-----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, NgSk/q1SzDAa/5jGjUi4K247ziNs+ragO7tR/zWyJrqIxtYjaMAgLy+f2lAKDc5z 4ctnbrDPT2Dss0OsV4mSBw== 0000745903-04-000051.txt : 20041105 0000745903-04-000051.hdr.sgml : 20041105 20041104175747 ACCESSION NUMBER: 0000745903-04-000051 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041104 EFFECTIVENESS DATE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USAA INVESTMENT TRUST CENTRAL INDEX KEY: 0000745903 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04019 FILM NUMBER: 041120725 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/A 1 ncsracsf053104.txt FORM N-CSR AMENDED USAA CORNERSTONE STRATEGY FUND 05-31-2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR/A 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, CORNERSTONE STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2004 [LOGO OF USAA] USAA(R) USAA CORNERSTONE STRATEGY Fund [GRAPHIC OF USAA CORNERSTONE STRATEGY 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 17 Report of Independent Registered Public Accounting Firm 18 Portfolio of Investments 19 Notes to Portfolio of Investments 38 Financial Statements 41 Notes to Financial Statements 44 DIRECTORS' AND OFFICERS' INFORMATION 58
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 CORNERSTONE STRATEGY FUND OBJECTIVE - -------------------------------------------------------------------------------- Achieve a positive, inflation-adjusted rate of return and a reasonably stable value of Fund shares, thereby preserving purchasing power of shareholders' capital. TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- Using preset target ranges, the Fund's strategy is to invest its assets mostly in stocks (divided into the categories of U.S., international, real estate, and precious metals and minerals) and, to a much lesser extent, in bonds and money market instruments. - -------------------------------------------------------------------------------- 5/31/04 5/31/03 - -------------------------------------------------------------------------------- Net Assets $1,350.0 Million $1,132.5 Million Net Asset Value Per Share $25.80 $22.22 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/04 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 17.08% 3.26% 7.18% 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 GLOBAL LIPPER GLOBAL USAA S&P 500 FLEXIBLE PORTFOLIO FLEXIBLE CORNERSTONE INDEX FUNDS AVERAGE FUNDS INDEX STRATEGY FUND ------- ------------------ ------------- ------------- 5/31/1994 $10,000.00 $10,000.00 $10,000.00 $10,000.00 6/30/1994 9,755.29 9,839.47 9,798.61 9,849.40 7/31/1994 10,075.39 10,014.60 9,988.45 10,014.62 8/31/1994 10,487.53 10,236.74 10,200.66 10,279.37 9/30/1994 10,231.28 10,121.49 10,074.35 10,201.77 10/31/1994 10,460.80 10,181.95 10,059.19 10,128.74 11/30/1994 10,080.31 9,909.34 9,774.79 9,752.12 12/31/1994 10,229.55 9,939.26 9,783.46 9,988.96 1/31/1995 10,494.65 9,880.11 9,653.53 9,697.38 2/28/1995 10,903.24 10,061.41 9,794.28 9,843.17 3/31/1995 11,224.46 10,293.79 10,018.04 10,064.20 4/30/1995 11,554.73 10,533.03 10,246.14 10,261.73 5/31/1995 12,015.86 10,792.80 10,500.22 10,642.66 6/30/1995 12,294.46 10,928.42 10,601.27 10,760.23 7/31/1995 12,701.99 11,261.37 10,884.94 11,014.91 8/31/1995 12,733.70 11,258.42 10,877.00 11,077.36 9/30/1995 13,270.78 11,478.44 11,067.56 11,312.74 10/31/1995 13,223.37 11,420.40 10,975.17 11,106.18 11/30/1995 13,803.20 11,681.53 11,212.65 11,404.45 12/31/1995 14,069.08 11,967.05 11,466.00 11,826.86 1/31/1996 14,547.37 12,167.84 11,746.07 12,171.38 2/29/1996 14,682.71 12,188.65 11,743.18 12,235.36 3/31/1996 14,824.07 12,301.70 11,835.91 12,348.56 4/30/1996 15,042.42 12,537.28 12,092.88 12,417.47 5/31/1996 15,429.70 12,664.30 12,169.61 12,535.59 6/30/1996 15,488.53 12,688.36 12,220.03 12,609.41 7/31/1996 14,804.62 12,383.30 11,921.94 12,300.35 8/31/1996 15,117.37 12,617.30 12,097.82 12,576.07 9/30/1996 15,967.46 13,014.79 12,437.34 12,928.39 10/31/1996 16,407.68 13,141.51 12,590.65 13,117.31 11/30/1996 17,646.81 13,664.35 13,126.62 13,687.76 12/31/1996 17,297.24 13,662.53 13,145.23 13,940.64 1/31/1997 18,377.31 13,897.38 13,388.59 14,150.36 2/28/1997 18,521.58 14,009.95 13,465.88 14,218.51 3/31/1997 17,761.98 13,789.82 13,245.78 13,998.31 4/30/1997 18,821.41 13,891.92 13,375.31 14,082.20 5/31/1997 19,972.10 14,518.89 13,937.68 14,658.91 6/30/1997 20,859.99 14,987.31 14,328.15 15,188.43 7/31/1997 22,519.37 15,643.23 14,917.40 15,899.90 8/31/1997 21,258.74 15,146.48 14,489.34 15,425.85 9/30/1997 22,422.35 15,955.68 15,106.72 16,308.57 10/31/1997 21,674.34 15,382.48 14,571.06 15,889.01 11/30/1997 22,676.87 15,503.34 14,616.41 15,954.39 12/31/1997 23,066.04 15,649.60 14,741.79 16,121.26 1/31/1998 23,320.91 15,815.92 14,777.77 16,115.52 2/28/1998 25,001.94 16,447.72 15,444.05 16,678.55 3/31/1998 26,281.23 16,966.53 15,962.29 17,207.12 4/30/1998 26,550.35 17,123.82 16,103.09 17,270.32 5/31/1998 26,094.61 16,991.15 15,965.18 17,172.65 6/30/1998 27,153.79 17,029.59 15,952.67 17,074.98 7/31/1998 26,866.81 16,864.10 15,796.69 16,682.73 8/31/1998 22,985.19 15,038.73 14,048.83 14,953.02 9/30/1998 24,458.91 15,377.26 14,273.71 15,245.28 10/31/1998 26,445.35 16,128.89 15,019.02 15,764.19 11/30/1998 28,047.50 16,802.66 15,691.51 16,217.50 12/31/1998 29,662.67 17,274.50 16,067.23 16,445.16 1/31/1999 30,902.60 17,452.56 16,258.01 16,426.43 2/28/1999 29,942.32 16,972.10 15,862.61 15,982.98 3/31/1999 31,139.96 17,476.91 16,379.13 16,132.87 4/30/1999 32,345.84 18,278.16 17,259.05 17,169.68 5/31/1999 31,582.87 17,994.39 16,984.11 17,044.76 6/30/1999 33,330.86 18,662.67 17,613.69 17,332.07 7/31/1999 32,294.65 18,745.59 17,601.56 17,149.93 8/31/1999 32,134.77 18,737.73 17,539.67 16,965.23 9/30/1999 31,254.91 18,741.87 17,443.81 16,734.37 10/31/1999 33,231.90 19,117.74 17,797.48 16,945.45 11/30/1999 33,907.39 19,841.64 18,422.34 17,097.16 12/31/1999 35,901.69 21,313.64 19,661.10 17,782.55 1/31/2000 34,098.11 20,936.14 19,259.36 17,276.04 2/29/2000 33,453.32 22,082.99 20,330.87 17,125.46 3/31/2000 36,723.91 22,177.80 20,232.11 18,179.54 4/30/2000 35,619.43 21,471.81 19,554.93 18,022.11 5/31/2000 34,889.23 21,049.40 19,247.80 17,981.05 6/30/2000 35,748.49 21,884.75 19,937.75 18,350.66 7/31/2000 35,190.09 21,302.83 19,691.54 18,203.39 8/31/2000 37,374.68 22,058.76 20,363.14 18,585.72 9/30/2000 35,402.04 21,419.53 19,762.38 18,090.10 10/31/2000 35,251.64 20,995.62 19,379.39 17,927.26 11/30/2000 32,474.67 20,276.19 18,630.60 17,601.56 12/31/2000 32,633.99 20,986.44 19,384.79 18,270.88 1/31/2001 33,791.11 21,460.16 19,635.38 18,592.93 2/28/2001 30,711.96 20,377.42 18,645.20 17,898.73 3/31/2001 28,767.43 19,497.30 17,725.47 17,297.58 4/30/2001 31,001.18 20,349.03 18,629.29 18,149.22 5/31/2001 31,209.15 20,264.27 18,486.79 18,084.81 6/30/2001 30,449.83 20,069.99 18,216.61 17,805.70 7/31/2001 30,149.96 19,811.30 17,958.70 17,848.64 8/31/2001 28,264.42 19,443.16 17,515.20 17,433.55 9/30/2001 25,982.18 17,891.22 16,360.41 16,224.08 10/31/2001 26,477.92 18,412.98 16,747.02 16,381.53 11/30/2001 28,508.45 19,233.82 17,352.06 17,168.76 12/31/2001 28,758.34 19,555.04 17,373.43 17,408.66 1/31/2002 28,338.89 19,217.16 17,261.05 17,125.72 2/28/2002 27,792.25 19,125.56 17,119.45 17,222.52 3/31/2002 28,837.62 19,851.26 17,595.00 17,803.30 4/30/2002 27,090.03 19,671.30 17,357.93 17,565.03 5/31/2002 26,891.15 19,676.68 17,562.10 17,550.14 6/30/2002 24,976.36 19,017.52 16,900.71 16,924.68 7/31/2002 23,029.92 17,671.64 15,900.27 15,964.15 8/31/2002 23,180.68 17,812.81 15,979.38 16,090.73 9/30/2002 20,663.92 16,642.76 14,996.45 15,174.88 10/31/2002 22,480.69 17,264.53 15,627.81 15,733.32 11/30/2002 23,802.59 18,165.29 16,254.96 16,388.57 12/31/2002 22,404.95 17,639.35 15,841.53 15,971.50 1/31/2003 21,819.15 17,344.98 15,590.41 15,525.29 2/28/2003 21,491.29 17,142.91 15,427.29 15,309.87 3/31/2003 21,699.36 17,121.98 15,410.93 15,302.18 4/30/2003 23,485.91 18,255.83 16,307.10 16,271.55 5/31/2003 24,722.14 19,482.01 17,179.70 17,094.74 6/30/2003 25,037.94 19,626.77 17,387.44 17,340.93 7/31/2003 25,479.60 19,761.42 17,523.23 17,471.72 8/31/2003 25,975.53 20,235.24 17,893.15 17,841.00 9/30/2003 25,700.49 20,586.30 18,166.73 17,848.69 10/31/2003 27,153.62 21,434.79 18,861.77 18,671.89 11/30/2003 27,392.26 21,728.22 19,164.34 18,964.24 12/31/2003 28,827.82 22,714.01 19,806.31 19,758.58 1/31/2004 29,356.85 23,164.66 20,254.08 20,006.82 2/29/2004 29,764.76 23,540.78 20,538.85 20,363.67 3/31/2004 29,315.77 23,683.49 20,631.19 20,193.01 4/30/2004 28,856.17 23,010.79 20,036.21 19,843.92 5/31/2004 29,251.37 23,122.38 20,128.84 20,014.58
