-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cq20luh7YsqtbJxSz/cJD0fcntczKC7evuAMipTRbyerUvgRaWqH8T+YKKV3Xhdc vq2xvoXGuc+DN3Wh9JSZ+w== 0000745903-04-000028.txt : 20040803 0000745903-04-000028.hdr.sgml : 20040803 20040803094415 ACCESSION NUMBER: 0000745903-04-000028 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040803 EFFECTIVENESS DATE: 20040803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USAA INVESTMENT TRUST CENTRAL INDEX KEY: 0000745903 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04019 FILM NUMBER: 04946787 BUSINESS ADDRESS: STREET 1: 9800 FREDERICKSBURG ROAD STREET 2: A-3-W CITY: SAN ANTONIO STATE: TX ZIP: 78288-0227 BUSINESS PHONE: 2104988696 MAIL ADDRESS: STREET 1: 9800 FREDERICKSBURG ROAD STREET 2: A-3-W CITY: SAN ANTONIO STATE: TX ZIP: 78288-0227 N-CSR 1 ncsremf53104.txt USAA EMERGING MARKETS FUND ANNUAL RPT 5/31/04 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: 811-4019 Exact name of registrant as specified in charter: USAA INVESTMENT TRUST Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Name and address of agent for service: MARK S. HOWARD USAA INVESTMENT TRUST 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Registrant's telephone number, including area code: (210) 498-0226 Date of fiscal year end: MAY 31 Date of reporting period: MAY 31, 2004 ITEM 1. REPORT TO STOCKHOLDERS. USAA INVESTMENT TRUST, EMERGING MARKETS FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2004 [LOGO OF USAA] USAA(R) USAA EMERGING MARKETS Fund [GRAPHIC OF USAA EMERGING MARKETS FUND] A n n u a l R e p o r t - -------------------------------------------------------------------------------- MAY 31, 2004 Table of CONTENTS - -------------------------------------------------------------------------------- MESSAGE FROM THE PRESIDENT 2 INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5 FINANCIAL INFORMATION Distributions to Shareholders 12 Report of Independent Registered Public Accounting Firm 13 Portfolio of Investments 14 Notes to Portfolio of Investments 21 Financial Statements 22 Notes to Financial Statements 25 DIRECTORS' AND OFFICERS' INFORMATION 38
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS ABOUT THE FUND. (C)2004, USAA. All rights reserved. 2 M E S S A G E ==============------------------------------------------------------------------ from the PRESIDENT " FIRST-QUARTER EARNINGS WERE STRONG . . . [PHOTO OF CHRISTOPHER W. CLAUS] SECOND-QUARTER EARNINGS SHOULD CONTINUE TO IMPRESS. " - -------------------------------------------------------------------------------- As I write to you in early June, the U.S. economy continues to improve. The country has seen job growth for nine consecutive months, including 248,000 new jobs created in May. The gross domestic product (GDP) is also growing at a healthy pace - up 3.9% during the first quarter - and I expect the economy to be reasonably strong throughout 2004. First-quarter earnings were strong, exceeding expectations by a record number. Second- quarter earnings should continue to impress. Despite the good news, the financial markets have been volatile and nervous. The primary concerns are the price of oil, Iraq, the pending presidential election, inflation, and rising interest rates. In the case of oil, demand is outstripping supply, with buyers now paying a "terrorist premium." A disruption in oil production would make oil prices spike, and if oil costs more than $40 a barrel, the price increase could wipe out about one-half percent of world GDP. Iraq is likely to remain a difficult situation for years to come as democracy in the Middle East strives to take root. And while markets tend to perform fairly well during presidential elections - perhaps an expression of voters' optimism - no one knows quite what to expect this time around. On the inflation front, our expectation is that inflation will remain moderate and under control, even though the price of oil and some foods may rise. The Federal Reserve Board (the Fed) is expected to raise short-term interest rates, but we believe any rate increases in the near future 3 . . . C O N T I N U E D ========================-------------------------------------------------------- will occur at a "measured pace." If inflation does rise above the level expected, the Fed is likely to move more quickly and aggressively in an effort to combat long-term inflation. Going forward, we expect stock prices to end the year higher than they are now. Short-term interest rates should rise, making money market funds a more attractive choice for people holding cash. Longer-term investors will feel the initial pinch of rate increases, but should be rewarded in time with the potential for higher yields and the compounding of interest payments. Regardless of what occurs in the coming months, we remain committed to helping you achieve your investment goals. Our market-tested portfolio management team will continue to provide you with a range of resources, including quality service and no-load mutual funds that have no sales loads, 12b-1 fees, or long-term contractual plans. On behalf of everyone at USAA, thank you for your business. Sincerely, /s/ Christopher W. Claus Christopher W. Claus President and Vice Chairman of the Board CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE USAA MUTUAL FUNDS CAREFULLY BEFORE INVESTING. CONTACT US FOR A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUNDS FROM USAA INVESTMENT MANAGEMENT COMPANY, DISTRIBUTOR. READ IT CAREFULLY BEFORE INVESTING. AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. MUTUAL FUND OPERATING EXPENSES APPLY AND CONTINUE THROUGHOUT THE LIFE OF THE FUND. 5 I N V E S T M E N T ====================------------------------------------------------------------ OVERVIEW USAA EMERGING MARKETS FUND OBJECTIVE - -------------------------------------------------------------------------------- Capital appreciation. TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- Invests at least 80% of the Fund's assets in equity securities of emerging market companies. - -------------------------------------------------------------------------------- 5/31/04 5/31/03 - -------------------------------------------------------------------------------- Net Assets $95.1 Million $54.8 Million Net Asset Value Per Share $10.06 $7.24 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/04 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS SINCE INCEPTION ON 11/7/94 39.14% 3.69% 1.21% THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT USAA.COM. TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. 6 . . . C O N T I N U E D ========================-------------------------------------------------------- OVERVIEW CUMULATIVE PERFORMANCE COMPARISON [CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER EMERGING USAA LIPPER EMERGING MSCI MARKETS FUNDS EMERGING MARKETS MARKETS FUNDS EMERGING MARKETS AVERAGE FUND INDEX INDEX --------------- ---------------- --------------- ---------------- 11/07/94 $10,000 $10,000 $10,000 $10,000 11/30/94 9,668 9,550 9,656 9,601 12/31/94 9,006 9,170 8,923 8,830 01/31/95 8,179 8,390 8,010 7,891 02/28/95 8,052 8,300 7,877 7,688 03/31/95 8,124 8,720 7,912 7,737 04/30/95 8,468 9,130 8,166 8,084 05/31/95 8,895 9,770 8,547 8,514 06/30/95 8,920 9,950 8,582 8,540 07/31/95 9,267 10,320 8,881 8,731 08/31/95 9,091 10,090 8,653 8,526 09/30/95 9,109 9,940 8,611 8,485 10/31/95 8,718 9,330 8,253 8,160 11/30/95 8,585 9,286 8,040 8,015 12/31/95 8,868 9,505 8,318 8,370 01/31/96 9,646 10,634 9,074 8,965 02/29/96 9,596 10,767 8,968 8,823 03/31/96 9,661 10,716 9,043 8,891 04/30/96 10,108 11,291 9,362 9,247 05/31/96 10,256 11,424 9,455 9,206 06/30/96 10,331 11,260 9,473 9,263 07/31/96 9,735 10,436 8,924 8,630 08/31/96 10,026 10,824 9,168 8,851 09/30/96 10,101 10,974 9,262 8,928 10/31/96 9,850 10,608 9,049 8,690 11/30/96 10,100 10,921 9,254 8,835 12/31/96 10,279 11,082 9,334 8,875 01/31/97 11,117 11,933 10,048 9,480 02/28/97 11,514 12,331 10,406 9,886 03/31/97 11,262 12,094 10,141 9,627 04/30/97 11,376 11,965 10,141 9,644 05/31/97 11,901 12,418 10,491 9,920 06/30/97 12,595 12,988 11,005 10,451 07/31/97 13,038 13,267 11,327 10,607 08/31/97 11,918 12,251 10,080 9,257 09/30/97 12,423 12,928 10,444 9,513 10/31/97 10,518 10,917 8,700 7,952 11/30/97 10,124 10,393 8,302 7,662 12/31/97 10,305 10,699 8,378 7,847 01/31/98 9,583 9,715 7,794 7,231 02/28/98 10,452 10,808 8,490 7,986 03/31/98 10,850 11,333 8,807 8,333 04/30/98 10,931 11,234 8,849 8,242 05/31/98 9,529 9,814 7,682 7,113 06/30/98 8,647 8,863 6,954 6,367 07/31/98 8,917 9,029 7,166 6,568 08/31/98 6,423 6,118 5,112 4,669 09/30/98 6,594 6,548 5,304 4,965 10/31/98 7,170 7,496 5,814 5,488 11/30/98 7,622 7,893 6,204 5,945 12/31/98 7,519 7,904 6,127 5,859 01/31/99 7,373 7,706 6,002 5,764 02/28/99 7,321 7,651 5,951 5,820 03/31/99 8,119 8,411 6,614 6,587 04/30/99 9,211 9,580 7,533 7,402 05/31/99 9,118 9,360 7,442 7,359 06/30/99 10,220 10,363 8,277 8,194 07/31/99 9,966 10,128 8,072 7,972 08/31/99 9,845 9,972 7,982 8,044 09/30/99 9,482 9,506 7,699 7,772 10/31/99 9,823 9,717 7,930 7,937 11/30/99 10,891 10,528 8,805 8,649 12/31/99 12,883 12,049 10,352 9,749 01/31/00 12,773 11,794 10,232 9,807 02/29/00 13,337 12,193 10,537 9,937 03/31/00 13,477 12,171 10,568 9,985 04/30/00 12,022 10,616 9,418 9,039 05/31/00 11,320 9,972 8,917 8,665 06/30/00 11,873 10,505 9,359 8,970 07/31/00 11,323 10,026 8,977 8,509 08/31/00 11,567 10,159 9,070 8,551 09/30/00 10,386 9,259 8,203 7,804 10/31/00 9,635 8,703 7,591 7,238 11/30/00 8,727 7,825 6,905 6,605 12/31/00 9,029 8,203 7,154 6,765 01/31/01 10,114 8,970 7,983 7,696 02/28/01 9,331 8,203 7,364 7,094 03/31/01 8,472 7,470 6,661 6,397 04/30/01 8,961 7,814 7,002 6,713 05/31/01 9,221 7,959 7,194 6,793 06/30/01 9,055 7,847 7,069 6,654 07/31/01 8,456 7,436 6,630 6,233 08/31/01 8,285 7,169 6,544 6,172 09/30/01 7,120 6,269 5,610 5,217 10/31/01 7,548 6,580 5,904 5,540 11/30/01 8,305 7,103 6,489 6,119 12/31/01 8,827 7,728 6,904 6,604 01/31/02 9,182 8,107 7,176 6,828 02/28/02 9,378 8,363 7,336 6,940 03/31/02 9,917 8,921 7,738 7,359 04/30/02 10,009 8,932 7,833 7,406 05/31/02 9,920 8,843 7,761 7,288 06/30/02 9,195 8,185 7,193 6,741 07/31/02 8,516 7,494 6,656 6,228 08/31/02 8,575 7,583 6,710 6,324 09/30/02 7,737 6,769 6,037 5,642 10/31/02 8,092 7,014 6,325 6,008 11/30/02 8,595 7,505 6,751 6,421 12/31/02 8,380 7,338 6,584 6,208 01/31/03 8,311 7,248 6,546 6,181 02/28/03 8,145 7,048 6,391 6,014 03/31/03 7,875 6,847 6,185 5,844 04/30/03 8,606 7,505 6,781 6,364 05/31/03 9,245 8,062 7,269 6,821 06/30/03 9,679 8,453 7,635 7,210 07/31/03 10,170 8,921 7,984 7,661 08/31/03 10,854 9,378 8,518 8,176 09/30/03 11,035 9,590 8,707 8,235 10/31/03 11,913 10,315 9,385 8,936 11/30/03 12,063 10,505 9,524 9,046 12/31/03 13,028 11,229 10,333 9,702 01/31/04 13,427 11,575 10,629 10,046 02/29/04 14,031 12,077 11,106 10,510 03/31/04 14,199 12,155 11,255 10,645 04/30/04 13,089 11,408 10,368 9,775 05/31/04 12,835 11,218 10,166 9,645
