-----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, B6exXWIa6L3wDWcl5eSXn00RkQljedkmGawb9yin146GCTyaNuUgC7Q3obXu8nBT dE1y0JBmi7Pr5BHJqWCwAg== 0000745903-06-000061.txt : 20060804 0000745903-06-000061.hdr.sgml : 20060804 20060804121405 ACCESSION NUMBER: 0000745903-06-000061 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060531 FILED AS OF DATE: 20060804 DATE AS OF CHANGE: 20060804 EFFECTIVENESS DATE: 20060804 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 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04019 FILM NUMBER: 061004685 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 0000745903 S000003257 USAA GNMA Trust C000008675 GNMA Trust USGNX N-CSR 1 ncsrgnma053106.txt USAA GNMA TRUST ANNUAL REPORT 05/31/2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-4019 Exact name of registrant as specified in charter: USAA INVESTMENT TRUST Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Name and address of agent for service: EILEEN M. SMILEY USAA INVESTMENT TRUST 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Registrant's telephone number, including area code: (210) 498-4103 Date of fiscal year end: MAY 31 Date of reporting period: MAY 31, 2006 ITEM 1. REPORT TO STOCKHOLDERS. USAA GNMA TRUST- ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006 [LOGO OF USAA] USAA(R) USAA GNMA Trust(R) [GRAPHIC OF USAA GNMA TRUST] A n n u a l R e p o r t - -------------------------------------------------------------------------------- MAY 31, 2006 Table of CONTENTS - -------------------------------------------------------------------------------- MESSAGE FROM THE PRESIDENT 2 MANAGER'S COMMENTARY 4 FUND RECOGNITION 9 INVESTMENT OVERVIEW 10 FINANCIAL INFORMATION Distributions to Shareholders 15 Report of Independent Registered Public Accounting Firm 16 Portfolio of Investments 17 Notes to Portfolio of Investments 20 Financial Statements 21 Notes to Financial Statements 24 EXPENSE EXAMPLE 35 ADVISORY AGREEMENTS 37 DIRECTORS' AND OFFICERS' INFORMATION 43
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)2006, USAA. All rights reserved. 2 M E S S A G E ==============------------------------------------------------------------------ from the PRESIDENT " IT IS A CLASSIC SCENARIO. WHEN MARKETS [PHOTO OF CHRISTOPHER W. CLAUS] GO UP, RISK TOLERANCE GOES UP, AND INVESTORS START TO CHASE PERFORMANCE. " June 2006 - -------------------------------------------------------------------------------- Remember risk? It is the flip side of the risk/reward equation. In exchange for the possibility of higher returns, you take on more risk. But during the last two to three years, many investors have forgotten this fundamental investment truth. Hungry for returns in the low-interest-rate environment, they flocked into the riskier asset classes - the emerging markets, small-cap stocks, precious metals, and commodities. Investor experience has been all about reward and very little about risk. In May, however, risk finally re-emerged as a consideration in investment decision-making. Rising global interest rates and the potential for a worldwide economic slowdown have led to increased market volatility, reminding investors that outsized rewards are generally paired with greater risk. As a result, the old adage that you should be paid for the risk you assume has taken on renewed meaning. It is a classic scenario. When markets go up, risk tolerance goes up, and investors start to chase performance. The opposite approach is often the better course. You would be wise to cultivate patience during rising markets and potentially reduce the amount of risk you take. Experienced investors know that as market returns increase, so do the chances of a correction. Still, when the financial markets are awash in liquidity, it is easy to forget the fundamentals. If you cannot find the returns you want in conservative equity and fixed-income investments, you are tempted to seek higher returns elsewhere. This is precisely what happened during the last couple of years. But in the spring, it all began to unravel as global interest rates continued to rise. In the months ahead, we may see even higher short-term rates as 3 . . . C O N T I N U E D ========================-------------------------------------------------------- the Federal Reserve Board (the Fed) tries to combat inflation. We may also see a slowdown in the U.S. economy, and if the U.S. economy cools, the world economy is likely to follow suit. In this environment, money market fund yields - currently near 5% - are appealing, especially for risk-averse investors. Once the Fed pauses, bonds should become more attractive. For equity investors, the most prudent play may be a conservative stance. They might also want to consider locking in some of their gains in the emerging markets, small-cap stocks, precious metals, and commodities. At USAA Investment Management Company, we have already taken a more conservative position in our international and emerging markets portfolios - perhaps earlier than a crystal ball would have suggested - but as the market has fallen, our relative performance has been solid. Going forward, we will continue to look for investment opportunities that have the potential to add value while evaluating the risks that could affect them. From all of us here, thank you for your business and the opportunity to serve your investment needs. 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 AT (800) 531-8448 FOR A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUNDS FROM USAA INVESTMENT MANAGEMENT COMPANY, DISTRIBUTOR (USAA). 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 $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. Past performance is no guarantee of future results. o As interest rates rise, existing bond prices fall. o Foreign and precious metals and minerals investing are subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. 4 M A N A G E R ' S ==================-------------------------------------------------------------- COMMENTARY on the Fund [PHOTO OF MARGARET "DIDI" WEINBLATT] MARGARET "DIDI" WEINBLATT, Ph.D., CFA USAA Investment Management Company - -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? For the year ended May 31, 2006, the USAA GNMA Trust had a total return of 0.40%. This compares to a 0.10% return for the Lipper GNMA Funds Index and 0.72% for the Lehman Brothers GNMA 30-Year Index. WHAT WAS THE MARKET ENVIRONMENT DURING THE PERIOD? The Federal Reserve Board (the Fed) continued to raise short-term interest rates; by the end of May 2006, the federal funds rate stood at 5%, up from a low of 1% in June 2004. Unlike the previous reporting year, when long-term rates remained stubbornly low in the face of Fed hikes, long-term rates moved up substantially, although not as much as short-term rates. The yield on the benchmark 10-year U.S. Treasury bond rose from 3.98% on May 31, 2005, to 5.12% a year later (see chart on next page). Partially driving the Fed's decision-making were the strong U.S. economy and occasional signs of inflation. Some indications of an economic slowdown began to appear during the latter part of the period. We've noted before that there's a lag between Fed rate hikes and their impact on the economy. It's our view that the cumulative effects of two years of sustained tightening are beginning to be felt. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. REFER TO PAGE 13 FOR BENCHMARK DEFINITIONS. 5 . . . C O N T I N U E D ========================-------------------------------------------------------- HISTORICAL YIELD CURVE [CHART OF HISTORICAL YIELD CURVE]
5/31/05 5/31/06 CHANGE ------- ------- ------ 3 MONTH 2.940% 4.833% 1.8932% 6 MONTH 3.108 5.062 1.9544 2 YEAR 3.574 5.033 1.4594 3 YEAR 3.626 5.030 1.4040 5 YEAR 3.735 5.032 1.2971 10 YEAR 3.981 5.119 1.1376 30 YEAR 4.320 5.228 0.9072
SOURCE: BLOOMBERG L.P. [END CHART] HOW DID MORTGAGE-BACKED SECURITIES PERFORM? Mortgage-backed securities outperformed the overall bond market. One reason is that mortgage-backed securities have interest-rate sensitivity similar to that of short- to intermediate-term bonds. Even though mortgage-backed securities have 15- or 30-year final maturities, they are paid off when a mortgage is refinanced or a house is sold, giving mortgages a weighted average life that is substantially less than the final maturity. Another performance driver was the fact that there is no risk of leveraged buyouts (LBOs) in GNMA securities (GNMAs) as there is in corporate bonds. In an LBO, a private equity fund can take a corporation private at the expense of current bondholders. Finally, we saw substantial foreign buying of GNMAs. Foreigners are 6 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund attracted to GNMAs because of their U.S. government guarantee. In the first part of the reporting year, foreign buying pushed valuations to very high levels relative to other mortgage-backed securities. But in 2006, foreign buying has cooled, leaving GNMAs at more reasonable levels, although still high by historical standards. TREASURY YIELDS AND FED FUNDS RATE [CHART OF TREASURY YIELDS AND FED FUNDS RATE]