[END CHART] DATA FROM 5/31/94 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 Cornerstone Strategy Fund to the following benchmarks: o The S&P 500 Index, an unmanaged index representing the weighted average performance of a group of 500 widely held, publicly traded stocks. It is not possible to invest directly in the S&P 500 Index. o The Lipper Global Flexible Portfolio Funds Average, an average performance level of all global flexible portfolio funds, reported by Lipper Inc., an independent organization that monitors the performance of mutual funds. o The Lipper Global Flexible Funds Index, which tracks the total return performance of the 30 largest funds within the Lipper Global Flexible Portfolio Funds category. 8 M A N A G E R S ' ==================-------------------------------------------------------------- COMMENTARY on the Fund MARK W. JOHNSON, CFA MATTHEW E. MEGARGEL, CFA USAA Investment Management Company Wellington Management Company, LLP Precious Metals and Minerals Securities U.S. Stocks MARGARET "DIDI" WEINBLATT, Ph.D., CFA JAMES P. HOFFMANN USAA Investment Management Company Wellington Management Company, LLP Bonds and Money Market Instruments Real Estate Securities ARNOLD J. ESPE, CFA DAVID R. MANNHEIM USAA Investment Management Company MFS Investment Management Bonds and Money Market Instruments International Stocks MARCUS L. SMITH MFS Investment Management International Stocks - -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? The USAA Cornerstone Strategy Fund had a total return of 17.08% for the year ended May 31, 2004. This compares to a 17.18% return for the Lipper Global Flexible Portfolio Funds Index, a 17.57% return for the Lipper Global Flexible Portfolio Funds Average, and an 18.32% return for the S&P 500 Index for the period. * * * * THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR RATING(TM) OF 4 STARS IN THE LARGE BLEND FUNDS CATEGORY (1,154 FUNDS IN CATEGORY) AS OF MAY 31, 2004. THE OVERALL MORNINGSTAR RATING FOR A FUND IS DERIVED FROM A WEIGHTED AVERAGE OF THE PERFORMANCE FIGURES ASSOCIATED WITH ITS THREE-, FIVE-, AND 10-YEAR (IF APPLICABLE) MORNINGSTAR RATING METRICS. REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS, THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. 9 . . . C O N T I N U E D ========================-------------------------------------------------------- With respect to the large blend funds, the USAA Cornerstone Strategy Fund received a Morningstar Rating of 5 stars for the three- and five-year periods among 1,154 and 853 funds, respectively, and 3 stars for the 10-year period among 270 funds through May 31, 2004. Ratings are based on risk-adjusted returns. HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND BONDS? We began the reporting year with roughly 47% of net assets in U.S. stocks, 32% in bond and money market instruments, 24% in international stocks, and 6% in precious metals and minerals securities. In late-June 2003, we shifted roughly 5.7% of assets from international stocks to U.S. stocks. In mid-August 2003, we eliminated our position in precious metals and minerals securities and invested the proceeds in U.S. stocks. In December 2003, we moved roughly 5% of assets from U.S. stocks back to international stocks. As the result of these shifts, market movements, and the performance of the Fund's managers, we ended the period with roughly 56% of net assets in U.S. stocks, 25% in international stocks, and 26% in bonds and money market instruments. WHAT WAS THE REASONING BEHIND THESE SHIFTS? Our shift from international stocks to U.S. stocks in the first half of the reporting year was driven by a greater comfort level with economic growth and earnings progression in the United States. The sale of precious metals and minerals securities in August was driven by a desire to capture a large gain in that sector and to finance a greater investment in U.S. stocks. While we continued to be constructive on the U.S. equity market, in December we moved some assets back to international stocks simply because their valuations had become so attractive relative to U.S. stocks. 10 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund HOW DID THE U.S. STOCKS PORTION OF THE FUND PERFORM? The equity portion's good relative and absolute performance were driven primarily by strong stock selection in information technology, the financial sector, and health care. Sector allocations helped performance because we had overweight positions, relative to the Russell 3000 Index, in information technology, industrials, and materials -- three of the best performing sectors in the Russell 3000 Index. Offsetting these positive results was somewhat weaker stock selection in the industrials and energy sectors. In terms of individual stocks, Intel Corp. and Cisco Systems, Inc. were the biggest contributors to absolute performance, while Wyeth was the largest detractor. HOW WAS THE U.S. STOCKS PORTION POSITIONED AT THE END OF THE REPORTING PERIOD? The equity portion continues to have a cyclical bias, with ongoing overweight positions, relative to the Russell 3000 Index, in industrials and technology. We added to our position in energy, because data continued to support higher average commodity prices due to high demand and relatively tight supply conditions over the long term. We had underweight positions in the less cyclical sectors of telecommunications services and utilities, and financials. Due to recent jobs data, we remain optimistic about the economy's moving to a more durable recovery, although we expect the actual rate of growth to decelerate in the second half of 2004. This transition may favor a gradual unwinding of our cyclical posture later in the year in favor of more stable areas of the equity market. THE RUSSELL 3000 INDEX MEASURES THE PERFORMANCE OF THE 3,000 LARGEST U.S. COMPANIES BASED ON TOTAL MARKET CAPITALIZATION, WHICH REPRESENTS APPROXIMATELY 98% OF THE INVESTABLE U.S. EQUITY MARKET. WELLINGTON MANAGEMENT AND USAA UTILIZE THE RUSSELL 3000 AS A FINANCIAL MARKET PERFORMANCE BENCHMARK IN MANAGING THE U.S. STOCK PORTION OF THE FUND. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 19-37. 11 . . . C O N T I N U E D ========================-------------------------------------------------------- HOW DID THE INTERNATIONAL STOCKS PORTION OF THE FUND PERFORM? Through the end of 2003, lower-quality stocks with a high degree of leverage to the global economic recovery led the market higher, causing the Fund's international portion--with its focus on higher-quality companies--to lag. As the period progressed, investors focused increasingly on individual company fundamentals, and this shift helped the international portion outperform the MSCI-EAFE Index in the second half of the reporting year. HOW WAS STOCK SELECTION FOR THE INTERNATIONAL STOCKS PORTION OF THE FUND? Overall, our stock selection contributed positively to performance, while our sector allocations were slightly negative. The biggest positive contributor to performance was stock selection within the financial services sector, and we were also helped by good stock selection within retailing. The fact that we did not own Royal Dutch/Shell (U.K.) contributed positively, because the large index holding suffered from several downward restatements of its oil reserves. On the negative side, our stock selection in utilities and communications was a primary detractor from performance. In the basic materials sector, one of our top holdings, L'Air Liquide S.A. (France), lagged other stocks in its group, but we continue to like the stock as a long-term investment. THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST (MSCI-EAFE) INDEX IS AN UNMANAGED INDEX WHICH REFLECTS THE MOVEMENTS OF STOCK MARKETS IN EUROPE, AUSTRALIA, AND THE FAR EAST BY REPRESENTING A BROAD SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET. MFS INVESTMENT MANAGEMENT UTILIZES THE MSCI-EAFE AS A PERFORMANCE BENCHMARK IN MANAGING THE INTERNATIONAL STOCKS PORTION OF THE FUND. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. 12 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund HOW WAS THE INTERNATIONAL STOCKS PORTION POSITIONED AT THE END OF THE REPORTING YEAR? On a sector level, our biggest overweight position was in leisure, primarily through media companies. Our biggest underweight position was in financial services. By country, we ended the reporting year underweight in Japan and Great Britain, and just slightly overweight in continental Europe. We also had holdings in Canada and Latin America, which are not represented in the MSCI-EAFE Index. WHAT ABOUT THE BONDS AND MONEY MARKET INSTRUMENTS PORTION OF THE FUND? Over the 12-month period, rising interest rates eroded bond prices, but income from the Fund's bonds largely compensated HISTORICAL YIELD CURVE* [CHART OF HISTORICAL YIELD CURVE]
5/30/03 5/28/04 CHANGE ------- ------- ------ 3 MONTH 1.098% 1.060% -0.0379% 6 MONTH 1.083 1.378 0.2946 2 YEAR 1.322 2.532 1.2106 3 YEAR 1.565 3.063 1.4985 5 YEAR 2.289 3.791 1.5017 10 YEAR 3.370 4.647 1.2770 30 YEAR 4.376 5.345 0.9683
