications, Inc. * 56 1 Agilent Technologies, Inc. * 202 6 Andrew Corp. * 76 1 Apple Computer, Inc. * 402 23 Avaya, Inc. * 198 2 CIENA Corp. * 276 1 Cisco Systems, Inc. * 2,909 57 Comverse Technology, Inc. * 96 2 Corning, Inc. * 731 18 Dell, Inc. * 1,113 27 EMC Corp. * 1,124 12 Gateway, Inc. * 200 1 Hewlett-Packard Co. 1,337 43 International Business Machines Corp. 741 57 Jabil Circuit, Inc. 83 2 JDS Uniphase Corp. * 794 2 Juniper Networks, Inc. * 200 3 Lexmark International, Inc., Class A * 52 3 Lucent Technologies, Inc. * 2,113 5 Molex, Inc. 68 2 Motorola, Inc. 1,181 24 NCR Corp. * 87 3 Network Appliance, Inc. * 178 6 QLogic Corp. * 76 1 Qualcomm, Inc. 783 31 SanDisk Corp. * 88 5 Sanmina -- SCI Corp. * 252 1 Solectron Corp. * 433 2 Sun Microsystems, Inc. * 1,636 7 Symbol Technologies, Inc. 120 1 Tektronix, Inc. 39 1 Tellabs, Inc. * 214 3 Xerox Corp. * 440 6 ----------- 359 TELECOMMUNICATION SERVICES 0.5% -------------------------------------------------------------------------------- Alltel Corp. 183 12 AT&T Corp. 1,834 51 BellSouth Corp. 849 31 CenturyTel, Inc. 55 2 Citizens Communications Co. 156 2 Embarq Corp * 70 3 Qwest Communications International, Inc. * 734 6 Sprint Nextel Corp. 1,404 28 Verizon Communications, Inc. 1,383 46 ----------- 181 TRANSPORTATION 0.3% -------------------------------------------------------------------------------- Burlington Northern Santa Fe Corp. 175 14 CSX Corp. 103 7 Delta Air Lines, Inc. * 100 -- FedEx Corp. 143 17
12 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Norfolk Southern Corp. 195 10 Ryder System, Inc. 29 2 Southwest Airlines Co. 335 6 Union Pacific Corp. 125 12 United Parcel Service, Inc., Class B 515 42 ----------- 110 UTILITIES 0.5% -------------------------------------------------------------------------------- Allegheny Energy, Inc. * 78 3 Ameren Corp. 96 5 American Electric Power Co., Inc. 187 6 CenterPoint Energy, Inc. 147 2 CMS Energy Corp. * 105 1 Consolidated Edison, Inc. 117 5 Constellation Energy Group, Inc. 85 5 Dominion Resources, Inc. 164 12 DTE Energy Co. 85 3 Duke Energy Corp. 585 17 Dynegy, Inc., Class A * 143 1 Edison International 155 6 Entergy Corp. 98 7 Exelon Corp. 314 18 FirstEnergy Corp. 157 9 FPL Group, Inc. 190 8 KeySpan Corp. 83 3 Nicor, Inc. 32 1 NiSource, Inc. 130 3 Peoples Energy Corp. 19 1 PG&E Corp. 163 6 Pinnacle West Capital Corp. 47 2 PPL Corp. 179 6 Progress Energy, Inc. 120 5 Public Service Enterprise Group, Inc. 118 8 Sempra Energy 123 6 TECO Energy, Inc. 99 1 The AES Corp. * 310 6 The Southern Co. 349 11 TXU Corp. 217 13 Xcel Energy, Inc. 192 4 ----------- 184
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 80.7% of net assets Schwab Institutional Select S&P 500 Fund, Select Shares (a) 920,990 9,274 Schwab International Index Fund, Select Shares (a),(b) 420,294 8,225 Schwab Small-Cap Index Fund, Select Shares (a) 325,458 7,990 Schwab Total Bond Market Fund (a) 601,781 5,771 Schwab Value Advantage Money Fund, Select Shares (a) 254,860 255 ----------- 31,515
FACE AMOUNT VALUE SECURITY ($ X 1,000) ($ X 1,000) SHORT-TERM INVESTMENTS 5.6% of net assets Brown Brothers Harriman & Co. Cash Management Sweep 2,155 2,155
SECURITY FACE AMOUNT VALUE RATE, MATURITY DATE ($ X 1,000) ($ X 1,000) U.S. GOVERNMENT SECURITIES 0.1% of net assets U.S. Treasury Bill 4.71%, 09/14/06 45 45
END OF INVESTMENTS. At 06/30/2006, the tax basis cost of the fund's investments was $32,596 and the unrealized appreciation and depreciation were $7,083 and ($493), respectively, with a net unrealized appreciation of $6,590. In addition to the above, the fund held the following at 06/30/2006. All numbers are x 1,000 except number of futures contracts.
NUMBER OF CONTRACT UNREALIZED CONTRACTS VALUE GAINS FUTURES CONTRACT 1.0% of net assets S & P Mini 500 Index Future, Long Expires 09/15/06 6 384 9
* Non-income producing security. (a) Issuer is affiliated with the fund's adviser. (b) All or a portion of this security is held as collateral for open futures contracts. See financial notes. 13 SCHWAB MARKETTRACK GROWTH PORTFOLIO II Statement of ASSETS AND LIABILITIES As of June 30, 2006; unaudited. All numbers x 1,000 except NAV. ASSETS -------------------------------------------------------------------------------- Investments in affiliated underlying funds, at value (cost $27,041) $31,515 Investments, at value (cost $5,248) 7,671 Receivables: Fund shares sold 36 Dividends + 32 ---------- TOTAL ASSETS 39,254 LIABILITIES -------------------------------------------------------------------------------- Payables: Fund shares redeemed 175 Investments bought 27 Due to brokers for futures 1 Investment adviser and administrator fees 1 Accrued expenses + 12 ---------- TOTAL LIABILITIES 216 NET ASSETS -------------------------------------------------------------------------------- Total assets 39,254 Total liabilities - 216 ---------- NET ASSETS $39,038 NET ASSETS BY SOURCE Capital received from investors 31,319 Net investment income not yet distributed 761 Net realized capital gains 52 Net unrealized capital gains 6,906 NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $39,038 2,409 $16.21
14 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II Statement of OPERATIONS For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000. INVESTMENT INCOME -------------------------------------------------------------------------------- Dividends received from affiliated underlying funds $132 Dividends 136 Interest + 12 ---------- TOTAL INVESTMENT INCOME $280 NET REALIZED GAINS AND LOSSES -------------------------------------------------------------------------------- Net realized losses on sales of affiliated issuers (5) Net realized gains received from affiliated underlying funds 36 Net realized gains on investments 929 Net realized losses on futures contracts + (31) ---------- NET REALIZED GAINS 929 NET UNREALIZED GAINS AND LOSSES -------------------------------------------------------------------------------- Net unrealized losses on investments (401) Net unrealized gains on affiliated funds 822 Net unrealized gains on futures contracts + 9 ---------- NET UNREALIZED GAINS 430 EXPENSES -------------------------------------------------------------------------------- Investment adviser and administrator fees 84 Trustees' fees 8 Custodian fees 3 Portfolio accounting fees 8 Professional fees 15 Registration fees 1 Shareholder reports 11 Other expenses + 2 ---------- Total expenses 132 Expense reduction - 37 ---------- NET EXPENSES 95 INCREASE IN NET ASSETS FROM OPERATIONS -------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 280 NET EXPENSES - 95 ---------- NET INVESTMENT INCOME 185 NET REALIZED GAINS 929 NET UNREALIZED GAINS + 430 ---------- INCREASE IN NET ASSETS FROM OPERATIONS $1,544
See financial notes. 15 SCHWAB MARKETTRACK GROWTH PORTFOLIO II Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers x 1,000. Figures for current period are unaudited.
OPERATIONS ------------------------------------------------------------------------------------------- 1/1/06-6/30/06 1/1/05-12/31/05 Net investment income $185 $576 Net realized gains 929 156 Net unrealized gains + 430 1,255 ----------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 1,544 1,987 DISTRIBUTIONS PAID ------------------------------------------------------------------------------------------- Dividends from net investment income -- 466
TRANSACTIONS IN FUND SHARES ------------------------------------------------------------------------------------------- 1/1/06-6/30/06 1/1/05-12/31/05 SHARES VALUE SHARES VALUE Shares sold 316 $5,152 339 $5,081 Shares reinvested -- -- 29 466 Shares redeemed + (273) (4,407) (278) (4,162) ---------------------------------------------- NET TRANSACTIONS IN FUND SHARES 43 $745 90 $1,385
SHARES OUTSTANDING AND NET ASSETS ------------------------------------------------------------------------------------------- SHARES NET ASSETS SHARES NET ASSETS Beginning of period 2,366 $36,749 2,276 $33,843 Total increase + 43 2,289 90 2,906 ---------------------------------------------- END OF PERIOD 2,409 $39,038 2,366 $36,749 Net investment income not yet distributed $761 $576
16 See financial notes. SCHWAB MARKETTRACK GROWTH PORTFOLIO II FINANCIAL NOTES, unaudited. Unless stated, all dollar amounts are x 1,000. 1. BUSINESS STRUCTURE OF THE FUND Schwab MarketTrack Growth Portfolio II is a series of Schwab Annuity Portfolios, a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the fund in this report, which is highlighted: SCHWAB ANNUITY PORTFOLIOS Organized January 21, 1994 Schwab Money Market Portfolio SCHWAB MARKETTRACK GROWTH PORTFOLIO II Schwab S&P 500 Index Portfolio Schwab MarketTrack Growth Portfolio II offers one share class. Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary. The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies the fund uses in its operations and in the preparation of financial statements: (A) SECURITY VALUATION: The fund values the securities in its portfolio every business day. The fund uses the following policies to value various types of securities: - SECURITIES TRADED ON AN EXCHANGE OR OVER-THE-COUNTER: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate. - SECURITIES FOR WHICH NO QUOTED VALUE IS AVAILABLE OR WHEN A SIGNIFICANT EVENT HAS OCCURRED BETWEEN THE TIME OF THE SECURITY'S LAST CLOSE AND THE TIME THE FUND CALCULATES NET ASSET VALUE: valued at fair value, as determined in good faith by the fund's investment adviser using guidelines adopted by the fund's Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security's trading has been halted or suspended; the security has been de-listed from a national exchange; the security's primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security's primary pricing source is not able or willing to provide a price. - FUTURES: open contracts are valued at their settlement prices as of the close of their exchanges. When a fund closes out a futures position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly. - UNDERLYING FUNDS: valued at their respective net asset values as determined by those funds, in accordance with the Investment Company Act of 1940. 17 SCHWAB MARKETTRACK GROWTH PORTFOLIO II FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost. (B) PORTFOLIO INVESTMENTS: FUTURES CONTRACT: The fund may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements. One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for the fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities. Because futures carry inherent risks, the fund must give the broker a deposit of cash and/or securities (the "initial margin") whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount. Futures are traded publicly on exchanges, and their market value changes daily. The fund records the change in market value of futures, and also the change in the amount of margin deposit required ("due to/from broker"). (C) SECURITY TRANSACTIONS: Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved. Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date. For the period ended June 30, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:
PURCHASES SALES/MATURITIES --------- ---------------- $11,743 $12,335
(D) INCOME, EXPENSES AND DISTRIBUTIONS: Income from interest and the accretion of discount is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the fund records certain foreign security dividends on the day it learns of the ex-dividend date. Expenses that are specific to a fund are charged directly to that fund. Expenses that are common to all funds within a trust generally are allocated among the funds in proportion to their average daily net assets. The fund pays dividends from net investment income and makes distributions from net realized capital gains once a year. The fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund also keeps certain assets in segregated accounts, as may be required by securities law. 18 SCHWAB MARKETTRACK GROWTH PORTFOLIO II FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) BORROWING: The fund may borrow money from banks and custodians. The fund may obtain temporary bank loans through the trust to which the fund belongs to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with PNC Bank, N.A., and Bank of America, N.A., respectively. The fund pays interest on the amounts it borrows at rates that are negotiated periodically.
