-----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, LTWxVHh9guO7yyQUF1jgRt8SHiqqFqJSIGxjHi8Qzd/C/wYvJ9UqiQYtzDpHgIKF wVU8qxPXvXnmTWPQno0TOQ== 0000745903-06-000063.txt : 20060804 0000745903-06-000063.hdr.sgml : 20060804 20060804121538 ACCESSION NUMBER: 0000745903-06-000063 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: 061004704 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 S000003250 USAA Cornerstone Strategy Fund C000008668 Cornerstone Strategy Fund USCRX N-CSR 1 ncsrcnst053106.txt USAA CORNERSTONE STRATEGY FUND 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 CORNERSTONE STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006 [LOGO OF USAA] USAA(R) USAA CORNERSTONE STRATEGY Fund [GRAPHIC OF USAA CORNERSTONE STRATEGY FUND] A n n u a l R e p o r t - -------------------------------------------------------------------------------- MAY 31, 2006 Table of CONTENTS - -------------------------------------------------------------------------------- MESSAGE FROM THE PRESIDENT 2 MANAGERS' COMMENTARY 4 FUND RECOGNITION 11 INVESTMENT OVERVIEW 12 FINANCIAL INFORMATION Distributions to Shareholders 17 Report of Independent Registered Public Accounting Firm 18 Portfolio of Investments 19 Notes to Portfolio of Investments 54 Financial Statements 59 Notes to Financial Statements 62 EXPENSE EXAMPLE 79 ADVISORY AGREEMENTS 81 DIRECTORS' AND OFFICERS' INFORMATION 93
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 USAA Investment Management Company MFS Investment Management MARK W. JOHNSON, CFA (International Stocks) Precious Metals and Minerals, DAVID R. MANNHEIM Real Estate Securities MARCUS L. SMITH MARGARET "DIDI" WEINBLATT, Ph.D., CFA Bonds and Money Market Instruments Wellington Management Company, LLP (U.S. Stocks) ARNOLD J. ESPE, CFA MATTHEW E. MEGARGEL, CFA Bonds and Money Market Instruments MAYA K. BITTAR, CFA STUART H. WESTER, CFA U.S. Stocks FRANCIS J. BOGGAN, CFA JEFFREY L. KRIPKE Batterymarch Financial Management, Inc. (U.S. and International Stocks) THOMAS LINKAS, CFA CHARLES F. LOVEJOY, CFA - -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? For the year ended May 31, 2006, the USAA Cornerstone Strategy Fund had a total return of 8.67%. This compares to a return of 14.81% for the Lipper Global Flexible Funds Index and 8.63% for the S&P 500 Index. HOW WAS THE FUND ALLOCATED AMONG THE VARIOUS ASSET CLASSES? The Fund began the reporting year with 52% of net assets in U.S. equities, 29% in international equities, and 19% in bonds and money market instruments. Due to asset allocation adjustments and investment performance, the Fund ended the fiscal year with 42% of net assets in U.S. equities, 29% in international equities, 27% in bonds and money market instruments, 1% in precious metals and minerals securities, and 1% in real estate equity securities. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. REFER TO PAGE 14 FOR BENCHMARK DEFINITIONS. 5 . . . C O N T I N U E D ========================-------------------------------------------------------- WHY DID THE FUND UNDERPERFORM ITS LIPPER PEER GROUP INDEX? First, there was underperformance within the U.S. equity portion of the Fund relative to the Lipper Global Flexible Funds Index. Also, the Fund was underweight in international stocks in a period when international stocks significantly outperformed U.S. stocks. Finally, the Fund had an underweight position in stocks overall, both in the United States and overseas, in a period when stocks outperformed bonds by a good margin. WERE ANY STEPS TAKEN TO IMPROVE PERFORMANCE? Yes, USAA Investment Management Company (USAA IMCO) and the Fund's Board of Trustees made several key decisions during the reporting year that we believe will ultimately enhance long-term performance, increase flexibility and efficiency, and potentially reduce risk. These include: o In December 2005, Batterymarch Financial Management, Inc. (Batterymarch) began subadvising a portion of the Fund's assets using a "best ideas" global investment strategy, purchasing stocks that its stock-selection model has ranked the most attractive in the global marketplace. Instead of being tied to just one stock style in one country, Batterymarch can scour the world on your behalf for what it believes are the best investments in each global industry sector. o Effective March 1, 2006, the Fund's Board of Trustees voted to increase the international stocks category limit from 30% to 70%. o The Fund increased its utilization of exchange-traded funds (ETFs) for cost efficiency and investment flexibility. ETFs, relatively low-cost vehicles that typically track a market index, give us the ability to adjust the Fund's asset allocation quickly when USAA IMCO believes it is warranted. At the end of the 6 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund reporting year, 13.7% of the Fund's net assets were in ETFs tied to the U.S. stock market. HOW DID THE U.S. STOCK PORTION OF THE FUND THAT WELLINGTON MANAGEMENT COMPANY, LLP (WELLINGTON) MANAGES PERFORM? The Wellington-managed portion of the Fund underperformed the Russell 3000 Index. While stock selection was positive relative to the Russell 3000 Index, sector allocation detracted from relative performance. Energy was the top-performing area of the market, and the Fund benefited from overweight exposure to this sector, with Schlumberger Ltd., Chesapeake Energy Corp., and GlobalSantaFe Corp. among the top positive contributors to performance. Industrials company Precision Castparts Corp. delivered excellent performance with strong fundamental growth. In the financials sector, many of our capital markets-related stocks, including E*TRADE Financial Corp., Merrill Lynch & Co., Inc., and State Street Corp., outperformed on a relative basis. Stock selection in information technology, health care, and utilities detracted from relative performance in the portion of the Fund that Wellington managed. Adobe Systems, Inc. was our weakest-performing stock, because the company was between product cycles and struggled to meet its revenue and earnings targets. However, we view this as a short-term concern because the new version of the hugely popular Adobe Acrobat remains on track for a fall 2006 release. Dell, Inc., Yahoo!, Inc., and THE RUSSELL 3000 INDEX MEASURES THE PERFORMANCE OF THE 3,000 LARGEST U.S. COMPANIES BASED ON TOTAL MARKET CAPITALIZATION, WHICH REPRESENTS APPROXIMATELY 98% OF THE INVESTABLE U.S. EQUITY MARKET. WELLINGTON AND USAA IMCO UTILIZE THE RUSSELL 3000 AS A FINANCIAL MARKET PERFORMANCE BENCHMARK IN MANAGING THE U.S. STOCK PORTION OF THE FUND. GLOBALSANTAFE CORP., DELL, INC., YAHOO!, INC., TEMPUR-PEDIC INTERNATIONAL, INC., AND KOHL'S CORP. WERE SOLD OUT OF THE FUND PRIOR TO MAY 31, 2006. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 19-53. 7 . . . C O N T I N U E D ========================-------------------------------------------------------- Microsoft Corp. also hurt performance, as did the mattress company Tempur-Pedic International, Inc., the retailer Kohl's Corp., and biotechnology giant Amgen, Inc. As of the end of the reporting year, the portion of the portfolio that Wellington manages was overweight in the health care and consumer discretionary sectors, where we have been finding stocks with attractive valuations and good relative earnings potential. We were modestly overweight in energy as global demand and constrained supply foster long-term growth prospects. We also maintained an overweight position in information technology, with an emphasis on software companies, which should benefit from higher corporate spending amid new product cycles. We were underweight in utilities, which appear expensive on a price-to-earnings basis and less attractive on a yield basis given our modestly higher interest-rate outlook. HOW DID THE INTERNATIONAL STOCK PORTION OF THE FUND THAT MFS INVESTMENT MANAGEMENT (MFS) HANDLES PERFORM? The MFS-managed portion of the Fund underperformed the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI-EAFE) Index. As a result of a company-by-company bottom-up research process, we remained underweight in Japan, because although we don't dispute that an economic recovery is taking hold, stock prices have moved up very quickly, and from a valuation standpoint we believe we're finding better opportunities elsewhere. We were overweight in continental Europe, slightly overweight in the United Kingdom, and had 2.8% of net assets in emerging markets, which are not in the MSCI-EAFE Index. Among the best individual performers in the MFS-managed portion of the Fund relative to the MSCI-EAFE Index was THE MSCI-EAFE INDEX IS AN UNMANAGED INDEX THAT REFLECTS THE MOVEMENTS OF STOCK MARKETS IN EUROPE, AUSTRALASIA, AND THE FAR EAST BY REPRESENTING A BROAD SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET. 8 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund Schneider Electric S.A. (France), the global leader in electrical equipment distribution, which is benefiting from higher corporate expenditures on property and equipment. Other stocks that did well in the industrial goods and services sector were Sweden's Sandvik AB and Atlas Copco AB. In utilities and communications, our holding in Hutchison Telecommunications International Ltd. (Hong Kong) did well based on its strong position in the mobile phone market in India. Although we were underweight in the strong energy sector, we had very positive stock selection, led by EnCana Corp. (Canada) and CNOOC Ltd. (China). Consistent with the MFS philosophy of looking for above-average sustainable growth companies, we tended not to own metals and mining stocks that benefited from the strong rise in commodity prices. This hurt performance in the basic materials sector. Higher commodity prices also had a negative impact on our overweight position in Bridgestone Corp. (Japan). In consumer staples, our substantially overweight position in Nestle S.A. (Switzerland) detracted from performance on a relative basis. We at MFS continue to see a slowdown in global earnings growth, from above-trend levels back to being more in line with long-term trends. As earnings slow, we believe the markets tend to reward companies that show the ability to sustain above-average earnings growth, and we believe we're finding these companies throughout the world and in many sectors for the MFS portion of the Fund. HOW DID THE PORTION OF THE FUND THAT BATTERYMARCH MANAGES PERFORM? With the ability to purchase the stocks that its stock selection model has ranked as most attractive, from anywhere in the world, the portion of the Fund that Batterymarch manages significantly THE MSCI WORLD INDEX IS AN UNMANAGED INDEX THAT REFLECTS THE MOVEMENTS OF WORLD STOCK MARKETS BY REPRESENTING A BROAD SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET. SANDVIK AB AND ATLAS COPCO AB WERE SOLD OUT OF THE FUND PRIOR TO MAY 31, 2006. 9 . . . C O N T I N U E D ========================-------------------------------------------------------- outperformed the MSCI World Index from its introduction into the Fund in early December. Batterymarch intentionally keeps the industry sector weightings of its portion of the Fund approximately in line with the MSCI World Index as a risk-management tool, and therefore individual stock selection was the key to the strong performance. Performance during the period was helped by stock selection in the industrials, information technology, financials (excluding banks), energy, and consumer staples sectors, with Vallourec S.A., a French carbon steel manufacturer, and LUKoil Holdings ADR, a Russian oil company, among the top contributors. Exposure within the 11 global economic sectors was a result of bottom-up stock selection, as opposed to any top-down macro views. The Batterymarch stock selection model, which ranks a very broad stock universe, led us to end the reporting year with greater exposure to the value-oriented end of the spectrum for the Batterymarch portion of the Fund. This positioning reflects the fact that our model ranks stocks based on underlying company fundamentals; as these fundamentals shift, our goal is to shift with them. Batterymarch re-ranks all stocks daily, an approach that allows us to make investment decisions based on the most up-to-date information available. HOW DID THE FUND'S BOND AND MONEY MARKET INSTRUMENTS, A USAA IMCO-MANAGED-PORTION, PERFORM? It's hard for most people to be excited about performance when you barely manage to break even, as was the case with the bond portion during the reporting year. However, this represented outstanding performance relative to the Lehman Brothers U.S. Aggregate Bond Index. THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX COVERS THE U.S. INVESTMENT-GRADE FIXED-RATE BOND MARKET, INCLUDING GOVERNMENT AND CREDIT SECURITIES, AGENCY MORTGAGE PASS-THROUGH SECURITIES, ASSET-BACKED SECURITIES, AND COMMERCIAL MORTGAGE-BACKED SECURITIES THAT HAVE REMAINING MATURITIES OF MORE THAN ONE YEAR. 10 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund It was a tough environment for bonds as interest rates rose across all maturities on the yield curve, but USAA IMCO managed to provide a positive total return as interest on the bonds we owned offset the principal erosion caused by rising rates. A key factor in our good performance was our strategy regarding duration, a measure of interest-rate sensitivity. We began the year with a shorter-than-average duration, and gradually moved toward a neutral duration. Throughout the reporting year, we were opportunistic, buying when rates rose and selling as they fell, and also investing in floating-rate bonds whose income rose as the Federal Reserve Board (the Fed) raised rates. The biggest driver of our outperformance, however, was security selection. This USAA IMCO portion was overweight in corporate bonds, with a focus on individual issues in finance, utilities, and real estate investment trusts. We also benefited from our decision to emphasize commercial mortgage-backed securities over residential mortgages. Credit for our ability to pick the right bonds in the right sectors goes largely to USAA IMCO's team of 17 analysts here in San Antonio. With the economy in the sensitive transition period from high to moderate growth, and with the Fed under new leadership, we're avoiding making any big bets on duration as we move into the new reporting year. Instead, we are continuing to focus on what we do best, which is to use our research advantage to find individual securities that we believe give us the most value for a given level of risk. HOW DID THE USAA IMCO-MANAGED PRECIOUS METALS AND MINERALS PORTION OF THE FUND PERFORM? The Fund's allocation to precious metals and minerals securities helped performance, because the price of gold and other commodities rose dramatically. On behalf of everyone at USAA IMCO, Wellington, MFS, and Batterymarch, we thank you for your investment in the Fund. 11 F U N D ========------------------------------------------------------------------------ RECOGNITION USAA CORNERSTONE STRATEGY FUND - -------------------------------------------------------------------------------- OVERALL MORNINGSTAR RATING(TM) out of 1,472 large blend funds for the period ending May 31, 2006: OVERALL RATING * * * * 3-YEAR 5-YEAR 10-YEAR * * * * * * * * * * * * out of 1,472 funds out of 1,177 funds out of 440 funds The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Ratings metrics. Ratings are based on risk-adjusted returns. - -------------------------------------------------------------------------------- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS, THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.) 12 I N V E S T M E N T ====================------------------------------------------------------------ OVERVIEW USAA CORNERSTONE STRATEGY FUND (Ticker Symbol: USCRX) OBJECTIVE - -------------------------------------------------------------------------------- Achieve a positive, inflation-adjusted rate of return and a reasonably stable value of Fund shares, thereby preserving purchasing power of shareholders' capital. TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- Using preset target ranges, the Fund's strategy is to invest its assets mostly in stocks (divided into the categories of U.S., international, real estate, and precious metals and minerals) and, to a much lesser extent, in bonds and money market instruments.