[END CHART] *YIELD OF TREASURY BILLS, NOTES, AND BONDS. SOURCE: BLOOMBERG L.P. 13 . . . C O N T I N U E D ========================-------------------------------------------------------- for the fall in price. The reporting period began with economic growth muted and the federal funds rate at 45-year lows. In June 2003, longer-term rates bottomed at levels not seen since Dwight Eisenhower was president. Over the next 11 months, yields moved higher as the bond market began to price in an improving economy and future tightening by the Federal Reserve Board (the Fed). WHAT STRATEGIES DID YOU PURSUE IN THIS ENVIRONMENT? With interest rates so low, we kept the Fund's interest-rate sensitivity lower than that of the market. This was helpful because bond prices fall when interest rates rise. During the period, the Board of Trustees of the USAA Investment Trust expanded the Fund's allowable bond and money market instruments. While the Fund previously could purchase only U.S. government securities, as of October 13, 2003, we were allowed to purchase a wider array of investment-grade bonds and money market instruments. Our primary reason for doing this was to further the Fund's ability to diversify. This added flexibility proved beneficial, because corporate bonds posted excellent returns relative to Treasury bonds. We were also able to invest in some corporate floating-rate notes and short-term asset-backed securities that performed well in the face of rising rates. Our investment in Treasury inflation -protected securities (TIPS) also performed well as inflation expectations rose. WHAT'S YOUR OUTLOOK FOR THE BOND MARKET? As expected, the Fed raised the federal funds rate at its end-of-June meeting, in what we suspect is the first of a series of rate hikes. However, the bond market has priced in several rate hikes already. With the impact of easy monetary (interest rate) and YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 19-37. 14 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund fiscal (tax rebates) policy now behind us, the question is whether the economic expansion has enough momentum to sustain itself, especially given the headwinds from higher long-term rates and high energy prices. With more attractive opportunities available than we have seen over the past two years, we will look to make investments that increase the Fund's yield when we believe it's prudent to do so. HOW DID THE PRECIOUS METALS AND MINERALS SECURITIES PORTION OF THE FUND PERFORM? During the time the Fund was invested in precious metals and minerals, it performed well. The price of gold was fairly volatile over the course of the reporting year, beginning on June 1, 2003, at $364.45, rising as high as $431 on two occasions, and ultimately ending on May 31, 2004, at $393.35. HOW DID REAL ESTATE SECURITIES PERFORM? The Wilshire Real Estate Securities Index had a total return of 27.93% for the year ended May 31, 2004. The Fund had no allocation to real estate securities during the year ended May 31, 2004. All the managers of the USAA Cornerstone Strategy Fund thank you for the confidence you have placed in us. We will continue working hard on your behalf. THE WILSHIRE REAL ESTATE SECURITIES INDEX MEASURES THE PERFORMANCE OF PUBLICLY TRADED REAL ESTATE SECURITIES. WELLINGTON MANAGEMENT COMPANY, LLP UTILIZES THE WILSHIRE REAL ESTATE SECURITIES INDEX AS A PERFORMANCE BENCHMARK IN MANAGING THE REAL ESTATE SECURITIES PORTION OF THE FUND. 15 P O R T F O L I O ==================-------------------------------------------------------------- HIGHLIGHTS - -------------------------------------------------------------------------------- TOP 3 HOLDINGS* IN EACH SECTOR (% OF NET ASSETS) - -------------------------------------------------------------------------------- INTERNATIONAL STOCKS Reckitt Benckiser plc 0.9% Vodafone Group plc 0.7% AXA S.A. 0.6% BONDS Freddie Mac, Pool C01491 1.4% Government National Mortgage Assn., Pool 781496 1.1% U.S. Treasury Inflation-Indexed Notes, 3.38% 0.7% U.S. STOCKS Citigroup, Inc. 1.8% Microsoft Corp. 1.8% Bank of America Corp. 1.5% - --------------------------------------------------------------------------------
*EXCLUDES MONEY MARKET INSTRUMENTS. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 19-37. 16 . . . C O N T I N U E D ========================-------------------------------------------------------- HIGHLIGHTS ASSET ALLOCATION 5/31/04 [PIE CHART OF ASSET ALLOCATION] U.S. Stocks 55.5% International Stocks 24.9% Bonds 17.6% Money Market Instruments 8.6%
[END CHART] PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. - -------------------------------------------------------- TOP 10 INDUSTRIES* (% OF NET ASSETS) - -------------------------------------------------------- Pharmaceuticals 6.2% Diversified Banks 4.2% Communication Equipment 2.9% Integrated Oil & Gas 2.9% Industrial Conglomerates 2.7% Integrated Telecommunication Services 2.3% Other Diversified Financial Services 2.3% Semiconductors 2.2% Apparel Retail 2.1% Multi-Line Insurance 2.1% - --------------------------------------------------------
*EXCLUDES U.S. GOVERNMENT 17 D I S T R I B U T I O N S =========================------------------------------------------------------- to SHAREHOLDERS (unaudited) USAA CORNERSTONE STRATEGY 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. 50.32% of ordinary income distributions qualifies for the dividends-received deductions eligible to corporations. The Fund has designated a portion of the amount paid to redeeming shareholders, in the amount of $884,000, as a distribution for tax purposes. 18 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 CORNERSTONE STRATEGY FUND: We have audited the accompanying statement of assets and liabilities of the USAA Cornerstone Strategy 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 Cornerstone Strategy 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 19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- U.S. STOCKS (55.5%) ADVERTISING (0.5%) 175,400 Lamar Advertising Co.* $ 7,169 ---------- AEROSPACE & DEFENSE (1.8%) 50,700 General Dynamics Corp. 4,849 138,500 Precision Castparts Corp. 6,494 135,400 Rockwell Collins, Inc. 4,067 107,900 United Technologies Corp. 9,130 ---------- 24,540 ---------- AIR FREIGHT & LOGISTICS (0.4%) 82,200 FedEx Corp. 6,048 ---------- ALUMINUM (0.4%) 186,300 Alcoa, Inc. 5,831 ---------- APPAREL, ACCESSORIES, & LUXURY GOODS (0.6%) 34,500 Coach, Inc.* 1,505 69,300 Columbia Sportswear Co.* 3,749 68,400 Liz Claiborne, Inc. 2,346 ---------- 7,600 ---------- APPAREL RETAIL (0.9%) 58,600 Chico's FAS, Inc.* 2,514 261,700 Gap, Inc. 6,320 167,500 Pacific Sunwear of California, Inc.* 3,643 ---------- 12,477 ---------- APPLICATION SOFTWARE (0.1%) 124,450 Cadence Design Systems, Inc.* 1,722 ---------- ASSET MANAGEMENT & CUSTODY BANKS (0.5%) 145,900 Federated Investors, Inc. "B" 4,345 34,500 Legg Mason, Inc. 3,026 ---------- 7,371 ---------- AUTO PARTS & EQUIPMENT (0.2%) 49,600 Lear Corp. 2,938 ---------- BIOTECHNOLOGY (0.4%) 43,400 Albany Molecular Research, Inc.* 549 110,400 Genzyme Corp.* 4,811 ---------- 5,360 ----------
20 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- CASINOS & GAMING (0.1%) 34,800 International Game Technology, Inc. $ 1,368 ---------- COMMUNICATIONS EQUIPMENT (2.5%) 180,300 Brocade Communications Systems, Inc.* 1,080 405,500 Cisco Systems, Inc.* 8,982 727,800 Corning, Inc.* 9,018 273,600 Motorola, Inc. 5,409 372,000 Polycom, Inc.* 7,622 137,300 Tekelec, Inc.* 2,282 ---------- 34,393 ---------- COMPUTER HARDWARE (1.4%) 138,000 Apple Computer, Inc.* 3,872 237,600 Dell, Inc.* 8,359 72,800 IBM Corp. 6,449 ---------- 18,680 ---------- COMPUTER STORAGE & PERIPHERALS (0.1%) 56,600 SanDisk Corp.* 1,395 ---------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%) 35,500 Caterpillar, Inc. 2,675 ---------- CONSUMER FINANCE (0.3%) 79,000 American Express Co. 4,005 ---------- DATA PROCESSING & OUTSOURCED SERVICES (1.1%) 38,700 CheckFree Corp.* 1,187 38,000 DST Systems, Inc.* 1,825 254,400 First Data Corp. 11,013 50,500 SunGard Data Systems, Inc.* 1,399 ---------- 15,424 ---------- DISTILLERS & VINTNERS (0.1%) 25,600 Constellation Brands, Inc. "A"* 922 ---------- DIVERSIFIED BANKS (2.2%) 250,000 Bank of America Corp. 20,783 172,700 Bank One Corp. 8,367 ---------- 29,150 ---------- DIVERSIFIED CHEMICALS (0.7%) 207,000 Du Pont (E.I.) De Nemours & Co. 8,942 ----------
21 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- DIVERSIFIED COMMERCIAL SERVICES (1.2%) 302,000 ARAMARK Corp. "B" $ 8,302 108,800 ChoicePoint, Inc.* 4,705 70,200 ITT Educational Services, Inc.* 2,872 ---------- 15,879 ---------- ELECTRIC UTILITIES (0.3%) 104,000 Exelon Corp. 3,463 ---------- ELECTRICAL COMPONENTS & EQUIPMENT (0.2%) 135,500 American Power Conversion Corp. 2,453 ---------- ELECTRONIC EQUIPMENT MANUFACTURERS (0.4%) 94,800 Cognex Corp. 3,142 43,800 Waters Corp.* 2,018 ---------- 5,160 ---------- EXCHANGE-TRADED FUNDS(1.2%) 139,900 iShares Trust, Russell 2000 Growth Index Fund(g) 8,472 67,900 MidCap SPDR Trust Series 1(g) 7,405 ---------- 15,877 ---------- HEALTH CARE EQUIPMENT (1.3%) 100,700 Diagnostic Products Corp. 4,241 23,300 Guidant Corp. 1,266 220,700 Medtronic, Inc. 10,572 69,400 Viasys Healthcare, Inc.* 1,456 ---------- 17,535 ---------- HEALTH CARE FACILITIES (0.4%) 156,200 Odyssey Healthcare, Inc.* 2,647 77,400 Triad Hospitals, Inc.* 2,737 ---------- 5,384 ---------- HEALTH CARE SERVICES (0.6%) 25,700 Caremark Rx, Inc.* 802 202,000 Medco Health Solutions, Inc.* 7,076 ---------- 7,878 ---------- HEALTH CARE SUPPLIES (0.6%) 36,500 Cooper Companies, Inc. 2,014 58,700 Edwards Lifesciences Corp.* 2,128 74,200 Fisher Scientific International, Inc.* 4,260 ---------- 8,402 ----------
22 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- HOME IMPROVEMENT RETAIL (1.1%) 266,500 Lowe's Companies, Inc. $ 14,276 ---------- HOMEBUILDING (0.3%) 154,250 D.R. Horton, Inc. 4,458 ---------- HOUSEHOLD PRODUCTS (0.5%) 60,800 Procter& Gamble Co. 6,555 ---------- HYPERMARKETS & SUPER CENTERS (0.9%) 213,900 Wal-Mart Stores, Inc. 11,921 ---------- INDUSTRIAL CONGLOMERATES (2.7%) 81,500 3M Co. 6,892 565,100 General Electric Co. 17,586 386,100 Tyco International Ltd. 11,888 ---------- 36,366 ---------- INSURANCE BROKERS (0.4%) 160,900 Arthur J. Gallagher & Co. 5,125 ---------- INTEGRATED OIL & GAS (1.9%) 102,630 ChevronTexaco Corp. 9,278 363,900 Exxon Mobil Corp. 15,738 ---------- 25,016 ---------- INTEGRATED TELECOMMUNICATION SERVICES (0.5%) 381,100 Sprint Corp. - FON Group 6,768 ---------- INTERNET SOFTWARE & SERVICES (0.1%) 62,900 Yahoo!, Inc.* 1,929 ---------- INVESTMENT BANKING & BROKERAGE (1.2%) 374,600 E-Trade Group, Inc.* 4,274 216,400 Merrill Lynch & Co., Inc. 12,292 ---------- 16,566 ---------- MANAGED HEALTH CARE (0.7%) 50,300 Anthem, Inc.* 4,453 48,700 Coventry Health Care, Inc.* 2,244 114,900 Health Net, Inc.* 2,700 ---------- 9,397 ----------