30-YEAR YIELD 10-YEAR YIELD 2-YEAR YIELD FEDERAL FUNDS RATE 5/31/2005 4.32% 3.98% 3.58% 3.00% 6/1/2005 4.24 3.89 3.48 3.00 6/2/2005 4.24 3.91 3.53 3.00 6/3/2005 4.28 3.98 3.56 3.00 6/6/2005 4.24 3.95 3.58 3.00 6/7/2005 4.19 3.90 3.56 3.00 6/8/2005 4.22 3.94 3.60 3.00 6/9/2005 4.23 3.95 3.62 3.00 6/10/2005 4.33 4.05 3.70 3.00 6/13/2005 4.37 4.09 3.70 3.00 6/14/2005 4.42 4.11 3.69 3.00 6/15/2005 4.40 4.10 3.71 3.00 6/16/2005 4.37 4.07 3.67 3.00 6/17/2005 4.36 4.07 3.71 3.00 6/20/2005 4.39 4.11 3.71 3.00 6/21/2005 4.33 4.04 3.69 3.00 6/22/2005 4.24 3.94 3.60 3.00 6/23/2005 4.25 3.95 3.61 3.00 6/24/2005 4.22 3.92 3.58 3.00 6/27/2005 4.19 3.90 3.58 3.00 6/28/2005 4.25 3.97 3.65 3.00 6/29/2005 4.26 3.98 3.66 3.00 6/30/2005 4.19 3.92 3.64 3.25 7/1/2005 4.30 4.05 3.74 3.25 7/4/2005 4.30 4.04 3.74 3.25 7/5/2005 4.36 4.11 3.79 3.25 7/6/2005 4.33 4.07 3.77 3.25 7/7/2005 4.32 4.06 3.72 3.25 7/8/2005 4.34 4.09 3.77 3.25 7/11/2005 4.34 4.10 3.79 3.25 7/12/2005 4.39 4.14 3.84 3.25 7/13/2005 4.40 4.16 3.83 3.25 7/14/2005 4.42 4.18 3.84 3.25 7/15/2005 4.40 4.17 3.86 3.25 7/18/2005 4.47 4.22 3.89 3.25 7/19/2005 4.42 4.18 3.86 3.25 7/20/2005 4.39 4.16 3.87 3.25 7/21/2005 4.50 4.28 3.94 3.25 7/22/2005 4.44 4.22 3.91 3.25 7/25/2005 4.47 4.25 3.94 3.25 7/26/2005 4.45 4.23 3.93 3.25 7/27/2005 4.47 4.26 3.99 3.25 7/28/2005 4.40 4.19 3.95 3.25 7/29/2005 4.47 4.28 4.02 3.25 8/1/2005 4.51 4.31 4.04 3.25 8/2/2005 4.55 4.34 4.04 3.25 8/3/2005 4.50 4.29 4.01 3.25 8/4/2005 4.52 4.31 4.04 3.25 8/5/2005 4.58 4.39 4.10 3.25 8/8/2005 4.60 4.42 4.15 3.25 8/9/2005 4.57 4.39 4.11 3.50 8/10/2005 4.58 4.39 4.12 3.50 8/11/2005 4.52 4.32 4.07 3.50 8/12/2005 4.45 4.24 4.04 3.50 8/15/2005 4.48 4.28 4.06 3.50 8/16/2005 4.42 4.21 4.00 3.50 8/17/2005 4.48 4.27 4.05 3.50 8/18/2005 4.42 4.20 3.99 3.50 8/19/2005 4.42 4.21 4.02 3.50 8/22/2005 4.43 4.21 4.01 3.50 8/23/2005 4.40 4.18 3.98 3.50 8/24/2005 4.39 4.17 3.97 3.50 8/25/2005 4.37 4.16 4.00 3.50 8/26/2005 4.37 4.19 4.07 3.50 8/29/2005 4.36 4.17 4.05 3.50 8/30/2005 4.31 4.09 3.94 3.50 8/31/2005 4.26 4.02 3.82 3.50 9/1/2005 4.31 4.03 3.73 3.50 9/2/2005 4.30 4.04 3.76 3.50 9/5/2005 4.30 4.03 3.74 3.50 9/6/2005 4.36 4.10 3.81 3.50 9/7/2005 4.42 4.14 3.85 3.50 9/8/2005 4.43 4.15 3.87 3.50 9/9/2005 4.40 4.12 3.87 3.50 9/12/2005 4.45 4.17 3.91 3.50 9/13/2005 4.42 4.13 3.86 3.50 9/14/2005 4.45 4.17 3.88 3.50 9/15/2005 4.52 4.21 3.89 3.50 9/16/2005 4.57 4.27 3.98 3.50 9/19/2005 4.55 4.25 3.92 3.50 9/20/2005 4.53 4.24 3.98 3.75 9/21/2005 4.46 4.17 3.92 3.75 9/22/2005 4.46 4.18 3.94 3.75 9/23/2005 4.52 4.25 4.02 3.75 9/26/2005 4.56 4.29 4.05 3.75 9/27/2005 4.54 4.28 4.07 3.75 9/28/2005 4.50 4.26 4.08 3.75 9/29/2005 4.55 4.30 4.13 3.75 9/30/2005 4.57 4.33 4.17 3.75 10/3/2005 4.62 4.39 4.21 3.75 10/4/2005 4.60 4.37 4.21 3.75 10/5/2005 4.57 4.34 4.18 3.75 10/6/2005 4.61 4.39 4.20 3.75 10/7/2005 4.57 4.37 4.19 3.75 10/10/2005 4.57 4.36 4.19 3.75 10/11/2005 4.60 4.39 4.22 3.75 10/12/2005 4.66 4.44 4.23 3.75 10/13/2005 4.69 4.46 4.23 3.75 10/14/2005 4.70 4.48 4.26 3.75 10/17/2005 4.72 4.50 4.28 3.75 10/18/2005 4.69 4.47 4.25 3.75 10/19/2005 4.69 4.46 4.24 3.75 10/20/2005 4.66 4.43 4.22 3.75 10/21/2005 4.60 4.39 4.21 3.75 10/24/2005 4.66 4.45 4.25 3.75 10/25/2005 4.74 4.54 4.34 3.75 10/26/2005 4.79 4.59 4.37 3.75 10/27/2005 4.77 4.55 4.35 3.75 10/28/2005 4.77 4.57 4.39 3.75 10/31/2005 4.76 4.55 4.38 3.75 11/1/2005 4.76 4.57 4.40 4.00 11/2/2005 4.80 4.61 4.43 4.00 11/3/2005 4.85 4.65 4.46 4.00 11/4/2005 4.86 4.66 4.47 4.00 11/7/2005 4.82 4.62 4.45 4.00 11/8/2005 4.76 4.55 4.41 4.00 11/9/2005 4.84 4.64 4.49 4.00 11/10/2005 4.74 4.56 4.43 4.00 11/11/2005 4.74 4.57 4.43 4.00 11/14/2005 4.80 4.61 4.49 4.00 11/15/2005 4.75 4.56 4.46 4.00 11/16/2005 4.66 4.47 4.40 4.00 11/17/2005 4.65 4.46 4.37 4.00 11/18/2005 4.68 4.49 4.39 4.00 11/21/2005 4.66 4.46 4.37 4.00 11/22/2005 4.66 4.43 4.30 4.00 11/23/2005 4.70 4.49 4.35 4.00 11/24/2005 4.70 4.47 4.35 4.00 11/25/2005 4.66 4.43 4.35 4.00 11/28/2005 4.62 4.41 4.32 4.00 11/29/2005 4.69 4.48 4.39 4.00 11/30/2005 4.69 4.49 4.41 4.00 12/1/2005 4.72 4.52 4.44 4.00 12/2/2005 4.72 4.51 4.42 4.00 12/5/2005 4.76 4.57 4.47 4.00 12/6/2005 4.68 4.48 4.40 4.00 12/7/2005 4.71 4.51 4.40 4.00 12/8/2005 4.67 4.46 4.36 4.00 12/9/2005 4.73 4.53 4.40 4.00 12/12/2005 4.75 4.55 4.43 4.00 12/13/2005 4.73 4.52 4.41 4.25 12/14/2005 4.66 4.46 4.36 4.25 12/15/2005 4.67 4.46 4.35 4.25 12/16/2005 4.64 4.44 4.36 4.25 12/19/2005 4.64 4.44 4.37 4.25 12/20/2005 4.65 4.46 4.41 4.25 12/21/2005 4.68 4.49 4.44 4.25 12/22/2005 4.61 4.43 4.38 4.25 12/23/2005 4.55 4.38 4.37 4.25 12/26/2005 4.55 4.38 4.37 4.25 12/27/2005 4.51 4.34 4.35 4.25 12/28/2005 4.53 4.38 4.36 4.25 12/29/2005 4.51 4.36 4.36 4.25 12/30/2005 4.54 4.39 4.40 4.25 1/2/2006 4.54 4.39 4.40 4.25 1/3/2006 4.55 4.37 4.33 4.25 1/4/2006 4.54 4.34 4.30 4.25 1/5/2006 4.55 4.35 4.32 4.25 1/6/2006 4.56 4.38 4.35 4.25 1/9/2006 4.55 4.37 4.35 4.25 1/10/2006 4.61 4.43 4.40 4.25 1/11/2006 4.63 4.45 4.42 4.25 1/12/2006 4.59 4.41 4.38 4.25 1/13/2006 4.53 4.36 4.34 4.25 1/16/2006 4.53 4.36 4.33 4.25 1/17/2006 4.50 4.33 4.33 4.25 1/18/2006 4.51 4.33 4.33 4.25 1/19/2006 4.55 4.38 4.37 4.25 1/20/2006 4.52 4.35 4.35 4.25 1/23/2006 4.53 4.36 4.35 4.25 1/24/2006 4.57 4.39 4.39 4.25 1/25/2006 4.66 4.48 4.46 4.25 1/26/2006 4.70 4.52 4.49 4.25 1/27/2006 4.69 4.51 4.50 4.25 1/30/2006 4.70 4.53 4.51 4.25 1/31/2006 4.68 4.52 4.52 4.50 2/1/2006 4.71 4.56 4.58 4.50 2/2/2006 4.70 4.56 4.60 4.50 2/3/2006 4.63 4.53 4.57 4.50 2/6/2006 4.62 4.55 4.61 4.50 2/7/2006 4.66 4.57 4.60 4.50 2/8/2006 4.68 4.59 4.63 4.50 2/9/2006 4.65 4.55 4.66 4.50 2/10/2006 4.55 4.59 4.68 4.50 2/13/2006 4.56 4.58 4.67 4.50 2/14/2006 4.59 4.61 4.68 4.50 2/15/2006 4.57 4.60 4.69 4.50 2/16/2006 4.57 4.59 4.69 4.50 2/17/2006 4.51 4.54 4.68 4.50 2/20/2006 4.51 4.54 4.68 4.50 2/21/2006 4.53 4.57 4.70 4.50 2/22/2006 4.48 4.52 4.67 4.50 2/23/2006 4.50 4.56 4.72 4.50 2/24/2006 4.53 4.58 4.72 4.50 2/27/2006 4.55 4.59 4.73 4.50 2/28/2006 4.51 4.55 4.68 4.50 3/1/2006 4.56 4.59 4.70 4.50 3/2/2006 4.61 4.63 4.71 4.50 3/3/2006 4.66 4.68 4.75 4.50 3/6/2006 4.74 4.75 4.77 4.50 3/7/2006 4.71 4.72 4.75 4.50 3/8/2006 4.72 4.73 4.72 4.50 3/9/2006 4.72 4.73 4.71 4.50 3/10/2006 4.75 4.76 4.74 4.50 3/13/2006 4.76 4.77 4.72 4.50 3/14/2006 4.70 4.69 4.64 4.50 3/15/2006 4.75 4.73 4.68 4.50 3/16/2006 4.69 4.64 4.62 4.50 3/17/2006 4.72 4.67 4.64 4.50 3/20/2006 4.70 4.66 4.65 4.50 3/21/2006 4.75 4.72 4.74 4.50 3/22/2006 4.72 4.70 4.74 4.50 3/23/2006 4.76 4.74 4.77 4.50 3/24/2006 4.69 4.67 4.71 4.50 3/27/2006 4.73 4.71 4.74 4.50 3/28/2006 4.80 4.78 4.80 4.75 3/29/2006 4.84 4.81 4.80 4.75 3/30/2006 4.90 4.86 4.84 4.75 3/31/2006 4.89 4.85 4.82 4.75 4/3/2006 4.90 4.86 4.85 4.75 4/4/2006 4.91 4.87 4.82 4.75 4/5/2006 4.90 4.85 4.80 4.75 4/6/2006 4.97 4.90 4.84 4.75 4/7/2006 5.06 4.98 4.90 4.75 4/10/2006 5.03 4.96 4.88 4.75 4/11/2006 5.00 4.92 4.86 4.75 4/12/2006 5.06 4.98 4.91 4.75 4/13/2006 5.11 5.05 4.95 4.75 4/14/2006 5.11 5.05 4.95 4.75 4/17/2006 5.08 5.01 4.90 4.75 4/18/2006 5.08 4.98 4.83 4.75 4/19/2006 5.12 5.02 4.85 4.75 4/20/2006 5.14 5.04 4.88 4.75 4/21/2006 5.09 5.01 4.90 4.75 4/24/2006 5.06 4.98 4.88 4.75 4/25/2006 5.16 5.07 4.94 4.75 4/26/2006 5.18 5.11 4.99 4.75 4/27/2006 5.17 5.07 4.90 4.75 4/28/2006 5.16 5.05 4.86 4.75 5/1/2006 5.23 5.14 4.95 4.75 5/2/2006 5.21 5.11 4.91 4.75 5/3/2006 5.24 5.14 4.94 4.75 5/4/2006 5.24 5.15 4.97 4.75 5/5/2006 5.19 5.10 4.93 4.75 5/8/2006 5.18 5.11 4.95 4.75 5/9/2006 5.20 5.12 4.96 4.75 5/10/2006 5.19 5.13 4.99 5.00 5/11/2006 5.23 5.15 4.99 5.00 5/12/2006 5.31 5.20 5.01 5.00 5/15/2006 5.27 5.16 4.98 5.00 5/16/2006 5.21 5.10 4.95 5.00 5/17/2006 5.27 5.15 4.95 5.00 5/18/2006 5.17 5.06 4.91 5.00 5/19/2006 5.14 5.06 4.96 5.00 5/22/2006 5.13 5.04 4.95 5.00 5/23/2006 5.12 5.01 4.92 5.00 5/24/2006 5.13 5.04 4.94 5.00 5/25/2006 5.17 5.07 4.95 5.00 5/26/2006 5.16 5.05 4.95 5.00 5/29/2006 5.16 5.05 4.95 5.00 5/30/2006 5.19 5.08 4.97 5.00 5/31/2006 5.23 5.12 5.04 5.00
SOURCE: BLOOMBERG L.P. [END CHART] HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT? Concerned about rising interest rates, we began the year with a strategy of maintaining a relatively short duration (a measure of interest-rate sensitivity). We achieved this by buying higher-coupon bonds and keeping some assets in cash equivalents. About halfway through the reporting year, we began to extend duration through purchases of lower-coupon mortgages, and by the end of the period the Fund's interest-rate sensitivity was fairly 7 . . . C O N T I N U E D ========================-------------------------------------------------------- close to neutral. When foreign buying pushed GNMA prices to levels that, in our view, were too high, we restricted new purchases to Fannie Mae and Freddie Mac mortgage-backed securities. By the end of the period, we were taking advantage of the four-year highs in long-term rates to purchase additional securities. COUPON RATE COMPOSITION OF MORTGAGE POOLS [CHART OF COUPON RATE COMPOSITION OF MORTGAGE POOLS]
AVERAGE COUPON RATE COUPON RATE % 5.75% (MAY 2006) 5.00 16.2% 5.50 39.1 5.88 1.7 6.00 27.1 6.15 1.4 6.50 10.2 6.75 0.1 7.00 2.8 7.50 0.7 8.00 0.7