- ----------------------------------------------------------------------------------------- 5/31/06 5/31/05 - ----------------------------------------------------------------------------------------- Net Assets $1,712.1 Million $1,543.4 Million Net Asset Value Per Share $26.50 $26.53
- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/06 - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 8.67% 5.64% 6.62%
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. 13 . . . C O N T I N U E D ========================-------------------------------------------------------- CUMULATIVE PERFORMANCE COMPARISON [CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER GLOBAL USAA CORNERSTONE S&P 500 INDEX FLEXIBLE FUNDS INDEX STRATEGY FUND 05/31/96 $10,000.00 $10,000.00 $10,000.00 06/30/96 10,038.13 10,041.43 10,058.89 07/31/96 9,594.89 9,796.48 9,812.34 08/31/96 9,797.58 9,941.01 10,032.30 09/30/96 10,348.52 10,219.99 10,313.35 10/31/96 10,633.83 10,345.97 10,464.05 11/30/96 11,436.91 10,786.39 10,919.12 12/31/96 11,210.35 10,801.68 11,120.85 01/31/97 11,910.34 11,001.66 11,288.15 02/28/97 12,003.85 11,065.17 11,342.52 03/31/97 11,511.55 10,884.31 11,166.86 04/30/97 12,198.17 10,990.74 11,233.78 05/31/97 12,943.93 11,452.86 11,693.83 06/30/97 13,519.37 11,773.71 12,116.25 07/31/97 14,594.82 12,257.91 12,683.81 08/31/97 13,777.80 11,906.17 12,305.65 09/30/97 14,531.94 12,413.48 13,009.82 10/31/97 14,047.16 11,973.32 12,675.12 11/30/97 14,696.89 12,010.58 12,727.28 12/31/97 14,949.11 12,113.61 12,860.39 01/31/98 15,114.30 12,143.18 12,855.81 02/28/98 16,203.77 12,690.67 13,304.96 03/31/98 17,032.88 13,116.52 13,726.61 04/30/98 17,207.30 13,232.21 13,777.03 05/31/98 16,911.94 13,118.89 13,699.12 06/30/98 17,598.39 13,108.62 13,621.20 07/31/98 17,412.40 12,980.44 13,308.29 08/31/98 14,896.72 11,544.19 11,928.46 09/30/98 15,851.84 11,728.98 12,161.60 10/31/98 17,139.25 12,341.42 12,575.55 11/30/98 18,177.60 12,894.01 12,937.17 12/31/98 19,224.40 13,202.75 13,118.78 01/31/99 20,028.00 13,359.52 13,103.83 02/28/99 19,405.64 13,034.61 12,750.08 03/31/99 20,181.83 13,459.04 12,869.66 04/30/99 20,963.36 14,182.09 13,696.75 05/31/99 20,468.88 13,956.17 13,597.10 06/30/99 21,601.75 14,473.50 13,826.29 07/31/99 20,930.18 14,463.54 13,680.99 08/31/99 20,826.57 14,412.68 13,533.66 09/30/99 20,256.33 14,333.91 13,349.49 10/31/99 21,537.62 14,624.53 13,517.87 11/30/99 21,975.41 15,137.98 13,638.89 12/31/99 23,267.91 16,155.90 14,185.65 01/31/00 22,099.01 15,825.78 13,781.60 02/29/00 21,681.13 16,706.26 13,661.47 03/31/00 23,800.79 16,625.11 14,502.34 04/30/00 23,084.98 16,068.66 14,376.76 05/31/00 22,611.74 15,816.28 14,344.00 06/30/00 23,168.63 16,383.23 14,638.85 07/31/00 22,806.73 16,180.92 14,521.37 08/31/00 24,222.56 16,732.79 14,826.37 09/30/00 22,944.10 16,239.13 14,431.00 10/31/00 22,846.62 15,924.41 14,301.09 11/30/00 21,046.86 15,309.12 14,041.28 12/31/00 21,150.12 15,928.85 14,575.21 01/31/01 21,900.05 16,134.77 14,832.11 02/28/01 19,904.45 15,321.12 14,278.34 03/31/01 18,644.20 14,565.36 13,798.78 04/30/01 20,091.89 15,308.05 14,478.15 05/31/01 20,226.68 15,190.95 14,426.77 06/30/01 19,734.57 14,968.94 14,204.12 07/31/01 19,540.22 14,757.01 14,238.37 08/31/01 18,318.20 14,392.58 13,907.25 09/30/01 16,839.08 13,443.67 12,942.42 10/31/01 17,160.37 13,761.35 13,068.02 11/30/01 18,476.35 14,258.52 13,696.01 12/31/01 18,638.31 14,276.08 13,887.39 01/31/02 18,366.47 14,183.74 13,661.68 02/28/02 18,012.19 14,067.38 13,738.90 03/31/02 18,689.69 14,458.15 14,202.21 04/30/02 17,557.08 14,263.35 14,012.13 05/31/02 17,428.19 14,431.11 14,000.25 06/30/02 16,187.21 13,887.64 13,501.30 07/31/02 14,925.72 13,065.56 12,735.06 08/31/02 15,023.43 13,130.56 12,836.04 09/30/02 13,392.31 12,322.87 12,105.44 10/31/02 14,569.76 12,841.67 12,550.93 11/30/02 15,426.48 13,357.01 13,073.63 12/31/02 14,520.68 13,017.29 12,740.93 01/31/03 14,141.02 12,810.94 12,384.97 02/28/03 13,928.53 12,676.90 12,213.13 03/31/03 14,063.38 12,663.46 12,206.99 04/30/03 15,221.24 13,399.86 12,980.28 05/31/03 16,022.45 14,116.89 13,636.97 06/30/03 16,227.12 14,287.59 13,833.36 07/31/03 16,513.36 14,399.17 13,937.69 08/31/03 16,834.77 14,703.14 14,232.28 09/30/03 16,656.52 14,927.95 14,238.42 10/31/03 17,598.29 15,499.08 14,895.10 11/30/03 17,752.96 15,747.70 15,128.32 12/31/03 18,683.35 16,275.22 15,761.99 01/31/04 19,026.21 16,643.17 15,960.02 02/29/04 19,290.58 16,877.16 16,244.69 03/31/04 18,999.59 16,953.04 16,108.54 04/30/04 18,701.72 16,464.13 15,830.06 05/31/04 18,957.85 16,540.25 15,966.21 06/30/04 19,326.38 16,770.72 16,281.82 07/31/04 18,686.80 16,343.24 15,805.31 08/31/04 18,761.69 16,407.41 15,811.50 09/30/04 18,964.93 16,801.51 16,089.98 10/31/04 19,254.67 17,109.65 16,325.14 11/30/04 20,033.49 17,901.82 16,999.68 12/31/04 20,714.99 18,411.43 17,575.89 01/31/05 20,210.07 18,084.59 17,279.56 02/28/05 20,635.14 18,509.00 17,687.84 03/31/05 20,270.12 18,164.55 17,384.92 04/30/05 19,885.87 17,974.35 17,121.51 05/31/05 20,518.05 18,318.81 17,470.53 06/30/05 20,547.45 18,518.53 17,529.80 07/31/05 21,311.25 18,960.07 18,043.44 08/31/05 21,116.91 19,069.06 18,168.56 09/30/05 21,287.86 19,419.71 18,280.51 10/31/05 20,932.78 19,047.89 17,878.81 11/30/05 21,723.71 19,517.45 18,260.75 12/31/05 21,731.37 20,033.56 18,547.67 01/31/06 22,306.75 20,845.81 19,041.99 02/28/06 22,367.10 20,830.34 18,999.01 03/31/06 22,645.46 21,120.74 19,242.58 04/30/06 22,949.33 21,565.22 19,593.62 05/31/06 22,289.64 21,031.62 18,984.68
[END CHART] DATA FROM 5/31/96 THROUGH 5/31/06. 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 The graph on page 13 illustrates the comparison of a $10,000 hypothetical investment in the USAA Cornerstone Strategy Fund to the following benchmarks: o The S&P 500 Index is an unmanaged index representing the weighted average performance of a group of 500 widely held, publicly traded stocks. It is not possible to invest directly in the S&P 500 Index. o The Lipper Global Flexible Funds Index tracks the total return performance of the 10 largest funds within the Lipper Global Flexible Portfolio Funds category. 15 . . . C O N T I N U E D ========================-------------------------------------------------------- - --------------------------------------------------------------------------- TOP 3 HOLDINGS* IN EACH CATEGORY (% of Net Assets) - --------------------------------------------------------------------------- INTERNATIONAL STOCKS Roche Holdings AG 0.8% Reckitt Benckiser plc 0.7% Nestle S.A. 0.6% BONDS Chase Commercial Mortgage Securities Corp., Series 2000-2, Class A2 0.3% Chase Commercial Mortgage Securities Corp., Series 2000-3, Class A2 0.3% Credit Suisse First Boston Mortgage Securities Corp., Series 2000-C1, Class A2 0.3% U.S. EQUITIES iShares Trust, S&P 500 Index Fund** 13.5% Bank of America Corp. 0.7% General Electric Co. 0.5% PRECIOUS METALS AND MINERALS SECURITIES Freeport-McMoRan Copper & Gold, Inc. "B" 0.2% Newmont Mining Corp. 0.2% Glamis Gold Ltd. 0.1% REAL ESTATE EQUITY SECURITIES Duke Realty Corp., Preferred 0.2% Leopalace21 Corp. 0.1% Simon Property Group, Inc. 0.1%
*EXCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED. **PURSUANT TO A SECURITIES AND EXCHANGE COMMISSION (SEC) EXEMPTIVE ORDER AND A RELATED AGREEMENT WITH ISHARES TRUST (ISHARES), THE FUND MAY INVEST IN ISHARES IN AMOUNTS EXCEEDING LIMITS SET FORTH IN THE INVESTMENT COMPANY ACT OF 1940 THAT WOULD OTHERWISE BE APPLICABLE. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 19-53. FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY. 16 . . . C O N T I N U E D ========================-------------------------------------------------------- OVERVIEW ASSET ALLOCATION 5/31/06 [PIE CHART OF ASSET ALLOCATION] U.S. Equities 41.5% International Equities 28.9% Bonds 25.2% Precious Metals & Minerals Securities 1.4% Real Estate Equity Securities 0.8% Other* 12.4%
[END CHART] PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. *INCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED. - ------------------------------------------------------ TOP 10 INDUSTRIES* (% of Net Assets) - ------------------------------------------------------ Diversified Banks 3.8% Electric Utilities 3.5% Pharmaceuticals 3.3% Integrated Oil & Gas 3.2% Property & Casualty Insurance 3.1% Commercial Mortgage-Backed Securities 2.7% Regional Banks 2.7% Multi-Line Insurance 2.5% Oil & Gas Exploration & Production 2.3% Other Diversified Financial Services 2.1%
*EXCLUDES U.S. GOVERNMENT AND EXCHANGE-TRADED FUNDS. 17 D I S T R I B U T I O N S ==========================------------------------------------------------------ to SHAREHOLDERS USAA CORNERSTONE STRATEGY FUND 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 year ended May 31, 2006, the Fund distributed long-term realized capital gains of $2.008419 per share. Certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Of the distributions paid during the fiscal year, the maximum amount that may be considered qualified dividend income is $8,433,000. 20.33% of ordinary income distributions qualify for dividends- received deductions eligible to corporations. For the fiscal year ended May 31, 2006, certain dividends paid by the Fund qualify as interest-related dividends. The Fund designates $18,984,000 as qualifying interest income. The Fund has designated a portion of the amount paid to redeeming shareholders, in the amount of $7,596,000, as a long-term capital gain distribution for tax purposes. 18 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D =======================--------------------------------------------------------- Public ACCOUNTING Firm THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE STRATEGY FUND: We have audited the accompanying statement of assets and liabilities of the USAA Cornerstone Strategy Fund (a portfolio of USAA Investment Trust) (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 Cornerstone Strategy Fund 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 19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- U.S. EQUITIES (41.5%) U.S. COMMON STOCKS (27.4%) AEROSPACE & DEFENSE (1.4%) 60,500 Boeing Co. $ 5,037 88,900 Lockheed Martin Corp. 6,444 32,300 Precision Castparts Corp. 1,861 69,500 Raytheon Co. 3,187 107,000 United Technologies Corp. 6,690 -------- 23,219 -------- APPAREL & ACCESSORIES & LUXURY GOODS (0.0%)(q) 11,300 Polo Ralph Lauren Corp. 638 -------- APPAREL RETAIL (0.3%) 39,600 Abercrombie & Fitch Co. "A" 2,291 8,000 Christopher & Banks Corp. 215 66,650 Jos. A. Bank Clothiers, Inc.* 2,421 -------- 4,927 -------- APPLICATION SOFTWARE (0.5%) 153,500 Adobe Systems, Inc.* 4,395 41,600 Autodesk, Inc.* 1,514 33,200 Intuit, Inc.* 1,835 -------- 7,744 -------- ASSET MANAGEMENT & CUSTODY BANKS (0.7%) 25,400 Affiliated Managers Group, Inc.(g)* 2,291 93,800 Nuveen Investments, Inc. "A"(g) 4,213 82,000 State Street Corp. 5,092 -------- 11,596 -------- AUTO PARTS & EQUIPMENT (0.1%) 26,000 Johnson Controls, Inc. 2,214 -------- AUTOMOTIVE RETAIL (0.1%) 49,800 O'Reilly Automotive, Inc.* 1,578 -------- BIOTECHNOLOGY (0.5%) 57,400 Alkermes, Inc.* 1,138 98,100 Amgen, Inc.* 6,630 -------- 7,768 --------
20 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- BROADCASTING & CABLE TV (0.6%) 256,750 CBS Corp. "B" $ 6,652 16,700 DIRECTV Group, Inc.* 293 72,200 Univision Communications, Inc. "A"* 2,596 -------- 9,541 -------- CASINOS & GAMING (0.3%) 111,200 Penn National Gaming, Inc.* 4,273 14,900 Scientific Games Corp. "A"* 568 24,400 Shuffle Master, Inc.(g)* 890 -------- 5,731 -------- CATALOG RETAIL (0.1%) 51,950 Coldwater Creek, Inc.* 1,335 -------- COMMUNICATIONS EQUIPMENT (1.0%) 32,400 ADTRAN, Inc. 817 245,800 Cisco Systems, Inc.* 4,838 233,800 Corning, Inc.* 5,670 54,500 Foundry Networks, Inc.* 701 76,400 Motorola, Inc. 1,611 68,000 QUALCOMM, Inc. 3,074 -------- 16,711 -------- COMPUTER HARDWARE (0.1%) 44,700 Avid Technology, Inc.* 1,761 -------- COMPUTER STORAGE & PERIPHERALS (0.5%) 332,200 EMC Corp.* 4,252 87,000 QLogic Corp.* 1,556 14,600 SanDisk Corp.* 821 63,500 Seagate Technology* 1,483 52,200 Western Digital Corp.* 1,062 -------- 9,174 -------- CONSTRUCTION & ENGINEERING (0.3%) 56,800 Fluor Corp. 4,979 -------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%) 35,700 Oshkosh Truck Corp. 1,887 18,400 Terex Corp.* 1,683 -------- 3,570 --------
21 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- CONSTRUCTION MATERIALS (0.1%) 14,800 Martin Marietta Materials, Inc. $ 1,354 -------- CONSUMER FINANCE (0.0%)(q) 30,700 Doral Financial Corp.(g) 231 -------- DATA PROCESSING & OUTSOURCED SERVICES (0.6%) 66,300 Alliance Data Systems Corp.* 3,518 26,000 DST Systems, Inc.* 1,529 97,700 First Data Corp. 4,505 -------- 9,552 -------- DEPARTMENT STORES (0.4%) 49,900 Federated Department Stores, Inc. 3,634 46,000 J.C. Penney Co., Inc. 2,795 -------- 6,429 -------- DIVERSIFIED METALS & MINING (0.2%) 48,300 Phelps Dodge Corp. 4,139 -------- EDUCATIONAL SERVICES (0.2%) 67,400 Career Education Corp.* 2,197 16,100 ITT Educational Services, Inc.* 1,046 -------- 3,243 -------- ELECTRIC UTILITIES (0.2%) 36,200 Edison International 1,420 36,600 FirstEnergy Corp. 1,919 -------- 3,339 -------- ELECTRONIC EQUIPMENT MANUFACTURERS (0.1%) 41,000 Amphenol Corp. "A" 2,278 -------- ELECTRONIC MANUFACTURING SERVICES (0.2%) 51,700 Jabil Circuit, Inc. 1,800 164,600 Sanmina-SCI Corp.* 774 231,900 Solectron Corp.* 825 -------- 3,399 -------- ENVIRONMENTAL & FACILITIES SERVICES (0.3%) 146,900 Waste Management, Inc. 5,380 --------
22 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- FOOD RETAIL (0.3%) 143,500 Kroger Co. $ 2,886 121,300 Safeway, Inc. 2,860 -------- 5,746 -------- FOOTWEAR (0.1%) 20,500 Nike, Inc. "B" 1,646 -------- GAS UTILITIES (0.0%)(q) 7,200 Energen Corp. 244 2,700 Questar Corp. 199 -------- 443 -------- HEALTH CARE DISTRIBUTORS (0.1%) 36,500 Patterson Companies, Inc.* 1,250 -------- HEALTH CARE EQUIPMENT (0.7%) 31,000 Biomet, Inc. 1,091 46,500 Kinetic Concepts, Inc.* 1,809 167,500 Medtronic, Inc. 8,457 9,900 Respironics, Inc.* 337 -------- 11,694 -------- HEALTH CARE FACILITIES (0.0%)(q) 12,200 Community Health Systems, Inc.* 460 -------- HEALTH CARE SERVICES (0.4%) 30,400 Amedisys, Inc.(g)* 1,087 75,200 Medco Health Solutions, Inc.* 4,053 42,300 Omnicare, Inc. 1,961 -------- 7,101 -------- HEALTH CARE SUPPLIES (0.0%)(q) 14,100 Cooper Companies, Inc. 668 -------- HOME IMPROVEMENT RETAIL (0.2%) 58,700 Lowe's Companies, Inc. 3,656 -------- HOMEBUILDING (0.3%) 76,633 D.R. Horton, Inc. 2,020 15,500 KB Home 794
23 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 30,100 Lennar Corp. "A" $ 1,442 1,500 NVR, Inc.(g)* 913 -------- 5,169 -------- HOTELS, RESORTS, & CRUISE LINES (0.0%)(q) 16,100 Hilton Hotels Corp. 442 -------- HOUSEHOLD APPLIANCES (0.1%) 13,400 Whirlpool Corp. 1,205 -------- HOUSEHOLD PRODUCTS (0.4%) 134,900 Procter & Gamble Co. 7,318 -------- HUMAN RESOURCE & EMPLOYMENT SERVICES (0.1%) 14,900 Manpower, Inc. 981 -------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.2%) 34,200 Mirant Corp.* 851 50,400 TXU Corp. 2,888 -------- 3,739 -------- INDUSTRIAL CONGLOMERATES (0.8%) 261,700 General Electric Co. 8,966 60,500 Textron, Inc. 5,501 -------- 14,467 -------- INSURANCE BROKERS (0.0%)(q) 3,900 National Financial Partners Corp. 175 -------- INTEGRATED OIL & GAS (1.3%) 31,500 Chevron Corp. 1,883 135,884 ConocoPhillips 8,600 138,100 Exxon Mobil Corp. 8,412 20,600 Marathon Oil Corp. 1,546 23,700 Occidental Petroleum Corp. 2,349 -------- 22,790 -------- INTEGRATED TELECOMMUNICATION SERVICES (0.2%) 6,300 AT&T, Inc. 164 34,600 NeuStar, Inc. "A"* 1,113
24 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 43,200 Verizon Communications, Inc. $ 1,349 -------- 2,626 -------- INTERNET SOFTWARE & SERVICES (0.3%) 12,400 Google, Inc. "A"* 4,611 -------- INVESTMENT BANKING & BROKERAGE (0.7%) 7,300 A.G. Edwards, Inc. 391 151,700 E*TRADE Financial Corp.* 3,682 17,300 Lehman Brothers Holdings, Inc. 1,152 63,700 Merrill Lynch & Co., Inc. 4,613 35,500 Morgan Stanley 2,116 -------- 11,954 -------- IT CONSULTING & OTHER SERVICES (0.1%) 72,000 Accenture Ltd. "A" 2,027 13,900 MPS Group, Inc.* 209 -------- 2,236 -------- LIFE & HEALTH INSURANCE (0.2%) 48,800 MetLife, Inc. 2,512 -------- LIFE SCIENCES TOOLS & SERVICES (0.5%) 79,800 Applera Corp. - Applied Biosystems Group 2,362 9,100 Charles River Laboratories International, Inc.* 364 24,400 Fisher Scientific International, Inc.* 1,812 12,800 Invitrogen Corp.* 816 13,900 Millipore Corp.* 965 21,700 Techne Corp.* 1,187 31,800 Waters Corp.* 1,324 -------- 8,830 -------- MANAGED HEALTH CARE (1.0%) 74,225 Aetna, Inc. 2,855 6,800 CIGNA Corp. 631 36,000 Coventry Health Care, Inc.* 1,881 72,200 Health Net, Inc.* 3,106 22,200 Humana, Inc.* 1,124 6,900 Sierra Health Services, Inc.* 284 35,180 UnitedHealth Group, Inc. 1,546 76,600 WellPoint, Inc.* 5,483 -------- 16,910 --------