23 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- METAL & GLASS CONTAINERS (0.9%) 502,500 Pactiv Corp.* $ 11,849 ---------- MOVIES & ENTERTAINMENT (1.3%) 997,300 Time Warner, Inc.* 16,994 ---------- MULTI-LINE INSURANCE (1.2%) 229,600 American International Group, Inc. 16,830 ---------- OIL & GAS DRILLING (0.2%) 104,000 Ensco International, Inc. 2,771 ---------- OIL & GAS EQUIPMENT & SERVICES (0.6%) 145,200 Schlumberger Ltd. 8,301 ---------- OIL & GAS EXPLORATION & PRODUCTION (0.8%) 159,300 Apache Corp. 6,429 354,500 Chesapeake Energy Corp. 4,680 ---------- 11,109 ---------- OTHER DIVERSIFIED FINANCIAL SERVICES (2.1%) 519,543 Citigroup, Inc. 24,123 123,900 Principal Financial Group, Inc. 4,330 ---------- 28,453 ---------- PACKAGED FOODS & MEAT (0.2%) 165,400 Hain Celestial Group, Inc.* 2,928 ---------- PAPER PACKAGING (0.3%) 246,600 Smurfit-Stone Container Corp.* 4,478 ---------- PAPER PRODUCTS (0.4%) 139,100 International Paper Co. 5,832 ---------- PERSONAL PRODUCTS (0.7%) 234,400 Gillette Co. 10,100 ---------- PHARMACEUTICALS (3.9%) 252,500 Abbott Laboratories 10,405 133,600 Eli Lilly & Co. 9,842
24 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- 158,800 King Pharmaceuticals, Inc.* $ 2,122 585,500 Pfizer, Inc. 20,692 250,200 Wyeth 9,007 ---------- 52,068 ---------- PROPERTY & CASUALTY INSURANCE (1.0%) 67,800 Ambac Financial Group, Inc. 4,688 216,223 St. Paul Companies, Inc. 8,580 ---------- 13,268 ---------- RAILROADS (0.9%) 160,100 CSX Corp. 5,059 282,400 Norfolk Southern Corp. 6,843 ---------- 11,902 ---------- RESTAURANTS (0.1%) 57,500 Krispy Kreme Doughnuts, Inc.*(g) 1,235 ---------- SEMICONDUCTOR EQUIPMENT (1.2%) 312,600 Applied Materials, Inc.* 6,239 96,100 KLA-Tencor Corp.* 4,630 66,800 Novellus Systems, Inc.* 2,224 84,200 Varian Semiconductor Equipment Associates, Inc.* 3,096 ---------- 16,189 ---------- SEMICONDUCTORS (1.9%) 79,500 Fairchild Semiconductor International, Inc. "A"* 1,567 367,700 Intel Corp. 10,498 189,200 International Rectifier Corp.* 8,376 186,900 Texas Instruments, Inc. 4,880 ---------- 25,321 ---------- SOFT DRINKS (1.0%) 245,800 PepsiCo, Inc. 13,118 ---------- SPECIALTY STORES (1.6%) 184,500 Michaels Stores, Inc. 9,640 105,400 O'Reilly Automotive, Inc.* 4,736 219,800 PETsMART, Inc. 6,833 ---------- 21,209 ---------- SYSTEMS SOFTWARE (1.8%) 945,300 Microsoft Corp. 24,909 ----------
25 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- TECHNOLOGY DISTRIBUTORS (0.4%) 49,600 CDW Corp. $ 3,485 153,900 Ingram Micro, Inc. "A" * 2,224 ---------- 5,709 ---------- THRIFTS & MORTGAGE FINANCE (0.5%) 109,899 Countrywide Financial Corp. 7,088 ---------- TOBACCO (0.6%) 170,800 Altria Group, Inc. 8,193 ---------- TRADING COMPANIES & DISTRIBUTORS (0.1%) 28,700 Fastenal Co. 1,486 ---------- TRUCKING (0.3%) 101,300 Yellow Roadway Corp.* 3,617 ---------- WIRELESS TELECOMMUNICATION SERVICES (0.5%) 279,100 Nextel Communications, Inc. "A"* 6,456 ---------- Total U.S. stocks (cost: $648,362) 749,831 ---------- INTERNATIONAL STOCKS (24.9%) AUSTRALIA (1.0%) 789,116 News Corp. Ltd. (Movies & Entertainment) 7,243 635,243 QBE Insurance Group Ltd. (Property & Casualty Insurance) 5,671 ---------- 12,914 ---------- AUSTRIA (0.4%) 36,600 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 5,656 ---------- BRAZIL (0.5%) 92,600 Brasil Telecom Participacoes S.A. ADR (Preferred) (Integrated Telecommunication Services) 2,668 92,100 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 4,669 ---------- 7,337 ---------- CANADA (0.8%) 168,100 BCE, Inc. (Integrated Telecommunication Services)(g) 3,343 95,910 Canadian National Railway Co. (Railroads) 3,787 98,430 Encana Corp. (Integrated Oil & Gas) 3,853 ---------- 10,983 ----------
26 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- CAYMAN ISLANDS (0.0%)(o) 1,331,000 Semiconductor Manufacturing International Corp. (Semiconductors)* $ 331 ---------- FRANCE (3.9%) 411,400 AXA S.A. (Multi-Line Insurance) 8,443 202,981 Credit Agricole S.A. (Regional Banks)(g) 4,992 46,200 L'Air Liquide S.A. (Industrial Gases) 8,105 50,800 L'Oreal S.A. (Personal Products) 3,944 74,670 Sanofi-Synthelabo S.A. (Pharmaceuticals)(g) 4,935 104,238 Schneider Electric S.A. (Electrical Components & Equipment)(g) 7,017 81,170 Societe Television Francaise 1 (Broadcasting & Cable TV)(g) 2,522 42,080 Total S.A. (Integrated Oil & Gas)(g) 7,901 193,000 Veolia Environnement (Multi-Utilities & Unregulated Power)(g) 5,163 ---------- 53,022 ---------- GERMANY (0.7%) 120,520 Bayerische Motoren Werke AG (Automobile Manufacturers) 5,109 70,300 Schering AG (Pharmaceuticals) 3,835 ---------- 8,944 ---------- HONG KONG (0.5%) 6,398,500 CNOOC Ltd. (Oil& Gas Exploration & Production) 2,750 1,034,500 Esprit Holdings Ltd. (Apparel Retail) 4,539 ---------- 7,289 ---------- HUNGARY (0.3%) 117,000 OTP Bank Ltd. GDR (Regional Banks)* 4,731 ---------- IRELAND (0.6%) 379,000 Depfa Bank plc (Specialized Finance) 5,672 161,120 Irish Life & Permanent plc (Other Diversified Financial Services) 2,450 ---------- 8,122 ---------- ITALY (0.3%) 201,200 RAS S.p.A. (Multi-Line Insurance) 3,611 ---------- JAPAN (3.8%) 210,000 Bridgestone Corp. (Tires & Rubber) 3,516 146,000 Canon, Inc. (Electronic Equipment Manufacturers) 7,220 312,100 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 4,744
27 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- 297,000 Citizen Watch Co. (Apparel, Accessories, & Luxury Goods) $ 3,115 758 KDDI Corp. (Integrated Telecommunication Services) 4,430 83,400 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 4,821 118,300 Seiko Epson Corp. (Office Electronics) 4,068 314,000 Sekisui Chemical Co. Ltd. (Homebuilding) 2,319 82,000 Shinsei Bank (Diversified Banks) 555 125,200 Tokyo Broadcasting System, Inc. (Broadcasting & Cable TV) 2,231 1,403,000 Tokyo Gas Co. Ltd. (Gas Utilities) 4,952 169,400 Toyota Motor Corp. (Automobile Manufacturers) 6,149 234,100 Yamaha Corp. (Consumer Electronics) 3,556 ---------- 51,676 ---------- KOREA (0.6%) 9,430 Samsung Electronics Co. Ltd. (Semiconductors) 4,211 33,790 Samsung SDI Co. Ltd. (Computer Storage & Peripherals) 3,729 ---------- 7,940 ---------- MEXICO (0.2%) 76,200 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 3,220 ---------- NETHERLANDS (0.3%) 274,230 Reed Elsevier N.V. (Publishing) 3,829 ---------- NORWAY (0.1%) 129,060 DNB Holdings ASA (Diversified Banks) 818 ---------- SINGAPORE (0.6%) 318,000 DBS Group Holdings Ltd. (Diversified Banks) 2,639 3,099,000 Singapore Telecommunications Ltd. (Integrated Telecommunication Services) 3,995 233,000 United Overseas Bank Ltd. (Diversified Banks) 1,783 ---------- 8,417 ---------- SPAIN (1.0%) 258,600 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 3,425 175,550 Iberdrola S.A. (Electric Utilities) 3,543 449,198 Telefonica S.A. (Integrated Telecommunication Services)(g) 6,519 ---------- 13,487 ----------
28 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - --------------------------------------------------------------------------------------------- SWEDEN (1.7%) 126,800 Atlas Copco AB "A" (Industrial Machinery) $ 4,681 1,931,000 Ericsson LM "B" (Communications Equipment)* 5,392 287,900 Hennes & Mauritz AB "B" (Apparel Retail)(g) 7,130 150,100 Sandvik AB (Industrial Machinery) 5,097 ---------- 22,300 ---------- SWITZERLAND (2.5%) 149,900 Credit Suisse Group (Diversified Banks)* 5,149 13,099 Nestle S.A. (Packaged Foods & Meat) 3,407 90,110 Novartis AG (Pharmaceuticals) 4,041 71,400 Roche Holdings AG (Pharmaceuticals) 7,520 8,340 Straumann AG (Health Care Supplies) 1,723 30,042 Syngenta AG (Specialty Chemicals)* 2,389 24,800 Synthes, Inc. (Health Care Equipment) 2,919 89,236 UBS AG (Diversified Banks) 6,401 ---------- 33,549 ---------- TAIWAN (0.1%) 1,026,000 Compal Electronics, Inc. (Computer Hardware) 1,262 ---------- UNITED KINGDOM (5.0%) 852,600 Amvescap plc (Investment Banking & Brokerage) 5,715 133,390 AstraZeneca plc (Pharmaceuticals) 6,212 223,000 BG Group plc (Oil & Gas Exploration & Production) 1,357 147,170 BOC Group plc (Diversified Chemicals) 2,401 450,900 British Sky Broadcasting Group plc (Broadcasting & Cable TV) 5,070 49,140 Capital Radio plc (Broadcasting & Cable TV) 409 407,260 Diageo plc (Distillers & Vintners) 5,404 1,136,840 Kingfisher plc (Home Improvement Retail) 5,959 138,710 Next plc (Apparel Retail) 3,524 429,120 Reckitt Benckiser plc (Household Products) 11,624 165,544 Royal Bank Scotland Group plc (Diversified Banks) 4,997 3,785,230 Vodafone Group plc (Wireless Telecommunication Services) 8,898 574,400 William Hill plc (Casinos & Gaming) 5,696 ---------- 67,266 ---------- Total international stocks (cost: $272,485) 336,704 ----------
