-----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, E6mckTOc+4KPaiA27xGJg8PTUe4kU/apbK/K154buuigHXm/Ymqk1LtBT9Bzeeea 6p0JbwkxJiWaAL+7hXv5BA== 0000745903-04-000053.txt : 20041105 0000745903-04-000053.hdr.sgml : 20041105 20041104175826 ACCESSION NUMBER: 0000745903-04-000053 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: 041120728 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 ncsraintl053104.txt FORM N-CSR AMENDED USAA INTERNATIONAL 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, INTERNATIONAL FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2004 [LOGO OF USAA] USAA(R) USAA INTERNATIONAL Fund [GRAPHIC OF USAA INTERNATIONAL 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 14 Report of Independent Registered Public Accounting Firm 15 Portfolio of Investments 16 Notes to Portfolio of Investments 21 Financial Statements 22 Notes to Financial Statements 25 DIRECTORS' AND OFFICERS' INFORMATION 37
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 INTERNATIONAL FUND OBJECTIVE - -------------------------------------------------------------------------------- Capital appreciation with current income as a secondary objective. TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- Invests at least 80% of the Fund's assets in equity securities of foreign (including emerging market) companies. - -------------------------------------------------------------------------------- 5/31/04 5/31/03 - -------------------------------------------------------------------------------- Net Assets $479.5 Million $347.5 Million Net Asset Value Per Share $20.45 $16.15 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/04 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 27.65% 3.44% 6.02% 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]
USAA INTERNATIONAL LIPPER INTERNATIONAL LIPPER INTERNATIONAL MSCI-EAFE FUND FUNDS INDEX FUNDS AVERAGE INDEX ------------- -------------------- -------------------- --------- 5/31/1994 $10,000 $10,000 $10,000 $10,000 6/30/1994 9,908 9,842 9,864 10,141 7/31/1994 10,149 10,146 10,154 10,239 8/31/1994 10,618 10,496 10,455 10,481 9/30/1994 10,560 10,226 10,190 10,151 10/31/1994 10,682 10,408 10,395 10,489 11/30/1994 10,223 9,922 9,916 9,985 12/31/1994 10,106 9,790 9,827 10,048 1/31/1995 9,418 9,304 9,378 9,662 2/28/1995 9,320 9,302 9,418 9,634 3/31/1995 9,580 9,547 9,712 10,235 4/30/1995 9,983 9,897 10,035 10,620 5/31/1995 10,249 9,995 10,151 10,493 6/30/1995 10,327 10,033 10,184 10,309 7/31/1995 10,857 10,584 10,732 10,951 8/31/1995 10,603 10,406 10,511 10,533 9/30/1995 10,727 10,580 10,695 10,739 10/31/1995 10,525 10,359 10,499 10,450 11/30/1995 10,610 10,468 10,614 10,741 12/31/1995 10,944 10,771 10,919 11,174 1/31/1996 11,305 11,026 11,150 11,220 2/29/1996 11,502 11,073 11,211 11,257 3/31/1996 11,711 11,246 11,402 11,497 4/30/1996 12,229 11,612 11,762 11,831 5/31/1996 12,269 11,599 11,743 11,613 6/30/1996 12,354 11,705 11,825 11,678 7/31/1996 11,763 11,310 11,407 11,337 8/31/1996 12,118 11,458 11,568 11,362 9/30/1996 12,339 11,714 11,827 11,664 10/31/1996 12,292 11,667 11,779 11,544 11/30/1996 12,949 12,216 12,317 12,004 12/31/1996 13,040 12,325 12,382 11,849 1/31/1997 13,455 12,341 12,361 11,435 2/28/1997 13,523 12,564 12,527 11,622 3/31/1997 13,543 12,630 12,557 11,664 4/30/1997 13,632 12,685 12,596 11,726 5/31/1997 14,320 13,401 13,359 12,489 6/30/1997 15,048 14,044 13,991 13,177 7/31/1997 15,528 14,495 14,411 13,391 8/31/1997 14,699 13,450 13,388 12,391 9/30/1997 15,669 14,313 14,234 13,085 10/31/1997 14,586 13,227 13,179 12,079 11/30/1997 14,108 13,116 13,079 11,956 12/31/1997 14,218 13,219 13,201 12,060 1/31/1998 14,218 13,538 13,533 12,612 2/28/1998 15,150 14,398 14,430 13,421 3/31/1998 16,089 15,180 15,170 13,834 4/30/1998 16,466 15,413 15,401 13,944 5/31/1998 16,222 15,444 15,434 13,876 6/30/1998 15,860 15,309 15,319 13,981 7/31/1998 15,783 15,543 15,535 14,123 8/31/1998 13,111 13,307 13,314 12,373 9/30/1998 12,652 12,893 12,867 11,994 10/31/1998 13,823 13,841 13,832 13,244 11/30/1998 14,221 14,535 14,550 13,922 12/31/1998 14,780 14,892 14,994 14,472 1/31/1999 14,987 14,983 15,141 14,429 2/28/1999 14,451 14,597 14,753 14,085 3/31/1999 14,765 15,083 15,263 14,673 4/30/1999 15,561 15,786 15,974 15,268 5/31/1999 15,147 15,199 15,322 14,481 6/30/1999 15,737 15,920 16,099 15,046 7/31/1999 16,300 16,276 16,497 15,493 8/31/1999 16,472 16,404 16,649 15,550 9/30/1999 16,472 16,457 16,704 15,706 10/31/1999 16,611 17,031 17,327 16,294 11/30/1999 17,560 18,281 18,548 16,861 12/31/1999 19,014 20,527 20,767 18,374 1/31/2000 18,268 19,325 19,629 17,206 2/29/2000 18,998 20,600 20,833 17,670 3/31/2000 19,492 20,653 20,938 18,355 4/30/2000 18,544 19,343 19,613 17,389 5/31/2000 18,065 18,812 19,021 16,964 6/30/2000 18,957 19,683 19,845 17,627 7/31/2000 18,315 19,045 19,183 16,888 8/31/2000 18,597 19,367 19,492 17,035 9/30/2000 17,632 18,238 18,384 16,206 10/31/2000 16,906 17,619 17,754 15,823 11/30/2000 16,214 16,875 17,036 15,229 12/31/2000 16,957 17,505 17,678 15,771 1/31/2001 17,239 17,608 17,766 15,763 2/28/2001 16,018 16,373 16,494 14,581 3/31/2001 14,865 15,222 15,280 13,609 4/30/2001 16,009 16,148 16,277 14,555 5/31/2001 15,565 15,756 15,851 14,041 6/30/2001 15,010 15,311 15,307 13,467 7/31/2001 14,917 14,913 14,916 13,222 8/31/2001 14,789 14,614 14,547 12,887 9/30/2001 13,243 13,022 13,001 11,581 10/31/2001 13,593 13,375 13,323 11,878 11/30/2001 14,131 13,874 13,834 12,316 12/31/2001 14,486 14,122 14,034 12,389 1/31/2002 13,985 13,552 13,448 11,731 2/28/2002 14,244 13,742 13,535 11,813 3/31/2002 15,021 14,468 14,243 12,509 4/30/2002 15,073 14,570 14,305 12,535 5/31/2002 