25 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- Movies & Entertainment (0.4%) 233,700 Time Warner, Inc. $ 4,022 70,250 Viacom, Inc. "B"* 2,652 -------- 6,674 -------- MULTI-LINE INSURANCE (0.5%) 59,300 American International Group, Inc. 3,606 20,300 Hartford Financial Services Group, Inc. 1,785 87,000 Loews Corp. 2,956 -------- 8,347 -------- MULTI-UTILITIES (0.4%) 23,400 Alliant Energy Corp. 805 53,500 Dominion Resources, Inc. 3,883 32,900 PG&E Corp. 1,305 -------- 5,993 -------- OIL & GAS DRILLING (0.2%) 105,600 Patterson-UTI Energy, Inc. 3,157 -------- OIL & GAS EQUIPMENT & SERVICES (0.3%) 7,800 Halliburton Co. 582 75,600 Schlumberger Ltd.(g) 4,957 3,900 Tidewater, Inc. 198 -------- 5,737 -------- OIL & GAS EXPLORATION & PRODUCTION (0.9%) 167,200 Chesapeake Energy Corp.(g) 5,115 26,300 Devon Energy Corp. 1,508 188,100 Noble Energy, Inc. 8,175 -------- 14,798 -------- OIL & GAS REFINING & MARKETING (0.1%) 37,000 Valero Energy Corp. 2,270 -------- OIL & GAS STORAGE & TRANSPORTATION (0.0%)(q) 5,400 Western Gas Resources, Inc. 265 -------- OTHER DIVERSIFIED FINANCIAL SERVICES (1.2%) 236,400 Bank of America Corp. 11,442 178,043 Citigroup, Inc. 8,777 -------- 20,219 --------
26 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- PACKAGED FOODS & MEAT (0.1%) 40,000 General Mills, Inc. $ 2,076 -------- PHARMACEUTICALS (1.1%) 85,900 Abbott Laboratories 3,668 106,900 Bristol-Myers Squibb Co. 2,624 83,900 Eli Lilly and Co. 4,333 6,800 Endo Pharmaceuticals Holdings, Inc.* 200 105,800 King Pharmaceuticals, Inc.* 1,881 28,000 Mylan Laboratories, Inc. 585 299,200 Schering-Plough Corp. 5,703 -------- 18,994 -------- PROPERTY & CASUALTY INSURANCE (0.7%) 112,100 ACE Ltd. 5,803 40,200 Chubb Corp. 2,031 23,800 First American Corp. 999 7,300 Ohio Casualty Corp. 218 2,400 Philadelphia Consolidated Holding Corp.* 80 66,450 W.R. Berkley Corp. 2,284 -------- 11,415 -------- RAILROADS (0.2%) 37,600 CSX Corp. 2,516 -------- REGIONAL BANKS (0.1%) 33,200 PNC Financial Services Group, Inc. 2,288 -------- RESTAURANTS (0.2%) 17,100 Brinker International, Inc. 627 17,500 Darden Restaurants, Inc. 620 47,800 RARE Hospitality International, Inc.* 1,470 -------- 2,717 -------- SEMICONDUCTOR EQUIPMENT (0.4%) 68,200 Freescale Semiconductor, Inc. "B"* 2,129 26,300 Lam Research Corp.* 1,178 35,000 MEMC Electronic Materials, Inc.* 1,226 96,650 Varian Semiconductor Equipment Associates, Inc.* 2,991 -------- 7,524 --------
27 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- SEMICONDUCTORS (0.6%) 76,300 Advanced Micro Devices, Inc.* $ 2,357 111,200 Analog Devices, Inc. 3,751 129,500 Atmel Corp.* 621 52,500 Microchip Technology, Inc. 1,801 86,400 National Semiconductor Corp. 2,219 -------- 10,749 -------- SOFT DRINKS (0.5%) 60,300 Pepsi Bottling Group, Inc. 1,890 117,400 PepsiCo, Inc. 7,098 -------- 8,988 -------- SPECIALIZED FINANCE (0.1%) 70,600 Nasdaq Stock Market, Inc.* 2,149 -------- SPECIALTY STORES (0.3%) 128,300 Michaels Stores, Inc. 4,987 -------- STEEL (0.0%)(q) 6,600 Nucor Corp. 695 -------- SYSTEMS SOFTWARE (0.5%) 366,800 Microsoft Corp. 8,308 -------- TECHNOLOGY DISTRIBUTORS (0.1%) 34,511 Arrow Electronics, Inc.* 1,121 16,500 CDW Corp. 923 -------- 2,044 -------- THRIFTS & MORTGAGE FINANCE (0.4%) 72,500 Golden West Financial Corp. 5,300 37,100 IndyMac Bancorp, Inc. 1,703 -------- 7,003 -------- TOBACCO (0.6%) 108,100 Altria Group, Inc. 7,821 59,600 Loews Corp. - Carolina Group 2,768 -------- 10,589 -------- TRADING COMPANIES & DISTRIBUTORS (0.1%) 22,400 Fastenal Co. 963 --------
28 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- TRUCKING (0.0%)(q) 12,800 Con-Way, Inc. $ 756 -------- WIRELESS TELECOMMUNICATION SERVICES (0.4%) 295,170 Sprint Nextel Corp. 6,261 17,000 Syniverse Holdings, Inc.* 277 -------- 6,538 -------- Total U.S. common stocks (cost: $411,875) 469,218 -------- U.S. PREFERRED SECURITIES (0.4%) ELECTRIC UTILITIES (0.0%)(q) 10,000 Southern California Edison Co., Series A, 5.35%, perpetual(l) 985 -------- PROPERTY & CASUALTY INSURANCE (0.1%) 10,000 Axis Capital Holdings Ltd. 1,005 -------- PRINCIPAL AMOUNT (000) - --------- REGIONAL BANKS (0.2%) $3,000 Farm Credit Bank of Texas, Series 1, 7.56%, perpetual(l) 3,144 -------- REINSURANCE (0.1%) 2,000 Swiss Re Capital I, LP, 6.85%(b,g,l) 1,978 -------- Total U.S. preferred securities (cost: $7,259) 7,112 -------- NUMBER OF SHARES - --------- U.S. EXCHANGE-TRADED FUNDS (13.7%) 1,815,500 iShares Trust, S&P 500 Index Fund(g) 231,603 15,100 MidCap SPDR Trust Series 1(g) 2,117 -------- Total U.S. exchange-traded funds (cost: $236,601) 233,720 -------- Total U.S. equities (cost: $655,735) 710,050 --------
29 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- INTERNATIONAL EQUITIES (28.9%) INTERNATIONAL STOCKS (28.9%) AUSTRALIA (0.6%) 112,000 BHP Billiton Ltd. (Diversified Metals & Mining) $ 2,379 433,645 QBE Insurance Group Ltd. (Property & Casualty Insurance) 6,988 17,100 Rio Tinto Ltd. (Diversified Metals & Mining) 1,005 -------- 10,372 -------- AUSTRIA (0.3%) 47,240 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks)(g) 2,693 12,800 OMV AG (Integrated Oil & Gas) 745 74,700 Telekom Austria AG (Integrated Telecommunication Services) 1,666 1,700 VA Stahl AG (Steel) 241 -------- 5,345 -------- BELGIUM (0.1%) 12,500 Delhaize Group (Food Retail) 799 -------- BERMUDA (0.2%) 100,000 Arch Capital Group Ltd., 8.00% (Perpetual Preferred) (Reinsurance) 2,507 70,000 Endurance Specialty Holdings Ltd., 7.75%, Series A (Perpetual Preferred) (Reinsurance) 1,664 -------- 4,171 -------- BRAZIL (0.5%) 48,014 Banco Bradesco S.A. (Preferred) (Diversified Banks) 1,463 44,600 Banco Itau S.A. ADR (Preferred) (Diversified Banks)(g) 1,188 34,310 Companhia Vale Do Rio Doce ADR (Steel) 1,599 84,549 Petroleo Brasileiro S.A. (Preferred) (Integrated Oil & Gas) 1,615 53,000,000 Tim Participacoes S.A. (Preferred) (Wireless Telecommunication Services) 126 33,500 Uniao De Bancos Brasileiros S.A. (Unibanco) GDR (Preferred) (Diversified Banks) 2,138 56,900 Unibanco Uniao De Bancos Brasileiros S.A. (Diversified Banks) 714 -------- 8,843 -------- CANADA (0.9%) 217,400 Bombardier, Inc. "B" (Aerospace & Defense)* 622 60,240 Canadian National Railway Co. (Railroads) 2,693 41,200 Canadian Natural Resources Ltd. (Oil & Gas Exploration & Production) 2,169 34,400 EnCana Corp. (Oil & Gas Exploration & Production) 1,735 6,100 First Quantum Minerals Ltd. (Diversified Metals & Mining) 302
30 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 9,300 Husky Energy, Inc. (Integrated Oil & Gas) $ 546 5,600 National Bank of Montreal (Diversified Banks) 311 14,900 Nexen, Inc. (Oil & Gas Exploration & Production) 829 38,600 Royal Bank Canada (Diversified Banks) 1,577 39,900 Shaw Communications, Inc. (Broadcasting & Cable TV) 1,112 17,200 Suncor Energy, Inc. (Integrated Oil & Gas) 1,388 8,700 Teck Cominco Ltd. (Diversified Metals & Mining) 554 31,420 Toronto-Dominion Bank (Other Diversified Financial Services) 1,704 -------- 15,542 -------- CHINA (0.3%) 2,848,500 CNOOC Ltd. (Oil & Gas Exploration & Production)(p) 2,163 954,000 China Life Insurance Co. Ltd. "H" (Life & Health Insurance)(p) 1,404 100,000 China Mobile Ltd. (Wireless Telecommunication Services)(p) 512 480,000 Denway Motors Ltd. (Automobile Manufacturers)(p) 166 294,000 PetroChina Co. Ltd. "H" (Integrated Oil & Gas)(p) 313 -------- 4,558 -------- DENMARK (0.1%) 19,700 Carlsberg A/S (Brewers) 1,379 8,700 Sydbank A/S (Regional Banks) 314 -------- 1,693 -------- FINLAND (0.1%) 21,900 Metso Corp. (Industrial Machinery) 779 -------- FRANCE (5.1%) 247,400 AXA S.A. (Multi-Line Insurance)(g) 8,591 38,193 Air Liquide S.A. (Industrial Gases) 7,938 22,100 Alstom RGPT (Construction & Engineering)* 1,876 10,200 Assurances Generales de France (AGF) (Multi-Line Insurance)(g) 1,235 27,450 Atos Origin S.A. (IT Consulting & Other Services)* 1,889 36,520 BNP Paribas S.A. (Diversified Banks)(g) 3,407 33,450 Bouygues S.A. (Construction & Engineering) 1,817 32,100 Cap Gemini S.A. (IT Consulting & Other Services) 1,761 167,341 Credit Agricole S.A. (Regional Banks)(g) 6,238 13,620 Groupe DANONE (Packaged Foods & Meat) 1,643 76,280 LVMH Moet Hennessy Louis Vuitton S.A. (Apparel & Accessories & Luxury Goods) 7,497 90,300 Legrand S.A. (Electrical Components & Equipment)(g)* 2,642 4,000 Natexis Banques Populaires (Regional Banks) 1,015 27,110 Pernod Ricard S.A. (Distillers & Vintners)(g) 5,291 283,700 SCOR (Reinsurance) 673
31 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 70,740 Sanofi-Aventis S.A. (Pharmaceuticals)(g) $ 6,667 97,904 Schneider Electric S.A. (Electrical Components & Equipment) 10,155 15,000 Societe BIC S.A. (Office Services & Supplies) 1,004 21,900 Societe Generale (Diversified Banks)(g)* 3,373 11,511 Societe Television Francaise (Broadcasting & Cable TV) 380 133,440 Total S.A. (Integrated Oil & Gas)(g) 8,652 1,100 Vallourec S.A. (Steel) 1,379 41,590 Veolia Environnement S.A. (Multi-Utilities)(g) 2,305 -------- 87,428 -------- GERMANY (1.6%) 2,200 Adidas-Salomon AG (Footwear) 436 72,930 Bayer AG (Diversified Chemicals) 3,275 27,550 Bayerische Motoren Werke AG (Automobile Manufacturers)(g) 1,417 5,500 Celesio AG (Pharmaceuticals) 527 63,550 Commerzbank AG (Diversified Banks)(g) 2,386 24,550 Deutsche Bank AG (Diversified Banks)(g) 2,817 55,050 Deutsche Lufthansa AG (Airlines) 962 5,900 Deutsche Postbank AG (Regional Banks) 413 44,620 E. On AG (Multi-Utilities) 5,146 6,000 Fresenius AG (Preferred) (Biotechnology) 979 12,500 Fresenius Medical Care AG (Health Care Equipment) 1,400 35,399 GEA Group AG (Diversified Commercial & Professional Services) 617 4,900 Heidelberger Druckmaschinen AG (Commercial Printing) 223 18,100 MAN AG (Industrial Machinery)(g) 1,301 6,600 Muenchener Rueckversicherungs-Gesellschaft AG (Reinsurance) 894 29,630 Schering AG (Pharmaceuticals) 3,231 18,350 Stada Arzneimittel AG (Pharmaceuticals) 734 -------- 26,758 -------- GREECE (0.1%) 24,196 Alpha Bank A.E. (Regional Banks) 604 7,800 Titan Cement Co. S.A. (Construction Materials) 408 -------- 1,012 -------- HONG KONG (0.5%) 405,000 Esprit Holdings Ltd. (Apparel Retail)(p) 3,250 2,189,000 Hutchison Telecommunications International Ltd. (Wireless Telecommunication Services)(p)* 3,522 1,089,000 Li & Fung Ltd. (Trading Companies & Distributors)(p) 2,220 -------- 8,992 -------- HUNGARY (0.0%)(q) 1,900 Gedeon Richter RT (Pharmaceuticals) 371 --------
32 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- INDIA (0.1%) 18,100 State Bank of India Ltd. GDR (Diversified Banks) $ 786 66,200 Tata Motors Ltd. ADR (Construction & Farm Machinery & Heavy Trucks)(g) 1,112 -------- 1,898 -------- INDONESIA (0.2%) 3,930,500 PT Bank Central Asia (Diversified Banks) 1,741 40,800 PT Telekomunikasi ADR (Integrated Telecommunication Services) 1,259 -------- 3,000 -------- IRELAND (0.0%)(q) 26,700 Irish Life & Permanent plc (Other Diversified Financial Services) 643 -------- ISRAEL (0.1%) 196,800 Bank Hapoalim Ltd. (Diversified Banks) 918 199,600 Bank Leumi Le-Israel (Regional Banks) 750 54,100 Israel Chemicals Ltd. (ICL) (Fertilizers & Agricultural Chemicals) 229 -------- 1,897 -------- ITALY (0.8%) 125,930 Assicurazioni Generali S.p.A. (Multi-Line Insurance) 4,581 217,810 Capitalia S.p.A. (Diversified Banks) 1,804 39,789 FastWeb S.p.A. (Communications Equipment)(g)* 1,965 654,540 UniCredito Italiano S.p.A. (Regional Banks) 4,991 -------- 13,341 -------- JAPAN (5.1%) 23,000 Aeon Credit Service Co. Ltd. (Consumer Finance) 606 8,200 Aisin Seiki Co. Ltd. (Auto Parts & Equipment) 279 129,000 Ajinomoto Co. Inc. (Packaged Foods & Meat) 1,522 73,900 Asahi Breweries Ltd. (Brewers) 1,083 453,000 Asahi Glass Co. Ltd. (Building Products) 5,985 193,000 Bridgestone Corp. (Tires & Rubber)(g) 3,927 10,000 Canon Sales Co. Inc. (Trading Companies & Distributors) 211 81,000 Canon, Inc. (Electronic Equipment Manufacturers) 5,585 100,000 Chiba Bank Ltd. (Regional Banks) 896 76,000 Daido Steel Co. Ltd. (Steel) 624 18,000 Dowa Mining Co. (Diversified Metals & Mining) 161 129,000 Fuji Electric Holdings Co. Ltd. (Electrical Components & Equipment) 682 168,500 Haseko Corp. (Homebuilding)* 579 144,000 Hitachi Ltd. (Electronic Equipment Manufacturers) 969 21,300 Hokkaido Electric Power Co. Inc. (Electric Utilities) 500 229,000 Itochu Corp. (Trading Companies & Distributors) 1,929
33 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 23,000 JTEKT Corp. (Auto Parts & Equipment) $ 454 136,000 Kaneka Corp. (Diversified Chemicals) 1,312 122,000 Kao Corp. (Personal Products) 3,030 216,000 Kawasaki Heavy Industries Ltd. (Construction & Farm Machinery & Heavy Trucks) 718 106,000 Kobe Steel Ltd. (Steel) 348 96,000 Komatsu Ltd. (Construction & Farm Machinery & Heavy Trucks) 1,906 291,000 Marubeni Corp. (Trading Companies & Distributors) 1,570 60,000 Matsushita Electric Industrial Co. Ltd. (Electronic Equipment Manufacturers) 1,287 154,000 Mazda Motor Corp. (Automobile Manufacturers) 921 35,000 Minebea Co. Ltd. (Industrial Machinery) 206 131,600 Mitsubishi Corp. (Trading Companies & Distributors) 2,765 257,000 Mitsubishi Electric Corp. (Heavy Electrical Equipment) 2,076 66,000 Mitsubishi Rayon Co. Ltd. (Textiles) 568 95,000 Mitsui Mining & Smelting Co. Ltd. (Diversified Metals & Mining) 610 32,600 Nintendo Co. Ltd. (Leisure Products) 5,463 70,500 Nishi Nippon City Bank Ltd. (Regional Banks) 326 51,100 Nitto Denko Corp. (Specialty Chemicals) 3,905 18,500 ORIX Corp. (Other Diversified Financial Services) 5,268 86,800 Omron Corp. (Electrical Components & Equipment) 2,352 242,000 Ricoh Co. Ltd. (Office Electronics) 4,698 77,000 Sekisui Chemical Co. Ltd. (Homebuilding) 650 607,000 Shinsei Bank Ltd. (Diversified Banks) 4,018 4,100 Sumco Corp. (Semiconductor Equipment) 241 75 Sumitomo Mitsui Financial Group, Inc. (Diversified Banks) 760 46,000 Taiheiyo Cement Corp. (Building Products) 192 107,000 Teijin Ltd. (Textiles) 754 491,000 Tokyo Gas Co. Ltd. (Gas Utilities) 2,434 112,000 Toppan Printing Co. Ltd. (Commercial Printing) 1,398 258,000 Toyobo Co. Ltd. (Textiles) 732 161,300 Toyota Motor Corp. (Automobile Manufacturers) 8,499 28,000 Yamaha Motor Co. Ltd. (Motorcycle Manufacturers) 745 105,000 Yaskawa Electric Corp. (Electronic Equipment Manufacturers) 1,134 -------- 86,878 -------- KOREA (0.7%) 79,600 Korea Electric Power Corp. ADR (Electric Utilities) 1,615 15,330 Samsung Electronics Co. Ltd. (Semiconductors)(p) 9,788 -------- 11,403 -------- MALAYSIA (0.0%)(q) 102,600 Genting Berhad (Casinos & Gaming) 636 --------
34 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- MEXICO (0.4%) 31,000 America Movil S.A. de C.V. ADR "L" (Wireless Telecommunication Services) $ 1,013 166,100 America Telecom S.A. de C.V. (Wireless Telecommunication Services)* 937 34,700 Cemex S.A. de C.V. ADR (Construction Materials)(g)* 1,977 162,210 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 2,983 -------- 6,910 -------- NETHERLANDS (0.9%) 7,200 Aalberts Industries N.V. (Industrial Machinery) 534 40,000 Aegon N.V., 6.38% (Preferred) (Life & Health Insurance) 946 12,400 Buhrmann N.V. (Trading Companies & Distributors) 192 38,800 CSM N.V. (Packaged Foods & Meat) 1,120 18,100 European Aeronautic Defense and Space Co. N.V. (Aerospace & Defense) 645 52,100 Hagemeyer N.V. (Trading Companies & Distributors)* 257 77,725 Heineken N.V. (Brewers) 3,106 55,600 ING Groep N.V. (Multi-Line Insurance)(g) 2,175 33,000 Koninklijke BAM Groep N.V. (Building Products) 703 91,000 Koninklijke Philips Electronics N.V. (Electrical Components & Equipment) 2,862 92,000 STMicroelectronics N.V. (Semiconductors) 1,499 74,600 Wolters Kluwer N.V. (Publishing)(g) 1,761 -------- 15,800 -------- NORWAY (0.2%) 28,800 Statoil ASA (Integrated Oil & Gas) 833 251,400 Telenor ASA (Wireless Telecommunication Services)(g) 3,173 -------- 4,006 -------- POLAND (0.0%)(q) 41,260 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks) 467 -------- RUSSIA (0.3%) 60,100 Gazprom OAO (Integrated Oil & Gas) 2,566 38,800 LUKoil Holdings ADR (Integrated Oil & Gas)* 3,003 -------- 5,569 -------- SINGAPORE (0.2%) 2,358,080 Singapore Telecommunications Ltd. (Integrated Telecommunication Services) 3,779 -------- SOUTH AFRICA (0.1%) 151,100 African Bank Investments Ltd. (Consumer Finance) 642 55,100 Aveng Ltd. (Building Products) 180