29 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- BONDS (17.6%) CORPORATE OBLIGATIONS (4.4%) ALUMINUM (0.1%) $ 2,000 Alcan, Inc., Notes(b) 1.52%(c) 12/08/2005 $ 2,005 ---------- BROADCASTING & CABLE TV (0.2%) 2,000 Comcast Cable Communications, Inc., Senior Notes 6.88 6/15/2009 2,186 ---------- CONSUMER FINANCE (0.3%) 2,000 American Honda Finance Corp., MTN(b) 1.34(c) 5/11/2007 1,999 2,000 General Motors Acceptance Corp., Notes 2.40(c) 10/20/2005 2,016 ---------- 4,015 ---------- DIVERSIFIED BANKS (0.1%) 2,000 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,957 ---------- DIVERSIFIED METALS & MINING (0.1%) 1,000 Glencore Funding LLC, Notes(b) 6.00 4/15/2014 917 ---------- ELECTRIC UTILITIES (0.9%) 2,000 Oglethorpe Power Corp., Secured Series Facility Bonds 6.97 6/30/2011 2,146 2,000 Pinnacle West Capital Corp., Senior Notes 1.98(c) 11/01/2005 2,002 2,000 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 2,052 2,000 PPL Capital Funding, Notes(b) 4.33 3/01/2009 1,938 2,000 Tampa Electric Co., Notes 6.38 8/15/2012 2,079 2,000 Tristate General & Transport Assoc., Notes(b) 6.04 1/31/2018 1,998 ---------- 12,215 ---------- FOOD RETAIL (0.2%) 2,000 Safeway Inc., Notes 5.80 8/15/2012 2,014 ---------- FOREST PRODUCTS (0.2%) 2,000 Weyerhaeuser Co., Notes 6.75 3/15/2012 2,164 ---------- GAS UTILITIES (0.2%) 2,000 Noram Energy Corp., Debentures 6.50 2/01/2008 2,116 1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 1,020 ---------- 3,136 ---------- HEALTH CARE FACILITIES (0.1%) 2,000 HCA, Inc., Notes 5.25 11/06/2008 1,971 ----------
30 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- HOUSEWARES & SPECIALTIES (0.2%) $ 2,000 Newell Rubermaid, Inc., MTN, Series A(e) 6.35% 7/15/2028 $ 2,124 ---------- INTEGRATED TELECOMMUNICATION SERVICES (0.1%) 1,000 Citizens Communications Co., Notes 8.50 5/15/2006 1,068 ---------- INVESTMENT BANKING & BROKERAGE (0.1%) 2,000 Morgan Stanley, Subordinated Notes 4.75 4/01/2014 1,842 ---------- MOVIES & ENTERTAINMENT (0.2%) 2,000 AOL Time Warner, Notes 5.63 5/01/2005 2,059 ---------- MULTI-UTILITIES & UNREGULATED POWER (0.1%) 1,000 Duke Capital Corp., Senior Notes 5.50 3/01/2014 953 ---------- OIL & GAS EQUIPMENT & SERVICES (0.3%) 2,000 Cooper Cameron Corp., Senior Notes 2.65 4/15/2007 1,941 2,000 Halliburton Co., Senior Notes 2.65(c) 10/17/2005 2,023 ---------- 3,964 ---------- OIL & GAS EXPLORATION & PRODUCTION (0.1%) 1,000 Nexen, Inc., Notes 5.05 11/20/2013 958 1,000 Southwestern Energy Co., MTN(e) 7.63 5/01/2027 1,040 ---------- 1,998 ---------- OIL & GAS REFINING & MARKETING & TRANSPORTATION (0.2%) 2,000 Magellan Midstream Partners LP, Notes 6.45 6/01/2014 2,025 ---------- PACKAGED FOODS & MEAT (0.2%) 2,000 Kraft Foods, Inc., Notes 4.63 11/01/2006 2,056 ---------- PAPER PRODUCTS (0.1%) 2,000 MeadWestVaco Corp., Notes 1.70(c) 12/01/2005 2,002 ---------- PROPERTY & CASUALTY INSURANCE (0.1%) 2,000 21st Century Insurance Group, Senior Notes(b) 5.90 12/15/2013 2,006 ---------- REAL ESTATE INVESTMENT TRUSTS (0.1%) 1,000 Istar Financial, Inc., Senior Notes(b) 5.13 4/01/2011 927 ---------- REINSURANCE (0.1%) 2,000 Montpelier Re Holdings Ltd., Senior Notes 6.13 8/15/2013 2,004 ----------
31 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- THRIFTS & MORTGAGE FINANCE (0.1%) $ 2,000 Independence Community Bank Corp., Notes(m) 3.50% 6/20/2013 $ 1,904 ---------- Total corporate obligations (cost: $60,717) 59,512 ---------- EURODOLLAR AND YANKEE OBLIGATIONS (0.6%) FOREIGN GOVERNMENT (0.1%) 2,000 Republic of Poland, Notes (Poland) 5.25 1/15/2014 1,961 ---------- INTEGRATED OIL & GAS (0.2%) 2,000 BP Capital plc, Company Guaranty Notes (United Kingdom) 2.75 12/29/2006 1,992 ---------- INTEGRATED TELECOMMUNICATION SERVICES (0.1%) 2,000 Telecom Italia Capital, Guaranteed Senior Notes, Series A (Luxembourg)(b) 4.00 11/15/2008 1,965 ---------- OIL & GAS EXPLORATION & PRODUCTION (0.2%) 2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 1,968 ---------- Total eurodollar and yankee obligations (cost: $8,034) 7,886 ---------- ASSET-BACKED SECURITIES (0.6%) AIRLINES (0.2%) 1,447 America West Airlines, Inc., Pass-Through Certificates, Series 1996-1, Class A, EETC 6.85 7/02/2009 1,462 1,732 Northwest Airlines Corp., Pass-Through Certificates, Series 1999-2A, EETC(g) 7.58 3/01/2019 1,751 ---------- 3,213 ---------- ASSET-BACKED FINANCING (0.4%) 2,000 DaimlerChrysler Auto Trust, Series 2003-B, Class A2(b) 1.61 7/08/2006 1,999 2,000 Ford Credit Auto Owner Trust, Series 2004-A, Class A2(f) 2.13 10/15/2006 1,999 1,439 Harley-Davidson Motorcycle Trust, Series 2003-4, Class A1 1.47 4/15/2008 1,435 ---------- 5,433 ---------- Total asset-backed securities (cost: $8,731) 8,646 ----------
32 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE SECURITIES (0.3%) COMMERICAL MORTGAGE-BACKED SECURITIES $ 1,211 LB Commercial Conduit Mortgage Trust, Series 1995-C2, Class C 7.76% 9/25/2025 $ 1,244 2,000 Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1998-C1, Class A2 6.48 11/15/2026 2,125 ---------- Total commercial mortgage securities (cost: $3,429) 3,369 ---------- U.S. GOVERNMENT AGENCY ISSUES (8.4%)(k) ASSET-BACKED FINANCING (0.2%) 2,928 U.S. Small Business Administration, Participation Certificates, Series 2003-20 F 4.07 6/01/2023 2,716 ---------- DEBENTURES (1.3%) Fannie Mae,(+) 5,000 CPI Floating Rate Note 2.83(c) 2/17/2009 4,964 5,000 Subordinated Note 5.25 8/01/2012 4,967 7,100 Benchmark Note 7.13 6/15/2010 8,046 ---------- 17,977 ---------- MORTGAGE-BACKED PASS-THROUGH SECURITIES (5.5%) Fannie Mae,(+) 8,775 Pool 706349 5.00 5/01/2033 8,452 1,132 Pool 610989 6.50 10/01/2016 1,196 2,258 Pool 253180 6.50 2/01/2030 2,345 995 Pool 535164 7.00 2/01/2030 1,050 350 Pool 547483 7.00 8/01/2030 369 Freddie Mac,(+) 7,218 Pool C79394 5.50 4/01/2033 7,168 18,449 Pool C01491 6.00 2/01/2033 18,783 Government National Mortgage Assn., 3,062 Pool 780860 6.00 9/15/2028 3,129 2,539 Pool 603869 6.00 1/15/2033 2,590 533 Pool 340945 6.50 5/15/2023 558 731 Pool 352106 6.50 8/15/2023 766 296 Pool 366762 6.50 4/15/2024 310 2,339 Pool 781494 6.50 8/20/2031 2,429 1,487 Pool 577423 6.50 1/15/2032 1,547 13,946 Pool 781496 6.50 9/15/2032 14,515 2,413 Pool 575469 7.00 12/15/2031 2,554 1,642 Pool 583624 7.00 6/15/2032 1,737
33 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- Government National Mortgage Assn., $ 37 Pool 206743 7.50% 3/15/2017 $ 40 156 Pool 207904 7.50 3/15/2017 170 18 Pool 207950 7.50 3/15/2017 20 1,311 Pool 002934 7.50 6/20/2030 1,405 318 Pool 003070 7.50 4/20/2031 341 69 Pool 166093 8.00 6/15/2016 76 21 Pool 166108 8.00 6/15/2016 22 34 Pool 177786 8.00 9/15/2016 37 52 Pool 186000 8.00 11/15/2016 57 32 Pool 193968 8.00 12/15/2016 36 39 Pool 203822 8.00 3/15/2017 43 1,185 Pool 002958 8.00 8/20/2030 1,287 4 Pool 034140 8.50 9/15/2009 4 15 Pool 138007 8.50 6/15/2016 17 7 Pool 164021 8.50 6/15/2016 8 33 Pool 159980 8.50 7/15/2016 37 4 Pool 171477 8.50 9/15/2016 4 5 Pool 176311 8.50 9/15/2016 6 11 Pool 177247 8.50 9/15/2016 12 14 Pool 174005 8.50 12/15/2016 15 29 Pool 197279 8.50 12/15/2016 32 52 Pool 190671 8.50 1/15/2017 57 7 Pool 197400 8.50 1/15/2017 8 33 Pool 201986 8.50 1/15/2017 36 32 Pool 185270 8.50 2/15/2017 36 5 Pool 157116 9.00 6/15/2016 5 1 Pool 162801 9.00 7/15/2016 1 4 Pool 166282 9.00 7/15/2016 5 3 Pool 164502 9.00 8/15/2016 3 7 Pool 172663 9.00 9/15/2016 8 3 Pool 170810 9.00 10/15/2016 3 26 Pool 031433 9.50 6/15/2009 28 3 Pool 032271 9.50 6/15/2009 3 45 Pool 034679 9.50 6/15/2009 50 11 Pool 038310 9.50 6/15/2009 12 7 Pool 035052 9.50 9/15/2009 8 28 Pool 167971 9.50 7/15/2016 31 56 Pool 172771 9.50 9/15/2016 62 6 Pool 182369 9.50 11/15/2016 7 3 Pool 185417 9.50 11/15/2016 4 36 Pool 186335 9.50 11/15/2016 40
34 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- Government National Mortgage Assn., $ 16 Pool 187909 9.50% 11/15/2016 $ 18 1 Pool 184544 9.50 12/15/2016 1 7 Pool 190555 9.50 12/15/2016 8 97 Pool 189802 9.50 4/15/2017 109 28 Pool 214646 9.50 5/15/2017 32 16 Pool 225137 9.50 8/15/2017 18 42 Pool 037733 10.00 11/15/2009 46 10 Pool 037889 10.00 11/15/2009 11 28 Pool 037888 10.00 11/15/2009 31 25 Pool 036897 10.00 12/15/2009 28 13 Pool 059731 11.50 3/15/2013 15 ---------- 73,891 ---------- COLLATERALIZED MORTGAGE OBLIGATIONS (0.9%) Freddie Mac,(+) 5,123 Series 2389 VH 6.00 12/01/2031 5,309 180 Series 2412 VA 6.50 11/15/2012 180 Government National Mortgage Assn., 5,000 Series 2003-50 PC 5.50 3/16/2032 4,913 1,067 Series 1999-11VC 6.50 5/20/2014 1,077 1,000 Series 2001-49 VB 7.00 11/16/2016 1,055 ---------- 12,534 ---------- OTHER U.S. GOVERNMENT AGENCIES (0.5%) 2,000 Perforadora Centrale S.A. de C.V. "A", Guaranteed Bond, Series A, Title XI 5.24 12/15/2018 1,984 4,524 Rowan Companies, Inc., Guaranteed Bond, Title XI 2.80 10/20/2013 4,202 ---------- 6,186 ---------- Total U.S. government agency issues (cost: $113,256) 113,304 ---------- U.S. TREASURY SECURITIES (2.6%) INFLATION-INDEXED NOTES (1.2%)(a) 8,441 3.38%, 1/15/2012(g) 9,409 6,459 3.50%, 1/15/2011 7,212 ---------- 16,621 ----------
35 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- NOTES (1.4%) $ 6,000 2.63%, 11/15/2006(g) $ 5,973 6,000 3.88%, 2/15/2013(g) 5,715 7,000 4.00%, 2/15/2014(g) 6,657 ---------- 18,345 ---------- Total U.S. Treasury securities (cost: $33,723) 34,966 ---------- MUNICIPAL BONDS (0.7%) COMMUNITY SERVICE (0.2%) 2,000 Jicarilla Apache Nation, NM, RB 2.95% 12/01/2006 1,983 ---------- ELECTRIC UTILITIES (0.1%) 1,000 Ohio State Water Development Auth. PCRB, Series 2000A(e) 2.20 4/01/2024 1,000 ---------- ENVIRONMENTAL SERVICES (0.3%) 2,000 California State Financing Auth. PCRB, (Republic Services, Inc.)(e) 2.00 12/01/2033 1,998 2,500 Gulf Coast Waste Disposal Auth., TX, RB, Series A(e) 2.50 5/01/2028 2,499 ---------- 4,497 ---------- HOSPITAL (0.1%) 2,000 Rhode Island State Health & Education RB, Series C (LOC - Citizens Bank of Rhode Island)(e) 3.60 9/15/2033 1,983 ---------- Total municipal bonds (cost: $9,500) 9,463 ---------- Total bonds (cost: $237,390) 237,146 ---------- Number of Shares - --------- MONEY MARKET INSTRUMENTS (8.6%) MONEY MARKET FUNDS (1.2%) ------------------------- 4,788,087 AIM Short-Term Investment Co. Liquid Assets Portfolio(h,i) 1.01 - 4,788 6,004,976 Merrill Lynch Premier Institutional Fund(h,i) 0.99 - 6,005 6,004,080 SSgA Prime Money Market Fund(h) 0.91 - 6,004 ---------- 16,797 ----------