15,219 14,778 14,472 12,693 6/30/2002 14,736 14,195 13,909 12,188 7/31/2002 13,243 12,778 12,534 10,985 8/31/2002 13,320 12,788 12,505 10,960 9/30/2002 12,327 11,411 11,193 9,783 10/31/2002 13,061 12,003 11,724 10,309 11/30/2002 13,303 12,571 12,235 10,777 12/31/2002 13,171 12,169 11,836 10,414 1/31/2003 12,614 11,723 11,375 9,979 2/28/2003 12,309 11,376 11,110 9,750 3/31/2003 12,196 11,098 10,883 9,559 4/30/2003 13,362 12,196 11,876 10,496 5/31/2003 14,050 12,980 12,587 11,132 6/30/2003 14,250 13,286 12,864 11,401 7/31/2003 14,398 13,659 13,173 11,677 8/31/2003 14,564 14,053 13,503 11,959 9/30/2003 14,938 14,335 13,778 12,327 10/31/2003 15,643 15,190 14,601 13,096 11/30/2003 16,157 15,495 14,894 13,387 12/31/2003 17,373 16,549 15,950 14,433 1/31/2004 17,645 16,905 16,224 14,637 2/29/2004 18,127 17,291 16,575 14,975 3/31/2004 18,004 17,376 16,625 15,059 4/30/2004 17,785 16,858 16,129 14,718 5/31/2004 17,934 16,848 16,142 14,749
[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 International Fund to the following benchmarks: o The Lipper International Funds Index, which tracks the total return performance of the 30 largest funds within the Lipper International Funds category. o The Lipper International Funds Average, an average performance level of all international funds, reported by Lipper Inc., an independent organization that monitors the performance of mutual funds. o The Morgan Stanley Capital International Europe, Australia and Far East (MSCI-EAFE) Index, an unmanaged index that 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. 8 M A N A G E R ' S ==================-------------------------------------------------------------- COMMENTARY on the Fund DAVID R. MANNHEIM MARCUS L. SMITH MFS Investment Management MFS Investment Management - -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? The USAA International Fund had a total return of 27.65% for the year ended May 31, 2004. This compares to a return of 28.54% for the Lipper International Funds Average, 29.80% for the Lipper International Funds Index, and 32.50% for the Morgan Stanley Capital International Europe, Australia and Far East (MSCI-EAFE) Index for the period. * * * * THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR RATING(TM) OF 4 STARS IN THE FOREIGN LARGE BLEND FUNDS CATEGORY (377 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. With respect to the foreign large blend funds, the USAA International Fund received a Morningstar Rating of 5 stars for the three-year period among 377 funds and 4 stars for the five- and 10-year periods among 282 and 79 funds, respectively, through May 31, 2004. Ratings are based on risk-adjusted returns. REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. 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 ========================-------------------------------------------------------- [LOGO OF LIPPER LEADER [LOGO OF LIPPER LEADER CONSISTENT RETURN] PRESERVATION] The Fund is listed as a Lipper Leader for Consistent Return and Preservation of 670 funds and 7,310 funds, respectively, within the Lipper International Funds category for the overall period ending May 31, 2004. HOW WOULD YOU CHARACTERIZE THE MARKET ENVIRONMENT? 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--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 Fund outperform the MSCI-EAFE Index in the second half of the reporting year. LIPPER RATINGS FOR CONSISTENT RETURN REFLECT FUNDS' HISTORICAL RISK-ADJUSTED RETURNS, ADJUSTED FOR VOLATILITY, RELATIVE TO PEERS AS OF MAY 31, 2004. THE USAA INTERNATIONAL FUND IN LIPPER'S INTERNATIONAL FUNDS CATEGORY RECEIVED A LIPPER LEADER RATING FOR CONSISTENT RETURN AMONG 670 FUNDS AND 484 FUNDS FOR THE THREE- AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF 4 FOR THE 10-YEAR PERIOD AMONG 112 FUNDS. LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS, AS OF MAY 31, 2004. PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE, MEASURES, AND FUNDS NAMED LIPPER LEADERS FOR PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY; THOSE LOSSES MAY BE LARGER FOR EQUITY AND MIXED-EQUITY FUNDS THAN FOR FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR PRESERVATION AMONG 7,310 FUNDS AND 5,007 FUNDS FOR THE THREE- AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF 2 FOR THE 10-YEAR PERIOD AMONG 1,526 FUNDS. RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF PERCENTILE RANKS FOR THE CONSISTENT RETURN AND PRESERVATION METRICS OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE LOWEST 20% ARE SCORED 5. LIPPER RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND LIPPER DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2004, REUTERS, ALL RIGHTS RESERVED. 10 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund HOW WAS THE FUND'S STOCK SELECTION? 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. Specifically, we owned two banks that benefited from their exposure to Eastern Europe - Erste Bank (Austria) and OTP Bank Ltd. GDR (Hungary). Also contributing positively were banking institution Depfa Bank plc (Ireland) and insurer QBE Insurance Group Ltd. (Australia). Our stock selection in the retail sector also helped performance, because Esprit Holdings Ltd. (Hong Kong) was up more than 100%. Retailer Next plc (U.K.) also recorded a big gain. The fact that we did not own Royal Dutch/Shell (U.K.) boosted performance, relatively speaking, because the large index holding suffered from several downward restatements of its oil reserves. Our stock selection in utilities and communications was a primary detractor. We owned BCE, Inc. (Canada), a telecommunications company not in the MSCI-EAFE Index that was relatively weak during the period due to regulatory and competitive concerns. We continued to hold the stock, however, because we believe its price fully reflected these concerns. Other holdings that detracted from performance in the sector were Brasil Telecom Participacoes S.A. ADR and France Telecom S.A. In the basic materials sector, one of our top holdings, L'Air Liquide S.A. (France), lagged other stocks in its group. Although the company continues to deliver solid earnings growth, it was less interesting to investors who were focused on companies with more cyclical exposure in the sector. We continue to like L'Air Liquide S.A. as a long-term investment. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-20. FRANCE TELECOM S.A. WAS SOLD OUT OF THE FUND PRIOR TO MAY 31, 2004. 11 . . . C O N T I N U E D ========================-------------------------------------------------------- HOW WAS THE FUND POSITIONED AT THE END OF THE PERIOD? 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, areas not represented in the MSCI-EAFE Index. Overall, we believe that valuations are reasonable because, while we expect interest rates to increase, corporate profits appear solid for the rest of 2004 and into 2005. We appreciate your trust and will continue to work hard on your behalf. 12 P O R T F O L I O ==================-------------------------------------------------------------- HIGHLIGHTS - -------------------------------------------- TOP 10 INDUSTRIES (% OF NET ASSETS) - -------------------------------------------- Pharmaceuticals 9.0% Diversified Banks 7.3% Integrated Telecommunication Services 6.1% Regional Banks 4.4% Apparel Retail 4.3% Broadcasting & Cable TV 3.8% Electrical Components & Equipment 3.4% Multi-Line Insurance 3.4% Automobile Manufacturers 3.3% Household Products 3.3% - --------------------------------------------
- -------------------------------------------- TOP 10 EQUITY HOLDINGS (% OF NET ASSETS) - -------------------------------------------- Reckitt Benckiser plc 3.3% Vodafone Group plc 2.6% L'Air Liquide S.A. 2.5% AXA S.A. 2.4% Roche Holdings AG 2.2% Canon, Inc. 2.1% News Corp. Ltd. 2.1% Hennes & Mauritz AB "B" 2.0% Schneider Electric S.A. 2.0% Total S.A. ADR 2.0% - --------------------------------------------
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-20. 13 . . . C O N T I N U E D ========================-------------------------------------------------------- ASSET ALLOCATION 5/31/04 [PIE CHART OF ASSET ALLOCATION] Other* 20.4% United Kingdom 19.4% France 15.2% Japan 15.1% United States 12.6% Switzerland 9.7% Sweden 6.3% Spain 3.7% Australia 3.7% Canada 3.1%
[END PIE CHART] *INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO AND MONEY MARKET INSTRUMENTS. PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-20. 14 D I S T R I B U T I O N S ==========================------------------------------------------------------ to SHAREHOLDERS (unaudited) USAA INTERNATIONAL FUND The following federal tax information related to the Fund's fiscal year ended May 31, 2004, is provided for information purposes only and should not be used for reporting to federal or state revenue agencies. Federal tax information for the calendar year will be reported to you on Form 1099-DIV in January 2005. The Fund has elected under Section 853 of the Internal Revenue Code to pass through the credit for taxes paid in foreign countries. The gross income derived from foreign sources and foreign taxes paid during the fiscal year by the Fund are $10,300,000 and $1,196,000, respectively. The Fund has designated a portion of the amount paid to redeeming shareholders, in the amount of $1,125,000, as a distribution for tax purposes. 15 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 INTERNATIONAL FUND: We have audited the accompanying statement of assets and liabilities of the USAA International 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 International 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 16 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS USAA INTERNATIONAL FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------ STOCKS (96.6%) AUSTRALIA (3.7%) 1,095,269 News Corp. Ltd. (Movies & Entertainment) $ 10,052 872,252 QBE Insurance Group Ltd. (Property & Casualty Insurance) 7,788 -------- 17,840 -------- AUSTRIA (1.6%) 50,200 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 7,758 -------- BRAZIL (2.1%) 130,500 Brasil Telecom Participacoes S.A. ADR (Preferred) (Integrated Telecommunication Services) 3,760 126,400 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 6,408 -------- 10,168 -------- CANADA (3.1%) 230,770 BCE, Inc. (Integrated Telecommunication Services) 4,590 130,391 Canadian National Railway Co. (Railroads) 5,148 135,220 Encana Corp. (Integrated Oil & Gas) 5,293 -------- 15,031 -------- CAYMAN ISLANDS (0.1%) 1,803,000 Semiconductor Manufacturing International Corp. (Semiconductors)* 449 -------- FRANCE (15.2%) 567,100 AXA S.A. (Multi-Line Insurance) 11,639 268,800 Credit Agricole S.A. (Regional Banks)(a) 6,610 69,140 L'Air Liquide S.A. (Industrial Gases) 12,129 71,600 L'Oreal S.A. (Personal Products) 5,559 103,420 Sanofi-Synthelabo S.A. (Pharmaceuticals)(a) 6,835 142,254 Schneider Electric S.A. (Electrical Components & Equipment)(a) 9,576 118,107 Societe Television Francaise 1 (Broadcasting & Cable TV)(a) 3,669 102,833 Total S.A. ADR (Integrated Oil & Gas) 9,675 266,100 Veolia Environnement (Multi-Utilities & Unregulated Power)(a) 7,119 -------- 72,811 -------- GERMANY (2.6%) 168,250 Bayerische Motoren Werke AG (Automobile Manufacturers) 7,132 93,700 Schering AG (Pharmaceuticals) 5,111 -------- 12,243 --------