35 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- 9,200 Imperial Holdings Ltd. (Trucking)* $ 197 160,600 Network Healthcare Holdings Ltd. (Health Care Facilities)* 218 20,600 Reunert Ltd. (Electrical Components & Equipment) 199 -------- 1,436 -------- SPAIN (0.5%) 304,560 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 6,311 77,860 Iberdrola S.A. (Electric Utilities)(g) 2,499 -------- 8,810 -------- SWEDEN (0.5%) 8,300 Alfa Laval AB (Construction & Engineering) 253 16,000 Boliden AB (Diversified Metals & Mining) 310 1,176,700 LM Ericsson Telephone Co. "B" ADR (Communications Equipment) 3,760 65,600 Skandinaviska Enskilda Banken "A" (Diversified Banks) 1,565 73,800 Svenska Handelsbanken "A" (Regional Banks) 1,976 -------- 7,864 -------- SWITZERLAND (2.9%) 84,500 ABB Ltd. (Construction & Engineering) 1,068 6,900 Actelion Ltd. (Pharmaceuticals)* 804 43,590 Credit Suisse Group (Diversified Banks) 2,516 7,745 Holcim Ltd. (Construction Materials) 608 45,793 Julius Baer Holding Ltd. "B" (Diversified Banks) 4,040 35,645 Nestle S.A. (Packaged Foods & Meat) 10,633 83,200 Roche Holdings AG (Pharmaceuticals) 12,952 3,050 Swiss Life Holding (Property & Casualty Insurance) 705 75,613 Swiss Re (Reinsurance) 5,315 14,570 Synthes, Inc. (Health Care Equipment) 1,784 77,573 UBS AG (Diversified Capital Markets) 8,772 3,935 Zurich Financial Services AG (Multi-Line Insurance)* 890 -------- 50,087 -------- TAIWAN (0.3%) 263,200 Hon Hai Precision Industry Co., Ltd. GDR (Electronic Equipment Manufacturers) 3,324 140,400 Siliconware Precision Industries Co. ADR (Semiconductors)(g) 854 -------- 4,178 -------- THAILAND (0.1%) 609,690 Bangkok Bank Public Co. Ltd. (Diversified Banks) 1,694 34,000 PTT Public Co. Ltd. (Integrated Oil & Gas) 216 -------- 1,910 --------
36 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- UNITED KINGDOM (5.1%) 53,958 Anglo American plc (Diversified Metals & Mining) $ 2,173 80,160 AstraZeneca plc (Pharmaceuticals) 4,234 391,970 BG Group plc (Oil & Gas Exploration & Production) 5,205 46,200 Barratt Developments plc (Homebuilding) 793 9,700 Bellway plc (Homebuilding) 205 42,600 Bovis Homes Group plc (Homebuilding) 653 110,200 British Airways plc (Airlines)* 702 56,600 British Energy Group plc (Electric Utilities)* 732 49,400 Charter plc (Construction & Engineering)* 757 334,890 Diageo plc (Distillers & Vintners) 5,493 65,900 Drax Group plc (Electric Utilities)* 1,018 141,400 GKN plc (Auto Parts & Equipment) 719 275,130 GlaxoSmithKline plc (Pharmaceuticals) 7,615 43,100 HBOS plc (Diversified Banks) 737 42,300 Imperial Tobacco Group plc (Tobacco) 1,293 1,819,100 Invensys plc (Diversified Commercial & Professional Services)* 791 496,582 Ladbrokes plc (Casinos & Gaming) 3,692 189,550 Marks & Spencer Group plc (Department Stores) 1,925 90,370 Next plc (Apparel Retail) 2,746 109,620 Northern Rock plc (Diversified Banks) 2,105 40,580 Persimmon plc (Building Products) 911 308,170 Reckitt Benckiser plc (Household Products) 11,325 123,800 Rexam plc (Metal & Glass Containers) 1,109 197,100 Rolls-Royce Group plc (Aerospace & Defense)* 1,522 10,603,980 Rolls-Royce Group plc "B" (acquired 3/08/2006; cost $18) (Aerospace & Defense)(n,p)* 21 22,350 Royal Bank of Scotland Group plc (Diversified Banks) 721 139,740 Royal Dutch Shell plc "A" (Integrated Oil & Gas) 4,589 365,560 Smith & Nephew plc (Health Care Equipment) 2,984 158,690 Smiths Group plc (Aerospace & Defense) 2,632 1,089,660 Tesco plc (Food Retail) 6,531 11,000 Vedanta Resources plc (Diversified Metals & Mining) 298 254,850 WPP Group plc (Advertising) 3,138 595,790 William Hill plc (Casinos & Gaming) 6,858 126,260 Yell Group plc (Publishing) 1,184 -------- 87,411 -------- Total international stocks (cost: $410,131) 494,586 --------
37 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- INTERNATIONAL RIGHTS (0.0%)(q) SWITZERLAND 5 Holcim Ltd. (acquired 5/16/2006; cost $0) (Construction Materials)*(p,n) $ - -------- Total international equities (cost: $410,131) 494,586 -------- PRECIOUS METALS AND MINERALS SECURITIES (1.4%) GOLD (1.2%) AFRICAN GOLD COMPANIES (0.1%) 16,700 Gold Fields Ltd. 366 39,000 Gold Fields Ltd. ADR 854 -------- 1,220 -------- AUSTRALIAN GOLD COMPANIES (0.1%) 400,000 Lihir Gold Ltd.* 878 55,000 Newcrest Mining Ltd. 834 -------- 1,712 -------- EUROPEAN GOLD COMPANIES (0.1%) 47,000 Randgold Resources Ltd. ADR* 922 -------- NORTH AMERICAN GOLD COMPANIES (0.9%) 28,000 Agnico-Eagle Mines Ltd. 934 29,000 Barrick Gold Corp.(g) 888 260,000 Cambior, Inc.* 826 53,100 Freeport-McMoRan Copper & Gold, Inc. "B" 2,973 27,000 Glamis Gold Ltd.* 1,036 29,000 Goldcorp, Inc. 889 80,000 Kinross Gold Corp.* 874 31,000 Meridian Gold, Inc.* 969 81,800 Newmont Mining Corp. 4,266 28,000 Royal Gold, Inc. 792 90,000 Yamana Gold, Inc.* 930 -------- 15,377 -------- SOUTH AMERICAN GOLD COMPANIES (0.0%)(q) 34,000 Compania de Minas Buenaventura S.A. ADR 876 -------- Total gold (cost: $18,993) 20,107 --------
38 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER VALUE OF SHARES SECURITY (000) - ------------------------------------------------------------------------------------------- DIAMONDS (0.0%)(q) 21,000 Aber Diamond Corp. (cost: $818) $ 733 -------- PLATINUM GROUP METALS (0.1%) 8,600 Anglo American Platinum Corp. 762 4,200 Impala Platinum Holdings Ltd. 707 20,000 Lonmin plc 984 -------- Total platinum group metals (cost: $2,306) 2,453 -------- SILVER (0.1%) 160,000 Hecla Mining Co.(g)* (cost: $664) 874 -------- Total precious metals and minerals securities (cost: $22,781) 24,167 -------- REAL ESTATE EQUITY SECURITIES (0.8%) OFFICE REITS (0.2%) 120,000 Duke Realty Corp., Preferred, Series M, 6.95%, perpetual 2,951 30,000 HRPT Properties Trust "C", Preferred, 7.125%, cumulative redeemable 732 -------- 3,683 -------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.5%) 261,000 Capitaland Ltd. (Singapore) 678 4,800 CB Richard Ellis Group, Inc. "A"* 371 440,000 China Overseas Land and Investment Ltd. (Hong Kong)(p) 255 171,000 Hang Lung Properties Ltd. (Hong Kong)(p) 298 11,300 Jones Lang LaSalle, Inc. 898 95,000 Keppel Corp. Ltd. (Singapore) 812 58,000 Leopalace21 Corp. (Japan) 1,732 363,000 New World Development Ltd. (Hong Kong)(p) 577 5,600 Nexity (France) 342 513,000 Sino Land Co. (Hong Kong)(p) 779 145,000 Tokyu Land Corp. (Japan) 1,081 -------- 7,823 -------- RETAIL REITS (0.1%) 24,000 Simon Property Group, Inc. 1,911 -------- Total real estate equity securities (cost: $12,812) 13,417 --------
39 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- BONDS (25.2%) CORPORATE OBLIGATIONS (17.1%) APPAREL & ACCESSORIES & LUXURY GOODS (0.1%) $1,000 Kellwood Co., Debentures 7.63% 10/15/2017 $ 910 1,000 Kellwood Co., Senior Notes 7.88 7/15/2009 1,006 ---------- 1,916 ---------- BROADCASTING & CABLE TV (0.4%) 2,000 Cox Communications, Inc., Notes 4.63 6/01/2013 1,807 1,000 Cox Enterprises,Inc., Notes(b) 7.38 6/15/2009 1,033 2,000 Cox Enterprises, Inc., Notes(b) 8.00 2/15/2007 2,023 1,000 Liberty Media Corp., Senior Notes(g) 5.70 5/15/2013 924 1,000 Liberty Media Corp., Senior Notes 7.88 7/15/2009 1,046 ---------- 6,833 ---------- CASINOS & GAMING (0.1%) 1,000 Harrahs Operating Co., Inc., Bonds 5.63 6/01/2015 941 ---------- CONSUMER FINANCE (0.7%) 1,000 Ford Motor Credit Co., Senior Notes 4.95 1/15/2008 938 2,000 Ford Motor Credit Co., Notes(g) 7.00 10/01/2013 1,727 2,000 General Motors Acceptance Corp., Notes 6.13 8/28/2007 1,958 1,000 General Motors Acceptance Corp., Notes(g) 6.75 12/01/2014 909 2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,058 3,000 HSBC Finance Corp., Notes(g) 5.50 1/19/2016 2,873 2,000 SLM Corp., MTN, CPI Floating Rate Notes 5.36(c) 6/01/2009 1,952 ---------- 12,415 ---------- DATA PROCESSING & OUTSOURCED SERVICES (0.1%) 2,000 Fiserv, Inc., Notes 4.00 4/15/2008 1,935 ---------- DIVERSIFIED BANKS (0.3%) 1,000 Emigrant Bancorp, Inc., Senior Notes(b) 6.25 6/15/2014 969 1,000 JPMorgan Chase& Co., Notes 4.50 1/15/2012 944 1,500 Mizuho Capital Investment 1 Ltd., Subordinated Bonds(b) 6.69 6/30/2016 1,452 1,273 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,210 ---------- 4,575 ---------- DIVERSIFIED CHEMICALS (0.2%) 4,000 ICI Wilmington, Inc., Notes 4.38 12/01/2008 3,867 ----------
40 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- DIVERSIFIED REITS (0.2%) $2,000 Liberty Property, LP, Senior Notes 5.65% 8/15/2014 $ 1,933 2,000 Washington REIT, Senior Notes 5.25 1/15/2014 1,909 ---------- 3,842 ---------- ELECTRIC UTILITIES (2.8%) 1,000 American Electric Power Co., Inc., Senior Notes 4.71 8/16/2007 990 4,000 Black Hills Corp., Notes 6.50 5/15/2013 3,964 3,662 Cedar Brakes II, LLC, Senior Notes, Series C(b) 9.88 9/01/2013 4,107 3,000 Entergy Louisiana, Inc., First Mortgage Bonds 5.83 11/01/2010 2,959 2,000 Entergy Mississippi, Inc., First Mortgage Bonds 5.92 2/01/2016 1,931 950 FPL Energy National Wind, LLC, Secured Notes(b) 5.61 3/10/2024 913 4,000 Monongahela Power Co., Notes, Series A 7.36 1/15/2010 4,203 3,111 Oglethorpe Power Corp., Secured Series Facility Bonds 6.97 6/30/2011 3,161 4,300 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 4,313 2,000 PPL Capital Funding, Inc., Guaranteed Notes, Series A 4.33 3/01/2009 1,919 3,000 PPL Energy Supply, LLC, Bonds, Series A 5.70 10/15/2015 2,866 2,000 Sempra Energy ESOP, Series 1999 (NBGA)(b) 4.21 11/01/2014(e) 1,969 3,000 Texas-New Mexico Power Co., Notes 6.13 6/01/2008 3,003 3,000 Tristate General & Transport Association, Bonds(b) 6.04 1/31/2018 2,953 2,000 TXU Electricity Ltd., Senior Notes, Series TCRS (INS) 7.25 12/01/2016 2,194 2,000 TXU Energy Co., LLC, Senior Notes 7.00 3/15/2013 2,069 3,000 Virginia Electric Power Co., Senior Notes 5.40 1/15/2016 2,863 1,000 West Penn Power Co., Notes 6.63 4/15/2012 1,025 ---------- 47,402 ---------- ELECTRICAL COMPONENTS & EQUIPMENT (0.1%) 2,295 Ametek, Inc., Senior Notes 7.20 7/15/2008 2,348 ---------- GAS UTILITIES (0.7%) 3,000 Boardwalk Pipelines, LLC, Notes 5.50 2/01/2017 2,839 1,000 Enbridge Energy Partners, LP, Senior Notes 5.35 12/15/2014 940
41 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $2,500 Energy Transfer Partners, LP, Senior Notes 5.95% 2/01/2015 $ 2,419 2,000 Gulfstream Natural Gas Systems, LLC, Senior Notes(b) 6.19 11/01/2025 1,944 2,000 Noram Energy Corp., Debentures 6.50 2/01/2008 2,024 1,040 Northern Border Partners, LP, Senior Notes, Series A 8.88 6/15/2010 1,149 1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 995 ---------- 12,310 ---------- HEALTH CARE EQUIPMENT (0.1%) 1,000 Baxter International, Inc., Notes(g) 7.13 2/01/2007 1,007 ---------- HEALTH CARE FACILITIES (0.1%) 2,000 HCA, Inc., Notes 5.25 11/06/2008 1,969 ---------- HOUSEHOLD APPLIANCES (0.2%) 4,000 Stanley Works Capital Trust I, Bonds(b,l) 5.90 12/01/2045 3,742 ---------- HOUSEWARES & SPECIALTIES (0.1%) 2,000 Newell Rubbermaid, Inc., MTN, Series A(l) 6.35 7/15/2028 2,009 ---------- INTEGRATED OIL & GAS (0.2%) 3,124 Merey Sweeny, LP, Senior Notes(b) 8.85 12/18/2019 3,596 ---------- LIFE & HEALTH INSURANCE (0.6%) 2,000 Great West Life & Annuity, Inc., Bonds(b,l) 7.15 5/16/2046 2,002 1,000 Lincoln National Corp., Bonds(l) 7.00 5/17/2066 998 3,000 Phoenix Companies, Inc., Senior Notes 6.68 2/16/2008 3,011 4,000 Prudential Holdings, LLC, Bonds(b) 8.70 12/18/2023 4,775 ---------- 10,786 ---------- MANAGED HEALTH CARE (0.2%) 1,000 Coventry Health Care, Inc., Senior Notes 6.13 1/15/2015 975 2,135 Highmark, Inc., Senior Notes(b) 6.80 8/15/2013 2,195 ---------- 3,170 ---------- MULTI-LINE INSURANCE (1.0%) 4,000 American General Finance Corp., MTN 5.40 12/01/2015 3,823 1,000 ASIF Global Financing XIX, Senior Notes(b) 4.90 1/17/2013 955 4,000 Assurant, Inc., Notes 5.63 2/15/2014 3,867
42 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $4,000 ILFC E-Capital Trust I, Bonds(b,g,l) 5.90% 12/21/2065 $ 3,912 4,500 Oil Casualty Insurance Ltd., Subordinated Debentures(b) 8.00 9/15/2034 4,270 ---------- 16,827 ---------- MULTI-SECTOR HOLDINGS (0.1%) 1,000 Leucadia National Corp., Senior Notes 7.00 8/15/2013 990 ---------- MULTI-UTILITIES (0.4%) 4,000 Northwestern Corp., Notes(b) 7.30 12/01/2006 4,044 2,000 PSEG Funding Trust, Notes 5.38 11/16/2007 1,991 ---------- 6,035 ---------- OFFICE REITS (0.7%) 1,000 Arden Realty, LP, Notes 5.25 3/01/2015 959 3,000 Brandywine Operating Partnership, LP, Notes 5.63 12/15/2010 2,951 3,000 Carramerica Realty Corp., Notes 5.50 12/15/2010 2,980 2,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 1,829 3,000 HRPT Properties Trust, Notes 5.75 11/01/2015 2,890 ---------- 11,609 ---------- OIL & GAS EQUIPMENT & SERVICES (0.2%) 1,500 Seacor Holdings, Inc., Senior Notes 5.88 10/01/2012 1,448 2,000 Seacor Holdings, Inc., Senior Notes 7.20 9/15/2009 2,041 ---------- 3,489 ---------- OIL & GAS EXPLORATION & PRODUCTION (0.3%) 2,000 Southwestern Energy Co., MTN 7.35 10/02/2017 2,090 2,000 Southwestern Energy Co., MTN 7.63 5/01/2027(m) 2,087 ---------- 4,177 ---------- OIL & GAS REFINING & MARKETING (0.0%)(q) 500 Ultramar Diamond Shamrock Corp., Senior Notes 6.75 10/15/2037 510 ---------- OIL & GAS STORAGE & TRANSPORTATION (0.1%) 2,000 K N Capital Trust III, Subordinated Debentures 7.63 4/15/2028 1,798 ---------- OTHER DIVERSIFIED FINANCIAL SERVICES (0.4%) 2,600 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 2,883 1,000 Citigroup, Inc., Global Notes 4.25 7/29/2009 965 3,000 ZFS Finance USA Trust I, Notes(b,g,l) 6.15 12/15/2065 2,886 ---------- 6,734 ----------
43 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- PACKAGED FOODS & MEAT (0.1%) $2,000 Kraft Foods, Inc., Notes 4.63% 11/01/2006 $ 1,994 --------- PROPERTY & CASUALTY INSURANCE (1.9%) 2,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 1,928 2,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 1,952 1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75 12/01/2014 955 2,000 Berkshire Hathaway Finance Corp., Senior Notes 4.75 5/15/2012 1,900 5,000 Berkshire Hathaway Finance Corp., Senior Notes 4.85 1/15/2015 4,674 1,000 Fidelity National Title Group, Inc., Notes 5.25 3/15/2013 914 2,000 Fidelity National Title Group, Inc., Notes 7.30 8/15/2011 2,043 3,000 Fund American Companies, Inc., Notes 5.88 5/15/2013 2,916 2,000 Markel Corp., Senior Notes 6.80 2/15/2013 2,024 1,500 Markel Corp., Senior Notes 7.00 5/15/2008 1,528 1,000 Markel Corp., Notes 7.20 8/15/2007 1,015 500 Markel Corp., Senior Notes 7.35 8/15/2034 488 2,250 Ohio Casualty Corp., Notes 7.30 6/15/2014 2,307 1,000 RLI Corp., Senior Notes 5.95 1/15/2014 954 3,000 St. Paul Travelers Companies, Inc., Senior Notes 5.50 12/01/2015 2,882 1,000 W.R. Berkley Corp., Senior Notes 5.60 5/15/2015 948 3,000 XL Capital Ltd., Senior Notes 6.38 11/15/2024 2,841 --------- 32,269 --------- PUBLISHING (0.4%) 2,000 Gannett Co., Notes 5.75 6/01/2011 1,984 2,000 Knight-Ridder, Inc., Notes 5.75 9/01/2017 1,818 4,000 Scholastic Corp., Notes 5.00 4/15/2013 3,457 --------- 7,259 --------- RAILROADS (0.2%) 3,000 TTX Co., Notes(b) 5.40 2/15/2016 2,853 --------- REGIONAL BANKS (1.1%) 2,000 Bank of Hawaii, Notes 6.88 3/01/2009 2,049 2,000 Colonial Bank, N.A., Subordinated Notes 6.38 12/01/2015 1,989 2,000 First Republic Bank Corp., Subordinated Notes 7.75 9/15/2012 2,210 3,000 Fulton Capital Trust I, Notes 6.29 2/01/2036 2,736 1,000 Hudson United Bank, Subordinated Notes 7.00 5/15/2012 1,056
44 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $2,453 PNC Financial Services, Trust Preferred Securities, Series C 8.88% 3/15/2027 $ 2,613 3,000 Popular North America Capital Trust I, Bonds 6.56 9/15/2034 2,827 3,000 TCF National Bank, Subordinated Notes 5.50 2/01/2016 2,876 ---------- 18,356 ---------- RESIDENTIAL REITS (0.4%) 1,000 BRE Properties, Inc., Senior Notes 4.88 5/15/2010 968 2,000 ERP Operating, LP, Notes 5.25 9/15/2014 1,905 2,000 ERP Operating, LP, Senior Notes 5.38 8/01/2016 1,891 1,000 Post Apartment Homes, LP, Senior Notes 5.45 6/01/2012 955 2,000 United Dominion Realty Trust, Senior Notes 5.25 1/15/2015 1,867 ---------- 7,586 ---------- RETAIL REITS (0.8%) 3,000 Federal Realty Investment Trust, Notes 5.65 6/01/2016 2,890 3,000 Kimco Realty Corp., Notes 5.58 11/23/2015 2,885 3,000 Pan Pacific Retail Properties, Inc., Notes 5.25 9/01/2015 2,776 3,000 Simon Property Group, LP, Notes(b) 5.75 12/01/2015 2,929 3,000 Tanger Factory Outlets, Senior Notes 6.15 11/15/2015 2,924 ---------- 14,404 ---------- SPECIALIZED REITS (0.2%) 1,000 Hospitality Properties Trust, Senior Notes 5.13 2/15/2015 918 3,000 Nationwide Health Properties, Inc., Notes 6.00 5/20/2015 2,878 ---------- 3,796 ---------- THRIFTS & MORTGAGE FINANCE (0.8%) 1,000 Countrywide Financial Corp., MTN, Series A, Bonds 4.50 6/15/2010 956 1,000 Countrywide Home Loan, Guaranteed Notes, Series MTNL 4.00 3/22/2011 927 2,000 Independence Community Bank Corp., Notes(l) 3.50 6/20/2013 1,913 3,000 Independence Community Bank Corp., Subordinated Notes(l) 3.75 4/01/2014 2,840 3,000 Roslyn Bancorp, Inc., Senior Notes 7.50 12/01/2008 3,114 2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 1,947 500 Washington Mutual, Inc., Subordinated Notes 4.63 4/01/2014 451 2,000 World Savings Bank Federal Savings Bank, Notes 4.13 12/15/2009 1,911 ---------- 14,059 ----------