[END CHART] DATA SINCE INCEPTION ON 11/7/94 THROUGH 5/31/04. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE, AND THE CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. 7 . . . C O N T I N U E D ========================-------------------------------------------------------- The graph illustrates the comparison of a $10,000 hypothetical investment in the USAA Emerging Markets Fund to the following benchmarks: o The Lipper Emerging Markets Funds Average, an average of emerging markets funds, reported by Lipper Inc., an independent organization that monitors the performance of mutual funds. o The Lipper Emerging Markets Funds Index, which tracks the total return performance of the 30 largest funds within the Lipper Emerging Markets Funds category. o The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. 8 M A N A G E R S ' ==================-------------------------------------------------------------- COMMENTARY on the Fund D. KIRK HENRY, CFA CAROLYN M. KEDERSHA, CFA, CPA The Boston Company Asset The Boston Company Asset Management, LLC Management, LLC - -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? The USAA Emerging Markets Fund had a total return of 39.14% for the year ended May 31, 2004. This compares to a return of 39.85% for the Lipper Emerging Markets Funds Index, 38.82% for the Lipper Emerging Markets Fund Average, and 41.02% for the Morgan Stanley Capital International (MSCI) Emerging Markets Index for the period. WHAT LED TO THE STRONG PERFORMANCE IN EMERGING MARKETS? Emerging markets tend to be leading indicators, performing well when the global economy is reflating, since they are providers of raw materials and low-cost manufacturing. Lower interest rates and fiscal stimulation from the United States played a role, as has the rise of local demand in many emerging market economies, particularly in China, India, Thailand, Taiwan, and, more recently, Mexico. Continued economic restructuring has also been a factor, because several economies have de-linked their currencies from the U.S. dollar, privatized state-owned assets, and implemented banking reforms. DID EMERGING MARKETS RALLY THROUGHOUT THE REPORTING PERIOD? It was a strong year, but we did begin to see some stock market corrections toward the end of the reporting period. Among the factors that caused uncertainty were (and are) the U.S. presidential election, high oil prices, terrorist attacks on oil facilities, and concern over whether the Chinese economy can have a soft landing after years of sizzling growth. As economies reflated, there was a rising tide that lifted all boats and led lower-quality companies to lead most emerging stock markets higher. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS. 9 . . . C O N T I N U E D ========================-------------------------------------------------------- Now, as the economic cycle matures, macroeconomic issues are giving way to company-by-company fundamentals - a backdrop that should favor our style of investing in high-quality issues. WHICH GEOGRAPHIC REGIONS DID THE FUND EMPHASIZE? We were heavily invested in India, but began to reduce our overweight position in late 2003 as many of our stocks reached their price targets. This proved beneficial because the Indian market subsequently sold off. Two Indian companies that contributed to performance were Reliance Industries Ltd., a diversified industrial company with interests in oil and gas, power generation, and telecoms; and Satyam Computer Services Ltd., a software development firm that is benefiting from Western outsourcing. We had strong stock selection in Taiwan, South Korea, and Brazil, as well as in Poland, where a copper mining company we owned, KGHM Polska Miedz S.A., performed very well. WHAT AREAS DETRACTED FROM PERFORMANCE? We were overweight in Mexico, and we did not own America Movil, a mobile telecom company there, due to valuation. However, the Mexican stock market had shown signs of picking up as the reporting year ended. Our underweight position in information technology was detrimental, but our stock selection was good in the sector overall. Our overweight position in consumer staples also detracted from performance because investors avoided the more defensive sectors. WHAT'S YOUR MARKET OUTLOOK? We believe stock selection will be much more important moving forward. In fact, we saw this shift begin in April and May 2004. We want to own companies that can manage their profit margins through a wide range of economic cycles. We will continue working hard on your behalf. Thank you for the confidence you have placed in us. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 14-20. 10 P O R T F O L I O ==================-------------------------------------------------------------- HIGHLIGHTS
- ---------------------------------------------------------- TOP 10 INDUSTRIES* (% of Net Assets) - ---------------------------------------------------------- Diversified Banks 12.9% Integrated Telecommunication Services 11.0% Integrated Oil & Gas 7.5% Electric Utilities 4.7% Wireless Telecommunication Services 4.7% Industrial Conglomerates 3.5% Semiconductors 3.5% Computer Hardware 2.5% Multi-Line Insurance 2.5% Packaged Foods & Meat 2.2% - ----------------------------------------------------------
*EXCLUDES MONEY MARKET INSTRUMENTS.
- --------------------------------------------------------- TOP 10 EQUITY HOLDINGS (% of Net Assets) - --------------------------------------------------------- Korea Electric Power Corp. 2.6% China Mobile Ltd. 2.5% Nedcor Ltd. 2.5% Telefonos de Mexico S.A. de C.V. 2.2% United Microelectronics 2.2% Anglo American plc 2.1% SASOL Ltd. 1.9% Petroleo Brasileiro S.A. ADR 1.8% KT Corp. ADR 1.7% LUKoil Holdings ADR 1.7% - ---------------------------------------------------------
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 14-20. 11 . . . C O N T I N U E D ========================-------------------------------------------------------- ASSET ALLOCATION 5/31/04 [PIE CHART OF ASSET ALLOCATION] Other* 19.5% Korea 16.5% South Africa 12.3% Taiwan 12.0% Brazil 10.0% Mexico 7.4% India 6.8% Hong Kong 4.4% United Kingdom 3.6% Malaysia 3.4% Thailand 3.1%
[END CHART] *INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO AND MONEY MARKET INSTRUMENTS. PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. 12 D I S T R I B U T I O N S ==========================------------------------------------------------------ to SHAREHOLDERS (unaudited) USAA EMERGING MARKETS FUND The following federal tax information related to the Fund's fiscal year ended May 31, 2004, is provided for information purposes only and should not be used for reporting to federal or state revenue agencies. Federal tax information for the calendar year will be reported to you on Form 1099-DIV in January 2005. The Fund has elected under Section 853 of the Internal Revenue Code to pass through the credit for taxes paid in foreign countries. The gross income derived from foreign sources and foreign taxes paid during the fiscal year by the Fund is $2,540,000 and $253,000, respectively. 13 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D ========================-------------------------------------------------------- Public ACCOUNTING Firm THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA EMERGING MARKETS FUND: We have audited the accompanying statement of assets and liabilities of the USAA Emerging Markets Fund (a portfolio of USAA Investment Trust), including the portfolio of investments, as of May 31, 2004, and the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the periods presented through May 31, 2002, were audited by other auditors whose report dated July 5, 2002, expressed an unqualified opinion on those statements and financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2004, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of USAA Emerging Markets Fund as of May 31, 2004, the results of its operations for the year then ended, and the changes in its net assets and financial highlights for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. /S/ ERNST & YOUNG LLP San Antonio, Texas July 9, 2004 14 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- STOCKS (96.3%) AFRICA (0.5%) 23,060 BidBEE Ltd. (Industrial Conglomerates)* $ 132 51,000 Tongaat-Hulett Group Ltd. (Agricultural Products) 352 -------- 484 -------- BERMUDA (0.3%) 396,000 Texwinca Holdings Ltd. (Textiles) 315 -------- BRAZIL (10.0%) 12,760 Banco Bradesco S.A. (Preferred) (Diversified Banks) 539 15,500 Banco Itau S.A. ADR (Preferred) (Diversified Banks) 655 10,800 Brasil Telecom Participacoes S.A. ADR (Preferred) (Integrated Telecommunication Services) 311 13,800 Companhia Brasileira de Distribuicao Grupo Pao de Acucar GDR (Preferred) (Hypermarkets & Super Centers) 207 57,920,000 Companhia Energetica de Minas Gerais (CEMIG) (Preferred) (Electric Utilities) 798 14,452,900 Companhia Paranaense de Energia-Copel (Electric Utilities) 32 84,177,700 Companhia Paranaense de Energia-Copel (Preferred) (Electric Utilities) 252 5,200 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 264 57,300 Companhia de Bebidas das Americas ADR (Preferred) (Brewers) 1,086 14,000,000 Companhia de Saneamento Basico de Sao Paulo (SABESP) (Water Utilities) 539 8,400,000 Companhia de Tecidos Norte de Minas (Preferred) (Textiles) 551 13,500,000 Duratex S.A. (Preferred) (Building Products) 260 25,234 Embraer Empresa Brasileira de Aeronautica S.A. ADR (Preferred) (Aerospace & Defense) 643 67,126 Petroleo Brasileiro S.A. ADR (Integrated Oil & Gas) 1,752 22,400 Tele Celular Sul Participacoes S.A. ADR (Preferred) (Wireless Telecommunication Services)(a) 291 20,300 Telecomunicacoes Brasileiras S.A. ADR (Preferred) (Integrated Telecommunication Services) 537 32,600,000 Telecomunicacoes FIA (Preferred) (Integrated Telecommunication Services) 435 8,000,000 Telemar Norte Leste S.A. (Preferred) "A" (Integrated Telecommunication Services) 127 103,300,000 Telemig Celular S.A. (Preferred) (Wireless Telecommunication Services) 147
15 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- 9,900 Ultrapar Participacoes S.A. ADR (Preferred) (Oil & Gas Refining & Marketing & Transportation) $ 94 -------- 9,520 -------- CHILE (0.4%) 13,800 Banco Santander Chile S.A. ADR (Diversified Banks) 366 -------- CHINA (2.0%) 1,331,000 China Telecom Corp. Ltd. (Integrated Telecommunication Services) 418 1,806,000 Qingling Motors Co. Ltd. "H" (Automobile Manufacturers) 243 2,528,100 Shandong International Power Development Co. Ltd. "H" (Electric Utilities) 811 2,463,400 Sinopec Yizheng Chemical Fibre Co. Ltd. "H" (Specialty Chemicals) 452 -------- 1,924 -------- CROATIA (0.5%) 34,900 Pliva d.d. GDR (Pharmaceuticals) 515 -------- CZECH REPUBLIC (0.4%) 26,700 Cesky Telecom A.S. (Integrated Telecommunication Services) 335 -------- EGYPT (0.6%) 80,500 Commercial International Bank S.A.E. GDR (Diversified Banks) 291 34,200 Suez Cement Co. S.A.E. GDR (Construction Materials)* 309 -------- 600 -------- HONG KONG (4.4%) 35,000 Beijing Enterprises Holdings Ltd. (Packaged Foods & Meat) 39 843,600 China Mobile Ltd. (Wireless Telecommunication Services) 2,414 818,400 China Resources Enterprise Ltd. (Industrial Conglomerates) 1,013 371,900 Shanghai Industrial Holdings Ltd. (Industrial Conglomerates) 687 -------- 4,153 -------- HUNGARY (2.3%) 8,636 Gedeon Richter Rt. (Pharmaceuticals) 853 14,900 MOL Magyar Olaj-es Gazipari Rt. (Integrated Oil & Gas) 572 193,700 Magyar Tavkozlesi Rt. (Integrated Telecommunication Services) 754 -------- 2,179 --------