17 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA INTERNATIONAL FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------ HONG KONG (2.1%) 8,877,500 CNOOC Ltd. (Oil & Gas Exploration & Production) $ 3,816 1,437,000 Esprit Holdings Ltd. (Apparel Retail) 6,305 -------- 10,121 -------- HUNGARY (1.4%) 160,400 OTP Bank Ltd. GDR (Regional Banks)* 6,487 -------- IRELAND (2.3%) 517,100 Depfa Bank plc (Specialized Finance) 7,738 222,080 Irish Life & Permanent plc (Other Diversified Financial Services) 3,378 -------- 11,116 -------- ITALY (1.0%) 267,800 RAS S.p.A. (Multi-Line Insurance) 4,806 -------- JAPAN (15.1%) 283,000 Bridgestone Corp. (Tires & Rubber) 4,738 204,000 Canon, Inc. (Electronic Equipment Manufacturers) 10,088 426,400 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 6,481 421,000 Citizen Watch Co. (Apparel, Accessories, & Luxury Goods) 4,416 1,264 KDDI Corp. (Integrated Telecommunication Services) 7,386 114,400 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 6,613 164,400 Seiko Epson Corp. (Office Electronics) 5,654 432,000 Sekisui Chemical Co. Ltd. (Homebuilding) 3,191 112,000 Shinsei Bank (Diversified Banks) 758 170,300 Tokyo Broadcasting System, Inc. (Broadcasting & Cable TV) 3,035 1,929,000 Tokyo Gas Co. Ltd. (Gas Utilities) 6,809 235,000 Toyota Motor Corp. (Automobile Manufacturers) 8,530 310,100 Yamaha Corp. (Consumer Electronics) 4,710 -------- 72,409 -------- KOREA (2.3%) 13,020 Samsung Electronics Co. Ltd. (Semiconductors) 5,814 46,410 Samsung SDI Co. Ltd. (Computer Storage & Peripherals) 5,121 -------- 10,935 -------- MEXICO (0.9%) 105,400 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 4,454 -------- NETHERLANDS (1.1%) 376,680 Reed Elsevier N.V. (Publishing) 5,260 --------
18 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA INTERNATIONAL FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------ NORWAY (0.2%) 178,300 DNB Holdings ASA (Diversified Banks) $ 1,130 -------- SINGAPORE (2.3%) 447,000 DBS Group Holdings Ltd. (Diversified Banks) 3,710 4,046,000 Singapore Telecommunications Ltd. (Integrated Telecommunication Services) 5,216 269,000 United Overseas Bank Ltd. (Diversified Banks) 2,058 -------- 10,984 -------- SPAIN (3.7%) 356,800 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 4,725 234,240 Iberdrola S.A. (Electric Utilities) 4,727 556,011 Telefonica S.A. (Integrated Telecommunication Services)(a) 8,069 10,643 Telefonica S.A. ADR (Integrated Telecommunication Services) 465 -------- 17,986 -------- SWEDEN (6.3%) 173,300 Atlas Copco AB "A" (Industrial Machinery) 6,397 2,652,700 Ericsson LM "B" (Communications Equipment)* 7,407 388,000 Hennes & Mauritz AB "B" (Apparel Retail)(a) 9,609 207,000 Sandvik AB (Industrial Machinery) 7,030 -------- 30,443 -------- SWITZERLAND (9.7%) 207,000 Credit Suisse Group (Diversified Banks)* 7,110 17,995 Nestle S.A. (Packaged Foods & Meat) 4,681 123,700 Novartis AG (Pharmaceuticals) 5,547 99,100 Roche Holdings AG (Pharmaceuticals) 10,437 11,100 Straumann AG (Health Care Supplies) 2,294 41,222 Syngenta AG (Specialty Chemicals)* 3,277 35,400 Synthes, Inc. (Health Care Equipment) 4,166 123,580 UBS AG (Diversified Banks) 8,865 -------- 46,377 -------- TAIWAN (0.4%) 1,420,000 Compal Electronics, Inc. (Computer Hardware) 1,747 -------- UNITED KINGDOM (19.4%) 1,178,400 Amvescap plc (Investment Banking & Brokerage) 7,899 187,200 AstraZeneca plc (Pharmaceuticals) 8,718 309,800 BG Group plc (Oil & Gas Exploration & Production) 1,885
19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA INTERNATIONAL FUND MAY 31, 2004
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------ 206,630 BOC Group plc (Diversified Chemicals) $ 3,371 619,420 British Sky Broadcasting Group plc (Broadcasting & Cable TV) 6,965 84,670 Capital Radio plc (Broadcasting & Cable TV) 705 547,840 Diageo plc (Distillers & Vintners) 7,270 5,900 GlaxoSmithKline plc ADR (Pharmaceuticals) 251 1,577,958 Kingfisher plc (Home Improvement Retail) 8,271 185,780 Next plc (Apparel Retail) 4,719 589,960 Reckitt Benckiser plc (Household Products) 15,981 227,375 Royal Bank Scotland Group plc (Diversified Banks) 6,864 5,203,750 Vodafone Group plc (Wireless Telecommunication Services) 12,232 775,000 William Hill plc (Casinos & Gaming) 7,684 -------- 92,815 -------- Total stocks (cost: $382,839) 463,370 -------- MONEY MARKET INSTRUMENTS (12.6%) MONEY MARKET FUNDS (1.3%) 577,309 AIM Short-Term Investment Co. Liquid Assets Portfolio, 1.01%(b,c) 577 5,848,438 Merrill Lynch Premier Institutional Fund, 0.99%(b,c) 5,849 -------- 6,426 --------
PRINCIPAL AMOUNT (000) - --------- U.S. GOVERNMENT (2.7%) $12,971 Federal Home Loan Bank(f), 0.81%, 6/01/2004 12,971 -------- REPURCHASE AGREEMENTS (8.6%) 6,500 Banc One Capital Markets, Inc., 1.02%, acquired on 5/28/2004 and due 6/01/2004 at $6,500 (collateralized by $6,640 of Fannie Mae Notes(f), 0.99%, due 9/6/2005; market value $6,634)(b,d) 6,500 7,000 Bear Stearns & Co., Inc., 1.00%, acquired on 5/28/2004 and due 6/01/2004 at $7,000 (collateralized by $7,260 of Freddie Mac Notes(f), 6.00%, due 8/27/2018; market value $7,404)(b,d) 7,000 7,000 CS First Boston LLC, 1.03%, acquired on 5/28/2004 and due 6/01/2004 at $7,000 (collateralized by $23,720 of U.S. Treasury STRIPS, 5.75%(e), due 8/15/2025; market value $7,140)(b,d) 7,000
20 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA INTERNATIONAL FUND MAY 31, 2004