AMOUNT OUTSTANDING AVERAGE WEIGHTED AT 6/30/06 BORROWING* AVERAGE INTEREST ($ X 1000) ($ X 1000) RATE* (%) ---------- ---------- --------- Schwab MarketTrack Growth Portfolio II -- 329 5.24
* Based on the number of days for which the borrowing is outstanding. (F) ACCOUNTING ESTIMATES: The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It's possible that once the results are known, they may turn out to be different from these estimates. (G) INDEMNIFICATION: Under the fund's organizational documents, its officers and trustees are indemnified against certain liability 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 be remote. 3. AFFILIATES AND AFFILIATED TRANSACTIONS Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is the trust's shareholder services agent and transfer agent. For its advisory and the 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 0.44% Over $500 million 0.39%
Schwab does not charge the fund for transfer agent and shareholder services fees. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses to 0.50% through April 29, 2007. 19 FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 3. AFFILIATES AND AFFILIATED TRANSACTIONS (CONTINUED) The fund may engage in certain transactions involving related parties. For instance, the fund may own shares of The Charles Schwab Corporation if that company is included in an index which the fund uses as part of an indexing strategy. Pursuant to an exemptive order issued by the SEC, the fund may invest in other related funds. As of June 30, 2006, the shares owned by the fund as a percentage of the total shares of the underlying funds is: SCHWAB EQUITY INDEX FUNDS Institutional Select S&P 500 Fund 0.6% International Index Fund 0.5% Small-Cap Index Fund 0.5% SCHWAB BOND FUNDS Total Bond Market Fund 0.5% SCHWAB MONEY FUNDS Value Advantage Money Fund less than 0.1%
The fund may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. For the period ended June 30, 2006, 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 within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for the fund during the period. Trustees may include people who are officers and/or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such "interested persons" who may serve on a trust's board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in the fund's Statement of Operations. 4. 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 the participating insurance company separate accounts each year. The net investment income and realized capital gains and losses may differ for financial statement and tax purposes primarily due to differing treatments of losses on wash sales. As long as the fund meets the tax requirements, it is not required to pay federal income tax. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Ordinary income $576 Long-term capital gains --
20 Schwab MarketTrack Portfolios(R) FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 4. FEDERAL INCOME TAXES (CONTINUED) As of December 31, 2005, the fund had capital loss carry forwards available to offset future net capital gains before the expiration dates:
EXPIRE 2010 $293 2011 200 2012 103 ---- Total $596 ====
The tax-basis components of distributions for the fiscal year ended December 31, 2005 were: From ordinary income $466 From long-term capital gains -- From 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 December 31, 2005, the fund made the following reclassifications: Capital received from investors $2 Net realized capital losses ($2)
21 INVESTMENT ADVISORY AGREEMENT APPROVAL The Investment Company Act of 1940 (the "1940 Act") requires that initial approval of, as well as the continuation of, a fund's investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or "interested persons" of any party (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund's trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the "SEC") takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement. Consistent with these responsibilities, the Board of Trustees (the "Board") calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with respect to existing funds in the Trust, including the Schwab MarketTrack Growth Portfolio II, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM's affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM. The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board's approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including: 1. the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds; 2. each fund's investment performance and how it compared to that of certain other comparable mutual funds; 3. each fund's expenses and how those expenses compared to those of certain other comparable mutual funds; 4. the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. ("Schwab"), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and 5. the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors. 22 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 considered the role of unaffiliated insurance companies in the distribution of the funds. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered Schwab's excellent reputation as a full service brokerage firm and its overall financial condition, and how this affects the success of the funds. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement. FUND PERFORMANCE. The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund's performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, when applicable, and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement. FUND EXPENSES. With respect to the funds' expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund's net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM's and Schwab's historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts 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, and the unique insurance dedicated distribution arrangements of the funds as compared to other funds managed by CSIM. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement. PROFITABILITY. With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management's profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the Funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under 23 the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM's cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM's profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement. ECONOMIES OF SCALE. The trustees considered the existence of any economies of scale and whether those are passed along to a fund's shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM's agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab's commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add breakpoints for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale. In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees' deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment. 24 TRUSTEES AND OFFICERS The tables below give information about the trustees and officers for The Schwab Annuity Portfolios, which includes the fund covered in this report. The "Fund Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ MARIANN BYERWALTER Chairman of JDN Corporate 98 Board 1--Director, Redwood Trust, Inc. 1960 Advisory LLC. From 1996 to Board 2--Director, PMI Group, Inc. Trustee 2001, Vice President for (Trustee of The Schwab Business Affairs and Chief Annuity Portfolios since Financial Officer of Stanford 2000.) University, and in 2001, Special Advisor to the President of Stanford University. ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. DORWARD Chief Executive Officer, 57 None. 1931 Dorward & Associates (corporate Trustee management,marketing and (Trustee of The Schwab communications consulting Annuity Portfolios since firm). From 1996-1999, 1989.) Executive Vice President and Managing Director, Grey Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising. ------------------------------------------------------------------------------------------------------------------------------------ WILLIAM A. HASLER Retired. Dean Emeritus, Haas 98 Board 1--Director, Aphton Corp. 1941 School of Business, University Board 2--Director, Mission West Properties Trustee of California,Berkeley. Until Board 3--Director, TOUSA (Trustee of The Schwab February 2004, Co-Chief Board 4--Director, Stratex Networks Annuity Portfolios since Executive Officer, Aphton Board 5--Director, Genitope Corp. 2000.) Corp.(bio-pharmaceuticals). Board 6--Director & Non-Executive Prior to August 1998, Dean of Chairman, Solectron Corp. the Haas School of Business, Board 7--Director, Ditech Communications Corp. University of California, Berkeley (higher education).
25 INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ ROBERT G. HOLMES Chairman, Chief Executive 57 None. 1931 Officer and Director, Semloh Trustee Financial, Inc. (international (Trustee of The Schwab financial services and Annuity Portfolios since investment advisory firm). 1989.) ------------------------------------------------------------------------------------------------------------------------------------ GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries 1950 Officer and founder of Smith Board 2--Chairman of the Audit Trustee Graham & Co. (investment Committee of Northern Border Partners, (Trustee of The Schwab advisors). M.L.P. Annuity Portfolios since 2000.) ------------------------------------------------------------------------------------------------------------------------------------ DONALD R. STEPHENS Managing Partner, D.R. 57 None. 1938 Stephens & Company Trustee (investments). Prior to 1996, (Trustee of The Schwab Chairman and Chief Executive Annuity Portfolios since Officer of North American 1989.) Trust (real estate investment trust). ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL W. WILSEY Chairman and Chief Executive 57 None. 1943 Officer, Wilsey Bennett, Inc. Trustee (real estate investment and (Trustee of The Schwab management, and other Annuity Portfolios since investments). 1989.)
26 INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ CHARLES R. SCHWAB 2 Chairman, Chief Executive 57 None. 1937 Officer and Director, The Chairman and Trustee Charles Schwab Corporation, (Chairman and Trustee Charles Schwab & Co.,Inc.; of The Schwab Annuity Chairman and Director, Portfolios since 1989.) Charles Schwab Investment Management, Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation. ------------------------------------------------------------------------------------------------------------------------------------ RANDALL W. MERK 2 Executive Vice President 98 None. 1954 and President, Schwab Trustee Financial Products, Charles (Trustee of The Schwab Schwab & Co.,Inc.; Director, Annuity Portfolios since Charles Schwab Asset Management 2005.) (Ireland) Limited and Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.
27 OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment 1955 Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President President and Chief Executive Officer and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; (Officer of The Schwab Annuity President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Portfolios since 2004.) Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation. ------------------------------------------------------------------------------------------------------------------------------------ STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab 1955 Investment Management, Inc.; Chief Investment Officer, The Charles Schwab Senior Vice President and Chief Trust Company. Investment Officer (Officer of The Schwab Annuity Portfolios since 1991.) ------------------------------------------------------------------------------------------------------------------------------------ GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment 1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Treasurer and Principal Financial Officer Insurance Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior (Officer of The Schwab Annuity Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Portfolios since 2004.) Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles 1959 Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr. Senior Vice President and Chief Portfolio Manager, Charles Schwab Investment Management, Inc. Investment Officer--Fixed Income (Officer of The Schwab Annuity Portfolios since 2004.) ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab 1963 Investment Management, Inc.; Vice President and Chief Investment Officer, Senior Vice President and Chief Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President Investment Officer--Equities and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc. (Officer of The Schwab Annuity Portfolios since 2004.)