36 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- VARIABLE-RATE DEMAND NOTES (0.2%)(n) ------------------------------------ ELECTRIC UTILITIES $ 2,000 Sempra Energy ESOP, Series 1999 (NBGA-Sempra Energy)(b) 1.50% 11/01/2014 $ 2,000 ---------- REPURCHASE AGREEMENTS (4.5%) ---------------------------- 14,000 Banc One Capital Markets, Inc., 1.02%, acquired on 5/28/2004 and due 6/01/2004 at $14,000 (collateralized by $20,114 of Fannie Mae Notes(k,+), 0.99% - 5.00%, due 9/06/2005 - 5/25/2033; market value of $14,280)(i,j) 14,000 15,000 CS First Boston LLC, 1.03%, acquired on 5/28/2004 and due 6/01/2004 at $15,000 (collateralized by $50,830 of U.S.Treasury STRIPS, 5.75%(l), due 8/15/2025; market value of $15,301)(i,j) 15,000 17,500 Lehman Brothers, Inc., 1.01%, acquired on 5/28/2004 and due 6/01/2004 at $17,500 (collateralized by $12,755 of FICO STRIPS, 5.84%(l), due 5/11/2018; $8,220 of Freddie Mac Notes(k,+), 1.62%, due 6/06/2008; and $8,675 of Tennessee Valley Auth. Bonds, 6.05%(l), due 12/15/2017; combined market value of $17,851)(i,j) 17,500 14,335 Morgan Stanley & Co. Inc., 1.01%, acquired on 5/28/2004 and due 6/01/2004 at $14,335 (collateralized by $15,020 of Fannie Mae Discount Notes(+), due 2/04/2005; market value of $14,844)(i, j) 14,335 ---------- 60,835 ----------
37 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - -------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (2.0%) ----------------------- AGRICULTURAL PRODUCTS (0.4%) $ 5,774 Dairy Farmers of America, Inc.(b,d) 1.09% 6/01/2004 $ 5,774 ---------- ASSET-BACKED FINANCING (1.6%) 8,100 Beacon Funding LLC(i) 1.17 6/17/2004 8,096 13,000 Park Granada LLC(i) 1.12 6/01/2004 13,000 ---------- 21,096 ---------- 26,870 ---------- DISCOUNT NOTE (0.7%) -------------------- 9,482 Federal Home Loan Bank(+) 0.81 6/01/2004 9,482 ---------- Total money market instruments (cost: $115,984) 115,984 ---------- TOTAL INVESTMENTS (COST: $1,274,221) $1,439,665 ==========
38 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA CORNERSTONE STRATEGY 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. PORTFOLIO DESCRIPTION ABBREVIATIONS CPI Consumer Price Index EETC Enhanced Equipment Trust Certificate ESOP Employee Stock Ownership Plan PCRB Pollution Control Revenue Bond MTN Medium-Term Note RB Revenue Bond CREDIT ENHANCEMENTS - add the financial strength of the provider of the enhancement to support the issuer's ability to repay the principal when due. A high-quality bank, insurance company, or other corporation, or a collateral trust may provide the enhancement. (LOC) Principal and interest payments are guaranteed by a bank letter of credit (NBGA) Principal and interest payments are guaranteed by a nonbank guarantee agreement. SPECIFIC NOTES - -------------------------------------------------------------------------------- (a) U.S. Treasury inflation-indexed notes - designed to provide a real rate of return after being adjusted over time to reflect the impact of inflation. Their principal value periodically adjusts to the rate 39 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 of inflation. They trade at the prevailing real, or after inflation, interest rates. The U.S. Treasury guarantees repayment of these securities of at least their face value in the event of sustained deflation or a drop in prices. Inflation adjustments to the face value of these securities are included in interest income. (b) Restricted security that is not registered under the Securities Act of 1933. A resale of this security in the United States may occur in an exempt transaction to a qualified institutional buyer as defined by Rule 144A, and as such has been deemed liquid by USAA Investment Management Company (the Manager) under guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. (c) Variable- or floating-rate security - interest rate is adjusted periodically. The interest rate disclosed represents the current rate at May 31, 2004. (d) Commercial paper issued in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Unless this commercial paper is subsequently registered, a resale of this commercial paper in the United States must be effected in a transaction exempt from registration under the Securities Act of 1933. Section 4(2) commercial paper is normally resold to other investors through or with the assistance of the issuer or an investment dealer who makes a market in this security, and as such has been deemed liquid by the Manager under guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. (e) Security has a mandatory put, which shortens its effective maturity date. (f) Security was fair valued at May 31, 2004, by the Manager in accordance with valuation procedures approved by the Board of Trustees. (g) The security or a portion thereof was out on loan as of May 31, 2004. (h) Rate represents the money market fund annualized seven-day yield at May 31, 2004. 40 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 (i) Investment was purchased with the cash collateral proceeds received from securities loaned. (j) 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. (k) U.S. government agency issues - mortgage-backed securities issued by Government National Mortgage Association (GNMA) and certain other U.S. government agencies are supported by the full faith and credit of the U.S. government. Securities issued by government-sponsored enterprises (GSEs) indicated with "+" are supported only by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. government. (l) Zero-coupon security. Rate represents the effective yield at date of purchase. (m) Callable security expected to be called prior to maturity due to a scheduled change from a fixed to a floating interest rate, which is likely to be uneconomical to the issuer. (n) Variable-rate demand notes (VRDNs) - provide the right, on any business day, to sell the security at face value on either that day or in seven days. The interest rate is adjusted at a stipulated daily, weekly, monthly, or quarterly interval to a rate that reflects current market conditions. VRDNs will normally trade as if the maturity is the earlier put date, even though stated maturity is longer. (o) Represents less than 0.1% of net assets. * Non-income-producing security for the year ended May 31, 2004. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 41 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 ASSETS Investments in securities, at market value (including securites on loan of $88,281) (identified cost of $1,274,221) $1,439,665 Cash 714 Cash denominated in foreign currencies (identified cost of $1,355) 1,369 Receivables: Capital shares sold 227 USAA Investment Management Company 63 Dividends and interest 4,130 Securities sold 5,432 Other 125 ---------- Total assets 1,451,725 ---------- LIABILITIES Payables: Upon return of securities loaned 92,724 Securities purchased 7,438 Capital shares redeemed 533 Unrealized depreciation on foreign currency contracts held, at value 1 Accrued management fees 845 Accrued transfer agent's fees 5 Other accrued expenses and payables 135 ---------- Total liabilities 101,681 ---------- Net assets applicable to capital shares outstanding $1,350,044 ========== NET ASSETS CONSIST OF: Paid-in capital $1,142,780 Accumulated undistributed net investment income 7,333 Accumulated net realized gain on investments 34,459 Net unrealized appreciation of investments 165,444 Net unrealized appreciation on foreign currency translations 28 ---------- Net assets applicable to capital shares outstanding $1,350,044 ========== Capital shares outstanding, unlimited number of shares authorized, no par value 52,328 ========== Net asset value, redemption price, and offering price per share $ 25.80 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 42 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA CORNERSTONE STRATEGY FUND YEAR ENDED MAY 31, 2004 INVESTMENT INCOME Dividends (net of foreign taxes withheld of $887) $ 14,915 Interest 9,774 Securities lending 273 -------- Total income 24,962 -------- EXPENSES Management fees 9,485 Administrative and servicing fees 1,897 Transfer agent's fees 2,607 Custody and accounting fees 555 Postage 289 Shareholder reporting fees 128 Trustees' fees 6 Registration fees 36 Professional fees 91 Other 29 -------- Total expenses 15,123 Expenses reimbursed (73) Expenses paid indirectly (300) -------- Net expenses 14,750 -------- NET INVESTMENT INCOME 10,212 -------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on: Investments (unaffiliated transactions) 92,881 Investments (affiliated transactions) 1,182 Foreign currency transactions (253) Change in net unrealized appreciation/depreciation of: Investments 89,628 Foreign currency translations (26) -------- Net realized and unrealized gain 183,412 -------- Increase in net assets resulting from operations $193,624 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 43 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA CORNERSTONE STRATEGY FUND YEARS ENDED MAY 31,
