Summary

Current Investment Program Tactical offers a single managed account program, its bellwhether Institutional Futures Program. The Program trades a globally diversified portfolio of commodities and currencies seeking above average long-term growth unrelated to stocks and bonds. It is managed via the Tactical Trading System described below. Trading Objective The Tactical Trading System (the "System") has been used to trade all of the Advisor's futures funds and managed accounts since inception in 1981, including the currently offered Institutional Futures Program. Its objectives are to achieve above-average growth during any 5 to 15 year holding period with low correlation to global stocks and bonds and to provide clients with a potential inflation hedge. The System trades a widely diversified portfolio of global commodity futures and currency forwards and benefits from long, broad price trends in the markets it trades. The System's trading strategies are all highly robust. Robust methods are those that Tactical expects to remain valid over the years. Highly robust techniques are based on very general, successful trading principles and as such are non-optimized and rarely exactly fit to any specific market situation. This lack of exact market-fit contributes to significant volatility in this investment. Tactical expects robust trading strategies to remain valid and thus increase the System's potential for above-average long-term growth. Portfolio managers and their trading programs are classified as either "systematic" or "discretionary" or a varying combination to the two. Systematic managers trade by following non-emotional sets of trading rules, often based on mathematical models of market behavior. Systematic managers use their judgment and intuition in designing their market models and trading systems. Discretionary managers, on the other hand, apply judgment and intuition in making every trading decision. Tactical's System is so fully systematic that virtually no day to day discretion is used. The System incorporates mathematical market models that integrate key elements of modern portfolio theory, chaos theory, and proprietary money management concepts. It is an exclusively technical system in that its inputs are data intrinsic to the markets: price and liquidity data, current positions, account equities, and previous outputs. It is to be distinguished from a fundamental system which weighs factors extrinsic to the markets such as supply and demand, governmental actions, and market sentiment. The System's outputs are precise buy and sell orders, including quantities to buy and sell, and markets to trade. It is computerized to reduce human error and emotional input. It has an elegantly small number of parameters whose values are identical across all markets. The Advisor believes that futures are a zero-sum game: for every winner there is a loser. Commercial hedgers trade in futures primarily to transfer risk and receive insurance against adverse price moves. Tactical believes that this economic benefit cannot possibly be obtained for free and that hedgers must therefore be net losers in futures over the long run, paying a "risk premium" for the insurance they receive. The Tactical Trading System is based upon capturing hedgers' risk premium. It is designed to trade opposite hedgers as much as possible and attempts to fade them at technically determined price levels. By doing so in a consistent, disciplined manner, the Advisor believes the System obtains a positive mathematical edge in the market place. Hedgers tend to sell when prices are strong and buy when prices are weak. By acting in opposition to this, the System buys strength and sells weakness, actually losing money on the majority of trades. The winning trades, less frequent but larger on average, occur when prices strengthen or weaken well beyond expectations, forming trends. By trading opposite hedgers, the System becomes a trend-follower in practice, but not by fundamental design. In contrast to trading systems that are designed specifically to capture trends, trendfollowing is an entirely natural result of this System designed to capture hedgers' risk premium. Certain aspects of the Tactical Trading System are based on nonlinear mathematical models described in chaos theory. Among other things, these models suggest that markets are fractal and that markets should intermittently exhibit unpredictable trending behavior over multiple time scales. The Tactical Trading System targets extra longterm trends, not uncommonly holding positions (with rolls) for over a year. This frequently requires riding out significant counter-trend price moves during which equity is lost. This contributes to the nearterm volatility in the System. Yet Tactical believes that targeting extra long-term trends is a highly robust trading strategy well worth the resultant volatility. The System trades commodities and currencies throughout the world, mostly on futures exchanges and in the interbank foreign exchange markets. Its portfolio is extremely well diversified and balanced in approximately 50 global markets. Physical commodities such as grain, food & fiber, metal, and petroleum futures make up about half of the portfolio. Currencies and global interest rate futures, the financial commodities, make up the rest. Stock index futures are rarely traded. As much as half or more of the trading may occur in non-U.S. markets. The System places great emphasis on portfolio composition. Markets are selected primarily on the basis of modified covariance analysis. The techniques identify the markets that are as distinctly different from each other as possible. Dr. Druz makes the final decision as to which markets comprise the portfolio and their respective weightings. Selecting diverse markets reduces volatility in the portfolio while increasing stability and robustness of the trading system. Tactical feels that a globally balanced and diversified portfolio with meaningful exposure to both physical and financial commodities is the most robust and most desirable futures portfolio. Money management deals with all aspects of equity management and risk control. It is vital to the System and is integrated from the ground up. The System uses proprietary, advanced money management and risk control strategies. Instead of trying to reduce near-term volatility at the cost of decreased potential long-term gain, the System occasionally employs sizable leverage in its money management techniques in efforts to transform high near-term volatility into increased potential long-term gain. Some examples of the money management strategies used by the System are: Overall portfolio risk exposure is constantly reassessed; stop-loss orders are placed whenever a trade is entered and once placed, never retreat from the market; a sophisticated variation of constant percentage risking is used which results in an initial average risk of less than 1.0% of account equity per trade. Additionally, internal statistical boundary limits are established as stop-loss protection for the overall trading program. The System adopts an aggressive investment posture. In efforts to make above average returns over any 5 to 15-year holding period, the System accepts relatively high near-term volatility and uncertainty as the tradeoff.