[END CHART] WHAT'S YOUR OUTLOOK? Although data on jobs, retail sales, home prices, and manufacturing are finally giving signs that economic growth is slowing, it's still difficult to say when the Fed will stop raising short-term rates. Our view is that the economy will continue to cool, with housing being a key factor. In the last three years, rising residential real estate prices have allowed consumers to maintain their spending by cashing out equity in their homes. Flat to lower home prices, therefore, could dampen consumer spending and slow employment growth, because so many of the new jobs that have been created are in housing-related industries. 8 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund As we move into the new reporting year, risk reduction seems to be the new investment theme. GNMAs should benefit from this emphasis because they are among the safest securities. Of course, for investors in this Fund, it's all about earning income. Although the net asset value will fluctuate, we believe long-term investors should focus on total return and steady income. COULD THE HOUSING SLOWDOWN HAVE AN IMPACT ON THE FUND? GNMAs are backed by the full faith and credit of the U.S. government. If a mortgage-holder defaults on a mortgage in a GNMA pool, the investor will receive all of the principal back. Regardless of housing prices, GNMAs are as safe from a credit-risk perspective as U.S. Treasuries. Indirectly, a housing slowdown could potentially be a catalyst for lower interest rates and a less-aggressive Fed, which, we believe, would be positive for the bond market overall. On behalf of everyone at USAA, we thank you for your investment in the Fund. THE USAA GNMA TRUST IS NOT INDIVIDUALLY BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. 9 F U N D ========------------------------------------------------------------------------ RECOGNITION USAA GNMA TRUST [LOGO OF LIPPER LEADER] [LOGO OF LIPPER LEADER] PRESERVATION EXPENSE The Fund is listed as a Lipper Leader for Preservation among 4,177 fixed-income funds and for Expense among 148 funds within the Lipper U.S. Mortgage category for the overall period ending May 31, 2006. LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS AS OF MAY 31, 2006. 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 4,177 AND 3,506 FIXED-INCOME FUNDS FOR THE THREE-AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF 2 AMONG 2,171 FIXED-INCOME FUNDS FOR THE 10-YEAR PERIOD. LIPPER RATINGS FOR EXPENSE REFLECT FUNDS' EXPENSE MINIMIZATION RELATIVE TO PEERS WITH SIMILAR LOAD STRUCTURES AS OF MAY 31, 2006. THE FUND RECEIVED A LIPPER LEADER RATING FOR EXPENSE AMONG 148, 128, AND 79 FUNDS FOR THE THREE-, FIVE-, AND 10-YEAR PERIODS, RESPECTIVELY, WITHIN THE LIPPER U.S. MORTGAGE CATEGORY. RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF PERCENTILE RANKS FOR THE PRESERVATION AND EXPENSE 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 2006, REUTERS, ALL RIGHTS RESERVED. 10 I N V E S T M E N T ====================------------------------------------------------------------ OVERVIEW USAA GNMA TRUST (Ticker Symbol: USGNX) OBJECTIVE - -------------------------------------------------------------------------------- High level of current income consistent with preservation of principal. TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- Normally invests at least 80% of the Fund's assets in GNMA securities backed by the full faith and credit of the U.S. government.
- -------------------------------------------------------------------------------- 5/31/06 5/31/05 - -------------------------------------------------------------------------------- Net Assets $521.2 Million $594.2 Million Net Asset Value Per Share $9.32 $9.76
- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/06 - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD 0.40% 4.04% 5.57% 4.97%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. 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. 11 . . . C O N T I N U E D ========================-------------------------------------------------------- AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS -- PERIODS ENDING MAY 31, 2006
- ----------------------------------------------------------------------------------------- TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE - ----------------------------------------------------------------------------------------- 10 YEARS 5.57% = 6.03% + (0.46%) 5 YEARS 4.04% = 5.22% + (1.18%) 1 YEAR 0.40% = 4.91% + (4.51%)
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. ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 10-YEAR PERIOD ENDING MAY 31, 2006 [CHART OF TOTAL RETURN, DIVIDEND RETURN, CHANGE IN SHARE PRICE]
TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE 5/31/1997 9.23% 7.28% 1.95% 5/31/1998 10.65 6.93 3.72 5/31/1999 3.15 6.25 -3.10 5/31/2000 0.21 6.51 -6.30 5/31/2001 12.91 7.36 5.55 5/31/2002 7.83 5.91 1.92 5/31/2003 6.49 5.70 0.79 5/31/2004 0.39 4.72 -4.33 5/31/2005 5.33 4.92 0.41 5/31/2006 0.40 4.91 -4.51
[END CHART] TOTAL RETURN EQUALS DIVIDEND RETURN PLUS SHARE PRICE CHANGE AND ASSUMES REINVESTMENT OF ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAIN DISTRIBUTIONS. DIVIDEND RETURN IS THE NET INVESTMENT INCOME FROM DIVIDENDS RECEIVED OVER THE PERIOD, ASSUMING REINVESTMENT OF ALL DIVIDENDS. SHARE PRICE CHANGE IS THE CHANGE IN NET ASSET VALUE OVER THE PERIOD ADJUSTED FOR 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. 12 . . . C O N T I N U E D ========================-------------------------------------------------------- OVERVIEW 12-MONTH DIVIDEND YIELD COMPARISON [CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
USAA GNMA TRUST LIPPER GNMA FUNDS AVERAGE 5/31/1997 6.90% 6.34% 5/31/1998 6.44 6.13 5/31/1999 6.38 5.90 5/31/2000 6.87 6.17 5/31/2001 6.64 5.92 5/31/2002 5.58 5.08 5/31/2003 5.54 4.27 5/31/2004 4.93 4.06 5/31/2005 4.80 3.96 5/31/2006 5.15 4.48
[END CHART] THE 12-MONTH DIVIDEND YIELD IS COMPUTED BY DIVIDING NET INVESTMENT INCOME DIVIDENDS PAID DURING THE PREVIOUS 12 MONTHS BY THE LATEST MONTH-END NET ASSET VALUE ADJUSTED FOR REALIZED CAPITAL GAIN DISTRIBUTIONS. THE GRAPH REPRESENTS DATA FOR PERIODS ENDING 5/31/97 TO 5/31/06. THE LIPPER GNMA FUNDS AVERAGE IS AN AVERAGE PERFORMANCE LEVEL OF ALL GNMA FUNDS, REPORTED BY LIPPER INC., AN INDEPENDENT ORGANIZATION THAT MONITORS THE PERFORMANCE OF MUTUAL FUNDS. 13 . . . C O N T I N U E D ========================-------------------------------------------------------- CUMULATIVE PERFORMANCE COMPARISON [CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LEHMAN BROTHERS GNMA 30-YEAR INDEX USAA GNMA TRUST LIPPER GNMA FUNDS INDEX 05/31/96 $10,000.00 $10,000.00 $10,000.00 06/30/96 10,132.66 10,126.73 10,112.14 07/31/96 10,171.18 10,149.32 10,148.63 08/31/96 10,174.59 10,186.85 10,148.43 09/30/96 10,346.04 10,341.78 10,309.22 10/31/96 10,556.99 10,559.00 10,512.34 11/30/96 10,712.85 10,723.87 10,670.17 12/31/96 10,654.68 10,659.85 10,601.56 01/31/97 10,737.46 10,742.02 10,669.75 02/28/97 10,777.20 10,781.66 10,697.10 03/31/97 10,669.25 10,670.50 10,595.01 04/30/97 10,845.69 10,818.59 10,757.88 05/31/97 10,958.67 10,923.31 10,854.20 06/30/97 11,089.73 11,076.01 10,982.01 07/31/97 11,290.08 11,282.17 11,188.96 08/31/97 11,266.50 11,220.87 11,153.69 09/30/97 11,416.95 11,378.46 11,300.66 10/31/97 11,534.73 11,517.32 11,412.90 11/30/97 11,571.89 11,538.88 11,437.65 12/31/97 11,676.48 11,673.47 11,550.42 01/31/98 11,790.38 11,836.73 11,663.74 02/28/98 11,816.66 11,806.33 11,679.91 03/31/98 11,866.48 11,883.87 11,721.45 04/30/98 11,935.21 11,957.55 11,788.38 05/31/98 12,017.27 12,086.84 11,872.41 06/30/98 12,067.69 12,202.29 11,923.93 07/31/98 12,136.17 12,231.50 11,979.73 08/31/98 12,230.83 12,425.98 12,092.00 09/30/98 12,376.09 12,705.15 12,241.38 10/31/98 12,364.57 12,456.91 12,177.01 11/30/98 12,434.97 12,597.23 12,246.85 12/31/98 12,485.71 12,637.69 12,294.68 01/31/99 12,574.25 12,734.87 12,369.26 02/28/99 12,533.03 12,445.04 12,287.74 03/31/99 12,608.85 12,576.50 12,365.13 04/30/99 12,669.31 12,605.62 12,419.15 05/31/99 12,604.57 12,465.64 12,329.78 06/30/99 12,552.93 12,374.20 12,261.81 07/31/99 12,470.26 12,137.74 12,181.41 08/31/99 12,465.51 12,005.76 12,169.47 09/30/99 12,667.25 12,236.51 12,368.03 10/31/99 12,743.06 12,248.67 12,424.77 11/30/99 12,748.39 12,256.30 12,426.30 12/31/99 12,722.34 12,181.15 12,372.93 01/31/00 12,607.64 12,121.01 12,265.00 02/29/00 12,770.61 12,296.25 12,416.20 03/31/00 12,975.29 12,446.87 12,610.93 04/30/00 12,962.52 12,381.64 12,582.34 05/31/00 13,011.66 12,499.11 12,633.36 06/30/00 13,250.73 12,747.31 12,848.05 07/31/00 13,319.72 12,809.09 12,901.01 08/31/00 13,521.56 13,019.76 13,090.87 09/30/00 13,647.28 13,105.59 13,203.43 10/31/00 13,749.99 13,212.21 13,285.96 11/30/00 13,943.00 13,440.43 13,488.66 12/31/00 14,140.22 13,663.46 13,682.04 01/31/01 14,371.46 13,869.53 13,890.15 02/28/01 14,434.57 13,972.18 13,960.42 03/31/01 14,520.83 14,072.32 14,029.69 04/30/01 14,544.71 14,034.88 14,030.07 05/31/01 14,666.83 14,110.43 14,125.42 06/30/01 14,710.42 14,128.61 14,159.74 07/31/01 14,962.47 14,406.34 14,422.65 08/31/01 15,071.57 14,535.09 14,530.18 09/30/01 15,274.98 14,741.77 14,723.33 10/31/01 15,477.83 14,960.80 14,911.31 11/30/01 15,347.64 14,771.25 14,769.07 12/31/01 15,301.95 14,640.13 14,697.07 01/31/02 15,456.65 14,790.79 14,846.56 02/28/02 15,614.15 14,973.50 15,006.13 03/31/02 15,466.09 14,758.04 14,849.63 04/30/02 15,738.03 15,065.90 15,109.19 05/31/02 15,840.99 15,215.45 15,208.19 06/30/02 15,968.42 15,325.48 15,327.14 07/31/02 16,153.52 15,495.25 15,501.99 08/31/02 16,266.07 15,654.82 15,623.12 09/30/02 16,400.67 15,781.77 15,748.97 10/31/02 16,451.26 15,809.21 15,783.30 11/30/02 16,466.80 15,808.22 15,786.26 12/31/02 16,630.55 15,992.20 15,956.13 01/31/03 16,672.62 16,031.15 15,994.62 02/28/03 16,756.07 16,112.19 16,082.99 03/31/03 16,767.90 16,110.41 16,076.06 04/30/03 16,806.76 16,164.46 16,114.72 05/31/03 16,807.34 16,200.49 16,133.26 06/30/03 16,858.45 16,215.08 16,160.33 07/31/03 16,580.02 15,877.80 15,836.11 08/31/03 16,689.23 15,975.62 15,931.91 09/30/03 16,930.15 16,232.57 16,194.79 10/31/03 16,886.00 16,170.74 16,128.31 11/30/03 16,944.51 16,198.55 16,179.70 12/31/03 17,102.67 16,313.94 16,292.53 01/31/04 17,188.18 16,395.79 16,378.19 02/29/04 17,300.77 16,492.25 16,479.18 03/31/04 17,371.65 16,558.90 16,532.59 04/30/04 17,098.13 16,314.04 16,257.65 05/31/04 17,063.42 16,261.82 16,216.59 06/30/04 17,217.84 16,395.86 16,330.76 07/31/04 17,357.14 16,512.81 16,467.48 08/31/04 17,598.10 16,709.55 16,690.00 09/30/04 17,635.22 16,739.69 16,676.58 10/31/04 17,774.60 16,839.69 16,785.82 11/30/04 17,734.15 16,803.29 16,739.24 12/31/04 17,849.42 16,874.49 16,829.14 01/31/05 17,952.95 16,954.95 16,926.84 02/28/05 17,897.30 16,901.90 16,865.76 03/31/05 17,863.29 16,866.15 16,831.37 04/30/05 18,043.71 17,024.82 16,991.40 05/31/05 18,173.62 17,127.78 17,101.57 06/30/05 18,291.75 17,163.02 17,138.67 07/31/05 18,397.85 17,110.17 17,069.71 08/31/05 18,340.81 17,251.87 17,211.98 09/30/05 18,305.96 17,167.60 17,122.44 10/31/05 18,490.85 17,092.50 17,038.19 11/30/05 18,623.99 17,129.29 17,085.82 12/31/05 18,864.24 17,331.71 17,275.99 01/31/06 18,794.44 17,381.44 17,317.22 02/28/06 18,950.43 17,398.92 17,348.26 03/31/06 18,876.53 17,311.81 17,231.28 04/30/06 18,797.25 17,233.57 17,163.26 05/31/06 18,836.72 17,196.59 17,117.83