16 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- INDIA (6.8%) 19,800 Dr. Reddy's Laboratories Ltd. ADR (Pharmaceuticals) $ 367 30,100 Gail India Ltd. GDR (Oil & Gas Refining & Marketing & Transportation) 608 34,500 Hindalco Industries Ltd. GDR (Aluminum) 693 61,400 ICICI Bank Ltd. ADR (Diversified Banks) 790 39,700 ITC Ltd. GDR (Tobacco) 774 175,650 Mahanagar Telephone Nigam Ltd. ADR (Integrated Telecommunication Services)(a) 1,024 72,557 Reliance Industries Ltd. GDR (Diversified Chemicals) 1,549 10,100 Satyam Computer Services Ltd. ADR (IT Consulting & Other Services) 197 17,400 State Bank of India Ltd. GDR (Diversified Banks) 426 -------- 6,428 -------- INDONESIA (2.2%) 798,000 Astra Agro Lestari Tbk (Agricultural Products) 215 284,000 PT Gudang Garam Tbk (Tobacco) 442 7,956,000 PT Indofood Sukses Makmur Tbk (Packaged Foods & Meat) 600 320,300 PT Indonesian Satellite Corp. Tbk (Integrated Telecommunication Services) 137 890,400 PT Telekomunikasi Tbk "B" (Integrated Telecommunication Services) 711 -------- 2,105 -------- ISRAEL (1.3%) 368,900 Bank Hapoalim Ltd. (Diversified Banks) 948 130,100 Super-Sol Ltd. (Food Retail) 296 -------- 1,244 -------- KOREA (16.5%) 11,440 Cheil Jedang Corp. (Packaged Foods & Meat) 605 6,300 Hyundai Department Store Co. (Department Stores) 149 3,220 Hyundai Mobis (Auto Parts & Equipment) 131 17,050 Hyundai Motor Co. Ltd. (Automobile Manufacturers) 655 36,590 INI Steel Co. (Steel) 274 55,000 Industrial Bank of Korea (Consumer Finance) 355 93,600 KT Corp. ADR (Integrated Telecommunication Services) 1,633 72,753 Kangwon Land Inc. (Casinos & Gaming) 796 60,440 Kia Motors Corp. (Automobile Manufacturers) 517 37,900 Kookmin Bank (Diversified Banks) 1,318
17 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- 4,300 Kookmin Bank ADR (Diversified Banks)* $ 148 155,540 Korea Electric Power Corp. (Electric Utilities) 2,518 28,869 Korea Exchange Bank (Diversified Banks)* 146 10,220 LG Household & Health Care Ltd. (Household Products) 263 10,370 POSCO (Steel) 1,282 11,600 POSCO ADR (Steel) 369 4,300 SK Telecom Co. Ltd. (Wireless Telecommunication Services) 731 8,400 SK Telecom Co. Ltd. ADR (Wireless Telecommunication Services)(a) 175 65,600 Samsung Corp. (Trading Companies & Distributors) 825 19,450 Samsung Electro Mechanics Co. Ltd. (Communications Equipment) 610 2,752 Samsung Electronics Co. Ltd. (Semiconductors) 1,229 14,430 Samsung Fire & Marine Insurance Co. Ltd. (Multi-Line Insurance) 926 -------- 15,655 -------- MALAYSIA (3.4%) 571,300 Gamuda Berhad (Construction & Engineering) 819 176,800 Genting Berhad (Casinos & Gaming) 721 120,000 Kuala Lumpur Kepong Berhad (Agricultural Products) 201 116,400 Malaysia International Shipping Corp. Berhad (Marine) 365 124,400 Proton Holdings Berhad (Automobile Manufacturers) 257 653,000 Sime Darby Berhad (Multi-Sector Holdings) 902 -------- 3,265 -------- MEXICO (7.4%) 100,001 Cemex S.A. de C.V. (Construction Materials) 584 64,000 Coca Cola Femsa S.A. de C.V. ADR (Soft Drinks) 1,399 567,100 Controladora Comercial Mexicana S.A. de C.V. (UBC) "B" (Food Retail) 666 1,364,833 Desc S.A. de C.V. ADR "B" (Industrial Conglomerates)* 401 310,700 Grupo Continental S.A. (Soft Drinks) 485 478,600 Kimberly-Clark de Mexico S.A. de C.V. "A" (Household Products) 1,256 31,000 Organizacion Soriana S.A. de C.V. "B" (Food Distributors) 98 63,300 Telefonos de Mexico S.A. de C.V. ADR "L" (Integrated Telecommunication Services) 2,129 -------- 7,018 --------
18 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- PHILIPPINES (0.6%) 241,000 ABS-CBN Broadcasting Corp. PDR (Broadcasting & Cable TV)* $ 91 495,240 Bank of the Philippine Islands (Diversified Banks) 372 267,400 Manila Electric Co. "B" (Construction & Engineering)* 153 -------- 616 -------- POLAND (2.8%) 1,600 Bank Polska Kasa Opieki Grupa (Diversified Banks) 52 3,600 Bank Przemyslowo-Handlowy PBK S.A. (Diversified Banks) 401 72,100 KGHM Polska Miedz S.A. (Diversified Metals & Mining)* 509 96,600 Polski Koncern Naftowy Orlen S.A. (Integrated Oil & Gas) 723 77,000 Telekomunikacja Polska S.A. GDR (Integrated Telecommunication Services) 295 168,057 Telekomunikacja Polska S.A. (Integrated Telecommunication Services) 651 -------- 2,631 -------- RUSSIA (2.3%) 14,600 LUKoil Holdings ADR (Integrated Oil & Gas) 1,606 19,800 YUKOS ADR (Integrated Oil & Gas) 610 -------- 2,216 -------- SOUTH AFRICA (12.3%) 85,100 ABSA Group Ltd. (Diversified Banks) 615 365,000 Aveng Ltd. (Building Products) 442 135,882 Bidvest Group Ltd. (Industrial Conglomerates) 1,090 203,000 Illovo Sugar Ltd. (Packaged Foods & Meat) 237 42,000 Imperial Holdings Ltd. (Trucking) 452 1,361,407 Metro Cash & Carry Ltd. (Food Distributors)* 519 541,093 Nampak Ltd. (Paper Packaging) 1,161 248,536 Nedcor Ltd. (Diversified Banks) 2,389 121,900 SASOL Ltd. (Integrated Oil & Gas) 1,853 309,000 Sanlam Ltd. (Life & Health Insurance) 421 60,800 Sappi Ltd. (Paper Products) 850 244,000 Shoprite Holdings Ltd. (Food Retail) 345 565,234 Steinhoff International Holdings Ltd. (Home Furnishings) 713 43,000 Tiger Brands Ltd. (Packaged Foods & Meat) 595 -------- 11,682 -------- TAIWAN (12.0%) 462,949 Accton Technology Corp. (Communications Equipment) 297 470,375 Asustek Computer, Inc. (Computer Storage & Peripherals) 1,150 201,000 China Motor Corp., Ltd. (Automobile Manufacturers) 285
19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- 44,900 Chunghwa Telecom Co. Ltd. ADR (Integrated Telecommunication Services) $ 725 15,000 Compal Electronics Inc. GDR (Computer Hardware) 92 1,130,000 Compal Electronics, Inc. (Computer Hardware) 1,390 499,200 Delta Electronics, Inc. (Electronic Equipment Manufacturers) 689 323,264 Elan Microelectronics Corp. (Semiconductor Equipment) 258 726,000 First Financial Holding Co. Ltd. (Diversified Banks)* 549 355,647 Nan Ya Plastic Corp. (Diversified Chemicals) 479 430,000 Nien Hsing Textile Co. Ltd. (Textiles) 421 20,000 President Chain Store Corp. (Food Retail) 36 394,500 Quanta Computer, Inc. (Computer Hardware) 900 2,084,821 SinoPac Holdings Co. (Diversified Banks) 1,120 721,720 Taiwan Cellular Corp. (Wireless Telecommunication Services) 685 2,386,431 United Microelectronics (Semiconductors) 2,077 581,440 Yageo Corp. (Electrical Components & Equipment)* 305 -------- 11,458 -------- THAILAND (3.1%) 2,944,100 Charoen Pokphand Foods Public Co. Ltd. (Agricultural Products) 253 270,400 Delta Electronics Public Co. Ltd. (Electrical Components & Equipment) 162 13,000 Electricity Generating Public Co. Ltd. (Electric Utilities) 23 443,500 Kasikornbank plc (Diversified Banks)* 539 2,483,000 Krung Thai Bank Public Co. Ltd. (Regional Banks) 673 60,400 PTT Exploration & Production Public Co. Ltd. (Oil & Gas Exploration & Production) 381 578,000 Siam Commercial Bank Public Co. Ltd. (Diversified Banks) 652 194,600 Siam Makro Public Co. Ltd. (General Merchandise Stores) 230 -------- 2,913 -------- TURKEY (0.6%) 36,120,000 Hurriyet Gazetecilik ve Matbaacilik A.S. (Publishing)* 92 80,999,000 Tupras-Turkiye Petrol Rafinerileri A.S. (Oil & Gas Refining & Marketing & Transportation) 485 -------- 577 -------- UNITED KINGDOM (3.6%) 94,191 Anglo American plc (Precious Metals & Minerals) 1,975 815,100 Old Mutual plc (Multi-Line Insurance) 1,412 -------- 3,387 -------- Total stocks (cost: $84,925) 91,586 --------
20 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA EMERGING MARKETS FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - -------------------------------------------------------------------------------------- MONEY MARKET INSTRUMENTS (2.7%) MONEY MARKET FUNDS (2.5%) 117,799 AIM Short-Term Investment Co. Liquid Assets Portfolio, 1.01%(b,c) $ 118 157,769 Merrill Lynch Premier Institutional Fund, 0.99%(b,c) 158 2,098,082 SSgA Prime Money Market Fund, 0.91%(c) 2,098 -------- 2,374 -------- PRINCIPAL AMOUNT (000) - --------- REPURCHASE AGREEMENT (0.2%) $200 Morgan Stanley & Co., Inc., 1.01%, acquired on 5/28/2004 and due 6/1/2004, at $200 (collateralized by $210 of Fannie Mae Discount Notes(e), due 2/4/2005; market value $208)(b,d) 200 -------- Total money market instruments (cost: $2,574) 2,574 -------- TOTAL INVESTMENTS (COST: $87,499) $ 94,160 ========
21 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA EMERGING MARKETS FUND MAY 31, 2004 GENERAL NOTES - -------------------------------------------------------------------------------- Market values of securities are determined by procedures and practices discussed in Note 1 to the financial statements. The percentages shown represent the percentages of the investments to net assets and, in total, may not equal 100%. ADR - American depositary receipts are receipts issued by a U.S. bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. GDR - Global depositary receipts are receipts issued by a U.S. or foreign bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. SPECIFIC NOTES - -------------------------------------------------------------------------------- (a) The security or a portion thereof was out on loan as of May 31, 2004. (b) Investment was purchased with the cash collateral proceeds received from securities loaned. (c) Rate represents the money market fund annualized seven-day yield at May 31, 2004. (d) Collateral on repurchase agreements is received by the Fund upon entering into the repurchase agreement. The collateral is marked-to-market daily to ensure its market value is equal to or in excess of the repurchase agreement price plus accrued interest. (e) U.S. government agency issues. Securities issued by government-sponsored enterprises (GSEs) are supported only by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. government. * Non-income-producing security for the year ended May 31, 2004. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 22 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA EMERGING MARKETS FUND MAY 31, 2004 ASSETS Investments in securities, at market value (including securities on loan of $440) (identified cost of $87,499) $ 94,160 Cash 34 Cash denominated in foreign currencies (identified cost of $1,422) 1,442 Receivables: Capital shares sold 61 USAA Transfer Agency Company 1 Dividends and interest 399 Securities sold 245 -------- Total assets 96,342 -------- LIABILITIES Payables: Upon return of securities loaned 476 Securities purchased 498 Capital shares redeemed 69 Accrued management fees 81 Accrued transfer agent's fees 3 Other accrued expenses and payables 135 -------- Total liabilities 1,262 -------- Net assets applicable to capital shares outstanding $ 95,080 ======== NET ASSETS CONSIST OF: Paid-in capital $175,959 Accumulated undistributed net investment income 623 Accumulated net realized loss on investments (88,106) Net unrealized appreciation of investments 6,661 Net unrealized depreciation on foreign currency translations (57) -------- Net assets applicable to capital shares outstanding $ 95,080 ======== Capital shares outstanding, unlimited number of shares authorized, no par value 9,455 ======== Net asset value, redemption price, and offering price per share $ 10.06 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA EMERGING MARKETS FUND YEAR ENDED MAY 31, 2004 INVESTMENT INCOME Dividends (net of foreign taxes withheld of $253) $ 2,297 Interest 15 Securities lending 8 ------- Total income 2,320 ------- EXPENSES Management fees 816 Administrative and servicing fees 124 Transfer agent's fees 288 Custody and accounting fees 213 Postage 25 Shareholder reporting fees 17 Trustees' fees 6 Registration fees 46 Professional fees 44 Other 4 ------- Total expenses 1,583 Expenses paid indirectly (25) ------- Net expenses 1,558 ------- NET INVESTMENT INCOME 762 ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on: Investments 15,113 Foreign currency transactions (67) Change in net unrealized appreciation/depreciation of: Investments 5,516 Foreign currency translations (56) ------- Net realized and unrealized gain 20,506 ------- Increase in net assets resulting from operations $21,268 =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA EMERGING MARKETS FUND YEARS ENDED MAY 31,