45 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- TOBACCO (0.3%) $1,000 Universal Corp., MTN, Series C 5.20% 10/15/2013 $ 899 2,000 Universal Corp., MTN, Series B 7.88 2/15/2008 2,053 2,000 UST, Inc., Notes 6.63 7/15/2012 2,059 ---------- 5,011 ---------- TRUCKING (0.2%) 2,750 Roadway Corp., Senior Notes 8.25 12/01/2008 2,864 ---------- WIRELESS TELECOMMUNICATION SERVICES (0.3%) 2,000 Iwo Holdings Inc., Senior Discount Notes, 10.75%, 1/15/2010 8.43(r) 1/15/2015 1,575 3,000 US Unwired, Inc., Secured Notes 10.00 6/15/2012 3,364 ---------- 4,939 ---------- Total corporate obligations (cost: $302,816) 292,222 ---------- EURODOLLAR AND YANKEE OBLIGATIONS (3.2%)(f) DIVERSIFIED BANKS (0.7%) 3,000 BOI Capital Funding Number 3 LP, Guaranteed Bonds (United Kingdom)(b,g,l) 6.11 1/29/2049 2,816 1,500 Chuo Mitsui Trust & Banking Co., Subordinated Notes (Japan)(b,l) 5.51 12/29/2049 1,407 1,000 HBOS plc, Subordinated Notes (United Kingdom)(b) 6.41 10/01/2035 906 1,000 Mizuho Finance, Notes (Japan)(b) 5.79 4/15/2014 986 2,000 MUFG Capital Finance 1 Ltd., Guaranteed Preferred Bonds (Japan)(l) 6.35 7/29/2049 1,973 1,000 Nordea Bank AB, Subordinated Notes (Sweden)(b,l) 5.42 12/29/2049 940 1,000 Skandinaviska Enskilda Banken, Subordinated Bonds (Sweden)(b,l) 5.47 3/29/2049 938 2,000 UFJ Finance Aruba AEC, Notes (Japan) 8.75 11/13/2049 2,122 ---------- 12,088 ---------- DIVERSIFIED METALS & MINING (0.1%) 2,000 Glencore Funding, LLC, Notes (Switzerland)(b) 6.00 4/15/2014 1,878 ---------- FOOD RETAIL (0.2%) 3,000 Woolworths Ltd., Senior Notes (Australia)(b) 5.25 11/15/2011 2,930 ----------
46 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT (0.1%) $2,000 Republic of Poland, Global Unsubordinated Notes (Poland) 5.25% 1/15/2014 $ 1,953 ---------- INTEGRATED OIL & GAS (0.2%) 2,000 BP Capital plc, Guaranty Notes (United Kingdom) 2.75 12/29/2006 1,973 1,000 Pemex Finance Ltd., Senior Notes (Mexico) 8.88 11/15/2010 1,089 950 PEMEX Finance Ltd., Notes (Mexico) 9.03 2/15/2011 1,022 ---------- 4,084 ---------- OIL & GAS DRILLING (0.1%) 1,721 Delek & Avner-Yam Tethys Ltd., Secured Notes (Israel)(b) 5.33 8/01/2013 1,657 ---------- OIL & GAS EXPLORATION & PRODUCTION (0.5%) 2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 1,978 5,000 EOG Resources Canada, Inc., Senior Notes (Canada)(b) 4.75 3/15/2014 4,663 2,000 RAS Laffan Liquefied Natural Gas Co. Ltd. II, Bonds, Series A (Qatar)(b) 5.30 9/30/2020 1,883 ---------- 8,524 ---------- OIL & GAS REFINING & MARKETING (0.2%) 3,000 GS Caltex Corp., Notes (Korea)(b,g) 5.50 10/15/2015 2,849 ---------- PAPER PRODUCTS (0.0%)(q) 1,000 Domtar, Inc., Notes (Canada) 5.38 12/01/2013 815 ---------- PROPERTY & CASUALTY INSURANCE (0.1%) 1,145 Mantis Reef Ltd. II, Notes (Australia)(b) 4.80 11/03/2009 1,102 ---------- REGIONAL BANKS (0.1%) 1,000 Kaupthing Bank, Bonds (Iceland)(b) 7.13 5/19/2016 1,004 ---------- REINSURANCE (0.8%) 2,000 Endurance Specialty Holdings, Ltd., Senior Notes (Bermuda) 6.15 10/15/2015 1,929 5,000 Montpelier Re Holdings Ltd., Senior Notes (Bermuda) 6.13 8/15/2013 4,652
47 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $5,000 Platinum Underwriters Finance, Inc., Guaranteed Notes, Series B (Bermuda) 7.50% 6/01/2017 $ 4,921 2,000 Stingray Pass-Through Trust, Pass-Through Certificates (Cayman Islands)(b) 5.90 1/12/2015 1,923 ---------- 13,425 ---------- RETAIL REITS (0.1%) 2,000 Westfield Capital Corp., Senior Notes (Australia)(b) 5.13 11/15/2014 1,880 ---------- Total Eurodollar and Yankee obligations (cost: $56,345) 54,189 ---------- ASSET-BACKED SECURITIES (0.9%) AIRLINES (0.2%) America West Airlines, Inc., Pass-Through Certificates, 939 Series 1996-1, Class A, EETC 6.85 7/02/2009 940 1,825 Series 1999-1, Class G, EETC (INS) 7.93 1/02/2019 1,927 ---------- 2,867 ---------- ASSET-BACKED FINANCING (0.7%) 2,304 Aerco Ltd., Series 2A, Class A4(b) 5.60(c) 7/15/2025 2,213 1,423 Airport Airplanes, Pass-Through Certificates, Series 1R, Class A8 5.46(c) 3/15/2019 1,363 4,000 ARG Funding Corp., Series 2005-1A, Class A3(b) 4.29 4/20/2011 3,828 2,000 Chase Credit Card Owner Trust, Series 2002-5, Class A 5.18(c) 10/15/2009 2,003 1,000 Permanent Financing plc, Notes, Series 8, Class 1B 4.98(c) 6/10/2042 1,000 2,000 Trinity Rail Leasing L.P., Series 2006 1A, Class A1(b) 5.90 5/14/2036 2,003 ---------- 12,410 ---------- Total asset-backed securities (cost: $15,286) 15,277 ---------- COMMERCIAL MORTGAGE SECURITIES (2.7%) COMMERCIAL MORTGAGE-BACKED SECURITIES (2.7%) 3,146 Banc of America Commercial Mortgage Inc., Series 2000-2, Class A1 7.02 9/15/2032 3,231 5,000 Chase Commercial Mortgage Securities Corp., Series 2000-3, Class A2 7.32 10/15/2032 5,279
48 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $5,000 Series 2000-2, Class A2 7.63% 7/15/2032 $ 5,342 1,000 Commercial Mortgage Asset Trust, Series 1999-C1, Class A4 6.98 1/17/2032 1,067 2,000 Commercial Mortgage Trust, Pass-Through Certificates, Series 2005- LP5, Class GMB1(b) 5.15 5/10/2043 1,954 Credit Suisse First Boston Mortgage Securities Corp., 1,900 Series 2001-CK6, Class A2 6.10 8/15/2036 1,913 5,000 Series 2000-C1, Class A2 7.55 4/15/2062 5,295 5,000 First Union National Bank Commercial Mortgage Trust, Series 1999-C4, Class A2 7.39 12/15/2031 5,253 1,000 GE Capital Commercial Mortgage Corp., Series 2001-3, Class A2 6.07 6/10/2038 1,020 3,000 Government Lease Trust, Series 1999-GSA1, Class A4(b) 6.48 5/18/2011 3,073 1,000 GS Mortgage Securities Corp. II, Series 2001-GL3A, Class A2(b) 6.45 8/05/2018 1,036 2,000 JP Morgan Chase Commercial Mortgage Securities Corp., Series 2006-LDP6, Class A-SB 5.49(c) 4/15/2043 1,964 Merrill Lynch Mortgage Investors, Inc., 2,000 Series 1998-C1, Class A2 6.48 11/15/2026 2,020 949 Series 1999-C1, Class A2 7.56 11/15/2031 990 2,000 Prudential Mortgage Capital Funding, LLC, Series 2001-ROCK, Class B 6.76 5/10/2034 2,099 4,413 TIAA Real Estate Co. Ltd., Series 2001 C1A, Class A-3(b) 6.56 6/19/2026 4,474 ---------- 46,010 ---------- INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.0%)(d,q) 9,250 Bear Stearns Commercial Mortgage Securities, Inc., Series 2004-ESA, Class X1 (acquired 6/17/2004; cost $538)(b,n) 1.83 5/14/2016 490 ---------- Total commercial mortgage securities (cost: $46,932) 46,500 ---------- U.S. GOVERNMENT AGENCY ISSUES (0.7%)(j) ASSET-BACKED FINANCING (0.1%) 2,535 U.S. Small Business Administration, Participation Certificates, Series 2003-20 F 4.07 6/01/2023 2,298 ----------
49 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%)(q) $ 341 Government National Mortgage Assn. I, Series 2001-49 VB 7.00% 11/16/2016 $ 342 ---------- INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(d) 43,751 Government National Mortgage Assn.I, Series 2003-59, Class XB 2.28 7/16/2010 1,343 ---------- MORTGAGE-BACKED PASS-THROUGH SECURITIES (0.2%) Fannie Mae(+), 488 Pool 610989 6.50 10/01/2016 497 412 Pool 535164 7.00 2/01/2030 424 222 Pool 547483 7.00 8/01/2030 228 Government National Mortgage Assn. I, 212 Pool 340945 6.50 5/15/2023 216 333 Pool 352106 6.50 8/15/2023 340 154 Pool 366762 6.50 4/15/2024 157 612 Pool 577423 6.50 1/15/2032 624 33 Pool 206743 7.50 3/15/2017 34 107 Pool 207904 7.50 3/15/2017 111 15 Pool 207950 7.50 3/15/2017 16 11 Pool 166093 8.00 6/15/2016 12 4 Pool 166108 8.00 6/15/2016 5 20 Pool 177786 8.00 9/15/2016 21 24 Pool 186000 8.00 11/15/2016 25 29 Pool 193968 8.00 12/15/2016 31 35 Pool 203822 8.00 3/15/2017 37 2 Pool 034140 8.50 9/15/2009 2 8 Pool 138007 8.50 6/15/2016 9 7 Pool 164021 8.50 6/15/2016 7 24 Pool 159980 8.50 7/15/2016 25 4 Pool 176311 8.50 9/15/2016 4 2 Pool 177247 8.50 9/15/2016 2 13 Pool 174005 8.50 12/15/2016 14 22 Pool 197279 8.50 12/15/2016 24 3 Pool 197400 8.50 1/15/2017 3 19 Pool 201986 8.50 1/15/2017 21 14 Pool 185270 8.50 2/15/2017 15 3 Pool 157116 9.00 6/15/2016 3 1 Pool 162801 9.00 7/15/2016 1
50 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- Government National Mortgage Assn. I, $ 3 Pool 166282 9.00% 7/15/2016 $ 3 2 Pool 164502 9.00 8/15/2016 2 4 Pool 172663 9.00 9/15/2016 5 3 Pool 170810 9.00 10/15/2016 3 12 Pool 031433 9.50 6/15/2009 12 1 Pool 032271 9.50 6/15/2009 1 18 Pool 034679 9.50 6/15/2009 19 5 Pool 035052 9.50 9/15/2009 5 7 Pool 167971 9.50 7/15/2016 8 18 Pool 172771 9.50 9/15/2016 19 3 Pool 185417 9.50 11/15/2016 3 18 Pool 186335 9.50 11/15/2016 20 4 Pool 187909 9.50 11/15/2016 4 51 Pool 189802 9.50 4/15/2017 56 23 Pool 214646 9.50 5/15/2017 25 9 Pool 225137 9.50 8/15/2017 10 10 Pool 037733 10.00 11/15/2009 10 3 Pool 037889 10.00 11/15/2009 3 13 Pool 037888 10.00 11/15/2009 14 11 Pool 036897 10.00 12/15/2009 12 4 Pool 059731 11.50 3/15/2013 4 Government National Mortgage Assn. II, 464 Pool 002934 7.50 6/20/2030 482 109 Pool 003070 7.50 4/20/2031 114 404 Pool 002958 8.00 8/20/2030 429 ---------- 4,171 ---------- OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.3%) 1,733 Perforadora Centrale S.A. de C.V. "A", Guaranteed Bond, Series A, Title XI 5.24 12/15/2018 1,706 3,571 Rowan Companies, Inc., Guaranteed Bond, Title XI 2.80 10/20/2013 3,237 ---------- 4,943 ---------- Total U.S. government agency issues (cost: $13,546) 13,097 ---------- U.S. TREASURY SECURITIES (0.2%) BONDS (0.2%) 4,000 4.50%, 2/15/2036(g)(cost: $3,542) 3,575 ----------
51 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- MUNICIPAL BONDS (0.4%) CASINOS & GAMING (0.1%) $2,000 Mashantucket (Western) Pequot Tribe, CT, RB(b) 5.91% 9/01/2021 $ 1,864 ---------- COMMUNITY SERVICE (0.1%) 650 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 642 ---------- HOSPITAL (0.1%) 1,965 Rhode Island State Health & Education RB, Series C (LOC - Citizens Bank of Rhode Island) 3.60 9/15/2033(m) 1,911 ---------- MULTI-UTILITIES (0.1%) 2,074 California Maritime Infrastructure Auth. RB, Series 1999 6.63 11/01/2009 2,093 ---------- Total municipal bonds (cost: $6,751) 6,510 ---------- Total bonds (cost: $445,218) 431,370 ---------- MONEY MARKET INSTRUMENTS (1.4%) VARIABLE-RATE DEMAND NOTES (0.3%)(o) ------------------------------------ HEALTH CARE FACILITIES (0.2%) 3,940 Louisiana Public Facilities Auth., RB, Series 2002D (LOC - Hibernia National Bank) 5.75 7/01/2028 3,940 ---------- ELECTRIC UTILITIES (0.1%) 2,000 Sempra Energy ESOP, Series 1999A (NBGA)(b) 5.71 11/01/2014 2,000 ---------- 5,940 ---------- COMMERCIAL PAPER (0.2%) ----------------------- ASSET-BACKED FINANCING 2,699 Lockhart Funding LLC(a,b) 5.02 6/02/2006 2,699 ---------- DISCOUNT NOTE (0.2%) -------------------- 3,331 Federal Home Loan Bank(j,+,k) 4.89 6/01/2006 3,331 ----------
52 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
MARKET NUMBER COUPON VALUE OF SHARES SECURITY RATE MATURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- MONEY MARKET FUNDS (0.7%) ------------------------- 12,512,340 SSgA Prime Money Market Fund 4.84%(h) - $ 12,512 ---------- Total money market instruments (cost: $24,482) 24,482 ---------- PRINCIPAL AMOUNT (000) - ---------- SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED (11.0%) CORPORATE OBLIGATIONS (3.4%) ---------------------------- OTHER DIVERSIFIED FINANCIAL SERVICES $ 20,000 Canadian Imperial Bank of Commerce, Yankee CD (Canada) 5.23 1/30/2007 20,018 15,000 Five Finance Inc.(b) 5.12(c) 12/01/2006 15,004 22,481 Tango Finance Corp., MTN(b) 5.13(c) 10/25/2006 22,490 ---------- 57,512 ---------- COMMERCIAL PAPER (2.7%) ----------------------- ASSET-BACKED FINANCING 11,053 Mont Blanc Capital Corp.(a,b,k) 5.10 6/07/2006 11,044 25,000 Park Granada LLC(a,b,k) 5.15 6/01/2006 25,000 11,000 Park Sienna LLC(a,k) 5.15 6/01/2006 11,000 ---------- 47,044 ---------- MONEY MARKET FUNDS (0.0%)(q) ---------------------------- 702,905 AIM Short-Term Investment Co. Liquid Assets Portfolio 4.92(h) - 703 49,777 Merrill Lynch Premier Institutional Fund 4.81(h) - 50 ---------- 753 ---------- REPURCHASE AGREEMENTS (4.9%)(i) ------------------------------- 13,000 Credit Suisse First Boston LLC, 5.00%, acquired on 5/31/2006 and due 6/01/2006 at $13,000 (collateralized by $13,915 of Freddie Mac Discount Notes(j,+), 5.25%(k), due 4/18/2007; market value $13,264) 13,000
53 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006
PRINCIPAL MARKET AMOUNT VALUE (000) SECURITY (000) - ----------------------------------------------------------------------------------------------------------------------------- $ 21,000 Deutsche Bank Securities, Inc., 5.02%, acquired on 5/31/2006 and due 6/01/2006 at $21,000 (collateralized by $8,112 of Federal Home Loan Discount Notes(j,+), 5.03%(k), due 7/21/2006; $13,470 of Federal Home Loan Bank Bonds(j,+), 3.10%, due 11/08/2006; combined market value $21,425) $ 21,000 20,000 Merrill Lynch Government Securities, Inc., 5.01%, acquired on 5/31/2006 and due 6/01/2006 at $20,000 (collateralized by $20,425 of U.S. Treasury Notes, 4.88%, due 4/30/2011; market value $20,401) 20,000 30,000 Morgan Stanley & Co., Inc., 5.02%, acquired on 5/31/2006 and due 6/01/2006 at $30,000 (collateralized by $31,490 of Federal Home Loan Bank Bonds(j,+), 5.70% - 6.25%, due 6/15/2021 - 7/03/2025; combined market value $31,061) 30,000 ---------- 84,000 ---------- Total short-term investments purchased with cash collateral from securities loaned (cost: $189,301) 189,309 ---------- TOTAL INVESTMENTS (COST: $1,760,460) $1,887,381 ==========