[END CHART] DATA FROM 5/31/96 THROUGH 5/31/06. The graph illustrates the comparison of a $10,000 hypothetical investment in the USAA GNMA Trust to the following benchmarks: o The Lehman Brothers GNMA 30-Year Index is an unmanaged index of pass-through securities with an original maturity of 30 years. o The Lipper GNMA Funds Index tracks the total return performance of the 10 largest funds within the Lipper GNMA Funds category. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, 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. 14 . . . C O N T I N U E D ========================-------------------------------------------------------- OVERVIEW ASSET ALLOCATION 5/31/06 [PIE CHART OF ASSET ALLOCATION] 30-Year Fixed-Rate Single-Family Mortgages* 89.4% Collateralized Mortgage Obligations 5.9% 15-Year Fixed-Rate Single-Family Mortgages* 4.8% Repurchase Agreements 2.5%
[END CHART] PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. *COMBINED IN THE PORTFOLIO OF INVESTMENTS UNDER MORTGAGE-BACKED PASS-THROUGH SECURITIES, SINGLE-FAMILY. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 17-19. 15 D I S T R I B U T I O N S ==========================------------------------------------------------------ to SHAREHOLDERS USAA GNMA TRUST The following federal tax information related to the Fund's fiscal year ended May 31, 2006, 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 2007. For the fiscal year ended May 31, 2006, certain dividends paid by the Fund qualify as interest-related dividends. The Fund designates $28,321,000 as qualifying interest income. 16 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 GNMA TRUST: We have audited the accompanying statement of assets and liabilities of the USAA GNMA Trust (a portfolio of USAA Investment Trust) (the "Fund"), including the portfolio of investments, as of May 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four 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 audit. The financial highlights for the period presented through May 31, 2002, were audited by other auditors whose report, dated July 5, 2002, expressed an unqualified opinion on those financial highlights. We conducted our audit 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. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides 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 the USAA GNMA Trust at May 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Antonio, Texas July 14, 2006 17 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (in thousands) USAA GNMA TRUST MAY 31, 2006
PRINCIPAL COUPON MARKET AMOUNT SECURITY RATE MATURITY VALUE - ---------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY ISSUES (100.1%)(a) MORTGAGE-BACKED PASS-THROUGH SECURITIES, SINGLE-FAMILY (94.2%) Government National Mortgage Assn. I, $ 6,113 Pool 604858 5.50% 12/15/2018 $ 6,067 32,068 Pool 604713 5.50 10/15/2033 31,231 14,639 Pool 616143 5.50 12/15/2033 14,257 7,277 Pool 615486 5.50 7/15/2034 7,092 6,397 Pool 781378 6.00 12/15/2016 6,470 3,435 Pool 780770 6.00 4/15/2028 3,435 1,227 Pool 482833 6.00 11/15/2028 1,226 3,164 Pool 492703 6.00 2/15/2029 3,160 2,022 Pool 781148 6.00 7/15/2029 2,020 3,284 Pool 584367 6.00 5/15/2032 3,277 9,911 Pool 603869 6.00 1/15/2033 9,887 2,687 Pool 553069 6.00 2/15/2033 2,681 3,902 Pool 581541 6.00 7/15/2033 3,893 2,446 Pool 615955 6.00 9/15/2033 2,440 1,016 Pool 456861 6.50 5/15/2028 1,037 849 Pool 472596 6.50 5/15/2028 868 805 Pool 462642 6.50 7/15/2028 822 776 Pool 464827 6.50 9/15/2028 792 2,132 Pool 490804 6.50 11/15/2028 2,177 101 Pool 434165 6.50 1/15/2029 103 93 Pool 469900 6.50 1/15/2029 96 2,744 Pool 486065 6.50 3/15/2031 2,798 2,203 Pool 485860 6.50 10/15/2031 2,246 1,837 Pool 577423 6.50 1/15/2032 1,873 858 Pool 581120 6.50 3/15/2032 874 2,139 Pool 552707 6.50 8/15/2032 2,180 11,025 Pool 781516 6.50 9/15/2032 11,242 89 Pool 474279 6.75 5/15/2028 92 224 Pool 474256 6.75 5/15/2028 229 157 Pool 440293 7.00 4/15/2027 162 1,434 Pool 780570 7.00 5/15/2027 1,485 66 Pool 478209 7.00 6/15/2028 68 111 Pool 458908 7.00 7/15/2028 115 376 Pool 464128 7.00 8/15/2028 389 294 Pool 486467 7.00 8/15/2028 304 421 Pool 464854 7.00 9/15/2028 435 2,592 Pool 487603 7.00 5/15/2029 2,681 2,022 Pool 487613 7.00 6/15/2029 2,091 1,022 Pool 555482 7.00 8/15/2031 1,057
18 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) (in thousands) USAA GNMA TRUST MAY 31, 2006
PRINCIPAL COUPON MARKET AMOUNT SECURITY RATE MATURITY VALUE - ---------------------------------------------------------------------------------------------------------- Government National Mortgage Assn. I, $ 620 Pool 781328 7.00% 9/15/2031 $ 642 995 Pool 564438 7.00 10/15/2031 1,029 343 Pool 563599 7.00 6/15/2032 354 1,278 Pool 563613 7.00 7/15/2032 1,321 621 Pool 780716 7.50 2/15/2028 652 111 Pool 781001 7.50 3/15/2029 117 285 Pool 499432 7.50 4/15/2029 299 424 Pool 470683 7.50 7/15/2029 445 872 Pool 510533 7.50 10/15/2029 914 229 Pool 518539 7.50 10/15/2029 239 141 Pool 538003 7.50 8/15/2030 148 219 Pool 443263 7.50 12/15/2030 229 113 Pool 486050 7.50 1/15/2031 119 74 Pool 530250 7.50 1/15/2031 77 181 Pool 552172 7.50 11/15/2031 190 18 Pool 178674 8.00 1/15/2022 20 373 Pool 352169 8.00 6/15/2023 398 437 Pool 442548 8.00 5/15/2027 466 416 Pool 511530 8.00 7/15/2030 444 171 Pool 520978 8.00 9/15/2030 183 123 Pool 307542 8.50 6/15/2021 133 37 Pool 329602 8.50 7/15/2022 40 158 Pool 312950 9.00 7/15/2021 171 Government National Mortgage Assn. II, 14,356 Pool 003389 5.00 5/20/2033 13,585 15,674 Pool 003414 5.00 7/20/2033 14,831 10,350 Pool 003568 5.00 6/20/2034 9,800 29,147 Pool 003759 5.00 9/20/2035 27,573 3,799 Pool 003375 5.50 4/20/2033 3,684 12,754 Pool 003530 5.50 3/20/2034 12,377 41,885 Pool 003678(d) 5.50 2/20/2035 40,631 41,853 Pool 003702 5.50 4/20/2035 40,600 23,453 Pool 003736 5.50 7/20/2035 22,751 2,255 Pool 003052 6.00 3/20/2031 2,245 5,096 Pool 003273 6.00 8/20/2032 5,072 4,054 Pool 003285 6.00 9/20/2032 4,034 4,111 Pool 003460 6.00 10/20/2033 4,105 4,261 Pool 448816 6.00 12/20/2033 4,234 12,553 Pool 003517 6.00 2/20/2034 12,496 12,527 Pool 003531 6.00 3/20/2034 12,470 10,222 Pool 003611 6.00 9/20/2034 10,176
19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) (in thousands) USAA GNMA TRUST MAY 31, 2006
PRINCIPAL COUPON MARKET AMOUNT SECURITY RATE MATURITY VALUE - ---------------------------------------------------------------------------------------------------------- Government National Mortgage Assn. II, $24,213 Pool 003625 6.00% 10/20/2034 $ 24,103 7,385 Pool 605742 6.00 11/20/2034 7,341 15,000 Pool 003852(c) 6.00 5/20/2036 14,929 754 Pool 003080 6.50 5/20/2031 765 648 Pool 003107 6.50 7/20/2031 658 1,975 Pool 781494 6.50 8/20/2031 2,005 2,882 Pool 781427 6.50 4/20/2032 2,923 2,726 Pool 003250 6.50 6/20/2032 2,764 10,752 Pool 003599 6.50 8/20/2034 10,899 2,334 Pool 002971 7.00 9/20/2030 2,394 312 Pool 003070 7.50 4/20/2031 325 94 Pool 000563 8.00 12/20/2022 99 2,150 Pool 002958 8.00 8/20/2030 2,285 Fannie Mae (+), 14,744 Pool 846573 5.00 12/01/2035 13,844 1,399 Pool 598427 6.00 2/01/2017 1,409 1,376 Pool 608749 6.50 10/01/2016 1,401 4,705 Pool 618473 6.50 12/01/2016 4,791 Freddie Mac (+), 4,860 Pool G18095 5.00 1/01/2021 4,694 10,760 Pool A42616 5.50 12/01/2035 10,380 -------- 490,655 -------- COLLATERALIZED MORTGAGE OBLIGATIONS (5.9%) Government National Mortgage Assn. I, 15,000 Series 2003-50, Class PC 5.50 3/16/2032 14,608 8,703 Series 2002-35, Class C 5.88 10/16/2023 8,796 7,404 Series 2001-12, Class B 6.15 6/16/2021 7,484 -------- 30,888 -------- Total U.S. government agency issues (cost: $538,028) 521,543 -------- REPURCHASE AGREEMENTS (2.5%)(b) 13,113 UBS Securities LLC, 5.00%, acquired on 5/31/2006 and due on 6/01/2006 at $13,113 (collateralized by $14,150 of Fannie Mae Notes(a,+), 4.63%, due 5/01/2013; market value $13,376) (cost: $13,113) 13,113 -------- TOTAL INVESTMENTS (COST: $551,141) $534,656 ========
20 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA GNMA TRUST MAY 31, 2006 GENERAL NOTES - -------------------------------------------------------------------------------- Market values of securities are determined by procedures and practices discussed in Note 1 to the financial statements. The portfolio of investments category percentages shown represent the percentages of the investments to net assets and, in total, may not equal 100%. SPECIFIC NOTES - -------------------------------------------------------------------------------- (a) U.S. government agency issues - mortgage-backed securities issued by Government National Mortgage Association (GNMA) are supported by the full faith and credit of the U.S. government. Securities issued by government-sponsored enterprises (GSEs) indicated with "+" are supported only by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. government. (b) 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. (c) At May 31, 2006, the aggregate market value of securities purchased on a delayed-delivery basis was $14,929,000. (d) At May 31, 2006, a portion of this security was segregated to cover when-issued securities. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA GNMA TRUST MAY 31, 2006 ASSETS Investments in securities, at market value (identified cost of $551,141) $534,656 Cash 1 Receivables: Capital shares sold 103 USAA Transfer Agency Company (Note 6C) 3 Interest 2,515 Securities sold 14,875 -------- Total assets 552,153 -------- LIABILITIES Payables: Securities purchased 29,901 Capital shares redeemed 514 Dividends on capital shares 425 Accrued management fees 56 Accrued transfer agent's fees 16 Other accrued expenses and payables 65 -------- Total liabilities 30,977 -------- Net assets applicable to capital shares outstanding $521,176 ======== NET ASSETS CONSIST OF: Paid-in capital $580,404 Accumulated net realized loss on investments (42,743) Net unrealized depreciation of investments (16,485) -------- Net assets applicable to capital shares outstanding $521,176 ======== Capital shares outstanding, unlimited number of shares authorized, no par value 55,946 ======== Net asset value, redemption price, and offering price per share $ 9.32 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 22 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA GNMA TRUST YEAR ENDED MAY 31, 2006 INVESTMENT INCOME Interest income $ 28,032 -------- EXPENSES Management fees 708 Administration and servicing fees 850 Transfer agent's fees 876 Custody and accounting fees 113 Postage 80 Shareholder reporting fees 32 Trustees' fees 9 Registration fees 43 Professional fees 52 Other 24 -------- Total expenses 2,787 Expenses paid indirectly (4) -------- Net expenses 2,783 -------- NET INVESTMENT INCOME 25,249 -------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss (126) Change in net unrealized appreciation/depreciation (22,656) -------- Net realized and unrealized loss (22,782) -------- Increase in net assets resulting from operations $ 2,467 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA GNMA TRUST YEARS ENDED MAY 31,
2006 2005 ---------------------------- FROM OPERATIONS Net investment income $ 25,249 $ 24,552 Net realized gain (loss) on investments (126) 686 Change in net unrealized appreciation/depreciation of investments (22,656) 5,792 ---------------------------- Increase in net assets resulting from operations 2,467 31,030 ---------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (28,404) (28,942) ---------------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 69,320 79,152 Reinvested dividends 22,819 22,918 Cost of shares redeemed (139,240) (120,435) ---------------------------- Decrease in net assets from capital share transactions (47,101) (18,365) ---------------------------- Capital contribution from USAA Transfer Agency Company (Note 6C) 3 - ---------------------------- Net decrease in net assets (73,035) (16,277) NET ASSETS Beginning of period 594,211 610,488 ---------------------------- End of period $ 521,176 $ 594,211 ============================ CHANGE IN SHARES OUTSTANDING Shares sold 7,237 8,082 Shares issued for dividends reinvested 2,387 2,341 Shares redeemed (14,585) (12,309) ---------------------------- Decrease in shares outstanding (4,961) (1,886) ============================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA GNMA TRUST MAY 31, 2006 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act of 1940 (the 1940 Act), as amended, is an open-end management investment company organized as a Massachusetts business trust consisting of 10 separate funds. The information presented in this annual report pertains only to the USAA GNMA Trust (the Fund), which is classified as diversified under the 1940 Act. The Fund's investment objective is to provide a high level of current income consistent with preservation of principal. A. SECURITY VALUATION - The value of each security is determined (as of the close of trading on the New York Stock Exchange on each business day the exchange is open) as set forth below: 1. Debt securities are valued each business day by a pricing service (the Service) approved by the Trust's Board of Trustees. The Service uses the mean between quoted bid and asked prices or the last sales price to price securities when, in the Service's judgment, these prices are readily available and are representative of the securities' market values. For many securities, such prices are not readily available. The Service generally prices these securities based on methods that include consideration of yields or prices of securities of comparable quality, coupon, maturity, and type; indications as to values from dealers in securities; and general market conditions. 2. Securities purchased with original maturities of 60 days or less are valued at amortized cost, which approximates market value. 3. Repurchase agreements are valued at cost, which approximates market value. 4. 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 25 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 valued in good faith at fair value, using methods determined by USAA Investment Management Company (the Manager), an affiliate of the Fund, under valuation procedures approved by the Trust's Board of Trustees. The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market in which they are traded and the actual price realized from the sale of a security may differ materially from the fair value price. Valuing these securities at fair value is intended to cause the Fund's net asset value (NAV) to be more reliable than it otherwise would be. Fair value methods used by the Manager include, but are not limited to, obtaining market quotations from secondary pricing services, broker-dealers, or widely used quotation systems. General factors considered in determining the fair value of securities include fundamental analytical data, the nature and duration of any restrictions on disposition of the securities, and an evaluation of the forces that influenced the market in which the securities are purchased and sold. 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). Gains or losses from sales of investment securities are computed on the identified cost basis. Interest income is recorded on the accrual basis. Discounts and premiums are amortized over the life of the respective securities, using the effective yield method for long-term securities and the straight-line method for short-term securities. D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements with commercial banks or recognized security dealers. 26 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 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 Fannie Mae and 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. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery and payment for securities that have been purchased by the Fund on a delayed-delivery or when-issued basis can take place a month or more after the trade date. During the period prior to settlement, these securities do not earn interest, are subject to market fluctuation, and may increase or decrease in value prior to their delivery. The Fund maintains segregated assets with a market value equal to or greater than the amount of its purchase commitments. The purchase of securities on a delayed-delivery or when-issued basis may increase the volatility of the Fund's NAV to the extent that the Fund makes such purchases while remaining substantially fully invested. As of May 31, 2006, outstanding delayed-delivery commitments, including interest purchased where applicable, for the Fund were $29,901,000, which included when- issued securities of $14,899,000. Also outstanding was a same-day sale of a when-issued commitment of $14,875,000. F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian and other banks utilized by the Fund for cash 27 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 management purposes, realized credits, if any, generated from cash balances in the Fund's bank accounts are used to reduce the Fund's expenses. For the year ended May 31, 2006, these custodian and other bank credits reduced the Fund's expenses by $4,000. G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that contain a variety of representations and warranties that provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. H. USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINE OF CREDIT - -------------------------------------------------------------------------------- The Fund participates in a joint, short-term, revolving, committed loan agreement of $300 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager. The purpose of the agreement is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at a rate per annum equal to the rate at which CAPCO obtains funding in the capital markets, with no markup. The USAA funds that are party to the loan agreement are assessed facility fees by CAPCO based on the funds' assessed proportionate share of CAPCO's operating expenses related to obtaining and 28 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 maintaining CAPCO's funding programs in total (in no event to exceed 0.07% annually of the $300 million loan agreement). The facility fees are allocated among the funds based on their respective average net assets for the period. Prior to January 6, 2006, the facility fees assessed by CAPCO were limited to an amount not to exceed 0.09% annually of the $300 million loan agreement. For the year ended May 31, 2006, the Fund paid CAPCO facility fees of $1,000, which represents 1.8% of total fees paid to CAPCO by the USAA funds. The Fund had no borrowings under this agreement during the year ended May 31, 2006. (3) DISTRIBUTIONS - -------------------------------------------------------------------------------- The character of any 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-basis and tax-basis accounting for security paydowns resulted in reclassifications to the statement of assets and liabilities to increase accumulated undistributed net investment income and increase accumulated net realized loss on investments by $3,155,000. This reclassification has no effect on net assets. The tax character of distributions paid during the years ended May 31, 2006, and 2005, was as follows: 2006 2005 ----------------------------- Ordinary income* $28,404,000 $28,942,000 *Includes distribution of short-term realized capital gains, if any, which are taxable as ordinary income. 