28 OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment 1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Chief Compliance Officer and AML Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Officer Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and (Officer of The Schwab Annuity Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co., Portfolios since 2002.) Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab 1961 Investment Management, Inc.; Senior Vice President and Deputy General Counsel, Secretary and Chief Legal Officer Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable (Officer of The Schwab Annuity Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Portfolios since 1998.) Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser. 3 The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board. 29 [CHARLES SCHWAB LOGO] LARGE BLEND SCHWAB S&P 500 INDEX PORTFOLIO (formerly Schwab S&P 500 Portfolio) LARGE-CAP SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2006 An investor should consider a fund's investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund's prospectus. Please call 1-888-311-4887 for a prospectus. Please read the prospectus carefully before you invest. PROXY VOTING POLICIES, PROCEDURES AND RESULTS A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000. Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's website at www.sec.gov. The industry/sector classification of the fund's portfolio holdings uses the Global Industry Classification Standard (GICS) which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc. MANAGEMENT'S DISCUSSION for the six months ended June 30, 2006 [PHOTO OF JEFFREY MORTIMER] JEFFREY MORTIMER, CFA, senior vice president and chief investment officer, equities, of the investment adviser, is responsible for the overall management of the portfolio. Prior to joining the firm in October 1997, he worked for more than eight years in asset management. [PHOTO OF LARRY MANO] LARRY MANO, a vice president and senior portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the portfolio. Prior to joining the firm in November 1998, he worked for 20 years in equity management. THE INVESTMENT ENVIRONMENT AND THE FUND After a volatile six months in the domestic markets, equity and fixed income funds ended the period with mixed returns. Several key issues dominated market discussions throughout the period, including slowing economic growth, inflation fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile crude oil prices. The markets remained in a steady growth mode over the first quarter of 2006 and ended the period on a positive note. Volatility was up during the second quarter of the year, but remained lower than its historical norm. During the six-month report period, oil prices hit new record highs and the Fed continued to raise short-term interest rates to curb inflationary pressures, boosting its Fed Funds target rate four consecutive times during the six-month period and bringing the benchmark rate up to 5.25%. This was the 17th rate hike over the past two years. Rising sharply in the second half of the report period, crude oil prices peaked in April at around $75 per barrel while domestic gasoline prices were above $3 a gallon. In recent months, crude oil prices climbed back in response to declining crude inventories and geopolitical concerns. Despite the volatility in energy prices, gains in productivity have remained strong and corporate earnings continue to rise. Reasonable valuations, a solid earnings season, and expectations that monetary policy tightening will soon come to an end, helped support the markets. Additionally, job and income growth remained positive, though they slowed during the report period. Moderate inflationary expectations and large foreign capital inflows helped to contain increases in long-term interest rates. As noted above, the Fed continued its tightening cycle throughout the period, raising its Fed Funds target 0.25% at each of its four meetings. As the Fed raised rates, the yield curve flattened and had brief periods of inversion. Historically, economic slowdowns or recessions have followed ASSET CLASS PERFORMANCE COMPARISON % returns during the report period This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below. 2.21% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S. Treasury obligations -0.72% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market 2.71% S&P 500(R) INDEX: measures U.S. large-cap stocks 8.21% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks 10.16% MSCI EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East [LINE GRAPH]
THREE-MONTH LEHMAN BROTHERS RUSSELL MSCI U.S. TREASURY BILLS U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R) (T-BILLS) BOND INDEX INDEX INDEX INDEX 31-Dec-05 0.00 0.00 0.00 0.00 0.00 6-Jan-06 0.05 0.26 3.02 3.90 5.12 13-Jan-06 0.12 0.52 3.22 5.26 4.71 20-Jan-06 0.21 0.57 1.13 4.70 2.71 27-Jan-06 0.28 0.04 2.94 8.82 5.74 3-Feb-06 0.36 -0.02 1.41 7.65 4.74 10-Feb-06 0.43 -0.22 1.70 6.61 3.97 17-Feb-06 0.52 0.13 3.38 8.69 4.02 24-Feb-06 0.60 0.16 3.61 9.54 5.79 3-Mar-06 0.69 -0.27 3.49 9.84 5.51 10-Mar-06 0.77 -0.50 3.07 8.06 5.22 17-Mar-06 0.86 0.01 5.18 11.03 8.89 24-Mar-06 0.94 0.08 4.84 12.19 8.69 31-Mar-06 1.03 -0.65 4.21 13.94 9.40 7-Apr-06 1.11 -0.98 4.31 12.62 11.15 14-Apr-06 1.19 -1.23 3.82 11.89 9.88 21-Apr-06 1.30 -0.86 5.62 15.03 13.93 28-Apr-06 1.41 -0.83 5.61 13.92 14.62 5-May-06 1.47 -0.98 6.85 16.51 17.90 12-May-06 1.56 -1.32 4.15 10.67 16.70 20-May-05 1.66 -0.72 2.24 7.72 10.49 27-May-05 1.75 -0.65 3.33 8.78 11.01 3-Jun-05 1.84 -0.26 4.03 9.98 11.98 10-Jun-05 1.93 -0.22 1.17 4.62 5.52 17-Jun-05 2.02 -0.86 1.14 3.42 4.84 24-Jun-05 2.12 -1.32 0.60 2.99 5.34 30-Jun-06 2.21 -0.72 2.71 8.21 10.16
These figures assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Remember that past performance is not an indication of future results. Data source: Charles Schwab & Co., Inc. Source of Sector Classification: S&P and MSCI. Schwab S&P 500 Index Portfolio 1 MANAGEMENT'S DISCUSSION continued [PHOTO OF TOM BROWN] TOM BROWN, an associate portfolio manager of the investment adviser, is the day-to-day co-manager of the portfolio. He joined Schwab in 1995, became a trader in 1999, and was named to his current position in 2004. the inversion of the yield curve. Following a strong start to 2006, economic growth has moderated over the past six months. Despite rising interest rates and soaring energy prices, the S&P 500 Index 1 posted gains of 2.71% for the six-month period ending June 30, 2006 while the Russell 2000 Index also displayed a positive return of 8.21%. As improving fundamentals and attractive valuations have strengthened investor interest in emerging markets, the MSCI EAFE (Morgan Stanley Capital International, Inc. Europe, Australasia, and Far East) Index also had an impressive return of 10.16% for the six-month period. Although performance of the bond markets was sluggish, as measured by the Lehman Brothers U.S. Aggregate Bond Index, which was down 0.72% for the six-month period, these types of results are not unusual. When the economy is strong and job growth is robust, investors normally expect to see more inflation, which generally leads to higher interest rates and lower bond prices. Rising interest rates have led to volatility in the equities markets and have weighed down bond returns. Meanwhile, money market funds enticed investors as the rise in short-term interest rates offered yields that have not been seen in years. The mixed messages that arose from the slowing economy and rising inflation have left investors puzzled about the direction of the Fed policy. The June 29 Federal Open Market Committee (FOMC) policy statement did little to alleviate uncertainty, as the Fed acknowledged slower growth while expressing concern about inflation risks. THE SCHWAB S&P 500 INDEX PORTFOLIO was up 2.65%, closely tracking its benchmark, the S&P 500 Index, which was up 2.71%. Bear in mind that the fund's return, unlike the index, includes the impact of operating expenses. Most of the fund's appreciation occurred during the first quarter of 2006. Within the portfolio, the best performing Sectors were Energy and Telecommunication Services. With the price of crude oil appreciating during the period, energy-related stocks were the overall top performers in the fund. On the downside, Information Technology was the worst performing Sector and slightly detracted from the fund's overall performance. Past performance does not indicate future results. Source of Sector Classification: S&P and MSCI. All portfolio 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. The portfolio's share price and principal values change and when you sell your shares they may be worth more or less than what you paid for them. 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. Portfolio returns do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio's returns would have been lower. 1 Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R) are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the fund. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the fund. 2 Schwab S&P 500 Index Portfolio SCHWAB S&P 500 INDEX PORTFOLIO PERFORMANCE as of 6/30/06 AVERAGE ANNUAL TOTAL RETURNS 1, 2, 3 This bar chart compares performance of the portfolio with its benchmark and Morningstar category. [BAR CHART]
Fund Category: Benchmark: MORNINGSTAR PORTFOLIO S&P 500(R) INDEX LARGE-CAP BLEND 6 MONTHS 2.65% 2.71% 1.42% 1 YEAR 8.40% 8.63% 7.46% 5 YEARS 2.20% 2.49% 1.00% SINCE INCEPTION: 11/1/96 7.58% 8.00% n/a
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1, 2 This graph shows performance since inception of a hypothetical $10,000 investment in the portfolio, compared with a similar investment in its benchmark. $20,255 PORTFOLIO $21,032 S&P 500(R) INDEX [LINE GRAPH]