54 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA CORNERSTONE STRATEGY FUND 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%. ADR - American depositary receipts are receipts issued by a U.S. bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. GDR - Global depositary receipts are receipts issued by a U.S. or foreign bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. ISHARES - exchange-traded funds, managed by Barclays Global Fund Advisors, that represent a portfolio of stocks designed to closely track a specific market index. iShares funds are traded on securities exchanges. SPDR - Standard & Poor's depositary receipt, or "spider," is an exchange-traded fund based on either the S&P 500 Index or the S&P MidCap 400 Index, and is traded on the American Stock Exchange (AMEX). PORTFOLIO DESCRIPTION ABBREVIATIONS CPI Consumer Price Index EETC Enhanced Equipment Trust Certificate ESOP Employee Stock Ownership Plan MTN Medium-Term Note RB Revenue Bond REIT Real Estate Investment Trust 55 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 CREDIT ENHANCEMENTS - add the financial strength of the provider of the enhancement to support the issuer's ability to repay the principal and interest payments when due. A high-quality bank, insurance company or other corporation, or a collateral trust may provide the enhancement. (LOC) Principal and interest payments are guaranteed by a bank letter of credit. (NBGA) Principal and interest payments are guaranteed by a non-bank guarantee agreement from Sempra Energy. (INS) Scheduled principal and interest payments are insured by AMBAC Assurance Corp. The insurance does not guarantee the market value of the security. SPECIFIC NOTES - -------------------------------------------------------------------------------- (a) Commercial paper issued in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Unless this commercial paper is subsequently registered, a resale of this commercial paper in the United States must be effected in a transaction exempt from registration under the Securities Act of 1933. Section 4(2) commercial paper is normally resold to other investors through or with the assistance of the issuer or an investment dealer who makes a market in this security, and as such has been deemed liquid by USAA Investment Management Company (the Manager) under liquidity guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. (b) Restricted security that is not registered under the Securities Act of 1933. A resale of this security in the United States may occur in an exempt transaction to a qualified institutional buyer as defined by Rule 144A, and as such has been deemed liquid by the Manager under liquidity guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. 56 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (c) Variable-rate or floating-rate security - interest rate is adjusted periodically. The interest rate disclosed represents the current rate at May 31, 2006. (d) Interest-only commercial mortgage-backed securities (IO CMBSs) - represent the right to receive only the interest payments on an underlying pool of commercial mortgage loans. The interest rate disclosed is the purchase yield, which reflects an anticipated yield based upon interest rates at the time of purchase and the estimated timing and amount of future cash flows. The principal amount represents the notional amount of the underlying pool on which current interest is calculated. IO CMBSs are backed by loans that have various forms of prepayment protection, which include lock-out provisions, yield maintenance provisions, and prepayment penalties. This serves to moderate their prepayment risk. IO CMBSs are subject to recessionary default-related prepayments that may have a negative impact on yield. (e) Security has a mandatory call or put, which shortens its effective maturity date. (f) Eurodollar and Yankee obligations are dollar-denominated instruments that are issued outside the U.S. capital markets by foreign corporations and financial institutions and by foreign branches of U.S. corporations and financial institutions (Eurodollar obligations) as well as dollar-denominated instruments that are issued by foreign issuers in the U.S. capital markets (Yankee obligations). (g) The security or a portion thereof was out on loan as of May 31, 2006. (h) Rate represents the money market fund annualized seven-day yield at May 31, 2006. (i) Collateral on repurchase agreements is received by the Fund upon entering into the repurchase agreement. The collateral is 57 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 marked-to-market daily to ensure its market value is equal to or in excess of the repurchase agreement price plus accrued interest. (j) U.S. government agency issues - mortgage-backed securities issued by Government National Mortgage Association (GNMA) and certain other U.S. government agencies are supported by the full faith and credit of the U.S. government. Securities issued by government- sponsored enterprises (GSEs) indicated with "+" are supported only by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. government. (k) Zero-coupon security. Rate represents the effective yield at date of purchase. (l) Callable security expected to be called prior to maturity due to a scheduled change from a fixed to a floating interest rate, which is likely to be uneconomical to the issuer. (m) Put bond - provides the right to sell the bond at face value at specific tender dates prior to final maturity. The put feature may shorten the effective maturity of the security. (n) Security deemed illiquid by the Manager, under liquidity guidelines approved by the Board of Trustees. The aggregate market value of these securities at May 31, 2006, was $511,000, which represented 0.03% of the Fund's net assets. (o) Variable-rate demand notes (VRDNs) - provide the right to sell the security at face value on either that day or within the rate-reset period. The interest rate is adjusted at a stipulated daily, weekly, monthly, quarterly, or other specified time interval to a rate that reflects current market conditions. VRDNs will normally trade as if the maturity is the earlier put date, even though stated maturity is longer. 58 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (p) Security was fair valued at May 31, 2006, by the Manager in accordance with valuation procedures approved by the Board of Trustees. (q) Represents less than 0.1% of net assets. (r) Stepped coupon security that is initially issued in zero-coupon form and converts to coupon form at the specified date and rate shown in the security's description. The rate presented in the coupon rate column represents the effective yield at the date of purchase. * Non-income-producing security for the year ended May 31, 2006. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA CORNERSTONE STRATEGY FUND May 31, 2006 ASSETS Investments in securities, at market value (including securities on loan of $182,039) (identified cost of $1,760,460) $1,887,381 Cash denominated in foreign currencies (identified cost of $1,188) 1,199 Receivables: Capital shares sold 675 Dividends and interest 9,459 Securities sold 10,553 Other 232 ---------- Total assets 1,909,499 ---------- LIABILITIES Payables: Upon return of securities loaned 189,324 Securities purchased 4,982 Capital shares redeemed 545 Accrued management fees 1,162 Accrued transfer agent's fees 13 Bank overdraft 1,306 Other accrued expenses and payables 34 Unrealized depreciation on foreign currency contracts held, at value 10 ---------- Total liabilities 197,376 ---------- Net assets applicable to capital shares outstanding $1,712,123 ========== NET ASSETS CONSIST OF: Paid-in capital $1,478,122 Accumulated undistributed net investment income 21,206 Accumulated net realized gain on investments 85,838 Net unrealized appreciation of investments 126,921 Net unrealized appreciaton on foreign currency translations 36 ---------- Net assets applicable to capital shares outstanding $1,712,123 ========== Capital shares outstanding, unlimited number of shares authorized, no par value 64,602 ========== Net asset value, redemption price, and offering price per share $ 26.50 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 60 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA CORNERSTONE STRATEGY FUND YEAR ENDED MAY 31, 2006 INVESTMENT INCOME Dividends (net of foreign taxes withheld of $1,541) $ 22,603 Interest 28,657 Securities lending (net) 955 -------- Total income 52,215 -------- EXPENSES Management fees 11,903 Administration and servicing fees 2,463 Transfer agent's fees 3,402 Custody and accounting fees 718 Postage 432 Shareholder reporting fees 153 Trustees' fees 10 Registration fees 61 Professional fees 91 Other 40 -------- Total expenses 19,273 Expenses paid indirectly (148) -------- Net expenses 19,125 -------- NET INVESTMENT INCOME 33,090 -------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on: Investments: Unaffiliated transactions 181,561 Affiliated transactions (91) Foreign currency transactions (181) Change in net unrealized appreciation/depreciation of: Investments (80,363) Foreign currency translations 78 -------- Net realized and unrealized gain 101,004 -------- Increase in net assets resulting from operations $134,094 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 61 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA CORNERSTONE STRATEGY FUND YEARS ENDED MAY 31,
2006 2005 --------------------------- FROM OPERATIONS Net investment income $ 33,090 $ 16,556 Net realized gain on investments 181,470 70,129 Net realized loss on foreign currency transactions (181) (248) Change in net unrealized appreciation/depreciation of: Investments (80,363) 41,840 Foreign currency translations 78 (70) --------------------------- Increase in net assets resulting from operations 134,094 128,207 --------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (14,156) (24,372) Net realized gains (119,993) (66,035) --------------------------- Distributions to shareholders (134,149) (90,407) --------------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 237,362 213,808 Shares issued for dividends reinvested 131,463 88,378 Cost of shares redeemed (200,027) (146,650) --------------------------- Increase in net assets from capital share transactions 168,798 155,536 --------------------------- Net increase in net assets 168,743 193,336 NET ASSETS Beginning of period 1,543,380 1,350,044 --------------------------- End of period $1,712,123 $1,543,380 =========================== Accumulated undistributed (overdistributed) net investment income: End of period $ 21,206 $ (157) =========================== CHANGE IN SHARES OUTSTANDING Shares sold 8,801 8,114 Shares issued for dividends reinvested 5,036 3,311 Shares redeemed (7,413) (5,575) --------------------------- Increase in shares outstanding 6,424 5,850 ===========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 62 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA CORNERSTONE STRATEGY FUND 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 Cornerstone Strategy Fund (the Fund), which is classified as diversified under the 1940 Act. The Fund's investment objective is to achieve a positive, inflation- adjusted rate of return and a reasonably stable value of Fund shares, thereby preserving the purchasing power of shareholders' capital. A. SECURITY VALUATION - The value of each security is determined (as of the close of trading on the New York Stock Exchange (NYSE) on each business day the exchange is open) as set forth below: 1. Equity securities, including exchange-traded funds (ETFs), except as otherwise noted, traded primarily on a domestic securities exchange or the Nasdaq over-the-counter markets are valued at the last sales price or official closing price on the exchange or primary market on which they trade. Equity securities traded primarily on foreign securities exchanges or markets are valued at the last quoted sales price, or the most recently determined official closing price calculated according to local market convention, available at the time the Fund is valued. If no last sale or official closing price is reported or available, the average of the bid and asked prices is generally used. 2. Equity securities trading in various foreign markets may take place on days when the NYSE is closed. Further, when the NYSE is open, the foreign markets may be closed. Therefore, the calculation of the Fund's net asset value (NAV) may not take place at the same time the prices of certain foreign securities held by the Fund are determined. In most cases, 63 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 events affecting the values of foreign securities that occur between the time of their last quoted sales or official closing prices and the close of normal trading on the NYSE on a day the Fund's NAV is calculated will not be reflected in the value of the Fund's foreign securities. However, USAA Investment Management Company (the Manager), an affiliate of the Fund, and the Fund's subadvisers, if applicable, will monitor for events that would materially affect the value of the Fund's foreign securities and, if necessary, the Manager will value the foreign securities in good faith, considering such available information that the Manager deems relevant, under valuation procedures approved by the Trust's Board of Trustees. In addition, the Fund may use information from an external vendor or other sources to adjust the foreign market closing prices of foreign equity securities to reflect what the Fund believes to be the fair value of the securities as of the close of the NYSE. Fair valuation of affected foreign equity securities may occur frequently based on an assessment that events that occur on a fairly regular basis (such as U.S. market movements) are significant. 3. Investments in open-end investment companies, other than ETFs, are valued at their NAV at the end of each business day. 4. Debt securities purchased with original maturities of 60 days or less are valued at amortized cost, which approximates market value. 5. Repurchase agreements are valued at cost, which approximates market value. 6. Other debt securities are valued each business day by a pricing service (the Service) approved by the Trust's Board of Trustees. The Service uses the mean between quoted bid and asked prices or the last sales price to price securities when, in the Service's judgment, these prices are readily available and are representative of the securities' market values. For many 64 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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. 7. Securities for which market quotations are not readily available or are considered unreliable, or whose values have been materially affected by events occurring after the close of their primary markets but before the pricing of the Fund, are valued in good faith at fair value, using methods determined by the Manager in consultation with the Fund's subadvisers, if applicable, 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 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. 65 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, certain dividends from foreign securities are recorded upon notification. Interest income is recorded on the accrual basis. Discounts and premiums are amortized over the life of the respective securities, using the effective yield method for long-term securities and the straight-line method for short-term securities. D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements with commercial banks or recognized security dealers. These agreements are collateralized by obligations issued or guaranteed as to both principal and interest by the U.S. government, its agencies, or its instrumentalities. Government- sponsored enterprises (GSEs), such as 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. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the securities of foreign issuers and may be traded in foreign currency. Since the Fund's accounting records are maintained in U.S. dollars, foreign currency amounts are translated into U.S. dollars on the following basis: 66 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 1. Purchases and sales of securities, income, and expenses at the exchange rate obtained from an independent pricing service on the respective dates of such transactions. 2. Market value of securities, other assets, and liabilities at the exchange rate obtained from an independent pricing service on a daily basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Separately, net realized foreign currency gains/losses may arise from sales of foreign currency, currency gains/losses realized between the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. At the end of the Fund's fiscal year, net realized foreign currency gains/losses are reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statements of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. F. 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 67 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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, there were no outstanding delayed-delivery commitments or when-issued securities. G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that the Fund pays may be recaptured as a credit that is tracked and used by the custodian to directly reduce expenses paid by the Fund. In addition, through arrangements with the Fund's custodian and other banks utilized by the Fund for cash 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, brokerage commission recapture credits and custodian and other bank credits reduced the Fund's expenses by $121,000 and $27,000, respectively, resulting in a total reduction in Fund expenses of $148,000. H. 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. I. USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. 68 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (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 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 $3,000, which represents 5.0% 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. 