29 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 As of May 31, 2006, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 425,000 Accumulated capital and other losses (42,743,000) Unrealized depreciation of investments (16,485,000) Net investment income is accrued daily as dividends and distributed to shareholders monthly. Distributions of 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. At May 31, 2006, the Fund had a current post-October deferred capital loss of $1,524,000 and capital loss carryovers of $41,219,000, for federal income tax purposes. The post-October loss will be recognized on the first day of the following fiscal year. If not offset by subsequent capital gains, the capital loss carryovers will expire between 2008 and 2014, as shown below. It is unlikely that the Trust's Board of Trustees will authorize a distribution of capital gains realized in the future until the capital loss carryovers have been utilized or expire. CAPITAL LOSS CARRYOVERS -------------------------------------------- EXPIRES BALANCE ----------- ----------- 2008 $ 8,011,000 2009 13,754,000 2010 1,176,000 2012 9,577,000 2013 4,814,000 2014 3,887,000 ----------- Total $41,219,000 =========== 30 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 (4) INVESTMENT TRANSACTIONS - -------------------------------------------------------------------------------- Cost of purchases and proceeds from sales/maturities of securities, excluding short-term securities, for the year ended May 31, 2006, were $145,384,000 and $175,225,000, respectively. As of May 31, 2006, the cost of securities, including short-term securities, for federal income tax purposes, was $551,141,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2006, for federal income tax purposes, were $1,503,000 and $17,988,000, respectively, resulting in net unrealized depreciation of $16,485,000. (5) LENDING OF PORTFOLIO SECURITIES - -------------------------------------------------------------------------------- The Fund, through its third-party securities-lending agent, Metropolitan West Securities LLC (MetWest), 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 to the fair value of the securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned. Cash collateral is invested in high-quality short-term investments. The Fund and MetWest retain 80% and 20%, respectively, of the income earned from the investment of cash received as collateral, net of any expenses associated with the lending transactions. MetWest receives no other fees from the Fund for its services as securities-lending agent. 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. Wachovia Corp., parent company of MetWest, has agreed to indemnify the Fund against any losses due to counterparty default in securities-lending transactions. The Fund had no securities-lending transactions during the year ended May 31, 2006. 31 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 (6) TRANSACTIONS WITH MANAGER - -------------------------------------------------------------------------------- A. MANAGEMENT FEES - The Manager carries out the Fund's investment policies and manages the Fund's portfolio. 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 GNMA Funds Index, which tracks the total return performance of the 10 largest funds in the Lipper GNMA Funds category. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 0.125% of its average net assets for the fiscal year. 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 consists 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 - --------------------------------------------------------------------------------- +/- 0.20% to 0.50% +/- 0.04% +/- 0.51% to 1.00% +/- 0.05% +/- 1.01% 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%. 32 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 Under the performance fee arrangement, the Fund will pay a positive performance fee adjustment for a performance period whenever the Fund outperforms the Lipper GNMA Funds Index over that period, even if the Fund had overall negative returns during the performance period. For the year ended May 31, 2006, the Fund incurred total management fees, paid or payable to the Manager, of $708,000, which included no performance adjustment. B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain administration 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, 2006, the Fund incurred administration and servicing fees, paid or payable to the Manager, of $850,000. In addition to the services provided under its Administration and Servicing Agreement with the Fund, the Manager also provides certain legal and tax services for the benefit of the Fund. The Trust's Board of Trustees has approved the reimbursement of these expenses incurred by the Manager. For the year ended May 31, 2006, the Fund reimbursed the Manager $21,000 for these legal and tax services. These expenses are included in the professional fees expenses on the Fund's statement of operations. C. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services (SAS), an affiliate of the Manager, provides transfer agent services to the Fund based on an annual charge of $25.50 per shareholder account plus out-of-pocket expenses. The Fund also pays SAS fees that are related to the administration and servicing of accounts that are traded on an omnibus basis. For the year ended May 31, 2006, the Fund incurred transfer agent's fees, paid or payable to SAS, of $876,000. 33 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 In addition, the Fund recorded a receivable from SAS of $3,000 for adjustments related to corrections to shareholder transactions. D. 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. (7) 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. (8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS - -------------------------------------------------------------------------------- During the year ended May 31, 2006, in accordance with affiliated transaction procedures approved by the Trust's Board of Trustees, purchases and sales of security transactions were executed between the Fund and the following affiliated USAA fund at the then-current market price with no brokerage commissions incurred:
NET REALIZED GAIN TO SELLER PURCHASER COST TO PURCHASER SELLER ----------------------------------------------------------------------------------------------- USAA Life Income Fund USAA GNMA Trust $630,000 $2,000
34 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA GNMA TRUST MAY 31, 2006 (9) FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Per share operating performance for a share outstanding throughout each period is as follows:
YEAR ENDED MAY 31, -------------------------------------------------------------------- 2006 2005 2004 2003 2002 -------------------------------------------------------------------- Net asset value at beginning of period $ 9.76 $ 9.72 $ 10.16 $ 10.08 $ 9.89 -------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .48 .47 .48 .56 .57(b) Net realized and unrealized gain (loss) (.44) .04 (.44) .08 .19(b) -------------------------------------------------------------------- Total from investment operations .04 .51 .04 .64 .76 Less distributions: From net investment income (.48) (.47) (.48) (.56) (.57) -------------------------------------------------------------------- Net asset value at end of period $ 9.32 $ 9.76 $ 9.72 $ 10.16 $ 10.08 ==================================================================== Total return (%)* .40 5.33 .39 6.49 7.83 Net assets at end of period (000) $521,176 $594,211 $610,488 $751,794 $589,157 Ratio of expenses to average net assets (%)**(a) .49 .48 .47 .46 .41 Ratio of net investment income to average net assets (%)** 4.46 4.06 3.62 4.43 5.62(b) Portfolio turnover (%) 26.10 37.29 58.53 74.64 44.77 * Assumes reinvestment of all net investment income distributions during the period. ** For the year ended May 31, 2006, average net assets were $566,383,000. (a) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses paid indirectly decreased the expense ratios by less than 0.01%. (b) In 2001, a change in amortization method was made as required by an accounting pronouncement. Without that change, these amounts would have been: Net investment income $ .57 Net realized and unrealized gain $ .19 Ratio of net investment income to average net assets 5.63%
35 E X P E N S E ==============------------------------------------------------------------------ EXAMPLE (unaudited) USAA GNMA TRUST MAY 31, 2006 EXAMPLE - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: direct costs, such as wire fees, redemption fees, and low balance fees; and indirect costs, including management fees, transfer agency fees, and other Fund operating expenses. This example is intended to help you understand your indirect costs, also referred to as "ongoing costs" (in dollars), of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period of December 1, 2005, through May 31, 2006. ACTUAL EXPENSES - -------------------------------------------------------------------------------- The first line of the table on the next page provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES - -------------------------------------------------------------------------------- The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may 36 E X P E N S E ==============------------------------------------------------------------------ EXAMPLE (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any direct costs, such as wire fees, redemption fees, or low balance fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your costs would have been higher.