DATE PORTFOLIO S&P 500 INDEX 01-Nov-96 $10,000 $10,000 30-Nov-96 $10,750 $10,777 31-Dec-96 $10,530 $10,564 31-Jan-97 $11,170 $11,223 28-Feb-97 $11,250 $11,311 31-Mar-97 $10,780 $10,848 30-Apr-97 $11,410 $11,494 31-May-97 $12,090 $12,193 30-Jun-97 $12,630 $12,739 31-Jul-97 $13,620 $13,752 31-Aug-97 $12,860 $12,982 30-Sep-97 $13,560 $13,692 31-Oct-97 $13,120 $13,235 30-Nov-97 $13,720 $13,848 31-Dec-97 $13,948 $14,086 31-Jan-98 $14,098 $14,242 28-Feb-98 $15,108 $15,269 31-Mar-98 $15,869 $16,051 30-Apr-98 $16,029 $16,213 31-May-98 $15,739 $15,934 30-Jun-98 $16,369 $16,581 31-Jul-98 $16,189 $16,405 31-Aug-98 $13,848 $14,036 30-Sep-98 $14,738 $14,936 31-Oct-98 $15,929 $16,150 30-Nov-98 $16,879 $17,129 31-Dec-98 $17,862 $18,116 31-Jan-99 $18,595 $18,873 28-Feb-99 $18,012 $18,286 31-Mar-99 $18,726 $19,017 30-Apr-99 $19,439 $19,753 31-May-99 $18,967 $19,287 30-Jun-99 $20,012 $20,357 31-Jul-99 $19,389 $19,722 31-Aug-99 $19,288 $19,624 30-Sep-99 $18,756 $19,086 31-Oct-99 $19,931 $20,294 30-Nov-99 $20,323 $20,707 31-Dec-99 $21,517 $21,926 31-Jan-00 $20,434 $20,825 29-Feb-00 $20,040 $20,431 31-Mar-00 $22,003 $22,429 30-Apr-00 $21,335 $21,754 31-May-00 $20,890 $21,308 30-Jun-00 $21,396 $21,835 31-Jul-00 $21,072 $21,494 31-Aug-00 $22,367 $22,829 30-Sep-00 $21,183 $21,624 31-Oct-00 $21,082 $21,533 30-Nov-00 $19,412 $19,836 31-Dec-00 $19,506 $19,933 31-Jan-01 $20,183 $20,641 28-Feb-01 $18,337 $18,758 31-Mar-01 $17,178 $17,569 30-Apr-01 $18,501 $18,934 31-May-01 $18,614 $19,061 30-Jun-01 $18,163 $18,598 31-Jul-01 $17,978 $18,416 31-Aug-01 $16,850 $17,263 30-Sep-01 $15,486 $15,868 31-Oct-01 $15,784 $16,171 30-Nov-01 $16,984 $17,411 31-Dec-01 $17,135 $17,565 31-Jan-02 $16,876 $17,308 28-Feb-02 $16,544 $16,974 31-Mar-02 $17,155 $17,612 30-Apr-02 $16,119 $16,545 31-May-02 $15,995 $16,423 30-Jun-02 $14,855 $15,253 31-Jul-02 $13,695 $14,065 31-Aug-02 $13,768 $14,157 30-Sep-02 $12,266 $12,618 31-Oct-02 $13,343 $13,728 30-Nov-02 $14,120 $14,537 31-Dec-02 $13,292 $13,683 31-Jan-03 $12,935 $13,325 28-Feb-03 $12,735 $13,125 31-Mar-03 $12,861 $13,252 30-Apr-03 $13,911 $14,344 31-May-03 $14,635 $15,100 30-Jun-03 $14,824 $15,294 31-Jul-03 $15,076 $15,563 31-Aug-03 $15,370 $15,866 30-Sep-03 $15,202 $15,698 31-Oct-03 $16,063 $16,587 30-Nov-03 $16,200 $16,732 31-Dec-03 $17,042 $17,609 31-Jan-04 $17,339 $17,933 29-Feb-04 $17,583 $18,183 31-Mar-04 $17,318 $17,908 30-Apr-04 $17,042 $17,627 31-May-04 $17,276 $17,868 30-Jun-04 $17,605 $18,215 31-Jul-04 $17,021 $17,612 31-Aug-04 $17,085 $17,682 30-Sep-04 $17,265 $17,873 31-Oct-04 $17,520 $18,147 30-Nov-04 $18,231 $18,882 31-Dec-04 $18,837 $19,524 31-Jan-05 $18,386 $19,047 28-Feb-05 $18,772 $19,447 31-Mar-05 $18,440 $19,103 30-Apr-05 $18,086 $18,740 31-May-05 $18,665 $19,336 30-Jun-05 $18,686 $19,363 31-Jul-05 $19,373 $20,084 31-Aug-05 $19,191 $19,901 30-Sep-05 $19,341 $20,062 31-Oct-05 $19,008 $19,727 30-Nov-05 $19,727 $20,473 31-Dec-05 $19,732 $20,479 31-Jan-06 $20,244 $21,022 28-Feb-06 $20,299 $21,078 31-Mar-06 $20,561 $21,340 30-Apr-06 $20,833 $21,626 31-May-06 $20,222 $21,003 30-Jun-06 $20,255 $21,032
All portfolio and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized. 1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio's returns would have been lower. Portfolio returns do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the returns would be less than those shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. 2 Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R) are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the portfolio. The portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the portfolio. 3 Source for category information: Morningstar, Inc. Schwab S&P 500 Index Portfolio 3 SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO FACTS as of 6/30/06 STYLE ASSESSMENT 1
INVESTMENT STYLE Value Blend Growth MARKET CAP Large / / /x/ / / Medium / / / / / / Small / / / / / /
STATISTICS NUMBER OF HOLDINGS 501 -------------------------------------------------------------------------------- WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $87,250 -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO (P/E) 17.2 -------------------------------------------------------------------------------- PRICE/BOOK RATIO (P/B) 2.8 -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 2 2% --------------------------------------------------------------------------------
TOP HOLDINGS 3
% OF SECURITY NET ASSETS -------------------------------------------------------------------------------- (1) EXXON MOBIL CORP. 3.2% -------------------------------------------------------------------------------- (2) GENERAL ELECTRIC CO. 3.0% -------------------------------------------------------------------------------- (3) CITIGROUP, INC. 2.1% -------------------------------------------------------------------------------- (4) BANK OF AMERICA CORP. 1.9% -------------------------------------------------------------------------------- (5) MICROSOFT CORP. 1.8% -------------------------------------------------------------------------------- (6) PROCTER & GAMBLE CO. 1.6% -------------------------------------------------------------------------------- (7) JOHNSON & JOHNSON 1.6% -------------------------------------------------------------------------------- (8) PFIZER, INC. 1.5% -------------------------------------------------------------------------------- (9) ALTRIA GROUP, INC. 1.3% -------------------------------------------------------------------------------- (10) AMERICAN INTERNATIONAL GROUP, INC. 1.3% -------------------------------------------------------------------------------- TOTAL 19.3%
SECTOR WEIGHTINGS % of Investments This chart shows the portfolio's sector composition as of the report date. A sector is a portion of the overall stock market that is made up of industries whose business components share similar characteristics. [PIE CHART] 21.5% FINANCIALS 15.0% INFORMATION TECHNOLOGY 12.3% HEALTH CARE 11.7% INDUSTRIALS 10.2% CONSUMER DISCRETIONARY 10.1% ENERGY 9.6% CONSUMER STAPLES 3.3% TELECOMMUNICATION SERVICES 3.3% UTILITIES 3.0% MATERIALS Portfolio holdings may have changed since the report date. Source of Sector Classification: S&P and MSCI. 1 Source: Morningstar, Inc. This style assessment is the result of evaluating the portfolio based on a ten-factor model for value and growth characteristics. The portfolio's market capitalization placement is determined by the geometric mean of its holdings' market capitalizations. The assessment reflects the portfolio as of 6/30/06, which may have changed since then, and is not a precise indication of risk or performance--past, present, or future. 2 Not annualized. 3 This list is not a recommendation of any security by the investment adviser. 4 Schwab S&P 500 Index Portfolio PORTFOLIO 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 January 1, 2006 and held through June 30, 2006. ACTUAL RETURN lines in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value / $1,000 = 8.6), then multiply the result by the number given for your fund 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. If these transactional costs were included, your costs would have been higher.
ENDING BEGINNING ACCOUNT VALUE EXPENSES EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2 (Annualized) at 1/1/06 at 6/30/06 1/1/06-6/30/06 ------------------------------------------------------------------------------------------------------------- SCHWAB S&P 500 INDEX PORTFOLIO Actual Return 0.28% $1,000 $1,026.50 $1.41 Hypothetical 5% Return 0.28% $1,000 $1,023.41 $1.40
1 Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights. 2 Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 181 days of the period, and divided by 365 days of the fiscal year. Schwab S&P 500 Index Portfolio 5 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01 ------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 18.09 17.56 16.06 12.66 16.54 19.02 -------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.18 0.31 0.29 0.17 0.19 0.15 Net realized and unrealized gains or losses 0.30 0.53 1.40 3.40 (3.90) (2.46) --------------------------------------------------------------------- Total income or loss from investment operations 0.48 0.84 1.69 3.57 (3.71) (2.31) Less distributions: Dividends from net investment income -- (0.31) (0.19) (0.17) (0.17) (0.17) -------------------------------------------------------------------- Net asset value at end of period 18.57 18.09 17.56 16.06 12.66 16.54 -------------------------------------------------------------------- Total return (%) 2.65 1 4.75 10.53 28.22 (22.43) (12.16) RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.28 2 0.27 0.28 0.28 0.28 0.28 Gross operating expenses 0.31 2 0.30 0.31 0.32 0.35 0.33 Net investment income 1.63 2 1.59 1.75 1.50 1.33 1.09 Portfolio turnover rate 2 4 4 2 11 5 Net assets, end of period ($ x 1,000,000) 150 157 162 146 98 128
* Unaudited. 1 Not annualized. 2 Annualized 6 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS as of June 30, 2006, (Unaudited) This section shows all the securities in the fund's portfolio by industry classification and their value, as of the report date. The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund's most recent Form N-Q is also available by visiting Schwab's website at www.schwab.com/schwabfunds.
COST VALUE HOLDINGS BY CATEGORY ($ x 1,000) ($ x 1,000) -------------------------------------------------------------------------------- 99.7% COMMON STOCK 112,654 149,320 0.2% SHORT-TERM INVESTMENTS 199 199 --% U.S. GOVERNMENT SECURITIES 45 45 -------------------------------------------------------------------------------- 99.9% TOTAL INVESTMENTS 112,898 149,564 3.7% COLLATERAL INVESTED FOR SECURITIES ON LOAN 5,618 5,618 (3.6)% OTHER ASSETS AND LIABILITIES (5,446) -------------------------------------------------------------------------------- 100.0% NET ASSETS 149,736