The System is fully expected to be volatile in the nearterm because
(1) it employs only robust trading strategies which are non-optimized and never exactly fit to any market situation;
(2) it occasionally uses sizable leverage in its advanced money management strategies;
(3) it rides out significant intermediate counter-trends when holding trades in extra long-term trends.

As an example of the System's near-term volatility, Tactical expects an investment in the Institutional Futures Program to decline 18% on average from its most recent peak at some time during each year. In rare years the Trading Advisor expects this drawdown to be 33% or more, and further expects the investment to show a loss during some fiscal years. It should be emphasized that this near-term volatility is completely within the envelope of expected drawdowns of the System's aggressive money management style and will, in the Trading Advisor's opinion, actually improve the potential for above average long-term gains. In the Institutional Futures Program, between zero and 50% (average under 20%) of a client's account may be committed to margin and approximately 2% of a client's assets may be spent on brokerage commissions annually at institutional commission rates given the leverage employed and the frequency of trading. A systematic technical trading system has the tremendous advantage that it can be tested on historical data to gain substantial statistical confidence in its validity and stability. Tactical has written or cowritten state-of-the-art computer software for evaluating trading systems, and maintains a huge database for historical testing. Based on its real time trading and extensive historical testing, the Advisor has developed tremendous confidence in its Tactical Trading System. The System is the result of over 20 years of ongoing research, evolving very slowly over the years as new discoveries have been implemented. Since inception in 1981 the System's design objective has always been to achieve above-average long-term growth in a diversified portfolio of commodities and currencies. To accomplish this, it has consistently targeted capturing hedgers' risk premium by using quantitative methods based on robust characteristics of freemarket price behavior, implemented only after rigorous computerized historical testing. Tactical plans to continue its research and, therefore, retains the discretion to revise any method or strategy, including the technical trading factors used, the markets traded, and/or the money management principles applied. Such revisions, unless deemed material, will not usually be made known to its investors.

Principals of Tactical
David S. Druz, MD, 52, is the President, the founder, the sole director and shareholder of Tactical Investment Management Corporation. He began managing his own personal commodity interest accounts in August 1975. He has been registered with the National Futures Association as a principal since March 1983. Dr. Druz was employed by Stotler & Company, a former Futures Commission Merchant, beginning in June, 1977 and worked intermittently on a contractual basis until June, 1980 to perform commodity market research for its research department while concurrently attending medical school. He founded Tactical in February 1980 and beginning in June, 1980 to the present he has performed commodity market research for the company. Dr. Druz received a bachelor's degree in electrical engineering with emphasis in computer science from the University of Illinois in May, 1975 where he graduated first in his class with a 5.0 grade average. He received a medical doctor degree from Johns Hopkins School of Medicine in May, 1979 and subsequently pursued a dual career in futures investment analysis and in medicine. From July, 1979 through June, 1982 he did an emergency medicine residency and from July, 1982 through June, 1991 he worked as a board certified practicing emergency physician, all the while concurrently running Tactical Investment Management. In July, 1991, Dr. Druz left the practice of Emergency Medicine to devote his energies fully to Tactical Investment Management Corporation and his futures investment career.