2004 2003 ---------------------- FROM OPERATIONS Net investment income $ 762 $ 197 Net realized gain on investments 15,113 1,999 Net realized loss on foreign currency transactions (67) (113) Change in net unrealized appreciation/depreciation of: Investments 5,516 (6,168) Foreign currency translations (56) (12) ---------------------- Increase (decrease) in net assets resulting from operations 21,268 (4,097) ---------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 144,757 88,106 Cost of shares redeemed (125,739) (86,288) ---------------------- Increase in net assets from capital share transactions 19,018 1,818 ---------------------- Net increase (decrease) in net assets 40,286 (2,279) NET ASSETS Beginning of period 54,794 57,073 ---------------------- End of period $ 95,080 $ 54,794 ====================== Accumulated undistributed net investment income (loss): End of period $ 623 $ (6) ====================== CHANGE IN SHARES OUTSTANDING Shares sold 15,944 13,344 Shares redeemed (14,059) (12,973) ---------------------- Increase in shares outstanding 1,885 371 ====================== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA EMERGING MARKETS FUND MAY 31, 2004 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act of 1940, as amended, is a diversified, open-end management investment company organized as a Massachusetts business trust consisting of nine separate funds. The information presented in this annual report pertains only to the USAA Emerging Markets Fund (the Fund). The Fund's investment objective is capital appreciation. The Fund concentrates its investments in securities of companies in emerging market countries, which may have limited or developing capital markets. Such investments may involve greater risks than investments in developed markets, and political, social, or economic changes in these markets may cause the prices of such investments to be volatile. A. SECURITY VALUATION - The value of each security is determined (as of the close of trading on the New York Stock Exchange (NYSE) on each business day the exchange is open) as set forth below: 1. Portfolio securities, except as otherwise noted, traded primarily on a domestic securities exchange or the Nasdaq over-the-counter markets are valued at the last sales price or official closing price on the exchange or primary market on which they trade. Portfolio securities traded primarily on foreign securities exchanges or markets are valued at the last quoted sales price, or the most recently determined official closing price calculated according to local market convention, available at the time the Fund is valued. If no last sale or official closing price is reported or available, the average of the bid and asked prices is generally used. 2. Securities trading in various foreign markets may take place on days when the NYSE is closed. Further, when the NYSE is open, the foreign markets may be closed. Therefore, the calculation of the Fund's net asset value (NAV) may not take place at the same time the prices of certain foreign securities held by the Fund are determined. In most cases, events affecting the values of foreign securities that occur between the 26 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 time of their last quoted sales or official closing prices and the close of normal trading on the NYSE on a day the Fund's NAV is calculated will not be reflected in the value of the Fund's foreign securities. However, USAA Investment Management Company (the Manager), an affiliate of the Fund, and the Fund's subadviser, if applicable, will monitor for events that would materially affect the value of the Fund's foreign securities and, if necessary, the Manager will value the foreign securities in good faith, considering such available information that the Manager deems relevant, under valuation procedures approved by the Trust's Board of Trustees. In addition, the Fund may use information from an external vendor or other sources to adjust the foreign market closing prices of foreign equity securities to reflect what the Fund believes to be the fair value of the securities as of the close of the NYSE. Fair valuation of affected foreign equity securities may occur frequently based on an assessment that events that occur on a fairly regular basis (such as U.S. market movements) are significant. 3. Investments in open-end investment companies are valued at their net asset value at the end of each business day. 4. Debt securities purchased with maturities of 60 days or less are stated at amortized cost, which approximates market value. Repurchase agreements are valued at cost. 5. Securities for which market quotations are not readily available or are considered unreliable, or whose values have been materially affected by events occurring after the close of their primary markets but before the pricing of the Fund, are valued in good faith at fair value, using methods determined by the Manager, in consultation with the Fund's subadviser if applicable, under valuation procedures approved by the Trust's Board of Trustees. B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated 27 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 investment companies and to distribute substantially all of its income to its shareholders. Therefore, no federal income tax provision is required. C. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gain or loss from sales of investment securities is computed on the identified cost basis. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, certain dividends from foreign securities are recorded upon notification. Interest income is recorded on the accrual basis. Discounts and premiums on short-term securities are amortized on a straight-line basis over the life of the respective securities. D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements with commercial banks or recognized security dealers. These agreements are collateralized by obligations issued or guaranteed as to both principal and interest by the U.S. government, its agencies, or its instrumentalities. Government-sponsored enterprises (GSEs), such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), are supported only by the credit of the issuing U.S. government agency, and are neither issued nor guaranteed by the U.S. government. Obligations pledged as collateral are required to maintain a value equal to or in excess of the repurchase agreement price plus accrued interest and are held by the Fund, either through its regular custodian or through a special "tri-party" custodian that maintains separate accounts for both the Fund and its counterparty, until maturity of the repurchase agreement. The Fund's Manager monitors the creditworthiness of sellers with which the Fund may enter into repurchase agreements. E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the securities of foreign issuers and may be traded in foreign currency. Since the Fund's accounting records are maintained 28 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 in U.S. dollars, foreign currency amounts are translated into U.S. dollars on the following basis: 1. Purchases and sales of securities, income, and expenses at the exchange rate obtained from an independent pricing service on the respective dates of such transactions. 2. Market value of securities, other assets, and liabilities at the exchange rate obtained from an independent pricing service on a daily basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Separately, net realized foreign currency gains/losses may arise from sales of foreign currency, currency gains/losses realized between the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. These net realized foreign currency gains/ losses have been reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statement of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities other than investments in securities resulting from changes in the exchange rate. F. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that the Fund pays may be reimbursed and used to reduce the Fund's expenses. In addition, through other fee-offset arrangements with certain of the Fund's service providers, realized credits, if any, are used to reduce the Fund's expenses. For the year ended 29 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 May 31, 2004, these fee-offset arrangements reduced the Fund's expenses by $25,000. G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that contain a variety of representations and warranties that provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. H. USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINES OF CREDIT - -------------------------------------------------------------------------------- The Fund participates with other USAA funds in two joint, short-term, revolving, committed loan agreements totaling $500 million: $400 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager, and $100 million with Bank of America and State Street Bank and Trust Company (State Street), under which Bank of America and State Street have each committed $50 million. The purpose of the agreements is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability under its agreement with CAPCO, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate with no markup. Subject to availability under its agreement with Bank of America and State Street, the Fund may 30 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 borrow from Bank of America and State Street, at the federal funds rate plus a 0.50% markup, an amount which, when added to outstanding borrowings under the CAPCO agreement, does not exceed 25% of the Fund's total assets. The USAA funds that are party to the loan agreements are assessed facility fees in aggregate by Bank of America and State Street in an annual amount equal to 0.09% of the $100 million loan agreement, whether used or not, and by CAPCO based on the funds' assessed proportionate share of CAPCO's operating expenses related to obtaining and maintaining CAPCO's funding programs in total (in no event to exceed 0.09% annually of the $400 million loan agreement). The facility fees are allocated among the funds based on their respective average net assets for the period. For the year ended May 31, 2004, the Fund paid CAPCO facility fees of less than $500. The Fund had no borrowings under either of these agreements during the year ended May 31, 2004. (3) DISTRIBUTIONS - -------------------------------------------------------------------------------- The character of distributions made during the year from net investment income or net realized gains is determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. generally accepted accounting principles. Also, due to the timing of distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains were recorded by the Fund. During the current fiscal year, permanent differences between book-and tax-basis accounting for foreign currency gains and losses and foreign capital gains taxes resulted in reclassifications made to the statement of assets and liabilities to decrease accumulated undistributed net investment income and decrease accumulated net realized loss on investments by $133,000. This reclassification has no effect on net assets. 31 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 There were no distributions paid by the Fund during the years ended May 31, 2004, and 2003. As of May 31, 2004, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 697,000 Accumulated capital and other losses (88,050,000) Unrealized appreciation of investments 6,531,000 Unrealized depreciation on foreign currency translations (57,000)