2004 2003 ------------------------- FROM OPERATIONS Net investment income $ 10,212 $ 14,301 Net realized gain (loss) on investments 94,063 (25,601) Net realized loss on foreign currency transactions (253) (83) Change in net unrealized appreciation/depreciation of: Investments 89,628 (22,114) Foreign currency translations (26) (16) ------------------------- Increase (decrease) in net assets resulting from operations 193,624 (33,513) ------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (10,866) (13,120) Net realized gains - (21,185) ------------------------- Distributions to shareholders (10,866) (34,305) ------------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 146,191 85,029 Shares issued for dividends reinvested 10,569 33,431 Cost of shares redeemed (122,018) (115,229) ------------------------- Increase in net assets from capital share transactions 34,742 3,231 ------------------------- Net increase (decrease) in net assets 217,500 (64,587) NET ASSETS Beginning of period 1,132,544 1,197,131 ------------------------- End of period $1,350,044 $1,132,544 ========================= Accumulated undistributed net investment income: End of period $ 7,333 $ 6,516 ========================= CHANGE IN SHARES OUTSTANDING Shares sold 5,904 4,055 Shares issued for dividends reinvested 416 1,600 Shares redeemed (4,956) (5,491) ------------------------- Increase in shares outstanding 1,364 164 =========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 44 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA CORNERSTONE STRATEGY 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 Cornerstone Strategy Fund (the Fund). The Fund's investment objective is to achieve a positive, inflation-adjusted rate of return and a reasonably stable value of Fund shares, thereby preserving the purchasing power of shareholders' capital. 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 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 45 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 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. Other debt securities are valued each business day by a pricing service (the Service) approved by the Trust's Board of Trustees. The Service uses the mean between quoted bid and asked prices or the last sales price to price securities when, in the Service's judgment, these prices are readily available and are representative of the securities' market values. For many securities, such prices are not readily available. The Service generally prices these securities based on methods that include consideration of yields or prices of securities of comparable quality, coupon, maturity, and type; indications as to values from dealers in securities; and general market conditions. 46 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 6. 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 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 are amortized over the life of the respective securities, using the effective yield method for long-term securities and the straight-line method for short-term 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 47 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 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 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 48 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 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. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and payment for securities that have been purchased by the Fund on a when-issued basis can take place a month or more after the trade date. During the period prior to settlement, these securities do not earn interest, are subject to market fluctuation, and may increase or decrease in value prior to their delivery. The Fund maintains segregated assets with a market value equal to or greater than the amount of its purchase commitments. The purchase of securities on a when-issued basis may increase the volatility of the Fund's net asset value to the extent that the Fund makes such purchases while remaining substantially fully invested. The Fund had no when-issued commitments as of May 31, 2004. G. 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 May 31, 2004, these fee-offset arrangements reduced the Fund's expenses by $300,000. H. 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. 49 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 I. 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 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 $5,000. The Fund had no borrowings under either of these agreements during the year ended May 31, 2004. 50 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND 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 resulted in reclassifications made to the statement of assets and liabilities to increase paid-in capital by $884,000, increase accumulated undistributed net investment income by $1,471,000, and decrease accumulated net realized gain on investments by $2,355,000. This includes differences in accounting for security paydown losses, foreign currency gains and losses, other security transactions, and the utilization of earnings and profits distributed to shareholders on redemptions of shares as part of the dividends-paid deduction for federal income tax purposes. This reclassification has no effect on net assets. The tax character of distributions paid during the years ended May 31, 2004, and 2003, was as follows:
2004 2003 ------------------------------ Ordinary income* $10,866,000 $16,655,000 Long-term realized capital gains 884,000 17,650,000
*Includes distribution of short-term realized capital gains, if any, which are taxable as ordinary income. For the fiscal year ended May 31, 2004, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Of the distributions paid during the fiscal year, the maximum amount that may be considered qualified dividend income is $10,866,000. 51 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 The information and distributions reported herein may differ from the information and distributions reported to shareholders for the calendar year ending December 31, 2004, which will be reported in conjunction with the 2004 Form 1099-DIV. As of May 31, 2004, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 12,265,000 Undistributed long-term capital gains 39,794,000 Accumulated capital and other losses (135,000) Unrealized appreciation of investments 155,311,000 Unrealized appreciation on foreign currency translations 29,000
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 and differences in the timing of recognition of unrealized gains and losses on certain investments. 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 $22,715,000 to offset capital gains. At May 31, 2004, the Fund had a current post-October currency loss of $135,000, for federal income tax purposes. The post-October loss will be recognized on the first day of the following fiscal year. (4) INVESTMENT TRANSACTIONS - -------------------------------------------------------------------------------- Cost of purchases and proceeds from sales/maturities of securities, excluding short-term securities, for the year ended May 31, 2004, were $1,161,028,000 and $1,134,873,000, respectively. 52 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 The cost of securities at May 31, 2004, for federal income tax purposes, was $1,284,354,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2004, for federal income tax purposes, were $170,614,000 and $15,303,000, respectively, resulting in net unrealized appreciation of $155,311,000. (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. 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 5,603 $51 $51 $- Japanese Yen - --------------------------------------------------------------------------------
53 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 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 475 $348 $348 $- Canadian Dollar 6/01/2004 12 21 21 - Pound Sterling 6/01/2004 584 87 86 (1) Norwegian Krone 6/03/2004 443 66 66 - Norwegian Krone - -------------------------------------------------------------------------------- $522 $521 $(1) - --------------------------------------------------------------------------------
(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 value of approximately $88,281,000 and received cash collateral of $92,724,000 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, directly manages portions of the Fund's 54 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 portfolio, and provides portfolio management oversight of the Fund's assets managed by subadvisers. 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 Global Flexible Funds Index, which tracks the total return performance of the 30 largest funds in the Lipper Global Flexible Portfolio Funds category. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 0.75% 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 (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%. 55 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 For the year ended May 31, 2004, the Fund incurred total management fees, paid or payable to the Manager, of $9,485,000, which included no performance adjustment. B. SUBADVISORY ARRANGEMENTS - The Manager has entered into investment subadvisory agreements with Wellington Management Company, LLP (Wellington Management) and MFS Investment Management (MFS), under which Wellington Management directs the investment and reinvestment of portions of the Fund's assets invested in U.S. stocks and real estate securities (as allocated from time to time by the Manager), and MFS directs the investment and reinvestment of the portion of the Fund's assets invested in international stocks (as allocated from time to time by the Manager). The Manager (not the Fund) pays Wellington Management and MFS 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 $1,897,000. D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the Fund's average annual net assets, 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. For the year ended May 31, 2004, the Fund incurred reimbursable expenses of $73,000. 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. 56 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 For the year ended May 31, 2004, the Fund incurred transfer agent's fees, paid or payable to USAA Transfer Agency Company, of $2,607,000. 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. (9) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS - -------------------------------------------------------------------------------- During the year ended May 31, 2004, in accordance with affiliated transaction procedures approved by the Trust's Board of Trustees, security transactions were executed between the Fund and the following affiliated USAA funds at the then-current market price with no brokerage commissions incurred:
NET REALIZED COST TO GAIN (LOSS) SELLER PURCHASER PURCHASER TO SELLER - ------------------------------------------------------------------------------------- USAA Cornerstone Strategy Fund USAA Precious Metals and Minerals Fund $5,731,000 $1,182,000 USAA Life Diversified USAA Cornerstone Assets Fund Strategy Fund 499,000 (1,000)
57 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2004 (10) 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 $ 22.22 $ 23.57 $ 25.26 $ 26.27 $ 27.29 period -------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .22 .27 .39(c) .58 .63 Net realized and unrealized gain (loss) 3.57 (.93) (1.16)(c) (.40) .80 -------------------------------------------------------------------------------------- Total from investment operations 3.79 (.66) (.77) .18 1.43 -------------------------------------------------------------------------------------- Less distributions: From net investment income (.21) (.26) (.57) (.48) (.78) From realized capital gains - (.43) (.35) (.71) (1.67) -------------------------------------------------------------------------------------- Total distributions (.21) (.69) (.92) (1.19) (2.45) -------------------------------------------------------------------------------------- Net asset value at end of period $ 25.80 $ 22.22 $ 23.57 $ 25.26 $ 26.27 ====================================================================================== Total return(%)* 17.08 (2.59) (2.96) .58 5.49 Net assets at end of period (000) $1,350,044 $1,132,544 $1,197,131 $1,016,101 $1,097,170 Ratio of expenses to average net assets(%)** 1.19(a,b) 1.19(a,b) 1.16(a,b) 1.07(a) 1.09 Ratio of expenses to average net assets, excluding reimbursements(%)** 1.20(a) 1.27(a) 1.17(a) N/A N/A Ratio of net investment income to average net assets(%)** .81 1.34 1.69(c) 2.26 2.43 Portfolio turnover(%) 90.94 131.07 30.52 54.67 37.46 * Assumes reinvestment of all net investment income and realized capital gain distributions during the period. ** For the year ended May 31, 2004, average net assets were $1,265,330,000. (a) Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios as follows: (.02%) (.01%) - - N/A (b) Effective April 26, 2002, the Manager voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the Fund's average net assets. (c) In 2001, a change in amortization method was made as required by a recently issued accounting pronouncement. Without that change, these amounts would have been: Net investment income $ .39 Net realized and unrealized loss $(1.16) Ratio of net investment income to average net assets 1.70%
58 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. 59 . . . 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. 60 . . . 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. 61 . . . 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. 62 . . . 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, 63 . . . 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. 64 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 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_____________________________________________________________________ _____________________________________________________________________ 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 23405-0704 (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 accrued or paid by the Registrant to its 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, 2003 and 2004 were $140,400 and $154,195, respectively. (b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Funds' transfer agent for professional services rendered by Ernst & Young LLP for audit-related services related to the annual study of its internal controls for fiscal years ending May 31, 2003 and May 31, 2004 were $15,000 and $15,500, respectively. The Registrant did not accrue or pay Ernst & Young LLP any audit-related fees. (c) TAX FEES. The aggregate fees paid or accrued by the Registrant for professional services rendered by Ernst & Young, LLP for tax services are detailed in the table below:
Review of Analysis Review of Federal, State of Passive US/UK Tax and City Income Foreign Quarterly Treaty and and tax returns Investment Diversification issues related and excise tax Company Review under to grantor calculations Status Subchapter M trust TOTAL - --------------------------------------------------------------------------------------------- FYE 5/31/2003 $38,395 -0- -0- -0- $38,395 FYE 5/31/2004 $39,700 $4,583 $5,400 $1,547 $51,230 - --------------------------------------------------------------------------------------------- TOTAL $78,095 $4,583 $5,400 $1,547 $89,625 - ---------------------------------------------------------------------------------------------
All tax services were preapproved by the Audit Committee of the Registrant. (d) ALL OTHER FEES. The Funds' investment adviser and transfer agent, USAA Investment Management Company (IMCO) and USAA Transfer Agency Company (dba USAA Shareholder Account Services) (SAS) paid Ernst & Young LLP aggregate fees of $21,036 for non-audit services related to the Funds for the fiscal year ended May 31, 2003. The services are detailed in the table below: - -------------------------------------------------------------------------------- DESCRIPTION OF OTHER SERVICES - 5/31/2003 - -------------------------------------------------------------------------------- DESCRIPTION OF SERVICE AMOUNT PAID PARTY PAYING - -------------------------------------------------------------------------------- Review of Corporate $ 7,960 IMCO Governance Procedures Review of Anti-Money $ 2,500 IMCO Laundering Procedures As of Review $ 4,000 SAS Reporting and Oversight Review $ 6,576 IMCO - -------------------------------------------------------------------------------- TOTAL $21,036 - -------------------------------------------------------------------------------- These services provided in the fiscal year ending May 31, 2003 were not pre-approved by the Audit Committee because the engagements occurred prior to the rule's effectiveness requiring such pre-approval. Any such other non-audit fees to be provided to the Funds' investment adviser or transfer agent (or other affiliated service provider to the Funds) directly related to fund operations will be subject to the pre-approval requirement. No such fees were paid in the fiscal year ending May 31, 2004. (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 total aggregate non-audit fees accrued or paid to Ernst & Young for services rendered to the Registrant, and the Registrant's investment adviser, IMCO, and transfer agent, SAS, for the fiscal years ending May 31, 2003 and May 31, 2004 were $114,431 and $88,730, respectively. (h) Ernst & Young LLP provided non-audit services to IMCO in 2003 and 2004 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: OCTOBER 22, 2004 ------------------------------ 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: OCTOBER 26, 2004 ------------------------------ By:* /s/ DAVID HOLMES -------------------------------------------- Signature and Title: David Holmes/Treasurer Date: OCTOBER 26, 2004 ------------------------------ *Print the name and title of each signing officer under his or her signature. EX-99.CERT 3 certit053104amended.txt IT CERTIFICATION AMENDED 05-31-2004 ITEM 11 (a)(2). EXHIBITS. CERTIFICATIONS I, Christopher W. Claus, certify that: -------------------- 1. I have reviewed this report on Form N-CSR/A 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: October 26, 2004 CHRISTOPHER W. CLAUS ---------------------------- Christopher W. Claus President I, David Holmes, certify that: 1. I have reviewed this report on Form N-CSR/A 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: October 26, 2004 DAVID HOLMES ---------------------------- David Holmes Treasurer EX-99.906 CERT 4 cert906it053104amended.txt IT 906 CERTIFICATION AMENDED 05-31-2004 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/A (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: October 26, 2004 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/A (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: October 26, 2004 DAVID HOLMES ----------------------- ------------------------------- David Holmes Treasurer -----END PRIVACY-ENHANCED MESSAGE-----