69 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 During the current fiscal year, permanent differences between book-basis and tax-basis accounting resulted in reclassifications to the statement of assets and liabilities to increase paid-in capital by $7,596,000, increase accumulated undistributed net investment income by $2,429,000, and decrease accumulated net realized gain on investments by $10,025,000. This includes differences in the accounting for foreign currency gains and losses, security paydowns, and passive foreign investment corporation gains and losses, and the utilization of earnings and profits distributed to shareholders on redemption of shares as part of the dividends-paid deduction for federal income tax purposes. This reclassification has no effect on net assets. The tax character of distributions paid during the years ended May 31, 2006, and 2005, was as follows: 2006 2005 --------------------------- Ordinary income* $ 16,721,000 $38,916,000 Long-term realized capital gains 117,428,000 51,491,000 *Includes distribution of short-term realized capital gains, if any, which are taxable as ordinary income. As of May 31, 2006, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 34,552,000 Undistributed long-term capital gains 75,982,000 Unrealized appreciation of investments 123,421,000 Unrealized appreciation on foreign currency translations 46,000 The difference between book-basis and tax-basis unrealized appreciation of investments is attributable to the tax deferral of losses on wash sales. The difference between book-basis and tax-basis appreciation on foreign currency translations is due to the tax deferral of gains on foreign currency contracts. Distributions of net investment income and realized gains from security transactions not offset by capital losses are made annually in the 70 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. (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 $2,445,413,000 and $2,382,783,000, respectively. As of May 31, 2006, the cost of securities, including short-term securities, for federal income tax purposes, was $1,763,960,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2006, for federal income tax purposes, were $166,024,000 and $42,603,000, respectively, resulting in net unrealized appreciation of $123,421,000. (5) FORWARD FOREIGN CURRENCY CONTRACTS - -------------------------------------------------------------------------------- The Fund may enter into forward currency contracts to hedge against foreign currency exchange risks on the non-U.S. dollar denominated securities held in the Fund's portfolio. A forward currency contract is an agreement to purchase or sell a specified currency at a specified future date or over a specified time period at a price set at the trade date of the contract. Forward currency contracts are valued on a daily basis using foreign currency exchange rates obtained from an independent pricing service. Risks of entering into currency contracts include the potential inability of the counterparty to meet the terms of the contract and the Fund's giving up the opportunity for potential profit. At May 31, 2006, the Fund had no open forward foreign currency contracts. 71 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (6) 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 and 105% of the fair value of international 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. For the year ended May 31, 2006, the Fund received securities-lending income of $955,000, which is net of the 20% income retained by MetWest. As of May 31, 2006, the Fund loaned securities having a fair market value of approximately $182,039,000, which excluded $751,000 of securities on loan that were sold prior to May 31, 2006. The Fund received cash collateral of $189,324,000 for the loans. Of this amount, $189,301,000 was invested in short-term investments, as noted in the Fund's portfolio of investments, and $23,000 remained in cash. 72 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (7) TRANSACTIONS WITH MANAGER - -------------------------------------------------------------------------------- A. MANAGEMENT FEES - The Manager provides investment management services to the Fund pursuant to an Investment Advisory Agreement. Under this agreement, the Manager is responsible for managing the business and affairs of the Fund and for directly managing the day-to-day investment of a portion of the Fund's assets, subject to the authority of and supervision by the Trust's Board of Trustees. The Manager is also authorized to select (with approval of the Trust's Board of Trustees) one or more subadvisers to manage the day-to-day investment of a portion of the Fund's assets. The Manager monitors each subadviser's performance through quantitative and qualitative analysis, and periodically recommends to the Trust's Board of Trustees as to whether each subadviser's agreement should be renewed, terminated, or modified. The Manager also is responsible for allocating assets to the subadvisers. The allocation for each subadviser can range from 0% to 100% of the Fund's assets, and the Manager can change the allocations without shareholder approval. The investment management fee for the Fund is composed of a base fee and a performance adjustment that increases or decreases the base fee depending upon the performance of the Fund relative to the performance of the Lipper Global Flexible Funds Index, which tracks the total return performance of the 10 largest funds in the Lipper Global Flexible Portfolio Funds category. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 0.75% of the Fund's average net assets 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. 73 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 The annual performance adjustment rate is multiplied by the average net assets of the Fund over the entire performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the month and the denominator of which is 365 (366 in leap years). The resulting amount is then added to (in the case of overperformance) or subtracted from (in the case of underperformance) the base fee, as referenced in the following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS - ------------------------------------------------------------------------- +/- 1.00% to 4.00% +/- 0.04% +/- 4.01% to 7.00% +/- 0.05% +/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and its relevant index, rounded to the nearest 0.01%. Under the performance fee arrangement, the Fund will pay a positive performance fee adjustment for a performance period whenever the Fund outperforms the Lipper Global Flexible 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 $11,903,000, which is net of a performance adjustment of $(412,000) that decreased the base management fee of 0.75% by 0.03%. B. SUBADVISORY ARRANGEMENTS - The Manager has entered into investment subadvisory agreements with Wellington Management Company, LLP (Wellington Management), MFS Investment Management (MFSIM), and effective December 1, 2005, with Batterymarch Financial Management, Inc. (Batterymarch), under which Wellington Management directs the investment and reinvestment of a portion of the Fund's assets 74 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 invested in U.S. stocks (as allocated from time to time by the Manager), MFSIM directs the investment and reinvestment of a portion of the Fund's assets invested in international stocks (as allocated from time to time by the Manager), and Batterymarch directs the investment and reinvestment of a portion of the Fund's assets invested in U.S. and international stocks (as allocated from time to time by the Manager). Prior to March 1, 2006, Wellington Management also directed the investment and reinvestment of the portion of the Fund's assets invested in real estate securities. Effective March 1, 2006, the Manager (not the Fund) pays Wellington Management a subadvisory fee in the annual amount of 0.20% of the portion of the Fund's average net assets that Wellington Management manages. Wellington Management has agreed to waive all fees in excess of 0.18% of the portion of the Fund's average net assets that Wellington Management manages through June 30, 2006. Wellington Management may terminate this waiver if the Manager allocates less than 100% of certain USAA funds' assets investable in U.S. stocks to Wellington Management. The Manager has allocated less than 100% of these funds' assets investable in U.S. stocks to Wellington Management, so Wellington Management may terminate this waiver at any time. Prior to March 1, 2006, the Manager (not the Fund) paid Wellington Management a subadvisory fee in the annual amount of 0.40% of the first $50 million of the portion of the Fund's average net assets that Wellington Management managed and invested in real estate securities, plus 0.35% of the portion of the Fund's average net assets over $50 million that Wellington Management managed and invested in real estate securities, plus 0.20% of the portion of the Fund's average net assets that Wellington Management managed and invested in securities other than real estate securities. For the year ended May 31, 2006, the Manager incurred subadvisory fees, paid or payable to Wellington Management, of $1,092,000. 75 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 Effective January 3, 2006, the Manager (not the Fund) pays MFSIM a subadvisory fee in the annual amount of 0.29% of the portion of the Fund's average net assets that MFSIM manages. Prior to January 3, 2006, the Manager (not the Fund) paid MFSIM a subadvisory fee based on the aggregate average net assets that MFSIM managed in the USAA World Growth Fund, the USAA International Fund, the USAA Life Investment Trust World Growth Fund, and the USAA Cornerstone Strategy Fund combined (MFSIM Funds), in the annual amount of 0.335% of the first $350 million of assets, plus 0.225% of assets over $350 million but not over $1 billion, plus 0.200% of assets over $1 billion. For the year ended May 31, 2006, the Manager incurred subadvisory fees for the Fund, paid or payable to MFSIM, of $830,000. Effective March 1, 2006, the Manager (not the Fund) pays Batterymarch a subadvisory fee based on the aggregate net assets that Batterymarch manages in the USAA Cornerstone Strategy Fund and the USAA Capital Growth Fund combined in an annual amount of 0.25% on the first $250 million of assets; 0.21% on assets over $250 million and up to $500 million; and 0.17% on assets over $500 million. For the period of December 1, 2005, through February 28, 2006, the Manager (not the Fund) paid Batterymarch a subadvisory fee based on the Fund's net assets that Batterymarch managed, in an annual amount of 0.25% on the first $250 million of assets, 0.21% on assets over $250 million and up to $500 million, and 0.17% on assets over $500 million. For the year ended May 31, 2006, the Manager incurred subadvisory fees, paid or payable to Batterymarch, of $303,000. C. 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 76 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 average net assets. For the year ended May 31, 2006, the Fund incurred administration and servicing fees, paid or payable to the Manager, of $2,463,000. 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 $52,000 for these legal and tax services. These expenses are included in the professional fees expenses on the Fund's statement of operations. D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the Fund's average annual net assets, before reductions of any expenses paid indirectly, and will reimburse the Fund for all expenses in excess of that amount. This agreement may be modified or terminated at any time. The Fund had no reimbursable expenses as of May 31, 2006. E. 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 $23 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 $3,402,000. F. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and distribution of the Fund's shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. 77 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (8) TRANSACTIONS WITH AFFILIATES - -------------------------------------------------------------------------------- Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated Trustees or Fund officers received any compensation from the Fund. (9) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS - -------------------------------------------------------------------------------- During the year ended May 31, 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 funds at the then-current market price with no brokerage commissions incurred:
NET REALIZED COST TO GAIN (LOSS) SELLER PURCHASER PURCHASER TO SELLER --------------------------------------------------------------------------------- USAA Cornerstone USAA Balanced $ 866,000 $ (91,000) Strategy Fund Strategy Fund USAA Precious Metals and USAA Cornerstone Minerals Fund Strategy Fund 816,000 573,000 USAA High-Yield USAA Cornerstone Opportunities Fund Strategy Fund 1,562,000 1,000
78 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 (10) 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 $ 26.53 $ 25.80 $ 22.22 $ 23.57 $ 25.26 --------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .56 .30(a) .22 .27 .39(d) Net realized and unrealized gain (loss) 1.68 2.13(a) 3.57 (.93) (1.16)(d) --------------------------------------------------------------------- Total from investment operations 2.24 2.43(a) 3.79 (.66) (.77) --------------------------------------------------------------------- Less distributions: From net investment income (.22) (.45) (.21) (.26) (.57) From realized capital gains (2.05) (1.25) - (.43) (.35) --------------------------------------------------------------------- Total distributions (2.27) (1.70) (.21) (.69) (.92) --------------------------------------------------------------------- Net asset value at end of period $ 26.50 $ 26.53 $ 25.80 $ 22.22 $ 23.57 ===================================================================== Total return (%)* 8.67 9.42 17.08 (2.59) (2.96) Net assets at end of period (000) $1,712,123 $1,543,380 $1,350,044 $1,132,544 $1,197,131 Ratio of expenses to average net assets (%)**(b,c) 1.17 1.18 1.19 1.19 1.16 Ratio of expenses to average net assets, excluding reimbursements (%)**(b) - - 1.20 1.27 1.17 Ratio of net investment income to average net assets (%)** 2.01 1.15 .81 1.34 1.69(d) Portfolio turnover (%) 150.51 64.88 90.94 131.07 30.52 * Assumes reinvestment of all net investment income and realized capital gain distributions during the period. ** For the year ended May 31, 2006, average net assets were $1,643,437,000. (a) Calculated using average shares. (b) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses paid indirectly decreased the expense ratios as follows: (.01%) (.02%) (.02%) (.01%) (.00%)(+) (+) Represents less than 0.01% of average net assets. (c) Effective April 26, 2002, the Manager voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the Fund's average net assets. (d) 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 $ .39 Net realized and unrealized loss $(1.16) Ratio of net investment income to average net assets 1.70%
79 E X P E N S E ==============------------------------------------------------------------------ EXAMPLE (unaudited) USAA CORNERSTONE STRATEGY FUND 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 80 E X P E N S E ==============------------------------------------------------------------------ EXAMPLE (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND 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 $1,039.60 $5.95 Hypothetical (5% return before expenses) 1,000.00 1,019.10 5.89