The difference between book-basis and tax-basis appreciation of investments is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation difference is attributable to the tax deferral of losses on wash sales. Distributions of net investment income and realized gains from security transactions not offset by capital losses are made annually in the succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. For the year ended May 31, 2004, the Fund utilized capital loss carryovers of $14,555,000 to offset capital gains. At May 31, 2004, the Fund had a current post-October currency loss of $74,000, and capital loss carryovers of $87,976,000 for federal income tax purposes. The post-October loss will be recognized on the first day of the following fiscal year. If not offset by subsequent capital gains, the capital loss carryovers will expire between 2007 and 2010, as shown below. It is unlikely that the Trust's Board of Trustees will authorize a distribution of capital gains realized in the future until the capital loss carryovers have been used or expire.
CAPITAL LOSS CARRYOVER BALANCE EXPIRES - --------------------------------------------------------------------- $40,625,000 2007 17,388,000 2009 29,963,000 2010
32 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 (4) INVESTMENT TRANSACTIONS - -------------------------------------------------------------------------------- Cost of purchases and proceeds from sales of securities, excluding short-term securities, for the year ended May 31, 2004, were $78,167,000 and $59,067,000, respectively. The cost of securities at May 31, 2004, for federal income tax purposes, was $87,629,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2004, for federal income tax purposes, were $9,672,000 and $3,141,000, respectively, resulting in net unrealized appreciation of $6,531,000. (5) FOREIGN CURRENCY CONTRACTS - -------------------------------------------------------------------------------- A forward currency contract (currency contract) is a commitment to purchase or sell a foreign currency at a specified date, at a negotiated price. The Fund may enter into currency contracts in connection with the purchase or sale of a security denominated in a foreign currency. These contracts allow the Fund to "lock in" the U.S. dollar price of the security. The Fund may also enter into currency contracts to hedge against foreign currency exchange risks on the non-U.S. dollar denominated securities held in the Fund's portfolio. Currency contracts are valued on a daily basis using foreign currency exchange rates obtained from an independent pricing service. Risks of entering into currency contracts include the potential inability of the counterparty to meet the terms of the contract and the Fund's giving up the opportunity for potential profit. 33 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 At May 31, 2004, the terms of open foreign currency contracts were as follows (in thousands):
FOREIGN CURRENCY CONTRACTS TO BUY - --------------------------------------------------------------------------------------------------- U.S. DOLLAR UNREALIZED EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION DATE RECEIVE 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION) - --------------------------------------------------------------------------------------------------- 6/01/2004 210 $32 $32 $- South African Rand - ---------------------------------------------------------------------------------------------------
FOREIGN CURRENCY CONTRACTS TO SELL - --------------------------------------------------------------------------------------------------- U.S. DOLLAR UNREALIZED EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION DATE DELIVER 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION) - --------------------------------------------------------------------------------------------------- 6/01/2004 1,730 $66 $66 $- Czech Koruna 6/01/2004 281 25 25 - Mexican Peso - --------------------------------------------------------------------------------------------------- $91 $91 - - ---------------------------------------------------------------------------------------------------
(6) LENDING OF PORTFOLIO SECURITIES - -------------------------------------------------------------------------------- The Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with cash collateral in an amount at least equal, at all times, to the fair value of the securities loaned. Cash collateral is invested in high-quality short-term investments. The Fund retains a portion of income from the investment of cash received as collateral. Risks to the Fund in securities-lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. As of May 31, 2004, the Fund loaned securities having a fair market 34 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 value of approximately $440,000 and received cash collateral of $476,000 for the loans. The cash collateral was invested in money market instruments, as noted in the Fund's portfolio of investments. (7) TRANSACTIONS WITH MANAGER - -------------------------------------------------------------------------------- A. MANAGEMENT FEES - The Manager carries out the Fund's investment policies and provides portfolio management oversight of the Fund's assets managed by a subadviser. The investment management fee for the Fund is composed of a base fee and a performance adjustment that increases or decreases the base fee depending upon the performance of the Fund relative to the performance of the Lipper Emerging Markets Funds Index, which tracks the total return performance of the 30 largest funds in the Lipper Emerging Markets Funds category. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 1.00% of the Fund's average net assets. The performance adjustment is calculated monthly by comparing the Fund's performance to that of the Lipper index over the performance period. The performance period for the Fund commenced on August 1, 2001, and will consist of the current month plus the preceding months through that date until a period of 36 months is included in the performance period. Thereafter, the performance period will consist of the current month plus the previous 35 months. The annual performance adjustment rate is multiplied by the average net assets of the Fund over the entire performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the month and the denominator of which is 365 (366 in leap years). The resulting amount is then added to (in the case of overperformance) or subtracted from 35 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 (in the case of underperformance) the base fee, as referenced in the following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS - --------------------------------------------------------------------------------- +/-1.00% to 4.00% +/-0.04% +/-4.01% to 7.00% +/-0.05% +/-7.01% and greater +/-0.06%
(1) Based on the difference between average annual performance of the Fund and its relevant index, rounded to the nearest 0.01%. For the year ended May 31, 2004, the Fund incurred total management fees, paid or payable to the Manager, of $816,000, which is net of a performance adjustment of $(9,000) that decreased the base management fee of 1.00% by 0.01%. B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an investment subadvisory agreement with The Boston Company Asset Management, LLC (The Boston Company), under which The Boston Company directs the investment and reinvestment of the Fund's assets (as allocated from time to time by the Manager). The Manager (not the Fund) pays The Boston Company a subadvisory fee. C. ADMINISTRATIVE AND SERVICING FEES - The Manager provides certain administrative and shareholder servicing functions for the Fund. For such services, the Manager receives a fee accrued daily and paid monthly at an annualized rate of 0.15% of the Fund's average net assets. For the year ended May 31, 2004, the Fund incurred administrative and servicing fees, paid or payable to the Manager, of $124,000. D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit the annual expenses of the Fund to 1.80% of the Fund's 36 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 average annual net assets, effective March 1, 2004, excluding the effect of any expenses paid indirectly, and will reimburse the Fund for all expenses in excess of that amount. This agreement may be modified or terminated at any time. Prior to March 1, 2004, the expense limitation was 2.10% of the Fund's annual average net assets. There were no reimbursable expenses for the year ended May 31, 2004. E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services, an affiliate of the Manager, provides transfer agent services to the Fund based on an annual charge of $23 per shareholder account plus out-of-pocket expenses. For the year ended May 31, 2004, the Fund incurred transfer agent's fees, paid or payable to USAA Transfer Agency Company, of $288,000. Additionally, the Fund recorded a receivable from USAA Transfer Agency Company of $1,000 at May 31, 2004. F. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and distribution of the Fund's shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. (8) TRANSACTIONS WITH AFFILIATES - -------------------------------------------------------------------------------- Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated trustees or Fund officers received any compensation from the Fund. 37 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA EMERGING MARKETS FUND MAY 31, 2004 (9) FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Per share operating performance for a share outstanding throughout each period is as follows:
YEAR ENDED MAY 31, ----------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------- Net asset value at beginning of period $ 7.24 $ 7.93 $ 7.16 $ 8.98 $ 8.49 ----------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income (loss) .07 .03(a) (.02)(a) .04(a) .02 Net realized and unrealized gain (loss) 2.75 (.72)(a) .81(a) (1.85)(a) .54 ----------------------------------------------------------------------------- Total from investment operations 2.82 (.69)(a) .79(a) (1.81)(a) .56 Less distributions: From net investment income - - (.02) (.01) (.07) ----------------------------------------------------------------------------- Net asset value at end of period $ 10.06 $ 7.24 $ 7.93 $ 7.16 $ 8.98 ============================================================================= Total return (%)* 38.95 (8.70) 11.11 (20.19) 6.55 Net assets at end of period (000) $95,080 $54,794 $57,073 $51,709 $234,953 Ratio of expenses to average net assets (%)** 1.92(b) 2.33(b) 2.51(b) 1.39(b) 1.28 Ratio of net investment income (loss) to average net assets (%)** .92 .42 (.33) .47 .14 Portfolio turnover (%) 75.67 140.89 257.45 196.75 147.24 * Assumes reinvestment of all net investment income distributions during the period. Calculated using net assets adjusted for last day trades and could differ from the Lipper reported return. ** For the year ended May 31, 2004, average net assets were $82,617,000. (a) Calculated using average shares. (b) Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios as follows: (.03%) - (.01%) (.01%) N/A
38 D I R E C T O R S ' A N D O F F I C E R S ' ====================------------------------------------------------------------ INFORMATION DIRECTORS* AND OFFICERS OF THE COMPANY - -------------------------------------------------------------------------------- The Board of Directors of the Company consists of seven Directors. These Directors and the Company's Officers supervise the business affairs of the USAA family of funds. The Board of Directors is responsible for the general oversight of the funds' business and for assuring that the funds are managed in the best interests of each fund's respective shareholders. The Board of Directors periodically reviews the funds' investment performance as well as the quality of other services provided to the funds and their shareholders by each of the fund's service providers, including USAA Investment Management Company (IMCO) and its affiliates. The term of office for each Director shall be fifteen (15) years or until the Director reaches age 70. All members of the Board of Directors shall be presented to shareholders for election or reelection, as the case may be, at least once every five years. Vacancies on the Board of Directors can be filled by the action of a majority of the Directors, provided that at least two-thirds of the Directors have been elected by the shareholders. Set forth below are the Directors and Officers of the Company, their respective offices and principal occupations during the last five years, length of time served, and information relating to any other directorships held. Each serves on the Board of Directors of the USAA family of funds consisting of four registered investment companies offering 38 individual funds as of May 31, 2004. Unless otherwise indicated, the business address of each is 9800 Fredericksburg Road, San Antonio, TX 78288. If you would like more information about the funds' Directors, you may call (800) 531-8181 to request a free copy of the funds' statement of additional information (SAI). * FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF DIRECTORS AND BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES THAT COMPRISE THE USAA FAMILY OF FUNDS WILL BE IDENTIFIED AS THE BOARD OF DIRECTORS. 39 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION INTERESTED DIRECTORS(1) - -------------------------------------------------------------------------------- ROBERT G. DAVIS (2) Director and Chairman of the Board of Directors Born: November 1946 Year of Election or Appointment: 1996 Chairman, Chief Executive Officer, and President of United Services Automobile Association (USAA) (10/02-present); President and Chief Executive Officer of USAA (4/00-10/02); President and Chief Operating Officer of USAA (6/99-3/00); Director of USAA (2/99-present); Deputy Chief Executive Officer for Capital Management of USAA (6/98-5/99); President, Chief Executive Officer, Director, and Chairman of the Board of Directors of USAA Capital Corporation (CAPCO) and several of its subsidiaries and affiliates (1/97-present); and President, Chief Executive Officer, Director, and Chairman of the Board of Directors of USAA Financial Planning Services (FPS) (1/97-7/03). Mr. Davis serves as a Director/Trustee and Chairman of the Boards of Directors/Trustees of the USAA family of funds. He also serves as a Director and Chairman of the Boards of Directors of USAA Investment Management Company (IMCO), USAA Life Insurance Company, USAA Federal Savings Bank, USAA Real Estate Company (RealCo), and USAA Financial Advisors, Inc. (FAI). CHRISTOPHER W. CLAUS (2,4) Director, President, and Vice Chairman of the Board of Directors Born: December 1960 Year of Election or Appointment: 2001 President and Chief Executive Officer, Director, and Vice Chairman of the Board of Directors, IMCO (2/01-present). Senior Vice President of Investment Sales and Service, IMCO (7/00-2/01); Vice President, Investment Sales and Service, IMCO (12/94-7/00). Mr. Claus serves as President, Director/Trustee, and Vice Chairman of the Boards of Directors/Trustees of the USAA family of funds. He also serves as President, Director, and Chairman of the Board of Directors of USAA Shareholder Account Services. He also holds the Officer position of Senior Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. 40 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION NON-INTERESTED (INDEPENDENT) DIRECTORS - -------------------------------------------------------------------------------- BARBARA B. DREEBEN (3,4,5,6) Director Born: June 1945 Year of Election or Appointment: 1994 President, Postal Addvantage (7/92-present), a postal mail list management service. Mrs. Dreeben serves as Director/Trustee of the USAA family of funds. Mrs. Dreeben holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. ROBERT L. MASON, PH.D. (3,4,5,6) Director Born: July 1946 Year of Election or Appointment: 1997 Institute Analyst, Southwest Research Institute (3/02-present); Staff Analyst, Southwest Research Institute (9/98-3/02), which focuses in the fields of technological research. Dr. Mason serves as a Director/Trustee of the USAA family of funds. Dr. Mason holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. MICHAEL F. REIMHERR (3,4,5,6) Director Born: August 1945 Year of Election or Appointment: 2000 President of Reimherr Business Consulting (5/95-present), an organization that performs business valuations of large companies to include the development of annual business plans, budgets, and internal financial reporting. Mr. Reimherr serves as a Director/Trustee of the USAA family of funds. Mr. Reimherr holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. 41 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION LAURA T. STARKS, PH.D. (3,4,5,6) Director Born: February 1950 Year of Election or Appointment: 2000 Charles E. and Sarah M. Seay Regents Chair Professor of Finance, University of Texas at Austin (9/96-present). Dr. Starks serves as a Director/Trustee of the USAA family of funds. Dr. Starks holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. RICHARD A. ZUCKER (2,3,4,5,6) Director Born: July 1943 Year of Election or Appointment: 1992 Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker serves as a Director/Trustee of the USAA family of funds. Mr. Zucker holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. (1) INDICATES THOSE DIRECTORS WHO ARE EMPLOYEES OF USAA INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940. (2) MEMBER OF EXECUTIVE COMMITTEE (3) MEMBER OF AUDIT COMMITTEE (4) MEMBER OF PRICING AND INVESTMENT COMMITTEE (5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE (6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE USAA FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430. 42 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION INTERESTED OFFICERS(1) - -------------------------------------------------------------------------------- CLIFFORD A. GLADSON Vice President Born: November 1950 Year of Appointment: 2002 Senior Vice President, Fixed Income Investments, IMCO (9/02-present); Vice President, Fixed Income Investments, IMCO (5/02-9/02); Vice President, Mutual Fund Portfolios, IMCO (12/99-5/02); Assistant Vice President, Fixed Income Investments, IMCO (11/94-12/99). Mr. Gladson also holds the Officer position of Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. STUART WESTER Vice President Born: June 1947 Year of Appointment: 2002 Vice President, Equity Investments, IMCO (1/99-present); Vice President, Investment Strategy and Analysis, CAPCO (6/96-1/99). Mr. Wester also holds the Officer position of Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. MARK S. HOWARD Secretary Born: October 1963 Year of Appointment: 2002 Senior Vice President, Life/IMCO/FPS General Counsel, USAA (10/03-present); Senior Vice President, Securities Counsel, USAA (12/02-10/03); Senior Vice President, Securities Counsel & Compliance, IMCO (1/02-12/02); Vice President, Securities Counsel & Compliance, IMCO (7/00-1/02); and Assistant Vice President, Securities Counsel, USAA (2/98-7/00). Mr. Howard also holds the Officer positions of Senior Vice President, Secretary, and Counsel for USAA Life Insurance Company, IMCO, FAI, FPS, and USAA Shareholder Account Services; and Secretary for USAA Life Investment Trust, a registered investment company offering five individual funds. DAVID M. HOLMES Treasurer Born: June 1960 Year of Appointment: 2001 Senior Vice President, Life/IMCO/FPS Senior Financial Officer, USAA (12/02-present); Senior Vice President, Senior Financial Officer, 43 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION IMCO (6/01-12/02); Vice President, Senior Financial Officer, RealCo (12/97-5/01). Mr. Holmes also holds the Officer positions of Senior Vice President, Senior Financial Officer of USAA Life Insurance Company, IMCO, USAA Shareholder Account Services, FAI, and FPS; and Treasurer of USAA Life Investment Trust, a registered investment company offering five individual funds. EILEEN M. SMILEY Assistant Secretary Born: November 1959 Year of Appointment: 2003 Vice President, Securities Counsel, USAA (2/04-present); Assistant Vice President, Securities Counsel, USAA (1/03-2/04); Attorney, Morrison & Foerster, LLP (1/99-1/03). Ms. Smiley also holds the Officer position of Vice President and Assistant Secretary of IMCO, FAI, and FPS; and Assistant Secretary of USAA Life Investment Trust, a registered investment company offering five individual funds. ROBERTO GALINDO, JR. Assistant Treasurer Born: November 1960 Year of Appointment: 2000 Assistant Vice President, Portfolio Accounting/Financial Administration, USAA (12/02-present); Assistant Vice President, Mutual Fund Analysis & Support, IMCO (10/01-12/02); Executive Director, Mutual Fund Analysis & Support, IMCO (6/00-10/01); Director, Mutual Fund Analysis, IMCO (9/99-6/00); Vice President, Portfolio Administration, Founders Asset Management LLC (7/98-8/99). Mr. Galindo also holds the Officer position of Assistant Treasurer of USAA Life Investment Trust, a registered investment company offering five individual funds. (1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940. 