EXPENSES PAID BEGINNING ENDING DURING PERIOD* ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2005 - DECEMBER 1, 2005 MAY 31, 2006 MAY 31, 2006 -------------------------------------------------------------- Actual $1,000.00 $1,003.90 $2.45 Hypothetical (5% return before expenses) 1,000.00 1,022.49 2.47
*Expenses are equal to the Fund's annualized expense ratio of 0.49%, which is net of any expenses paid indirectly, multiplied by the average account value over the period, multiplied by 182 days/365 days (to reflect the one-half year period). The Fund's ending account value on the first line in the table is based on its actual total return of 0.39% for the six-month period of December 1, 2005, through May 31, 2006. 37 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) USAA GNMA TRUST MAY 31, 2006 At a meeting of the Board of Trustees held on April 19, 2006, the Board, including the Trustees who are not "interested persons" of the Trust (the "Independent Trustees"), approved the continuance of the Investment Advisory Agreement between the Trust and the Manager with respect to the Fund. In advance of the meeting, the Trustees received and considered a variety of information relating to the Investment Advisory Agreement and the Manager, and were given the opportunity to ask questions and request additional information from management. The information provided to the Board included, among other things: (i) a separate report prepared by an independent third party, which provided a statistical analysis comparing the Fund's investment performance, expenses, and fees to comparable investment companies; (ii) information concerning the services rendered to the Fund, as well as information regarding the Manager's revenues and costs of providing services to the Fund and compensation paid to affiliates of the Manager; and (iii) information about the Manager's operations and personnel. Prior to voting, the Independent Trustees reviewed the proposed continuance of the Investment Advisory Agreement with management and with experienced independent counsel and received materials from such counsel discussing the legal standards for their consideration of the proposed continuation of the Investment Advisory Agreement with respect to the Fund. The Independent Trustees also reviewed the proposed continuation of the Investment Advisory Agreement with respect to the Fund in private sessions with their counsel at which no representatives of management were present. At each regularly scheduled meeting of the Board and its committees, the Board of Trustees of the Trust receives and reviews, among other things, information concerning the Fund's performance and related services provided by the Manager. At the meeting at which the renewal of the Investment Advisory Agreement is considered, particular focus is given to information concerning Fund performance, comparability of 38 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 fees and total expenses, and profitability. However, the Board noted that the evaluation process with respect to the Manager is an ongoing one. In this regard, the Board's and its committees' consideration of the Investment Advisory Agreement included certain types of information previously received at such meetings. After full consideration of a variety of factors, the Board of Trustees, including the Independent Trustees, voted to approve the Investment Advisory Agreement. In approving the Investment Advisory Agreement, the Trustees did not identify any single factor as controlling, and each Trustee attributed different weights to various factors. Throughout their deliberations, the Independent Trustees were represented and assisted by independent counsel. NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature, extent, and quality of the services provided by the Manager under the Investment Advisory Agreement, the Board of Trustees reviewed information provided by the Manager relating to its operations and personnel. The Board also took into account its familiarity with the Manager's management through Board meetings, discussions, and reports during the preceding year. The Board considered the fees paid to the Manager and the services provided to the Fund by the Manager under the Investment Advisory Agreement, as well as other services provided by the Manager and its affiliates under other agreements, and the personnel who provide these services. In addition to the investment advisory services provided to the Fund, the Manager and its affiliates provide administrative services, stockholder services, oversight of Fund accounting, marketing services, assistance in meeting legal and regulatory requirements, and other services necessary for the operation of the Fund and the Trust. The Board considered the Manager's management style and the performance of its duties under the Investment Advisory Agreement. The Board considered the level and depth of knowledge of the Manager, including the professional experience and qualifications of 39 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 its senior and investment personnel, as well as current staffing levels. The allocation of the Fund's brokerage, including the Manager's process for monitoring "best execution," was also considered. The Manager's role in coordinating the activities of the Fund's other service providers was also considered. The Board considered the Manager's financial condition and that it had the financial wherewithal to continue to provide the same scope and high quality of services under the Investment Advisory Agreement. In reviewing the Investment Advisory Agreement, the Board focused on the experience, resources, and strengths of the Manager and its affiliates in managing investment companies, including the Fund. The Board also reviewed the compliance and administrative services provided to the Fund by the Manager, including oversight of the Fund's day-to-day operations and oversight of Fund accounting. The Manager and its affiliates provide compliance and administrative services to the Fund. The Trustees, guided also by information obtained from their experiences as directors/trustees of the Fund and other investment companies managed by the Manager, also focused on the quality of the Manager's compliance and administrative staff. EXPENSES AND PERFORMANCE. In connection with its consideration of the Investment Advisory Agreement, the Board evaluated the Fund's advisory fees and total expense ratio as compared to other open-end investment companies deemed to be comparable to the Fund as determined by the independent third party in its report. The Fund's expenses were compared to (i) a group of investment companies chosen by the independent third party to be comparable to the Fund based upon certain factors, including fund type, comparability of investment objectives and classifications, sales load type (in this case, investment companies with no sales loads), asset size, and expense components (the "expense group") and (ii) a larger group of investment companies that includes all no-load retail open-end investment companies in similar investment classifications/objectives as the Fund regardless of 40 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 asset size, excluding outliers (the "expense universe"). Among other data, the Board noted that the Fund's management fee rate - which includes advisory and administrative services and the effects of any performance adjustment - was below the median of both its expense group and its expense universe. The data indicated that the Fund's total expenses were below the median of both its expense group and its expense universe. The Board took into account the various services provided to the Fund by the Manager and its affiliates. The Board also noted the level and method of computing the management fee, including the performance adjustment to such fee. In considering the Fund's performance, the Board of Trustees noted that the Board reviews at its regularly scheduled meetings information about the Fund's performance results. The Trustees also reviewed various comparative data provided to them in connection with their consideration of the renewal of the Investment Advisory Agreement, including, among other information, a comparison of the Fund's average annual total return with its Lipper index and with that of other mutual funds deemed to be in its peer group by the independent third party in its report (the "performance universe"). The Fund's performance universe consisted of the Fund and all retail and institutional open-end investment companies with the same classification/objective as the Fund regardless of asset size or primary channel of distribution. This comparison indicated that the Fund's performance exceeded the average of its performance universe and its Lipper index for the one-, three-, and five-year periods ended December 31, 2005. The Board also noted that the Fund's percentile performance ranking was in the top 30% and top 50% of its performance universe for the one-and three-year periods, respectively, ended December 31, 2005. COMPENSATION AND PROFITABILITY. The Board took into consideration the level and method of computing the management fee. The information considered by the Board included operating profit margin information for the Manager's business as a whole. The Board also received and 41 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 considered profitability information related to the management revenues from the Fund. This consideration included a broad review of the methodology used in the allocation of certain costs to the Fund. The Trustees reviewed the profitability of the Manager's relationship with the Fund before tax expenses. In reviewing the overall profitability of the management fee to the Manager, the Board also considered the fact that affiliates provide shareholder servicing and administrative services to the Fund for which they receive compensation. The Board also considered the possible direct and indirect benefits to the Manager from its relationship with the Trust, including that the Manager may derive reputational and other benefits from its association with the Fund. The Trustees recognized that the Manager should be entitled to earn a reasonable level of profits in exchange for the level of services it provides to the Fund and the entrepreneurial risk that it assumes as Manager. The Trustees also noted the relatively low management fee and total expenses of the Fund as compared to its peer group and peer universe. ECONOMIES OF SCALE. The Board considered whether there should be changes in the management fee rate or structure in order to enable the Fund to participate in any economies of scale. The Board noted that the Fund's contractual management fee is below the asset-weighted average of funds at all asset levels in its peer group as set forth in the report prepared by the independent third party. The Board also took into account management's discussions of the current advisory fee structure. The Board also considered the effect of the Fund's growth and size on its performance and fees, noting that if the Fund's assets increase over time, the Fund may realize other economies of scale if assets increase proportionally more than some expenses. The Board determined that the current investment management fee structure was reasonable. CONCLUSIONS. The Board reached the following conclusions regarding the Fund's Investment Advisory Agreement with the Manager, among others: (i) the Manager has demonstrated that it possesses the capability 42 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA GNMA TRUST MAY 31, 2006 and resources to perform the duties required of it under the Investment Advisory Agreement; (ii) the Manager maintains an appropriate compliance program; (iii) the performance of the Fund is reasonable in relation to the performance of funds with similar investment objectives and to relevant indices; (iv) the Fund's advisory expenses are reasonable in relation to those of similar funds and to the services to be provided by the Manager; and (v) the Manager's level of profitability from its relationship with the Fund is reasonable. Based on its conclusions, the Board determined that continuation of the Investment Advisory Agreement would be in the interests of the Fund and its shareholders. 43 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 five 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 20 years or until the Director reaches age 70. All members of the Board of Directors shall be presented to shareholders for election or re-election, 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 39 individual funds as of May 31, 2006. 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. 44 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION INTERESTED DIRECTOR(1) - -------------------------------------------------------------------------------- CHRISTOPHER W. CLAUS (2,4) Director Born: December 1960 Year of Election or Appointment: 2001 President, Chief Executive Officer, Director, and Chairman of the Board of Directors, IMCO (12/04-present); President and Chief Executive Officer, Director, and Vice Chairman of the Board of Directors, IMCO (2/01-12/04); Senior Vice President, Investment Sales and Service, IMCO (7/00-2/01). Mr. Claus serves as President, Director/Trustee, and Vice Chairman of the Boards of Director/Trustee of the USAA family of funds. He also serves as President, Director, and Chairman of the Board of Directors of USAA Shareholder Account Services (SAS). He also holds the Officer position of Senior Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. (1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED AN "INTERESTED PERSON" 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. 45 . . . 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. 