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) COMMON STOCK 99.7% of net assets AUTOMOBILES & COMPONENTS 0.5% -------------------------------------------------------------------------------- Cooper Tire & Rubber Co. (b)(c) 400 4 Ford Motor Co. (b)(c) 24,213 168 General Motors Corp. (b)(c) 6,278 187 Harley-Davidson, Inc. (b)(c) 3,800 208 Johnson Controls, Inc. 2,600 214 The Goodyear Tire & Rubber Co. (b)(c)* 2,500 28 ----------- 809 BANKS 7.8% -------------------------------------------------------------------------------- AmSouth Bancorp 4,453 118 Bank of America Corp. 60,202 2,896 BB&T Corp. 6,870 286 Comerica, Inc. 2,330 121 Commerce Bancorp, Inc. (b)(c) 2,300 82 Compass Bancshares, Inc. 1,610 89 Countrywide Financial Corp. 8,000 305 Fannie Mae 12,540 603 Fifth Third Bancorp 7,405 274 First Horizon National Corp. 1,400 56 Freddie Mac 9,010 514 Golden West Financial Corp. 3,500 260 Huntington Bancshares, Inc. 3,256 77 KeyCorp 5,400 193 M&T Bank Corp. (b)(c) 1,071 126 Marshall & Ilsley Corp. 2,738 125 MGIC Investment Corp. 733 48 National City Corp. 7,100 257 North Fork Bancorp, Inc. 6,200 187 PNC Financial Services Group, Inc. 3,770 264 Regions Financial Corp. 6,127 203 Sovereign Bancorp, Inc. 3,606 73 SunTrust Banks, Inc. 4,800 366 Synovus Financial Corp. 4,300 115 U.S. Bancorp 23,571 728 Wachovia Corp. 20,995 1,135 Washington Mutual, Inc. 12,845 585 Wells Fargo & Co. 21,779 1,461 Zions Bancorp 1,408 110 ----------- 11,657 CAPITAL GOODS 8.9% -------------------------------------------------------------------------------- 3M Co. 9,840 795 American Power Conversion Corp. 2,025 39 American Standard Cos., Inc. 2,400 104 Caterpillar, Inc. 8,680 647 Cooper Industries Ltd., Class A 1,300 121 Cummins, Inc. (b)(c) 600 73 Danaher Corp. 3,126 201 Deere & Co. 3,100 259 Dover Corp. 2,800 138 Eaton Corp. 1,740 131 Emerson Electric Co. 5,380 451 Fluor Corp. (b)(c) 1,100 102 General Dynamics Corp. 5,230 342 General Electric Co. (c) 135,130 4,454 Goodrich Corp. 1,660 67 Honeywell International, Inc. 11,037 445 Illinois Tool Works, Inc. 5,344 254 Ingersoll-Rand Co., Class A 4,400 188 ITT Industries, Inc. 2,480 123
See financial notes. 7 SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) L-3 Communications Holdings, Inc. 1,500 113 Lockheed Martin Corp. 4,690 336 Masco Corp. 5,710 169 Navistar International Corp. * 1,000 25 Northrop Grumman Corp. 4,534 290 Paccar, Inc. 1,864 154 Pall Corp. 1,400 39 Parker Hannifin Corp. 1,650 128 Raytheon Co. 5,830 260 Rockwell Automation, Inc. 2,350 169 Rockwell Collins, Inc. 2,500 140 Textron, Inc. 1,700 157 The Boeing Co. 10,396 852 Tyco International Ltd. 26,380 725 United Technologies Corp. 13,201 837 W.W. Grainger, Inc. 800 60 ----------- 13,388 COMMERCIAL SERVICES & SUPPLIES 0.8% -------------------------------------------------------------------------------- Allied Waste Industries, Inc. * 525 6 Avery Dennison Corp. 1,300 75 Cendant Corp. 13,603 222 Cintas Corp. 1,157 46 Equifax, Inc. 2,000 69 H&R Block, Inc. 4,200 100 Monster Worldwide, Inc. * 1,704 73 Pitney Bowes, Inc. 3,000 124 R.R. Donnelley & Sons Co. 2,960 94 Robert Half International, Inc. 1,550 65 Waste Management, Inc. 7,358 264 ----------- 1,138 CONSUMER DURABLES & APPAREL 1.1% -------------------------------------------------------------------------------- Brunswick Corp. 1,200 40 Centex Corp. 1,600 81 Coach, Inc. * 5,101 153 D.R. Horton, Inc. (b)(c) 3,600 86 Eastman Kodak Co. (b)(c) 3,155 75 Fortune Brands, Inc. 1,607 114 Harman International Industries, Inc. 800 68 Hasbro, Inc. 2,525 46 Jones Apparel Group, Inc. 1,500 48 KB Home 960 44 Leggett & Platt, Inc. 2,300 57 Lennar Corp., Class A 1,800 80 Liz Claiborne, Inc. 997 37 Mattel, Inc. 5,301 88 Newell Rubbermaid, Inc. 3,924 101 Nike, Inc., Class B 2,460 199 Pulte Homes, Inc. 2,800 81 Snap-On, Inc. 800 32 The Black & Decker Corp. 1,010 85 The Stanley Works 391 18 VF Corp. 1,110 75 Whirlpool Corp. 1,033 85 ----------- 1,693 CONSUMER SERVICES 1.6% -------------------------------------------------------------------------------- Apollo Group, Inc., Class A (b)(c)* 1,327 69 Carnival Corp. 5,222 218 Darden Restaurants, Inc. 2,090 82 Harrah's Entertainment, Inc. 2,400 171 Hilton Hotels Corp. 4,410 125 International Game Technology 4,700 178 Marriott International, Inc., Class A 3,512 134 McDonald's Corp. 16,301 548 Starbucks Corp. * 10,121 382 Starwood Hotels & Resorts Worldwide, Inc. 2,900 175 Wendy's International, Inc. 1,500 87 YUM! Brands, Inc. 3,700 186 ----------- 2,355 DIVERSIFIED FINANCIALS 8.0% -------------------------------------------------------------------------------- American Express Co. 16,071 855 Ameriprise Financial, Inc. 3,278 146 Capital One Financial Corp. 3,980 340 CIT Group, Inc. 2,600 136 Citigroup, Inc. (c) 64,683 3,120 E*TRADE Financial Corp. * 5,160 118 Federated Investors, Inc., Class B 1,100 35 Franklin Resources, Inc. 2,100 182 Janus Capital Group, Inc. 1,941 35 JPMorgan Chase & Co. 45,246 1,900 Legg Mason, Inc. 1,500 149 Lehman Brothers Holdings, Inc. 7,000 456 Mellon Financial Corp. 5,600 193 Merrill Lynch & Co., Inc. 11,880 826 Moody's Corp. 3,180 173 Morgan Stanley 14,147 894
8 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Northern Trust Corp. 2,470 137 SLM Corp. 5,600 296 State Street Corp. 4,500 261 T. Rowe Price Group, Inc. 3,400 129 The Bank of New York Co., Inc. 10,300 332 The Bear Stearns Cos., Inc. 1,512 212 The Charles Schwab Corp. (a) 14,146 226 The Goldman Sachs Group, Inc. 5,607 844 ----------- 11,995 ENERGY 10.0% -------------------------------------------------------------------------------- Anadarko Petroleum Corp. 6,094 291 Apache Corp. 4,008 274 Baker Hughes, Inc. 4,400 360 BJ Services Co. 4,300 160 Chesapeake Energy Corp. (b)(c) 4,800 145 ChevronTexaco Corp. 28,839 1,790 ConocoPhillips 21,353 1,399 CONSOL Energy, Inc. 1,200 56 Devon Energy Corp. 5,863 354 El Paso Corp. 6,441 97 EOG Resources, Inc. (b)(c) 3,214 223 Exxon Mobil Corp. (c) 79,219 4,860 Halliburton Co. (b)(c) 6,710 498 Hess Corp. (b)(c) 2,610 138 Kerr-McGee Corp. 2,552 177 Kinder Morgan, Inc. 1,350 135 Marathon Oil Corp. 4,832 402 Murphy Oil Corp. 1,632 91 Nabors Industries, Ltd. (b)(c)* 4,000 135 National-Oilwell Varco, Inc. * 1,893 120 Noble Corp. 1,800 134 Occidental Petroleum Corp. 5,500 564 Rowan Cos., Inc. 1,400 50 Schlumberger Ltd. 15,340 999 Sunoco, Inc. 1,740 121 Transocean, Inc. * 4,033 324 Valero Energy Corp. 8,260 549 Weatherford International, Ltd. * 4,280 212 Williams Cos., Inc. 7,900 184 XTO Energy, Inc. 4,229 187 ----------- 15,029 FOOD & STAPLES RETAILING 2.4% -------------------------------------------------------------------------------- Costco Wholesale Corp. 6,100 349 CVS Corp. 10,900 335 Safeway, Inc. 6,200 161 Supervalu, Inc. 2,735 84 Sysco Corp. 8,300 254 The Kroger Co. 9,400 205 Wal-Mart Stores, Inc. 32,331 1,557 Walgreen Co. 12,976 582 Whole Foods Market, Inc. 1,800 116 ----------- 3,643 FOOD, BEVERAGE & TOBACCO 4.8% -------------------------------------------------------------------------------- Altria Group, Inc. 27,111 1,991 Anheuser-Busch Cos., Inc. (b)(c) 9,783 446 Archer-Daniels-Midland Co. 8,700 359 Brown-Forman Corp., Class B 1,204 86 Campbell Soup Co. 2,300 85 Coca-Cola Enterprises, Inc. 4,000 81 ConAgra Foods, Inc. (b)(c) 6,770 150 Constellation Brands, Inc., Class A * 2,300 58 Dean Foods Co. * 1,700 63 General Mills, Inc. 4,880 252 H.J. Heinz Co. 4,510 186 Kellogg Co. 3,400 165 McCormick & Co., Inc. 1,700 57 Molson Coors Brewing Co., Class B 339 23 PepsiCo, Inc. 21,441 1,287 Reynolds American, Inc. 1,078 124 Sara Lee Corp. 10,600 170 The Coca-Cola Co. 26,963 1,160 The Hershey Co. 2,244 124 The Pepsi Bottling Group, Inc. 1,902 61 Tyson Foods, Inc., Class A 1,186 18 UST, Inc. 2,200 99 Wm. Wrigley Jr. Co., Class A 1,929 87 Wm. Wrigley Jr. Co., Class B 482 22 ----------- 7,154 HEALTH CARE EQUIPMENT & SERVICES 4.3% -------------------------------------------------------------------------------- Aetna, Inc. 7,640 305 AmerisourceBergen Corp. 2,720 114 Bausch & Lomb, Inc. 800 39 Baxter International, Inc. 8,690 320 Becton Dickinson & Co. 3,300 202
See financial notes. 9 SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Biomet, Inc. 2,507 79 Boston Scientific Corp. * 15,090 254 C.R. Bard, Inc. 1,520 111 Cardinal Health, Inc. 5,665 364 Caremark Rx, Inc. 6,054 302 CIGNA Corp. 1,560 154 Coventry Health Care, Inc. * 2,050 113 Express Scripts, Inc. * 2,040 146 HCA, Inc. 4,890 211 Health Management Associates, Inc., Class A 1,870 37 Hospira, Inc. * 2,100 90 Humana, Inc. * 2,100 113 IMS Health, Inc. 2,600 70 Laboratory Corp. of America Holdings * 1,504 94 Manor Care, Inc. 387 18 McKesson Corp. 3,956 187 Medco Health Solutions, Inc. * 3,888 223 Medtronic, Inc. 15,710 737 Patterson Cos., Inc. * 980 34 Quest Diagnostics 2,260 135 St. Jude Medical, Inc. * 4,204 136 Stryker Corp. 3,900 164 Tenet Healthcare Corp. * 6,500 45 UnitedHealth Group, Inc. 17,631 790 WellPoint, Inc. * 8,636 628 Zimmer Holdings, Inc. * 3,184 181 ----------- 6,396 HOUSEHOLD & PERSONAL PRODUCTS 2.4% -------------------------------------------------------------------------------- Alberto-Culver Co., Class B 1,000 49 Avon Products, Inc. 5,116 159 Clorox Co. 2,100 128 Colgate-Palmolive Co. 6,671 399 Kimberly-Clark Corp. 5,706 352 Procter & Gamble Co. (c) 42,674 2,373 The Estee Lauder Cos., Inc., Class A 1,500 58 ----------- 3,518 INSURANCE 4.7% -------------------------------------------------------------------------------- ACE Ltd. 3,900 197 AFLAC, Inc. 6,610 306 Ambac Financial Group, Inc. 1,392 113 American International Group, Inc. 33,639 1,986 AON Corp. 4,550 158 Cincinnati Financial Corp. 2,335 110 Genworth Financial, Inc., Class A 5,000 174 Lincoln National Corp. 3,661 207 Loews Corp. 5,640 200 Marsh & McLennan Cos., Inc. (b)(c) 7,200 194 MBIA, Inc. 1,750 102 Metlife, Inc. 9,807 502 Principal Financial Group, Inc. 3,874 216 Prudential Financial, Inc. 6,470 503 SAFECO Corp. 1,600 90 The Allstate Corp. 8,440 462 The Chubb Corp. 5,160 258 The Hartford Financial Services Group, Inc. 3,930 333 The Progressive Corp. 10,201 262 The St. Paul Travelers Cos., Inc. 8,999 401 Torchmark Corp. 1,500 91 UnumProvident Corp. 4,276 78 XL Capital Ltd., Class A 1,900 116 ----------- 7,059 MATERIALS 3.0% -------------------------------------------------------------------------------- Air Products & Chemicals, Inc. 3,000 192 Alcoa, Inc. 11,672 378 Allegheny Technologies, Inc. 770 53 Ashland, Inc. 900 60 Ball Corp. 1,400 52 Bemis Co. 1,400 43 E.I. du Pont de Nemours & Co. 12,115 504 Eastman Chemical Co. 1,000 54 Ecolab, Inc. 2,604 106 Freeport-McMoran Copper & Gold, Inc., Class B (b)(c) 2,400 133 Hercules, Inc. * 700 11 International Flavors & Fragrances, Inc. 1,000 35 International Paper Co. 6,498 210 Louisiana-Pacific Corp. 1,260 28 MeadWestvaco Corp. 2,549 71 Monsanto Co. 3,525 297 Newmont Mining Corp. (b)(c) 5,446 288 Nucor Corp. 4,000 217 Pactiv Corp. * 1,800 44 Phelps Dodge Corp. 2,690 221 PPG Industries, Inc. 2,300 152 Praxair, Inc. 4,165 225