PRINCIPAL MARKET AMOUNT VALUE (000) SECURITY (000) - ------------------------------------------------------------------------------------------ $6,500 Deutsche Bank Securities, Inc., 1.00%, acquired on 5/28/2004 and due 6/01/2004 at $6,500 (collateralized by $6,514 of Freddie Mac Notes(f), 2.05%, due 7/15/2031; market value $6,630)(b,d) $ 6,500 7,000 Lehman Brothers, Inc., 1.01%, acquired on 5/28/2004 and due 6/01/2004 at $7,000 (collateralized by $2,305 of FICO STRIPS, 5.80%(e), due 11/30/2017; market value $1,072 and $6,080 of Freddie Mac Notes(f), 1.62%, due 6/6/2008; market value $6,068)(b,d) 7,000 7,000 Morgan Stanley & Co., Inc., 1.01%, acquired on 5/28/2004 and due 6/01/2004 at $7,000 (collateralized by $7,225 of Fannie Mae Discount Notes(f), due 2/04/2005; market value $7,140)(b,d) 7,000 -------- 41,000 -------- Total money market instruments (cost: $60,397) 60,397 -------- TOTAL INVESTMENTS (COST: $443,236) $523,767 ========
21 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA INTERNATIONAL FUND MAY 31, 2004 GENERAL NOTES - -------------------------------------------------------------------------------- Market values of securities are determined by procedures and practices discussed in Note 1 to the financial statements. The percentages shown represent the percentages of the investments to net assets and, in total, may not equal 100%. ADR - American depositary receipts are receipts issued by a U.S. bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. GDR - Global depositary receipts are receipts issued by a U.S. or foreign bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. SPECIFIC NOTES - -------------------------------------------------------------------------------- (a) The security or a portion thereof was out on loan as of May 31, 2004. (b) Investment was purchased with the cash collateral proceeds received from securities loaned. (c) Rate represents the money market fund annualized seven-day yield at May 31, 2004. (d) Collateral on repurchase agreements is received by the Fund upon entering into the repurchase agreement. The collateral is marked- to-market daily to ensure its market value is equal to or in excess of the repurchase agreement price plus accrued interest. (e) Zero-coupon security. Rate represents the effective yield at date of purchase. (f) U.S. government agency issues. Securities issued by government- sponsored enterprises (GSEs) are supported only by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. government. * Non-income-producing security for the year ended May 31, 2004. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 22 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA INTERNATIONAL FUND MAY 31, 2004 ASSETS Investments in securities, at market value (including securities on loan of $45,036) (identified cost of $443,236) $523,767 Cash 122 Cash denominated in foreign currencies (identified cost of $1,227) 1,240 Receivables: Capital shares sold 175 USAA Transfer Agency Company 2 Dividends and interest 1,856 Securities sold 251 Other 136 -------- Total assets 527,549 -------- LIABILITIES Payables: Upon return of securities loaned 47,426 Securities purchased 65 Capital shares redeemed 154 Unrealized depreciation on foreign currency contracts held, at value 1 Accrued management fees 322 Accrued transfer agent's fees 9 Other accrued expenses and payables 95 -------- Total liabilities 48,072 -------- Net assets applicable to capital shares outstanding $479,477 ======== NET ASSETS CONSIST OF: Paid-in capital $369,671 Accumulated undistributed net investment income 3,546 Accumulated net realized gain on investments 25,681 Net unrealized appreciation of investments 80,531 Net unrealized appreciation on foreign currency translations 48 -------- Net assets applicable to capital shares outstanding $479,477 ======== Capital shares outstanding, unlimited number of shares authorized, no par value 23,446 ======== Net asset value, redemption price, and offering price per share $ 20.45 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA INTERNATIONAL FUND YEAR ENDED MAY 31, 2004 INVESTMENT INCOME Dividends (net of foreign taxes withheld of $1,196) $ 8,801 Interest 93 Securities lending 219 ------- Total income 9,113 ------- EXPENSES Management fees 3,236 Administrative and servicing fees 619 Transfer agent's fees 931 Custody and accounting fees 364 Postage 78 Shareholder reporting fees 37 Trustees' fees 6 Registration fees 62 Professional fees 47 Other 12 ------- Total expenses 5,392 Expenses paid indirectly (43) ------- Net expenses 5,349 ------- NET INVESTMENT INCOME 3,764 ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on: Investments 37,376 Foreign currency transactions (153) Change in net unrealized appreciation/depreciation of: Investments 55,707 Foreign currency translations (33) ------- Net realized and unrealized gain 92,897 ------- Increase in net assets resulting from operations $96,661 =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA INTERNATIONAL FUND YEARS ENDED MAY 31,