46 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION RICHARD A. ZUCKER (2,3,4,5,6) Director and Chairman of the Board of Directors 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. (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. (+) MR. ZUCKER WAS ELECTED AS CHAIRMAN OF THE BOARD IN 2005. 47 . . . 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). 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). 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/USAA Financial Planning Services (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). Mr. Howard also holds the Officer positions of Senior Vice President, Secretary, and Counsel for USAA Life Insurance Company, IMCO, USAA Financial Advisers, Inc. (FAI), FPS, and SAS; and Secretary for 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. 48 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION DEBRA K. DUNN Treasurer Born: August 1969 Year of Appointment: 2005 Assistant Vice President, IMCO/FPS Finance, USAA (9/04-present); Executive Director, IMCO/FPS Finance, USAA (12/03-9/04); Executive Director, FPS Finance, USAA (2/03-12/03); Director, FPS Finance, USAA (12/02-2/03); Director, Strategic Financial Analysis, IMCO (1/01-12/02); Financial Business Analyst, Strategic Financial Analysis, IMCO (3/00-1/01). Ms. Dunn also holds the Officer positions of Assistant Vice President and Treasurer for IMCO, SAS, FPS, and FAI; 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, SAS, 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). Mr. Galindo also holds the Officer position of Assistant Treasurer of USAA Life Investment Trust, a registered investment company offering five individual funds. 49 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION JEFFREY D. HILL Chief Compliance Officer Born: December 1967 Year of Appointment: 2004 Assistant Vice President, Mutual Funds Compliance, USAA (9/04-present); Assistant Vice President, Investment Management Administration & Compliance, USAA (12/02-9/04); Assistant Vice President, Investment Management Administration & Compliance, IMCO (9/01-12/02); Senior Manager, Investment Management Assurance and Advisory Services, KPMG LLP (6/98-8/01). 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__________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ TRUSTEES Christopher W. Claus Barbara B. Dreeben Robert L. Mason, Ph.D. Michael F. Reimherr 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 AND State Street Bank and Trust Company ACCOUNTING AGENT P.O. Box 1713 Boston, Massachusetts 02105 INDEPENDENT Ernst & Young LLP REGISTERED PUBLIC 100 West Houston St., Suite 1800 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. FOR ADDITIONAL (800) 531-8181 INFORMATION ABOUT For account servicing, exchanges, MUTUAL FUNDS or redemptions (800) 531-8448 RECORDED MUTUAL 24-hour service (from any phone) FUND PRICE QUOTES (800) 531-8066 MUTUAL FUND (from touch-tone phones only) USAA TOUCHLINE For account balance, last transaction, fund prices, or to exchange or redeem fund shares (800) 531-8777 INTERNET ACCESS USAA.COM THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800) SEC-0330. [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. enter keyword LESSMAIL. - -------------------------------------------------------------------------------- [LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R) USAA ---------------------------------- INSURANCE o MEMBER SERVICES 23413-0706 (C)2006, 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. On September 14, 2005, the Board of Trustees of USAA Investment Trust approved a revised Sarbanes Code applicable to the Funds' senior financial officers. There were no substantive changes to the ethical duties or responsibilities of the Funds' senior financial officers. The changes to the Sarbanes Code were necessary because of the change of the Funds' Chairman of the Board to an independent director. The revised Sarbanes Code clarifies that the same USAA personnel will continue to receive reports of all violations of the Sarbanes Code and be required to approve outside employment and certain financial interests in transactions. Under the revised Sarbanes Code, the Funds' Board of Directors will continue to receive the same notifications, reports and have the same power that it had before under the original Sarbanes Code. A copy of the revised Sarbanes Code is attached as an Exhibit to this Form N-CSR. No waivers (explicit or implicit) have been granted from a provision of the Sarbanes Code or the revised Sarbanes Code. 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 and an expert witness in cases involving financial reporting matters. Dr. Starks is an independent trustee 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. Dr. Starks resigned from the Board of Trustees effective May 22, 2006. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 10 funds in all. Only 9 funds of the Registrant (excluding the Total Return Strategy Fund) have a fiscal year-end of May 31 and are included within this report (the Funds). The aggregate fees billed by the Registrant's independent auditor, Ernst & Young LLP, for professional services rendered for the audit of the Funds' annual financial statements and services provided in connection with statutory and regulatory filings by the Registrant for the Funds for fiscal years ended May 31, 2006 and 2005 were $221,400 and $150,400, respectively. (b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP by USAA Shareholder Account Services (SAS) for professional services rendered for audit related services related to the annual study of internal controls of the transfer agent for fiscal years ended May 31, 2006 and 2005 were $50,000 and $15,500, respectively. All services were preapproved by the Audit Committee. (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 Federal, State and City Passive Quarterly Income and tax Foreign Diversification returns and excise Investment Review under Excise Tax tax calculations Company Subchapter M Assistance TOTAL - ---------------------------------------------------------------------------------------------- FYE 5-31-2006 $44,390 $11,125 $11,633 $ 8,494 $ 75,642 FYE 5-31-2005 $41,100 $14,050 $10,993 $ 0 $ 66,143 - ---------------------------------------------------------------------------------------------- TOTAL $85,490 $25,175 $22,626 $ 8,494 $141,785 - ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal years ended May 31, 2006 or 2005. (e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to be performed for the Registrant by Ernst & Young LLP must be pre-approved by the Audit Committee. The Audit Committee Charter also permits the Chair of the Audit Committee to pre-approve any permissible non-audit service that must be commenced prior to a scheduled meeting of the Audit Committee. All non-audit services were pre-approved by the Audit Committee or its Chair, consistent with the Audit Committee's preapproval procedures. (2) Not applicable. (f) Not applicable. (g) The aggregate non-audit fees billed by Ernst & Young LLP for services rendered to the Registrant and the Registrant's investment adviser, IMCO, and the Funds' transfer agent, SAS, for May 31, 2006 and 2005 were $187,642 and $109,143, respectively. (h) Ernst & Young LLP provided non-audit services to IMCO in 2006 and 2005 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 principal executive officer and principal 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. Disclosure controls and procedures were established for the new section of the shareholder reports detailing the factors considered by the Funds' Board in approving the Funds' advisory agreements. 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 MUTUAL FUNDS 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 Mutual Funds 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: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between the Covered Officers' personal and professional relationships; - 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; - compliance with applicable laws and governmental rules and regulations; - 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), the Chair/CEO of USAA, and if deemed material to the Funds' financial condition or reputation, the Chair of the relevant Funds' Board of Directors/ Trustees; and - 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: - 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; - 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. - 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. - 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: - 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. - 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. - 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. - 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 Chair/ CEO of USAA and reported to each affected Board. - 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 Chair/CEO of USAA and reported to each affected Board. III. DISCLOSURE AND COMPLIANCE REQUIREMENTS -------------------------------------- - 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. - 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. - 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. - 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. - A Covered Officer should not retaliate against any person who reports a potential violation of this Code in good faith. - 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 Chair/CEO of USAA and will be considered by the Board of Directors/Trustees. B. REQUIRED REPORTS ---------------- - EACH COVERED OFFICER MUST: ------------------------- - Upon adoption of the Code, affirm in writing to the Boards that he has received, read and understands the Code. - Annually thereafter affirm to the Chief Legal Officer that he has complied with the requirements of the Code. - THE CHIEF LEGAL OFFICER MUST: ---------------------------- - 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; - 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: - 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/CEO of USAA and the Chair of the relevant Funds' Audit Committee (if the complaint involves the President) 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. - INVESTIGATIONS. The Chief Legal Officer will take all appropriate action to investigate any potential violation unless the Chair/CEO of USAA directs 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 Chief Legal Officer 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. - 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. - 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 Chair/CEO of USAA 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 Chair of the relevant Funds' Audit Committee. 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 Boards 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 Mutual Funds Trust: June 25, 2003. Approved and adopted by the Board of Trustees of USAA Life Investment Trust: August 20, 2003. Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15, 2005. Approved and adopted as amended by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA Mutual Funds Trust: September 14, 2005. Approved and adopted as amended by the Board of Trustees of USAA Life Investment Trust: December 8, 2005. APPENDIX A COVERED OFFICERS ---------------- TITLE COMPANY - ----- ------- PRESIDENT USAA Mutual Fund, Inc. USAA Tax-Exempt Fund, Inc. USAA Investment Trust USAA Mutual Funds Trust USAA Life Investment Trust TREASURER USAA Mutual Fund, Inc. USAA Tax-Exempt Fund, Inc. USAA Investment Trust USAA Mutual Funds 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 (EXCEPT TOTAL RETURN STRATEGY FUND) By:* /s/ EILEEN M. SMILEY ----------------------------------------------------------- Signature and Title: Eileen M. Smiley, Assistant Secretary Date: JULY 31, 2006 ------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By:* /s/ CHRISTOPHER W. CLAUS ---------------------------------------------------- Signature and Title: Christopher W. Claus/President Date: JULY 31, 2006 ------------------------------ By:* /s/ DEBRA K. DUNN --------------------------------------------- Signature and Title: Debra K. Dunn/Treasurer Date: JULY 31, 2006 ------------------------------ *Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 exh99cert053106it.txt IT 05/31/2006 CERTIFICATION Item 11 (a)(2). Exhibits. CERTIFICATIONS I, Christopher W. Claus, certify that: -------------------- 1. I have reviewed the report on Form N-CSR for the period ending May 31, 2006 for the Funds of USAA INVESTMENT TRUST (except Total Return Strategy Fund); 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: JULY 31, 2006 /S/ CHRISTOPHER W. CLAUS -------------- ------------------------ Christopher W. Claus President I, Debra K. Dunn, certify that: ------------- 1. I have reviewed the report on Form N-CSR for the period ending May 31, 2006 for the Funds of USAA INVESTMENT TRUST (except Total Return Strategy Fund); 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: JULY 31, 2006 /S/ DEBRA K. DUNN --------------- ----------------- Debra K. Dunn Treasurer EX-99.906 CERT 3 exh99906cert053106it.txt IT 05/31/2006 906 CERTIFICATION 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 (except Total Return Strategy Fund) In connection with the Annual Report on Form N-CSR (Report) of the above-named issuer for the Fund listed above for the period ended May 31, 2006, 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: JULY 31, 2006 /S/ CHRISTOPHER W. CLAUS ------------- ------------------------- Christopher W. Claus President SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Name of Issuer: USAA INVESTMENT TRUST (except Total Return Strategy Fund) In connection with the Annual Report on Form N-CSR (Report) of the above-named issuer for the Fund listed above for the period ended May 31, 2006, 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: JULY 31, 2006 /S/ DEBRA K. DUNN ------------- ----------------- Debra K. Dunn Treasurer -----END PRIVACY-ENHANCED MESSAGE-----