10 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Rohm & Haas Co. 2,105 105 Sealed Air Corp. 1,214 63 Sigma-Aldrich Corp. 641 47 Temple-Inland, Inc. 1,600 69 The Dow Chemical Co. 12,706 496 United States Steel Corp. 1,500 105 Vulcan Materials Co. 1,300 101 Weyerhaeuser Co. 3,300 205 ----------- 4,565 MEDIA 3.5% -------------------------------------------------------------------------------- CBS Corp., Class B 10,980 297 Clear Channel Communications, Inc. * 5,956 184 Comcast Corp., Class A * 27,726 908 Dow Jones & Co., Inc. (b)(c) 800 28 Gannett Co., Inc. 3,160 177 McGraw-Hill Cos., Inc. 4,750 239 Meredith Corp. 500 25 News Corp., Class A 30,575 586 Omnicom Group, Inc. 2,300 205 The E.W. Scripps Co., Class A 1,000 43 The Interpublic Group of Cos., Inc. (b)(c)* 4,997 42 The New York Times Co., Class A (b)(c) 1,900 47 The Walt Disney Co. 28,501 855 Time Warner, Inc. 58,962 1,020 Tribune Co. 3,400 110 Univision Communications, Inc., Class A * 3,025 101 Viacom, Inc., Class B * 9,380 336 ----------- 5,203 PHARMACEUTICALS & BIOTECHNOLOGY 8.0% -------------------------------------------------------------------------------- Abbott Laboratories 20,130 878 Allergan, Inc. (b)(c) 1,880 202 Amgen, Inc. * 15,154 988 Applera Corp. - Applied Biosystems Group 2,800 90 Barr Pharmaceuticals, Inc. * 1,400 67 Biogen Idec, Inc. * 4,700 218 Bristol-Myers Squibb Co. 25,640 663 Eli Lilly & Co. 14,620 808 Fisher Scientific International, Inc. * 1,605 117 Forest Laboratories, Inc. * 3,720 144 Genzyme Corp. * 3,500 214 Gilead Sciences, Inc. * 6,200 367 Johnson & Johnson 38,599 2,313 King Pharmaceuticals, Inc. * 3,466 59 MedImmune, Inc. * 3,400 92 Merck & Co., Inc. 28,301 1,031 Millipore Corp. * 700 44 Mylan Laboratories, Inc. 3,091 62 PerkinElmer, Inc. 1,700 35 Pfizer, Inc. (c) 95,432 2,240 Schering-Plough Corp. 19,190 365 Thermo Electron Corp. * 1,380 50 Waters Corp. * 1,400 62 Watson Pharmaceuticals, Inc. * 1,500 35 Wyeth 17,470 776 ----------- 11,920 REAL ESTATE 1.0% -------------------------------------------------------------------------------- Apartment Investment & Management Co., Class A 1,300 56 Archstone-Smith Trust 2,700 137 Boston Properties, Inc. 1,216 110 Equity Office Properties Trust (b)(c) 5,001 183 Equity Residential 4,001 179 Kimco Realty Corp. 2,710 99 Plum Creek Timber Co., Inc. 2,560 91 ProLogis 2,600 136 Public Storage, Inc. 1,100 83 Simon Property Group, Inc. 2,400 199 Vornado Realty Trust 1,600 156 ----------- 1,429 RETAILING 3.4% -------------------------------------------------------------------------------- Amazon.com, Inc. * 3,000 116 AutoNation, Inc. (b)(c)* 1,900 41 AutoZone, Inc. * 700 62 Bed, Bath & Beyond, Inc. * 3,016 100 Best Buy Co., Inc. 5,475 300 Big Lots, Inc. * 1,400 24 Circuit City Stores, Inc. 2,054 56 Dillard's, Inc., Class A 600 19 Dollar General Corp. 4,263 60 Family Dollar Stores, Inc. 2,000 49 Federated Department Stores, Inc. 6,822 250 Genuine Parts Co. 2,500 104 Home Depot, Inc. 27,551 986 J.C. Penney Co., Inc. 3,100 209 Kohl's Corp. * 4,610 272
See financial notes. 11 SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Limited Brands, Inc. 3,908 100 Lowe's Cos., Inc. 10,230 621 Nordstrom, Inc. 2,850 104 Office Depot, Inc. * 4,100 156 OfficeMax, Inc. 900 37 RadioShack Corp. 259 4 Sears Holdings Corp. * 1,275 197 Staples, Inc. 9,850 239 Target Corp. 11,371 556 The Gap, Inc. 8,162 142 The Sherwin-Williams Co. 1,133 54 The TJX Cos., Inc. 6,310 144 Tiffany & Co. 1,126 37 ----------- 5,039 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.7% -------------------------------------------------------------------------------- Advanced Micro Devices, Inc. * 5,530 135 Altera Corp. * 4,880 86 Analog Devices, Inc. 4,730 152 Applied Materials, Inc. (c) 20,571 335 Broadcom Corp., Class A * 6,165 185 Freescale Semiconductor, Inc., Class B * 5,566 164 Intel Corp. 76,272 1,445 KLA-Tencor Corp. 2,700 112 Linear Technology Corp. (b)(c) 4,000 134 LSI Logic Corp. * 5,410 48 Maxim Integrated Products, Inc. 4,200 135 Micron Technology, Inc. (b)(c)* 8,800 133 National Semiconductor Corp. 4,400 105 Novellus Systems, Inc. * 1,900 47 NVIDIA Corp. * 4,800 102 PMC - Sierra, Inc. * 2,390 23 Teradyne, Inc. * 2,100 29 Texas Instruments, Inc. 20,941 634 Xilinx, Inc. 4,400 100 ----------- 4,104 SOFTWARE & SERVICES 5.6% -------------------------------------------------------------------------------- Adobe Systems, Inc. * 7,900 240 Affiliated Computer Services, Inc., Class A * 1,591 82 Autodesk, Inc. * 3,320 114 Automatic Data Processing, Inc. 7,173 325 BMC Software, Inc. * 3,200 76 CA, Inc. 6,444 132 Citrix Systems, Inc. * 2,360 95 Computer Sciences Corp. * 2,400 116 Compuware Corp. * 5,150 35 Convergys Corp. * 1,354 26 eBay, Inc. * 15,288 448 Electronic Arts, Inc. * 4,058 175 Electronic Data Systems Corp. 7,220 174 First Data Corp. 9,959 449 Fiserv, Inc. * 2,700 122 Google, Inc., Class A * 2,577 1,081 Intuit, Inc. * 2,520 152 Microsoft Corp. (c) 115,291 2,686 Novell, Inc. * 5,200 34 Oracle Corp. * 49,321 715 Parametric Technology Corp. * 1,484 19 Paychex, Inc. 4,450 173 Sabre Holdings Corp., Class A (b)(c) 1,883 41 Symantec Corp. * 13,941 217 Unisys Corp. * 4,700 30 VeriSign, Inc. * 2,025 47 Yahoo! Inc. (b)(c)* 16,601 548 ----------- 8,352 TECHNOLOGY HARDWARE & EQUIPMENT 6.6% -------------------------------------------------------------------------------- ADC Telecommunications, Inc. * 971 16 Agilent Technologies, Inc. * 5,867 185 Andrew Corp. * 1,450 13 Apple Computer, Inc. * 11,200 640 Avaya, Inc. * 5,632 64 CIENA Corp. * 6,700 32 Cisco Systems, Inc. * 79,601 1,555 Comverse Technology, Inc. * 2,700 53 Corning, Inc. * 20,650 499 Dell, Inc. * 30,772 751 EMC Corp. * 30,822 338 Gateway, Inc. * 1,000 2 Hewlett-Packard Co. 37,013 1,173 International Business Machines Corp. 20,285 1,558 Jabil Circuit, Inc. 2,327 60 JDS Uniphase Corp. * 20,155 51 Juniper Networks, Inc. * 7,200 115 Lexmark International, Inc., Class A * 1,300 73 Lucent Technologies, Inc. (b)(c)* 60,296 146
12 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) Molex, Inc. 1,800 60 Motorola, Inc. 32,435 654 NCR Corp. * 2,400 88 Network Appliance, Inc. * 4,800 169 QLogic Corp. * 2,590 45 Qualcomm, Inc. 21,490 861 SanDisk Corp. * 2,000 102 Sanmina -- SCI Corp. * 7,400 34 Solectron Corp. * 13,490 46 Sun Microsystems, Inc. * 45,801 190 Symbol Technologies, Inc. 2,212 24 Tektronix, Inc. 1,100 32 Tellabs, Inc. * 6,230 83 Xerox Corp. (b)(c)* 12,190 170 ----------- 9,882 TELECOMMUNICATION SERVICES 3.3% -------------------------------------------------------------------------------- Alltel Corp. 5,160 329 AT&T Corp. 50,212 1,400 BellSouth Corp. 23,530 852 CenturyTel, Inc. 1,490 55 Citizens Communications Co. 4,718 62 Embarq Corp * 1,997 82 Qwest Communications International, Inc. * 21,216 172 Sprint Nextel Corp. 38,840 776 Verizon Communications, Inc. 38,305 1,283 ----------- 5,011 TRANSPORTATION 2.0% -------------------------------------------------------------------------------- Burlington Northern Santa Fe Corp. 4,730 375 CSX Corp. 3,010 212 FedEx Corp. 3,920 458 Norfolk Southern Corp. 5,600 298 Ryder System, Inc. 600 35 Southwest Airlines Co. 7,887 129 Union Pacific Corp. 3,570 332 United Parcel Service, Inc., Class B 14,116 1,162 ----------- 3,001 UTILITIES 3.3% -------------------------------------------------------------------------------- Allegheny Energy, Inc. * 2,241 83 Ameren Corp. 2,700 136 American Electric Power Co., Inc. 5,170 177 CenterPoint Energy, Inc. 4,150 52 CMS Energy Corp. * 2,960 38 Consolidated Edison, Inc. 3,300 147 Constellation Energy Group, Inc. 2,500 136 Dominion Resources, Inc. (b)(c) 4,380 328 DTE Energy Co. 2,400 98 Duke Energy Corp. 15,564 457 Dynegy, Inc., Class A * 4,200 23 Edison International 4,200 164 Entergy Corp. 2,377 168 Exelon Corp. 8,690 494 FirstEnergy Corp. 4,288 233 FPL Group, Inc. 5,400 224 KeySpan Corp. 2,300 93 Nicor, Inc. (b)(c) 510 21 NiSource, Inc. 3,546 77 Peoples Energy Corp. (b)(c) 500 18 PG&E Corp. 4,800 189 Pinnacle West Capital Corp. 1,200 48 PPL Corp. (b)(c) 4,960 160 Progress Energy, Inc. 2,730 117 Public Service Enterprise Group, Inc. 3,300 218 Sempra Energy 3,141 143 TECO Energy, Inc. 2,840 42 The AES Corp. * 8,800 162 The Southern Co. 9,511 305 TXU Corp. 5,954 356 Xcel Energy, Inc. 3,809 73 ----------- 4,980
FACE AMOUNT VALUE SECURITY ($ x 1,000) ($ x 1,000) SHORT-TERM INVESTMENTS 0.2% of net assets Brown Brothers Harriman & Co. Cash Management Sweep 199 199
SECURITY FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) U.S. GOVERNMENT SECURITIES 0.0% of net assets TREASURY BILLS 0.0% -------------------------------------------------------------------------------- U.S. Treasury Bill 4.71%, 09/14/06 45 45
END OF INVESTMENTS. See financial notes. 13 SCHWAB S&P 500 INDEX PORTFOLIO PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE SECURITY SHARES ($ x 1,000) COLLATERAL INVESTED FOR SECURITIES ON LOAN 3.7% of net assets State Street Navigator Security Lending Prime Portfolio 5,618 5,618
END OF COLLATERAL INVESTED FOR SECURITIES ON LOAN. At June 30, 2006 the tax basis cost of the fund's investments was $113,991, and the unrealized appreciation and depreciation was $46,494 and ($10,921), respectively, with a net unrealized appreciation of $35,573. In addition to the above, the fund held the following at 06/30/06. All numbers x 1,000 except number of contracts.