2004 2003 -------------------------- FROM OPERATIONS Net investment income $ 3,764 $ 2,570 Net realized gain on investments 37,376 7,960 Net realized loss on foreign currency transactions (153) (260) Change in net unrealized appreciation/depreciation of: Investments 55,707 (39,257) Foreign currency translations (33) 25 -------------------------- Increase (decrease) in net assets resulting from operations 96,661 (28,962) -------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (2,281) (2,667) Net realized gains (1,058) - -------------------------- Distributions to shareholders (3,339) (2,667) -------------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 167,465 180,895 Reinvested dividends 3,186 2,536 Cost of shares redeemed (132,039) (186,718) -------------------------- Increase (decrease) in net assets from capital share transactions 38,612 (3,287) -------------------------- Net increase (decrease) in net assets 131,934 (34,916) NET ASSETS Beginning of period 347,543 382,459 -------------------------- End of period $ 479,477 $ 347,543 ========================== Accumulated undistributed net investment income: End of period $ 3,546 $ 2,211 ========================== CHANGE IN SHARES OUTSTANDING Shares sold 9,100 12,111 Shares issued for dividends reinvested 164 169 Shares redeemed (7,344) (12,443) -------------------------- Increase (decrease) in shares outstanding 1,920 (163) ==========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA INTERNATIONAL 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 International Fund (the Fund). The Fund's primary investment objective is capital appreciation with current income as a secondary objective. 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 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 26 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 Fund's subadviser, if applicable, will monitor for events that would materially affect the value of the Fund's foreign securities and, if necessary, the Manager will value the foreign securities in good faith, considering such available information that the Manager deems relevant, under valuation procedures approved by the Trust's Board of Trustees. In addition, the Fund may use information from an external vendor or other sources to adjust the foreign market closing prices of foreign equity securities to reflect what the Fund believes to be the fair value of the securities as of the close of the NYSE. Fair valuation of affected foreign equity securities may occur frequently based on an assessment that events that occur on a fairly regular basis (such as U.S. market movements) are significant. 3. Investments in open-end investment companies are valued at their net asset value at the end of each business day. 4. Debt securities purchased with maturities of 60 days or less are stated at amortized cost, which approximates market value. Repurchase agreements are valued at cost. 5. Securities for which market quotations are not readily available or are considered unreliable, or whose values have been materially affected by events occurring after the close of their primary markets but before the pricing of the Fund, are valued in good faith at fair value, using methods determined by the Manager, in consultation with the Fund's subadviser, if applicable, under valuation procedures approved by the Trust's Board of Trustees. B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated 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). 27 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 Gain or loss from sales of investment securities is computed on the identified cost basis. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, certain dividends from foreign securities are recorded upon notification. Interest income is recorded on the accrual basis. Discounts and premiums on short-term securities are amortized on a straight-line basis over the life of the respective securities. D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements with commercial banks or recognized security dealers. These agreements are collateralized by obligations issued or guaranteed as to both principal and interest by the U.S. government, its agencies, or its instrumentalities. Government- sponsored enterprises (GSEs), such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), are supported only by the credit of the issuing U.S. government agency, and are neither issued nor guaranteed by the U.S. government. Obligations pledged as collateral are required to maintain a value equal to or in excess of the repurchase agreement price plus accrued interest and are held by the Fund, either through its regular custodian or through a special "tri-party" custodian that maintains separate accounts for both the Fund and its counterparty, until maturity of the repurchase agreement. The Fund's Manager monitors the creditworthiness of sellers with which the Fund may enter into repurchase agreements. E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the securities of foreign issuers and may be traded in foreign currency. Since the Fund's accounting records are maintained 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. 28 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 2. Market value of securities, other assets, and liabilities at the exchange rate obtained from an independent pricing service on a daily basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Separately, net realized foreign currency gains/losses may arise from sales of foreign currency, currency gains/losses realized between the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. These net realized foreign currency gains/losses have been reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statement of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities other than investments in securities resulting from changes in the exchange rate. F. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that the Fund pays may be reimbursed and used to reduce the Fund's expenses. In addition, through other fee-offset arrangements with certain of the Fund's service providers, realized credits, if any, are used to reduce the Fund's expenses. For the year ended May 31, 2004, these fee-offset arrangements reduced the Fund's expenses by $43,000. G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that contain a variety of representations and warranties that provide 29 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 general indemnifications. The Trust's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. H. USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINES OF CREDIT - -------------------------------------------------------------------------------- The Fund participates with other USAA funds in two joint, short-term, revolving, committed loan agreements totaling $500 million: $400 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager, and $100 million with Bank of America and State Street Bank and Trust Company (State Street), under which Bank of America and State Street have each committed $50 million. The purpose of the agreements is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability under its agreement with CAPCO, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate with no markup. Subject to availability under its agreement with Bank of America and State Street, the Fund may 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 30 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 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 $2,000. The Fund had no borrowings under either of these agreements during the year ended May 31, 2004. (3) DISTRIBUTIONS - -------------------------------------------------------------------------------- The character of distributions made during the year from net investment income or net realized gains is determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. generally accepted accounting principles. Also, due to the timing of distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains were recorded by the Fund. During the current fiscal year, permanent differences between book- and tax-basis accounting resulted in reclassifications made to the statement of assets and liabilities to increase paid-in capital by $1,125,000, decrease accumulated undistributed net investment income by $148,000, and decrease accumulated net realized gain on investments by $977,000. This includes differences in the accounting for 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* $2,281,000 $2,667,000 Long-term realized capital gains 2,183,000 -
*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 31 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 distributions paid during the fiscal year, the maximum amount that may be considered qualified dividend income is $2,281,000. 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 $ 9,060,000 Undistributed long-term capital gains 21,052,000 Accumulated capital and other losses (134,000) Unrealized appreciation of investments 79,780,000 Unrealized appreciation on foreign currency translations 49,000
The difference between book-basis and tax-basis appreciation of investments is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation difference is attributable to the tax deferral of losses on wash sales. Distributions of net investment income and realized gains from security transactions not offset by capital losses are made annually in the succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. For the year ended May 31, 2004, the Fund utilized capital loss carryovers of $7,723,000 to offset capital gains. At May 31, 2004, the Fund had a current post-October currency loss of $134,000, 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 of securities, excluding short-term securities, for the year ended May 31, 2004, were $269,936,000 and $235,395,000, respectively. 32 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 The cost of securities at May 31, 2004, for federal income tax purposes, was $443,987,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2004, for federal income tax purposes, were $85,957,000 and $6,177,000, respectively, resulting in net unrealized appreciation of $79,780,000. (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 7,204 $65 $65 $- Japanese Yen - -----------------------------------------------------------------------------------------------
33 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL 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 540 $395 $395 $ - Canadian Dollar 6/01/2004 20 37 37 - Pound Sterling 6/01/2004 815 121 120 (1) Norwegian Krone 6/03/2004 621 92 92 - Norwegian Krone - ----------------------------------------------------------------------------------------------- $645 $644 $(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 $45,036,000 and received cash collateral of $47,426,000 for the loans. The cash collateral was invested in money market instruments, as noted in the Fund's portfolio of investments. (7) TRANSACTIONS WITH MANAGER - -------------------------------------------------------------------------------- A. MANAGEMENT FEES - The Manager carries out the Fund's investment policies and provides portfolio management oversight 34 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 of the Fund's assets managed by a subadviser. The investment management fee for the Fund is composed of a base fee and a performance adjustment that increases or decreases the base fee depending upon the performance of the Fund relative to the performance of the Lipper International Funds Index, which tracks the total return performance of the 30 largest funds in the Lipper International 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%. 