44 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD Christopher W. Claus, VICE CHAIRMAN OF THE BOARD Barbara B. Dreeben Robert L. Mason, Ph.D. Michael F. Reimherr Laura T. Starks, Ph.D. Richard A. Zucker ADMINISTRATOR, USAA Investment Management Company INVESTMENT ADVISER, P.O. Box 659453 UNDERWRITER, San Antonio, Texas 78265-9825 AND DISTRIBUTOR TRANSFER AGENT USAA Shareholder Account Services 9800 Fredericksburg Road San Antonio, Texas 78288 CUSTODIAN State Street Bank and Trust Company P.O. Box 1713 Boston, Massachusetts 02105 INDEPENDENT Ernst & Young LLP REGISTERED PUBLIC 100 West Houston St., Suite 1900 ACCOUNTING FIRM San Antonio, Texas 78205 TELEPHONE Call toll free - Central time ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m. Saturday, 8:30 a.m. to 5 p.m. Sunday, 10:30 a.m. to 7 p.m. FOR ADDITIONAL 1-800-531-8181, in San Antonio 456-7200 INFORMATION ABOUT For account servicing, exchanges, MUTUAL FUNDS or redemptions 1-800-531-8448, in San Antonio 456-7202 RECORDED MUTUAL 24-hour service (from any phone) FUND PRICE QUOTES 1-800-531-8066, in San Antonio 498-8066 MUTUAL FUND (from touch-tone phones only) USAA TOUCHLINE For account balance, last transaction, fund prices, or to exchange or redeem fund shares 1-800-531-8777, in San Antonio 498-8777 INTERNET ACCESS USAA.COM THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL DELIVERY WITHIN 30 DAYS OF YOUR REQUEST. COPIES OF THE FUND'S PROXY VOTING POLICIES AND PROCEDURES ARE AVAILABLE WITHOUT CHARGE (I) BY CALLING 1-800-531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. [LOGO OF RECYCLED PAPER] Recycled Paper - -------------------------------------------------------------------------------- [LOGO OF USAA] 9800 Fredericksburg Road ------------- USAA(R) San Antonio, Texas 78288 PRSRT STD U.S. Postage P A I D USAA ------------- Receive this document and others electronically. Sign up at USAA.COM. - -------------------------------------------------------------------------------- [LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R) USAA ---------------------------------- INSURANCE o MEMBER SERVICES 25558-0704 (C)2004, USAA. All rights reserved. ITEM 2. CODE OF ETHICS. On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code of Ethics (Sarbanes Code) applicable solely to its senior financial officers, including its principal executive officer (President), as defined under the Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to this Form N-CSR. No amendments have been made to the Sarbanes Code since it was adopted, and no waivers (explicit or implicit) from a provision of the Sarbanes Code have been granted. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial expert for USAA Investment Trust. Dr. Starks has served as a professor of Finance at the University of Texas at Austin since 1987, and has served as the Chair Professor of Finance since 1996. Dr. Starks also has served as a consultant to numerous clients, including accounting firms, on a range of finance, accounting and auditing issues. Dr. Starks is an independent director who serves as a member of the Audit Committee, Pricing and Investment Committee and the Corporate Governance Committee of the Board of Trustees of USAA Investment Trust. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 9 funds. The aggregate fees billed by the Registrant's independent auditor, Ernst & Young LLP, for professional services rendered for the audit of the Registrant's annual financial statements and services provided in connection with statutory and regulatory filings by the Registrant for fiscal years ended May 31, 2004 and 2003 were $145,300 and $140,400 respectively. (b) AUDIT RELATED FEE. No such fees were billed by Ernst & Young LLP for 2004 or 2003. (c) TAX FEES. The aggregate fees paid or accrued by the Registrant for professional services rendered by Ernst & Young LLP for the review of the Registrant's federal, state and city income tax returns and excise tax calculations for fiscal years ended May 31, 2004 and 2003 were $39,400 and $38,400, respectively. (d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal years ended May 31, 2004 or 2003. (e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to be performed for the Registrant by Ernst & Young LLP must be pre-approved by the Audit Committee. The Audit Committee Charter also permits the Chair of the Audit Committee to pre-approve any permissible non-audit service that must be commenced prior to a scheduled meeting of the Audit Committee. All non-audit services were pre-approved by the Audit Committee or its Chair, consistent with the Audit Committee's preapproval procedures. (2) Not applicable. (f) Not applicable. (g) The aggregate non-audit fees billed by Ernst & Young LLP for services rendered to the Registrant and the Registrant's investment adviser, IMCO, for 2004 and 2003 were $55,200 and $75,400, respectively. (h) Ernst & Young LLP provided non-audit services to IMCO in 2004 and 2003 that were not required to be pre-approved by the Registrant's Audit Committee because the services were not directly related to the operations of the Registrant's funds. The Board of Directors/Trustees will consider Ernst & Young LLP's independence and will consider whether the provision of these non-audit services to IMCO is compatible with maintaining Ernst & Young LLP's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not Applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Filed as part of the report to shareholders. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not Applicable. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not Applicable. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Corporate Governance Committee selects and nominates candidates for membership on the Board as independent directors. Currently, there is no procedure for shareholders to recommend candidates to serve on the Board. ITEM 10. CONTROLS AND PROCEDURES The chief executive officer and chief financial officer of USAA Investment Trust (Trust) have concluded that the Trust's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Trust's internal controls or in other factors that could significantly affect the Trust's internal controls subsequent to the date of their evaluation. ITEM 11. EXHIBITS. (a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly as set forth below: CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS USAA MUTUAL FUND, INC. USAA TAX-EXEMPT FUND, INC. USAA INVESTMENT TRUST USAA STATE TAX-FREE TRUST USAA LIFE INVESTMENT TRUST I. PURPOSE OF THE CODE OF ETHICS USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively, the Funds, and each a Company) have adopted this code of ethics (the Code) to comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and implementing regulations of the Securities and Exchange Commission (SEC). The Code applies to each Company's Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer (each a Covered Officer), as detailed in Appendix A. The purpose of the Code is to promote: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between the Covered Officers' personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents that each Company files with, or submits to, the SEC and in other public communications made by each Company; o compliance with applicable laws and governmental rules and regulations; o prompt internal reporting of violations of the Code to the Chief Legal Officer of each Company, the President of each Company (if the violation concerns the Treasurer) and the Chairman of the Board of Directors/Trustees of each Company; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to actual and apparent conflicts of interest. II. CONFLICTS OF INTEREST A. DEFINITION OF A CONFLICT OF INTEREST. A conflict of interest exists when a Covered Officer's private interest influences, or reasonably appears to influence, the Covered Officer's judgment or ability to act in the best interests of the Funds and their shareholders. For example, a conflict of interest could arise if a Covered Officer, or an immediate family member, receives personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of relationships between Covered Officers and the Funds and are already subject to conflict of interest provisions in the Investment Company Act of 1940 (the 1940 Act) and the Investment Advisers Act of 1940 (the Advisers Act). For example, Covered Officers may not individually engage in certain transactions with the Funds because of their status as "affiliated persons" of the Funds. The USAA Funds' and USAA Investment Management Company's (IMCO) compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts could arise from, or as a result of, the contractual relationships between the Funds and IMCO of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Funds or for IMCO, or for both), be involved in establishing policies and implementing decisions that will have different effects on IMCO and the Funds. The participation of Covered Officers in such activities is inherent in the contractual relationship between the Funds and IMCO and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in compliance with the provisions of the 1940 Act and the Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by each Company's Board of Directors/Trustees (each a Board, and collectively the Boards) that the Covered Officers also may be officers or employees of one or more other investment companies covered by this joint USAA Funds' Code. B. GENERAL RULE. Covered Officers Should Avoid Actual and Apparent Conflicts of Interest. Conflicts of interest, other than the conflicts described in the two preceding paragraphs, are covered by the Code. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds and their shareholders. Each Covered Officer must not engage in conduct that constitutes an actual conflict of interest between the Covered Officer's personal interest and the interests of the Funds and their shareholders. Examples of actual conflicts of interest are listed below but are not exclusive. Each Covered Officer must not: o use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds and their shareholders; o cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds and their shareholders. o accept gifts, gratuities, entertainment or any other benefit from any person or entity that does business or is seeking to do business with the Funds during contract negotiations. o accept gifts, gratuities, entertainment or any other benefit with a market value over $100 per person, per year, from or on behalf of any person or entity that does, or seeks to do, business with or on behalf of the Funds. o EXCEPTION. Business-related entertainment such as meals, and tickets to sporting or theatrical events, which are infrequent and not lavish are excepted from this prohibition. Such entertainment must be appropriate as to time and place, reasonable and customary in nature, modest in cost and value, incidental to the business, and not so frequent as to raise any question of impropriety (Customary Business Entertainment). Certain situations that could present the appearance of a conflict of interest should be discussed with, and approved by, or reported to, an appropriate person. Examples of these include: o service as a director on the board or an officer of any public or private company, other than a USAA company or a Company, must be approved by the USAA Funds' and IMCO's Code of Ethics Committee and reported to each affected Company. o the receipt of any non-nominal (i.e., valued over $25) gifts from any person or entity with which a Company has current or