NUMBER OF CONTRACT UNREALIZED CONTRACTS VALUE GAINS FUTURES CONTRACT S & P Mini 500 Index Future, Long Expires 9/15/06 4 256 6
* Non-income producing security. (a) Issuer is affiliated with the fund's adviser. (b) All or portion of security is on loan. (c) All or a portion of this security is held as collateral for open futures contracts. 14 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO Statement of ASSETS AND LIABILITIES As of June 30, 2006; unaudited. All numbers x 1,000 except NAV. ASSETS ------------------------------------------------------------------------------------------ Investments, at value including securities on loan of $5,501 (cost $112,898) $149,564 Collateral invested for securities on loan 5,618 Receivables: Fund shares sold 57 Dividends 173 Prepaid expenses + 24 ----------- TOTAL ASSETS 155,436 LIABILITIES ------------------------------------------------------------------------------------------ Collateral invested for securities on loan 5,618 Payables: Due to brokers for futures 1 Fund shares redeemed 14 Investment adviser and administrator fees 2 Accrued expenses + 65 ----------- TOTAL LIABILITIES 5,700 NET ASSETS ------------------------------------------------------------------------------------------ TOTAL ASSETS 155,436 TOTAL LIABILITIES - 5,700 ----------- NET ASSETS $149,736 NET ASSETS BY SOURCE Capital received from investors 124,650 Net investment income not yet distributed 3,762 Net realized capital losses (15,348) Net unrealized capital gains 36,672 NET ASSET VALUE (NAV) BY SHARE CLASS SHARES NET ASSETS / OUTSTANDING = NAV $149,736 8,065 $18.57
See financial notes. 15 SCHWAB S&P 500 INDEX PORTFOLIO Statement of OPERATIONS For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000. INVESTMENT INCOME -------------------------------------------------------------------------------- Dividends $1,474 Interest 7 Securities on loan + 3 --------- TOTAL INVESTMENT INCOME $1,484 NET REALIZED GAINS AND LOSSES -------------------------------------------------------------------------------- Net realized losses received from affiliated issuers (1) Net realized losses on investments sold + (718) ---------- NET REALIZED LOSSES (719) NET UNREALIZED GAINS AND LOSSES -------------------------------------------------------------------------------- Net unrealized gains on investments 3,652 Net unrealized gains on futures contracts + 16 ---------- NET UNREALIZED GAINS 3,668 EXPENSES -------------------------------------------------------------------------------- Investment adviser and administrator fees 155 Trustees' fees 15 Custodian fees 9 Portfolio accounting fees 18 Professional fees 15 Shareholder reports 19 Other expenses + 12 ---------- Total expenses 243 Expense reduction - 26 ---------- NET EXPENSES 217 INCREASE IN NET ASSETS FROM OPERATIONS -------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 1,484 NET EXPENSES - 217 ---------- NET INVESTMENT INCOME 1,267 NET REALIZED LOSSES (719) NET UNREALIZED GAINS + 3,668 ---------- INCREASE IN NET ASSETS FROM OPERATIONS $4,216
16 See financial notes. SCHWAB S&P 500 INDEX PORTFOLIO Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers x 1,000. Figures for current period are unaudited.
OPERATIONS -------------------------------------------------------------------------------- 1/1/06-6/30/06 1/1/05-12/31/05 Net investment income $1,267 $2,490 Net realized losses (719) (3,306) Net unrealized gains + 3,668 7,901 ----------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 4,216 7,085 DISTRIBUTIONS PAID -------------------------------------------------------------------------------- Dividends from net investment income -- 2,644
TRANSACTIONS IN FUND SHARES -------------------------------------------------------------------------------- 1/1/06-6/30/06 1/1/05-12/31/05 SHARES VALUE SHARES VALUE Shares sold 441 $8,225 1,528 $26,939 Shares reinvested -- -- 144 2,644 Shares redeemed + (1,077) (20,091) (2,193) (38,629) ---------------------------------------------- NET TRANSACTIONS IN FUND SHARES (636) ($11,866) (521) ($9,046)
SHARES OUTSTANDING AND NET ASSETS -------------------------------------------------------------------------------- SHARES NET ASSETS SHARES NET ASSETS Beginning of period 8,701 $157,386 9,222 $161,991 Total decrease + (636) (7,650) (521) (4,605) ---------------------------------------------- END OF PERIOD 8,065 $149,736 8,701 $157,386 Net investment income not yet distributed $3,762 $2,495
See financial notes. 17 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL NOTES, unaudited. Unless stated, all dollar amounts are x 1,000. 1. BUSINESS STRUCTURE OF THE FUND Schwab S&P 500 Index Portfolio is a series of Schwab Annuity Portfolios, a no-load, open-end management investment company. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The list below shows all the funds in the trust including the fund in this report, which is highlighted: SCHWAB ANNUITY PORTFOLIOS Organized January 21,1994 Schwab Money Market Portfolio Schwab MarketTrack Growth Portfolio II SCHWAB S&P 500 INDEX PORTFOLIO Schwab S&P 500 Index Portfolio offers one share class. Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary. The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies the fund uses in its operations and in the preparation of financial statements: (A) SECURITY VALUATION: The fund values the securities in its portfolio every business day. The fund uses the following policies to value various types of securities: - SECURITIES TRADED ON AN EXCHANGE OR OVER-THE-COUNTER: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate. - SECURITIES FOR WHICH NO QUOTED VALUE IS AVAILABLE OR WHEN A SIGNIFICANT EVENT HAS OCCURRED BETWEEN THE TIME OF THE SECURITY'S LAST CLOSE AND THE TIME THE FUND CALCULATES NET ASSET VALUE: valued at fair value, as determined in good faith by the fund's investment adviser using guidelines adopted by the fund's Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security's trading has been halted or suspended; the security has been de-listed from a national exchange; the security's primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security's primary pricing source is not able or willing to provide a price. 18 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - FUTURES: open contracts are valued at their settlement prices as of the close of their exchanges. When a fund closes out a futures position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly. - SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost. (B) PORTFOLIO INVESTMENTS: FUTURES CONTRACT: The fund may invest in futures contracts. Futures contracts involve certain risks because they can be very sensitive to market movements. One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for the fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. The potential for losses associated with futures contracts may exceed amounts recorded in the Statement of Assets and Liabilities. Because futures carry inherent risks, the fund must give the broker a deposit of cash and/or securities (the "initial margin") whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount. Futures are traded publicly on exchanges, and their market value changes daily. The fund records the change in market value of futures, and also the change in the amount of margin deposit required ("due to/from broker"). Securities Lending: The fund may loan securities to certain brokers, dealers and other financial institutions who pay the fund negotiated fees. The fund receives cash, letters of credit or U.S. government securities as collateral on these loans. All of the cash collateral received is reinvested in high quality, short-term investments. The value of the collateral must be at least 102% of the market value of the loaned securities as of the first day of the loan, and at least 100% each day thereafter. If the value of the collateral falls below 100%, it will be adjusted the following day. (C) SECURITY TRANSACTIONS: Security transactions are recorded as of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved. Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date. For the period ended June 30, 2006, purchases and sales of securities (excluding short-term obligations) were as follows:
PURCHASES SALES/MATURITIES --------- ---------------- $3,083 $11,970
19 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) INCOME, EXPENSES AND DISTRIBUTIONS: Income from interest and the accretion of discount is recorded as it accrues. Dividends and distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the fund records certain foreign security dividends on the day it learns of the ex-dividend date. Expenses that are specific to a fund are charged directly to that fund. Expenses that are common to all funds within a trust generally are allocated among the funds in proportion to their average daily net assets. The fund pays dividends from net investment income and makes distributions from net realized capital gains once a year. The fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund also keeps certain assets in segregated accounts, as may be required by securities law. (E) BORROWING: The fund may borrow money from banks and custodians. The fund may obtain temporary bank loans through the trust to which the fund belongs to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trust has custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with PNC Bank, N.A., and Bank of America, N.A., respectively. The fund pays interest on the amounts it borrows at rates that are negotiated periodically.