35 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 For the year ended May 31, 2004, the Fund incurred total management fees, paid or payable to the Manager, of $3,236,000, which included a performance adjustment of $142,000 that increased the base management fee of 0.75% by 0.03%. B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an investment subadvisory agreement with MFS Investment Management (MFS), under which MFS directs the investment and reinvestment of the Fund's assets (as allocated from time to time by the Manager). The Manager (not the Fund) pays 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 $619,000. D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services, an affiliate of the Manager, provides transfer agent services to the Fund based on an annual charge of $23 per shareholder account plus out-of-pocket expenses. For the year ended May 31, 2004, the Fund incurred transfer agent's fees, paid or payable to USAA Transfer Agency Company, of $931,000. Additionally, the Fund recorded a receivable from USAA Transfer Agency Company of $2,000 at May 31, 2004. E. 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. 36 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA INTERNATIONAL FUND MAY 31, 2004 (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) FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Per share operating performance for a share outstanding throughout each period is as follows:
YEAR ENDED MAY 31, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------------------------------------------------------------------- Net asset value at beginning of period $ 16.15 $ 17.63 $ 18.23 $ 22.28 $ 19.79 ------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .15 .11 .14 .16 .11 Net realized and unrealized gain (loss) 4.30 (1.46) (.56) (3.01) 3.70 ------------------------------------------------------------------------- Total from investment operations 4.45 (1.35) (.42) (2.85) 3.81 ------------------------------------------------------------------------- Less distributions: From net investment income (.10) (.13) (.18) (.11) (.18) From realized capital gains (.05) - - (1.09) (1.14) ------------------------------------------------------------------------- Total distributions (.15) (.13) (.18) (1.20) (1.32) ------------------------------------------------------------------------- Net asset value at end of period $ 20.45 $ 16.15 $ 17.63 $ 18.23 $ 22.28 ========================================================================= Total return (%)* 27.63 (7.63) (2.22) (13.84) 19.26 Net assets at end of period (000) $479,477 $347,543 $382,459 $419,236 $533,305 Ratio of expenses to average net assets (%)** 1.31(a) 1.42(a) 1.32(a) 1.14(a) 1.11 Ratio of net investment income to average net assets (%)** .91 .79 .78 .84 .73 Portfolio turnover (%) 58.70 148.14 35.63 32.75 39.75 * Assumes reinvestment of all net investment income and realized capital gain distributions during the period. Calculated using net assets adjusted for last day trades and could differ from the Lipper reported return. ** For the year ended May 31, 2004, average net assets were $413,042,000. (a)Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios as follows: (.01%) (.01%) - - N/A
37 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. 38 . . . 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. 39 . . . 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. 40 . . . 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. 41 . . . 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, 42 . . . 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. 43 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 44 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD Christopher W. Claus, VICE CHAIRMAN OF THE BOARD Barbara B. Dreeben Robert L. Mason, Ph.D. Michael F. Reimherr Laura T. Starks, Ph.D. Richard A. Zucker ADMINISTRATOR, USAA Investment Management Company INVESTMENT ADVISER, P.O. Box 659453 UNDERWRITER, San Antonio, Texas 78265-9825 AND DISTRIBUTOR TRANSFER AGENT USAA Shareholder Account Services 9800 Fredericksburg Road San Antonio, Texas 78288 CUSTODIAN State Street Bank and Trust Company P.O. Box 1713 Boston, Massachusetts 02105 INDEPENDENT Ernst & Young LLP REGISTERED PUBLIC 100 West Houston St., Suite 1900 ACCOUNTING FIRM San Antonio, Texas 78205 TELEPHONE Call toll free - Central time ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m. Saturday, 8:30 a.m. to 5 p.m. Sunday, 10:30 a.m. to 7 p.m. FOR ADDITIONAL 1-800-531-8181, in San Antonio 456-7200 INFORMATION ABOUT For account servicing, exchanges, MUTUAL FUNDS or redemptions 1-800-531-8448, in San Antonio 456-7202 RECORDED MUTUAL 24-hour service (from any phone) FUND PRICE QUOTES 1-800-531-8066, in San Antonio 498-8066 MUTUAL FUND (from touch-tone phones only) USAA TOUCHLINE For account balance, last transaction, fund prices, or to exchange or redeem fund shares 1-800-531-8777, in San Antonio 498-8777 INTERNET ACCESS USAA.COM THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL DELIVERY WITHIN 30 DAYS OF YOUR REQUEST. COPIES OF THE FUND'S PROXY VOTING POLICIES AND PROCEDURES ARE AVAILABLE WITHOUT CHARGE (I) BY CALLING 1-800-531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. [LOGO OF RECYCLED PAPER] Recycled Paper - -------------------------------------------------------------------------------- [LOGO OF USAA] 9800 Fredericksburg Road ------------- USAA(R) San Antonio, Texas 78288 PRSRT STD U.S. Postage P A I D USAA ------------- Receive this document and others electronically. Sign up at USAA.COM. - -------------------------------------------------------------------------------- [LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R) USAA ---------------------------------- INSURANCE o MEMBER SERVICES 23409-0704 (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-----