prospective business dealings must be reported to the Chief Legal Officer. For purposes of this Code, the individual holding the title of Secretary of a Company shall be considered the Chief Legal Officer of a Company. o the receipt of any business-related entertainment from any person or entity with which the Funds have current or prospective business dealings must be approved in advance by the Chief Legal Officer unless such entertainment qualifies as Customary Business Entertainment. o any ownership interest in, or any consulting or employment relationship with, any of the Company's service providers, other than IMCO or any other USAA company, must be approved by the Chairman of the Board of the Directors/Trustees and reported to each affected Board. o any material direct or indirect financial interest in commissions, transaction charges or spreads paid by the Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership should be approved by the Chairman of the Board of Directors/Trustees and reported to each affected Board. III. DISCLOSURE AND COMPLIANCE REQUIREMENTS o Each Covered Officer should familiarize himself with the disclosure requirements applicable to the Funds, and the procedures and policies implemented to promote full, fair, accurate, timely and understandable disclosure by each Company. o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' Directors/Trustees and auditors, and to government regulators and self-regulatory organizations. o Each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and IMCO with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents filed by a Company with, or submitted to, the SEC, and in other public communications made by the Funds. o Each Covered Officer is responsible for promoting compliance with the standards and restrictions imposed by applicable laws, rules and regulations, and promoting compliance with the USAA Funds' and IMCO's operating policies and procedures. o A Covered Officer should not retaliate against any person who reports a potential violation of this Code in good faith. o A Covered Officer should notify the Chief Legal Officer promptly if he knows of any violation of the Code. Failure to do so itself is a violation of this Code. IV. REPORTING AND ACCOUNTABILITY A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each Company is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret the Code in any particular situation. The Chief Legal Officer should consult, if appropriate, the USAA Funds' outside counsel or counsel for the Independent Directors/Trustees. However, any approvals or waivers sought by a Covered Officer will be reported initially to the Chairman of the Board of Directors/Trustees and will be considered by the Board of Directors/Trustees. B. REQUIRED REPORTS o EACH COVERED OFFICER MUST: o Upon adoption of the Code, affirm in writing to the Boards that he has received, read and understands the Code. o Annually thereafter affirm to the Chief Legal Officer that he has complied with the requirements of the Code. o THE CHIEF LEGAL OFFICER MUST: o report to the Board about any matter or situation submitted by a Covered Officer for interpretation under the Code, and the advice given by the Chief Legal Officer; o report annually to the Board and the Corporate Governance Committee describing any issues that arose under the Code, or informing the Board and Corporate Governance Committee that no reportable issues occurred during the year. C. INVESTIGATION PROCEDURES The Funds will follow these procedures in investigating and enforcing this Code: o INITIAL COMPLAINT. All complaints or other inquiries concerning potential violations of the Code must be reported to the Chief Legal Officer. The Chief Legal Officer shall be responsible for documenting any complaint. The Chief Legal Officer also will report immediately to the President of the Company (if the complaint involves the Treasurer), the Chairman of the Board (or for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA if the complaint involves the Chairman of the LIT Board) and the Chairperson of the Audit Committee any material potential violations that could have a material effect on the Funds' financial condition or reputation. For all other complaints, the Chief Legal Officer will report quarterly to the Board. o INVESTIGATIONS. The Chief Legal Officer will take all appropriate action to investigate any potential violation unless the Chairman of the Board or the Chairperson of the Audit Committee direct another person to undertake such investigation. The Chief Legal Officer may utilize USAA's Office of Ethics to do a unified investigation under this Code and USAA's Code of Conduct. The Chairman of the Board, or the Board as a whole, may direct the Company's outside counsel or the counsel to the Independent Directors/Trustees (if any) to participate in any investigation under this Code. o STATUS REPORTS. The Chief Legal Officer will provide monthly status reports to the Board about any alleged violation of the Code that could have a material effect on the Funds' financial condition or reputation, and quarterly updates regarding all other alleged violations of the Code. o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal Officer, or other investigating person, believes that a violation of the Code has occurred, he will report immediately to the Chairman of the Board (and for the USAA LIT the Chairman/CEO of USAA if the violation involves the Chairman of the LIT Board) the nature of the violation, and his recommendation regarding the materiality of the violation. If, in the opinion of the investigating person, the violation could materially affect the Funds' financial condition or reputation, the Chief Legal Officer also will notify the Chairperson of the Audit Committee of each Company. The Chief Legal Officer will inform, and make a recommendation to, the Board, which will consider what further action is appropriate. Appropriate action could include: (1) review of, and modifications to, the Code or other applicable policies or procedures; (2) notifications to appropriate personnel of IMCO or USAA; (3) dismissal of the Covered Officer; and/or (4) other disciplinary actions including reprimands or fines. o The Boards of Directors/Trustees understand that Covered Officers also are subject to USAA's Code of Business Conduct. If a violation of this Code also violates USAA's Code of Business Conduct, these procedures do not limit or restrict USAA's ability to discipline such Covered Officer under USAA's Code of Business Conduct. In that event, the Chairman of the Board of Directors/Trustees will report to the Boards the action taken by USAA with respect to a Covered Officer. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Act and the implementing regulations adopted by the SEC applicable to registered investment companies. If other policies and procedures of a Company, IMCO, or other service providers govern or purport to govern the behavior or activities of Covered Officers, they are superseded by this Code to the extent that they overlap, conflict with, or are more lenient than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance policies and procedures (including its Insider Trading Policy) are separate requirements applying to Covered Officers and other IMCO employees, and are not part of this Code. Also, USAA's Code of Conduct imposes separate requirements on Covered Officers and all employees of USAA, and also is not part of this Code. VI. AMENDMENTS Any amendment to this Code, other than amendments to Appendix A, must be approved or ratified by majority vote of the Board of Directors/Trustees. VII. CONFIDENTIALITY AND DOCUMENT RETENTION The Chief Legal Officer shall retain material investigation documents and reports required to be prepared under the Code for six years from the date of the resolution of any such complaint. All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board of Directors/Trustees and counsel for the Independent Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and other personnel of USAA as determined by the affected Company's Chief Legal Officer or the Chairman of the Board of Directors/Trustees. Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June 25, 2003. Approved and adopted by the Board of Trustees of USAA Life Investment Trust: August 20, 2003. APPENDIX A COVERED OFFICERS TITLE COMPANY PRESIDENT USAA Mutual Fund, Inc. USAA Tax-Exempt Fund, Inc. USAA Investment Trust USAA State Tax-Free Trust USAA Life Investment Trust TREASURER USAA Mutual Fund, Inc. USAA Tax-Exempt Fund, Inc. USAA Investment Trust USAA State Tax-Free Trust USAA Life Investment Trust (a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. (a)(3). Not Applicable. (b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit 99.906CERT. SIGNATURES 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: USAA INVESTMENT TRUST By:* /s/ EILEEN M. SMILEY ----------------------------------------------------------- Signature and Title: Eileen M. Smiley, Assistant Secretary Date: 07-25-04 ------------------------------ 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/ CHRISTOPHER W. CLAUS ---------------------------------------------------- Signature and Title: Christopher W. Claus/President Date: 07-28-04 ------------------------------ By:* /s/ DAVID HOLMES -------------------------------------------- Signature and Title: David Holmes/Treasurer Date: 07-28-04 ------------------------------ *Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 exh99cert053104it.txt USAA INVESTMENT TRUST-N-CSR CERTIFICATION 5/31/04 ITEM 11(a)(2). EXHIBITS. CERTIFICATIONS I, CHRISTOPHER W. CLAUS, certify that: -------------------- 1. I have reviewed this report on Form N-CSR for the fiscal period ending May 31, 2004 for the Funds of USAA INVESTMENT TRUST; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 07-28-04 /S/ CHRISTOPHER W. CLAUS ------------------------ Christopher W. Claus President I, DAVID HOLMES, certify that: ------------ 1. I have reviewed this report on Form N-CSR for the fiscal period ending MaY 31, 2004 for the Funds of USAA INVESTMENT TRUST; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based such evaluation; and (d) disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 07-28-04 /S/ DAVID HOLMES -------------------- David Holmes Treasurer EX-99.906 CERT 3 exh99906cert053104it.txt USAA INVESTMENT TRUST-NCSR 906 CERTIFICATION 5/31/04 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Name of Issuer: USAA INVESTMENT TRUST In connection with the Annual Report on Form N-CSR (Report) of the above-named issuer for the Funds for the fiscal period ended May 31, 2004, the undersigned hereby certifies, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: 07-28-04 /S/ CHRISTOPHER W. CLAUS -------- ------------------------ Christopher W. Claus President SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Name of Issuer: USAA INVESTMENT TRUST In connection with the Annual Report on Form N-CSR (Report) of the above-named issuer for the Funds for the fiscal period ended May 31, 2004, the undersigned hereby certifies, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: 07-28-04 /S/ DAVID HOLMES -------- ---------------- David Holmes Treasurer -----END PRIVACY-ENHANCED MESSAGE-----