*Expenses are equal to the Fund's annualized expense ratio of 1.17%, 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 3.96% for the six-month period of December 1, 2005, through May 31, 2006. 81 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 SEPTEMBER BOARD MEETING - -------------------------------------------------------------------------------- As disclosed in the Information Statement to shareholders dated December 1, 2005, the Board of Trustees, including the Trustees who are not "interested persons" of the Trust (the "Independent Trustees"), at a meeting held on September 14, 2005, approved the adoption of an Investment Subadvisory Agreement with Batterymarch Financial Management, Inc. (Batterymarch). In advance of the meeting, the Board received and considered a variety of information relating to the Investment Subadvisory Agreement and Batterymarch, 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) materials about Batterymarch's new "best ideas" global investment strategy; (ii) the qualifications of the individuals at Batterymarch responsible for these investment activities; (iii) the fees to be paid to Batterymarch; and (iv) the complementary nature of the investment strategies of Batterymarch with the existing subadvisers Wellington Management Company, LLP and MFS Investment Management. Prior to voting, the Independent Trustees reviewed the proposed Investment Subadvisory Agreement with management and with experienced independent counsel and received materials from such counsel discussing the legal standards for their consideration of the proposed Investment Subadvisory Agreement. The Independent Trustees also reviewed the proposed Investment Subadvisory Agreement in private sessions with their counsel at which no representatives of management were present. In approving the Fund's Investment Subadvisory Agreement with Batterymarch, the Board considered various factors, among them: (i) the nature, extent, and quality of services to be provided to the Fund by Batterymarch, including the personnel that will be providing services; (ii) Batterymarch's compensation and any other benefits that will be derived from the subadvisory relationship by Batterymarch; (iii) comparisons, to the extent available, of subadvisory fees and 82 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 performance to comparable investment companies; and (iv) the terms of the Investment Subadvisory Agreement. The Board's analysis of these factors is set forth below. After full consideration of a variety of factors, the Board, including the Independent Trustees, voted to approve the Investment Subadvisory Agreement with Batterymarch. In approving the Investment Subadvisory Agreement, the Board did not identify any single factor as controlling, and each Independent Board Member 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 PROVIDED; INVESTMENT PERSONNEL. The Board considered information provided to them regarding the services to be provided by Batterymarch. The Board considered Batterymarch's level of knowledge and investment style. The Board reviewed the experience and credentials of the investment personnel who will be responsible for managing the investment of portfolio securities with respect to the Fund and Batterymarch's level of staffing. The Board noted that the materials provided to them indicated that the method of compensating portfolio managers is reasonable and includes appropriate mechanisms to prevent a manager with underperformance from taking undue risks. The Board also noted Batterymarch's brokerage practices. The Board also considered Batterymarch's regulatory and compliance history. The Board noted that the Manager's monitoring processes of Batterymarch will include: (i) regular telephonic meetings to discuss, among other matters, investment strategies and to review portfolio performance; (ii) monthly portfolio compliance checklists and quarterly compliance certifications to the Board; and (iii) due diligence visits to Batterymarch. SUBADVISER COMPENSATION. The Board also took into consideration the financial condition of Batterymarch. In considering the cost of services to be provided by Batterymarch and the profitability to Batterymarch 83 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 of its relationship with the Fund, the Board noted that the fees under the Investment Subadvisory Agreement will be paid by the Manager. The Board also relied on the ability of the Manager to negotiate the Investment Subadvisory Agreement and the fees thereunder at arm's length. The Board also considered information relating to the cost of services to be provided by Batterymarch, Batterymarch's anticipated profitability with respect to the Fund, and the potential economies of scale in Batterymarch's management of the Fund, to the extent available. However, this information was less significant to the Board's consideration of the Investment Subadvisory Agreement than the other factors considered. SUBADVISORY FEES AND FUND PERFORMANCE. The Board noted that the "best ideas" global investment strategy is a new product offering from Batterymarch; and as a result, the Board received no information about the fees that Batterymarch charges to comparable clients. The Board considered that the Fund pays a management fee to the Manager and that, in turn, the Manager will pay a subadvisory fee to Batterymarch. The Board noted the Manager's expertise and resources in monitoring the performance, investment style, and risk-adjusted performance of Batterymarch. The Board also noted Batterymarch's long-term performance record for other accounts. CONCLUSION. The Board reached the following conclusions regarding the Investment Subadvisory Agreement, among others: (i) Batterymarch is qualified to manage a portion of the Fund's assets in accordance with its investment objectives and policies; (ii) Batterymarch maintains an appropriate compliance program; (iii) Batterymarch's performance in managing other accounts is reasonable; and (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 Batterymarch. Based on its conclusions, the Board determined that approval of the Investment Subadvisory Agreement with Batterymarch would be in the interests of the Fund and its shareholders. 84 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 APRIL BOARD MEETING - -------------------------------------------------------------------------------- At a meeting of the Board of Trustees held on April 19, 2006, the Board, including the Independent Trustees, approved the continuance of the Investment Advisory Agreement between the Trust and the Manager with respect to the Fund and the Subadvisory Agreements 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 Subadvisory Agreements and the Manager and the Subadvisers, 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 and Subadvisers' operations and personnel. Prior to voting, the Independent Trustees reviewed the proposed continuance of the Investment Advisory Agreement and the Subadvisory Agreements 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 and the Subadvisory Agreements with respect to the Fund. The Independent Trustees also reviewed the proposed continuation of the Investment Advisory Agreement and the Subadvisory Agreements 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 85 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 things, information concerning the Fund's performance and related services provided by the Manager and by each Subadviser. At the meeting at which the renewal of the Investment Advisory Agreement and Subadvisory Agreements is considered, particular focus is given to information concerning Fund performance, comparability of fees and total expenses, and profitability. However, the Board noted that the evaluation process with respect to the Manager and the Subadvisers is an ongoing one. In this regard, the Board's and its committees' consideration of the Investment Advisory Agreement and Subadvisory Agreements included certain information previously received at such meetings. INVESTMENT ADVISORY AGREEMENT - -------------------------------------------------------------------------------- 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 86 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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 its senior and investment personnel, as well as current staffing levels. The Board discussed the Manager's effectiveness in monitoring the performance of the Subadvisers and its timeliness in responding to performance issues. The allocation of the Fund's brokerage, including the Manager's process for monitoring "best execution" and the utilization of "soft dollars," were 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 87 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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 objective and classification, 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 the same investment classification/objective as the Fund regardless of 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 fee adjustment as well as any fee waivers or reimbursements - was above the median of its expense group and below the median of its expense universe. The data indicated that the Fund's total expenses, after reimbursements, were lower than 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 any performance adjustment to such fee. The Trustees also took into account the Manager's current voluntary undertakings to maintain expense limitations for the Fund and that the subadvisory fees under the Subadvisory Agreements are paid by the Manager. 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 88 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 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 was lower than the average of its performance universe and its Lipper index for the one- and three-year periods ended December 31, 2005, and was lower than the average of its performance universe and exceeded the average of its Lipper index for the five-year period ended December 31, 2005. The Board also noted that the Fund's percentile performance ranking was in the bottom 50% of its performance universe for the one- and three-year periods ending December 31, 2005. The Trustees considered the Manager's discussion of the factors contributing to the Fund's underperformance and its plan to address such performance. 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 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. In considering the profitability data with respect to the Fund, the Trustees noted that the Manager pays the subadvisory fees. 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 89 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 level of profits in exchange for the level of services it provides to the Fund and the entrepreneurial risk that it assumes as Manager. 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 took into account management's discussions of the current advisory fee structure. The Board also noted that the Fund's contractual management fees are 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 considered the fee waivers and expense reimbursement arrangements by the Manager and the fact that the Manager pays the subadvisory fees. The Board also took into account other economies of scale achieved by the Fund with respect to certain fixed expenses as a result of the Fund's asset size. 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 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 being addressed; (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. SUBADVISORY AGREEMENTS - -------------------------------------------------------------------------------- In approving each Subadvisory Agreement with respect to the Fund, the Board considered various factors, among them: (i) the nature, extent, 90 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 and quality of services provided to the Fund by the respective Subadviser, including the personnel providing services; (ii) the Subadviser's compensation and any other benefits derived from the subadvisory relationship; (iii) comparisons of subadvisory fees and performance to comparable investment companies; and (iv) the terms of the Subadvisory Agreement. The Board's analysis of these factors is set forth below. After full consideration of a variety of factors, the Board of Trustees, including the Independent Trustees, voted to approve each Subadvisory Agreement. In approving each Subadvisory 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 PROVIDED; INVESTMENT PERSONNEL. The Trustees considered information provided to them regarding the services provided by the Subadvisers, including information presented periodically throughout the previous year. The Board considered each Subadviser's level of knowledge and investment style. The Board reviewed the experience and credentials of the investment personnel who are responsible for managing the investment of portfolio securities with respect to the Fund and each Subadviser's level of staffing. The Trustees noted that the materials provided to them by each Subadviser indicated that the method of compensating portfolio managers is reasonable and includes appropriate mechanisms to prevent a manager with underperformance from taking undue risks. The Trustees also noted each Subadviser's brokerage practices. The Board also considered each Subadviser's regulatory and compliance history. The Board noted that the Manager's monitoring processes of each Subadviser include: (i) regular telephonic meetings to discuss, among other matters, investment strategies, and to review portfolio performance; (ii) monthly portfolio compliance checklists and quarterly compliance certifications to the Board; and (iii) due diligence visits to the Subadviser. 91 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 SUBADVISER COMPENSATION. The Board also took into consideration the financial condition of each Subadviser. In considering the cost of services to be provided by each Subadviser and the profitability to that Subadviser of its relationship with the Fund, the Trustees noted the undertakings of the Manager to maintain expense limitations for the Fund and also noted that the fees under the Subadvisory Agreement were paid by the Manager. The Trustees also relied on the ability of the Manager to negotiate each Subadvisory Agreement and the fees thereunder at arm's length. The Board also considered information relating to the cost of services to be provided by each Subadviser, each Subadviser's profitability with respect to the Fund, and the potential economies of scale in each Subadviser's management of the Fund, to the extent available. However, for the reasons noted above, this information was less significant to the Board's consideration of the Subadvisory Agreements than the other factors considered. SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the subadvisory fees for the Fund with the fees that each Subadviser charges to comparable clients. The Board considered that the Fund pays a management fee to the Manager and that, in turn, the Manager pays a subadvisory fee to each Subadviser. As noted above, the Board considered the Fund's performance during the one-, three-, and five- year periods ended December 31, 2005, as compared to the Fund's respective peer group and noted that the Board reviews at its regularly scheduled meetings information about the Fund's performance results. The Board also considered the performance of each Subadviser. The Board noted the Manager's expertise and resources in monitoring the performance, investment style, and risk-adjusted performance of each Subadviser. The Board was mindful of the Manager's focus on each Subadviser's performance and the explanations of management regarding the factors that contributed to the recent performance of the Fund. The Board also noted each Subadviser's long-term performance record for similar accounts. 92 A D V I S O R Y ================---------------------------------------------------------------- AGREEMENTS (unaudited) (continued) USAA CORNERSTONE STRATEGY FUND MAY 31, 2006 CONCLUSION. The Board reached the following conclusions regarding each Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage the Fund's assets in accordance with its investment objectives and policies; (ii) each Subadviser maintains an appropriate compliance program; (iii) the performance of the Fund is being addressed; and (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 each Subadviser. Based on the Board's conclusions, the Board of Trustees determined that approval of each Subadvisory Agreement with respect to the Fund would be in the interests of the Fund and its shareholders. 93 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. 94 . . . 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. 95 . . . 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. 96 . . . 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. 97 . . . 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. 98 . . . 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. 99 . . . 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). Mr. Hill also serves as Chief Compliance Officer of USAA Life Investment Trust, a registered investment company offering five individual funds. 100 N O T E S ==========---------------------------------------------------------------------- __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 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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 COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT 12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. 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 23405-0706 (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-----