AMOUNT OUTSTANDING AVERAGE WEIGHTED AT 6/30/06 BORROWING* AVERAGE INTEREST ($ X 1000) ($ X 1000) RATE* (%) ---------- ---------- --------- S&P 500 Index Portfolio -- 238 5.06
* Based on the number of days for which the borrowing is outstanding. (F) ACCOUNTING ESTIMATES: The accounting policies described in this report conform with accounting principles generally accepted in the United States of America. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It's possible that once the results are known, they may turn out to be different from these estimates. (G) INDEMNIFICATION: Under the fund's organizational documents, its officers and trustees are indemnified against certain liability 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 be remote. 20 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 3. AFFILIATES AND AFFILIATED TRANSACTIONS Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is the trust's shareholder services agent and transfer agent. For its advisory and administrative services to the fund, the investment adviser is entitled to receive an annual fee payable monthly based on the fund's average daily net assets described as follows:
AVERAGE DAILY NET ASSETS ------------------------ First $500 million 0.20% Over $500 million 0.17%
Schwab does not charge the fund for transfer agent and shareholder services fees. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the fund to limit the total expenses charged, excluding interest, taxes and certain non-routine expenses to 0.28% through April 29, 2007. The fund may engage in certain transactions involving related parties. For instance, the fund may own shares of The Charles Schwab Corporation if that company is included in an index which the fund uses as part of an indexing strategy. The fund may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. For the period ended June 30, 2006, 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 within the Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the Schwab Funds. There was no interfund borrowing or lending activity for the fund during the period. Trustees may include people who are officers and/or directors of the investment adviser or Schwab. Federal securities law limits the percentage of such "interested persons" who may serve on a trust's board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in the fund's Statement of Operations. 4. 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 the participating 21 SCHWAB S&P 500 INDEX PORTFOLIO FINANCIAL NOTES, unaudited (continued). Unless stated, all dollar amounts are x 1,000. 4. FEDERAL INCOME TAXES (CONTINUED) insurance company separate accounts each year. The net investment income and realized capital gains and losses may differ for financial statement and tax purposes primarily due to differing treatments of losses on wash sales. As long as the fund meets the tax requirements, it is not required to pay federal income tax. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Ordinary income $2,495 Long-term capital gains --
As of December 31, 2005, the fund had capital loss carry forwards available to offset future net capital gains before the expiration dates:
EXPIRE 2008 $664 2009 1,821 2010 7,810 2011 38 2012 359 2013 2,130 ------- Total $12,822 =======
The fund deferred capital losses occurring after December 31, 2005 to the next fiscal year ending at December 31, 2006. The aggregate amounts of these deferred losses are $732. The tax-basis components of distributions for the fiscal year ended December 31, 2005 were: From ordinary income $2,644 From long-term capital gains -- From return of capital --
22 INVESTMENT ADVISORY AGREEMENT APPROVAL The Investment Company Act of 1940 (the "1940 Act") requires that initial approval of, as well as the continuation of, a fund's investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or "interested persons" of any party (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund's trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the advisory agreement. In addition, the Securities and Exchange Commission (the "SEC") takes the position that, as part of their fiduciary duties with respect to fund fees, fund boards are required to evaluate the material factors applicable to a decision to approve an investment advisory agreement. Consistent with these responsibilities, the Board of Trustees (the "Board") calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with respect to existing funds in the Trust, including the Schwab S&P 500 Index Portfolio, and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM's affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The trustees also receive a memorandum from fund counsel regarding the responsibilities of trustees for the approval of investment advisory contracts. In addition, the Independent Trustees receive advice from independent counsel to the Independent Trustees, meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM. The Board, including a majority of the Independent Trustees, considered information specifically relating to the continuance of the Agreement at meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the renewal of the Agreement for an additional one year term at the meeting held on June 12, 2006. The Board's approval of the Agreement was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including: 1. the nature, extent and quality of the services provided to the funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the funds; 2. each fund's investment performance and how it compared to that of certain other comparable mutual funds; 3. each fund's expenses and how those expenses compared to those of certain other comparable mutual funds; 4. the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. ("Schwab"), with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and 5. the extent to which economies of scale would be realized as the funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of fund investors. 23 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 considered the role of unaffiliated insurance companies in the distribution of the funds. The information considered by the trustees included specific information concerning changes in the nature, extent and quality of services provided by CSIM since the trustees had last considered approval of the Agreement. The trustees also considered Schwab's excellent reputation as a full service brokerage firm and its overall financial condition, and how this affects the success of the funds. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the funds and the resources of CSIM and its affiliates dedicated to the funds supported renewal of the Agreement. FUND PERFORMANCE. The Board considered fund performance in determining whether to renew the Agreement. Specifically, the trustees considered each fund's performance relative to a peer group of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, when applicable, and market trends. As part of this review, the trustees considered the composition of the peer group, selection criteria and the reputation of the third party who prepared the peer group analysis. In evaluating the performance of each fund, the trustees considered both risk and shareholder risk expectations for such fund and the appropriateness of the benchmark used to compare the performance of each fund. The trustees further considered the level of fund performance in the context of its review of fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the funds supported renewal of the Agreement. FUND EXPENSES. With respect to the funds' expenses, the trustees considered the rate of compensation called for by the Agreement, and each fund's net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The trustees considered the effects of CSIM's and Schwab's historical practice of voluntarily waiving management and other fees to prevent total fund expenses from exceeding a specified cap. The trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts 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, and the unique insurance dedicated distribution arrangements of the funds as compared to other funds managed by CSIM. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the funds are reasonable and supported renewal of the Agreement. PROFITABILITY. With regard to profitability, the trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the trustees reviewed management's profitability analyses, together with certain commentary thereon from an independent accounting firm. The trustees also considered any other benefits derived by CSIM from its relationship with the funds, such as whether, by virtue of its management of the Funds, CSIM obtains investment information or other research resources that aid it in providing 24 advisory services to other clients. The trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each fund by CSIM and its affiliates. The Board also considered information relating to changes to CSIM's cost structure, including cost savings, technology investments and increased operating efficiencies and how these changes affected CSIM's profitability under the Agreement. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement. ECONOMIES OF SCALE. The trustees considered the existence of any economies of scale and whether those are passed along to a fund's shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of fund expenses, the trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such dis-economies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The trustees also considered CSIM's agreement to contractual investment advisory fee schedules that include lower fees at higher graduated asset levels. The Board also considered certain commitments by CSIM and Schwab that are designed to pass along potential economies of scale to fund shareholders. Specifically, the Board considered CSIM and Schwab's commitments, which may be changed only with Board approval: (i) to reduce contractual advisory fees or add break points for certain funds, and (ii) to implement, by means of expense limitation agreement, reductions in net overall expenses for certain funds. Based on this evaluation, and in consideration of the commitments made by CSIM and Schwab as discussed above, the Board concluded, within the context of its full deliberations, that the funds obtain reasonable benefit from economies of scale. In the course of their deliberations, the trustees did not identify any particular information or factor that was all-important or controlling. Based on the trustees' deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment. 25 TRUSTEES AND OFFICERS The tables below give information about the trustees and officers for The Schwab Annuity Portfolios, which includes the fund covered in this report. The "Fund Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ MARIANN BYERWALTER Chairman of JDN Corporate Advisory 98 Board 1--Director, Redwood Trust, Inc. 1960 LLC. From 1996 to 2001, Vice Board 2--Director, PMI Group, Inc. Trustee President for Business Affairs and (Trustee of The Schwab Chief Financial Officer of Stanford Annuity Portfolios since University, and in 2001, Special 2000.) Advisor to the President of Stanford University. ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. DORWARD Chief Executive Officer, Dorward & 57 None. 1931 Associates (corporate management, Trustee marketing and communications consulting (Trustee of The Schwab firm). From 1996-1999, Executive Vice Annuity Portfolios since President and Managing Director, Grey 1989.) Advertising. Prior to 1996, President and Chief Executive Officer, Allen & Dorward Advertising. ------------------------------------------------------------------------------------------------------------------------------------ WILLIAM A. HASLER Retired. Dean Emeritus, Haas School 98 Board 1--Director, Aphton Corp. 1941 of Business, University of California, Board 2--Director, Mission West Properties Trustee Berkeley. Until February 2004, Co- Board 3--Director, TOUSA (Trustee of The Schwab Chief Executive Officer, Aphton Corp. Board 4--Director, Stratex Networks Annuity Portfolios since (bio-pharmaceuticals). Prior to August Board 5--Director, Genitope Corp. 2000.) 1998, Dean of the Haas School of Board 6--Director & Non-Executive Business, University of California, Chairman, Solectron Corp. Berkeley (higher education). Board 7--Director, Ditech Communications Corp.
26 INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ ROBERT G. HOLMES Chairman, Chief Executive Officer 57 None. 1931 and Director, Semloh Financial, Inc. Trustee (international financial services and (Trustee of The Schwab investment advisory firm). Annuity Portfolios since 1989.) ------------------------------------------------------------------------------------------------------------------------------------ GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries 1950 Officer and founder of Smith Board 2--Chairman of the Audit Committee Trustee Graham & Co. (investment advisors). of Northern Border Partners, M.L.P. (Trustee of The Schwab Annuity Portfolios since 2000.) ------------------------------------------------------------------------------------------------------------------------------------ DONALD R. STEPHENS Managing Partner, D.R. Stephens & 57 None. 1938 Company (investments). Prior to Trustee 1996, Chairman and Chief (Trustee of The Schwab Executive Officer of North American Annuity Portfolios since Trust (real estate investment trust). 1989.) ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL W. WILSEY Chairman and Chief Executive 57 None. 1943 Officer, Wilsey Bennett, Inc. (real Trustee estate investment and management, (Trustee of The Schwab and other investments). Annuity Portfolios since 1989.)
27 INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF AND POSITION(S) WITH PORTFOLIOS IN THE TRUST; (TERM OF FUND COMPLEX OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------------ CHARLES R. SCHWAB 2 Chairman, Chief Executive Officer 57 None. 1937 and Director, The Charles Schwab Chairman and Trustee Corporation, Charles Schwab & Co., (Chairman and Trustee Inc.; Chairman and Director, Charles of The Schwab Annuity Schwab Investment Management, Portfolios since 1989.) Inc., Charles Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab (SIS) Holdings Inc. I, Schwab International Holdings, Inc.; Chief Executive Officer and Director, Schwab Holdings, Inc.; Director, U.S. Trust Company, N. A., U.S. Trust Corporation, United States Trust Company of New York. Until May 2003, Co-Chief Executive Officer, The Charles Schwab Corporation. RANDALL W. MERK 2 Executive Vice President and 98 None. 1954 President, Schwab Financial Trustee Products, Charles Schwab & Co., Inc.; (Trustee of The Schwab Director, Charles Schwab Asset Annuity Portfolios since Management (Ireland) Limited and 2005.) Charles Schwab Worldwide Funds PLC. From September 2002 to July 2004, Chief Executive Officer and President, Charles Schwab Investment Management, Inc. and Executive Vice President, Charles Schwab & Co., Inc. Prior to September 2002, President and Chief Investment Officer, American Century Investment Management, and Director, American Century Companies, Inc.
28 OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment Management, 1955 Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief President and Chief Executive Officer Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President, (Officer of The Schwab Annuity Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Portfolios since 2004.) President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation. ------------------------------------------------------------------------------------------------------------------------------------ STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab Investment 1955 Management, Inc.; Chief Investment Officer, The Charles Schwab Trust Company. Senior Vice President and Chief Investment Officer (Officer of The Schwab Annuity Portfolios since 1991.) ------------------------------------------------------------------------------------------------------------------------------------ GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment 1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance Treasurer and Principal Financial Officer Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc., (Officer of The Schwab Annuity Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer, Portfolios since 2004.) Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November 2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles Schwab 1959 Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager, Senior Vice President and Chief Charles Schwab Investment Management, Inc. Investment Officer--Fixed Income (Officer of The Schwab Annuity Portfolios since 2004.) ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab 1963 Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust Senior Vice President and Chief and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio Investment Officer--Equities Manager, Charles Schwab Investment Management, Inc. (Officer of The Schwab Annuity Portfolios since 2004.)
29 OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S) WITH THE TRUST; (TERM OF OFFICE, AND LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment 1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance Chief Compliance Officer and AML Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer, Officer Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From (Officer of The Schwab Annuity 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment Portfolios since 2002.) Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab & Co., Inc. ------------------------------------------------------------------------------------------------------------------------------------ KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment 1961 Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab & Secretary and Chief Legal Officer Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief (Officer of The Schwab Annuity Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Portfolios since 1998.) Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their employment with the investment adviser and the distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are employees of Schwab and/or the adviser. 3 The President, Treasurer and Secretary hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer serves at the pleasure of the Board. 30 ITEM 2: CODE OF ETHICS. Not applicable to this semi-annual report. ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to this semi-annual report. ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to this semi-annual report. ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6: SCHEDULE OF INVESTMENTS. The schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form. ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 11: CONTROLS AND PROCEDURES. (a) Based on their evaluation of Registrant's disclosure controls and procedures, as of a date within 90 days of the filing date, Registrant's Chief Executive Officer, Evelyn Dilsaver and Registrant's Principal Financial Officer, George Pereira, have concluded that Registrant's disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant's officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above. (b) During the second fiscal quarter of the period covered by this report, there have been no changes in Registrant's internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant's internal control over financial reporting. ITEM 12: EXHIBITS. (a)(1) Code of ethics - not applicable to this semi-annual report. (2) Separate certifications for Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached. (3) Not applicable. (b) A certification for Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Form N-CSR with the Commission. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Schwab Annuity Portfolios By: /s/ Evelyn Dilsaver ------------------------------------- Evelyn Dilsaver President and Chief Executive Officer Date: August 16, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Evelyn Dilsaver ------------------------------------- Evelyn Dilsaver President and Chief Executive Officer Date: August 16, 2006 By: /s/ George Pereira ------------------------------------- George Pereira Treasurer and Principal Financial Officer Date: August 16, 2006