SECURITY CAPITAL U S REAL ESTATE SHARES INC, 485APOS, 1998-04-16

SECURITY CAPITAL U S REAL ESTATE SHARES INC
485APOS, 1998-04-16

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1998

REGISTRATION NOS. 333-20649
811-8033
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 6
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 8
(Check Appropriate Box or Boxes)

------------------
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 345-5800
<TABLE>
<S> <C>
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE)
WITH COPIES TO:
</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
ANTHONY R. MANNO JR. JEFFREY A. KLOPF
SECURITY CAPITAL (US) MANAGEMENT GROUP INCORPORATED SECURITY CAPITAL GROUP INCORPORATED
11 SOUTH LASALLE STREET 125 LINCOLN AVENUE
CHICAGO, ILLINOIS 60603 SANTA FE, NEW MEXICO 87501
(NAME AND ADDRESS OF AGENT FOR SERVICE)

JEFFREY C. NELLESSEN DIANE E. AMBLER
SECURITY CAPITAL (US) MANAGEMENT GROUP INCORPORATED MAYER, BROWN & PLATT
11 SOUTH LASALLE STREET 2000 PENNSYLVANIA AVENUE, N.W.
CHICAGO, ILLINOIS 60603 WASHINGTON, D.C. 20006

It is proposed that this filing will become effective (check appropriate box):

_ immediately upon filing pursuant to paragraph (b). _ on (date) pursuant to paragraph (a)(1) of Rule 485.
on (date) pursuant to paragraph (b). x 75 days after filing pursuant to paragraph (a)(2).
_ 60 days after filing pursuant to paragraph (a)(1). - on (date pursuant to paragraph (a)(2) of Rule 485.
</TABLE>
If appropriate, check the following box:

this post-effective amendment designates a new effective
_ date for a previously filed post-effective amendment

Title of Securities being Registered............................... Common Stock

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>

CROSS REFERENCE TABLE

Pursuant to Rule 495

Showing Location in Part A (Prospectus),
Part B (Statement of Additional Information), and
Part C (Other Information) of Registration Statement
Information Required by Form N-1A

PART A
------

Item of Form N-1A Prospectus Caption
----------------- ------------------

1. Cover Page Cover Page

2. Synopsis Description of SC-REMFs and
SC-US

3. Condensed Financial Information Financial Highlights

4. General Description of Registrant Description of SC-REMFs and
SC-US

5. Management of SC-US Management of SC-US

5A. Management's Discussion of Fund Performance Information
Performance

6. Capital Stock and Other Securities Organization and Description
of Capital Stock

7. Purchase of Securities Being Offered Purchase of Shares

8. Redemption or Repurchase Redemption of Shares

9. Pending Legal Proceedings Not Applicable

PART B
------
Statement of Additional
Item of Form N-1A Information Caption
----------------- -------------------

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History Organization and Description
of Capital Stock

13. Investment Objectives and Policies Investment Objectives and
Policies

14. Management of SC-REMFs Management of SC-REMFs

15. Control Persons and Principal Holders Organization and Description
of Securities of Capital Stock
<PAGE>

Statement of Additional
Item of Form N-1A Information Caption
----------------- --------------------

16. Investment Advisory and Management of SC-REMFs;
Other Services Portfolio Transactions and
Brokerage

17. Brokerage Allocation and Management of SC-REMFs;
Other Practices Portfolio Transactions and
Brokerage

18. Capital Stock and Other Securities Organization and Description
of Capital Stock

19. Purchase, Redemption and Pricing of Distribution Plan;
Securities Being Offered Determination of Net Asset
Value; Redemption of Shares

20. Tax Status Taxation

21. Underwriters Distributor

22. Calculation of Performance Data Performance Information

23. Financial Statements Financial Statement

PART C
------

Item of Form N-1A Part C Caption
----------------- ------------

24. Financial Statements and Exhibits Financial Statements and Exhibits

25. Persons Controlled by or Under Persons Controlled By or Under
Common Control With Registrant Common Control with Registrant

26. Number of Holders of Securities Number of Holders of Securities

27. Indemnification Indemnification

28. Business and Other Connections of Business and Other Connections of
Investment Adviser Investment Adviser

29. Principal Underwriters Principal Underwriter

30. Location of Accounts and Records Location of Accounts and Records

31. Management Services Management Services

32. Undertakings Undertakings

33. Signatures Signatures
<PAGE>

PROSPECTUS

LOGO

11 South LaSalle Street
Chicago, Illinois 60603

Security Capital U.S. Real Estate Shares ("SC-US") is an investment
portfolio of Security Capital Real Estate Mutual Funds Incorporated ("SC-
REMFs"), an open-end management investment company organized under Maryland law.
SC-US seeks to provide shareholders with above-average total returns, including
current income and capital appreciation, primarily through investments in real
estate securities in the United States. Long term, SC-US's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in real estate securities in the United States, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and modeling techniques. Security Capital (US) Management Group
Incorporated ("SC (US) Management") serves as both investment adviser and
administrator to SC-US.

By this Prospectus, Class I shares of SC-US are being offered. Class I
shares are sold at net asset value without a sales charge to investors whose
minimum initial investment is $250,000. SC-US also offers Class R shares to
investors whose minimum initial investment is $2,500. Class R shares have
different expenses than Class I shares which would affect performance. Investors
desiring to obtain information about SC-US's other class of shares should call
1-888-SECURITY (toll free) or ask their sales representatives or SC-US's
distributor. This Prospectus provides you with information specific to the Class
I shares of SC-US. It contains information you should know before you invest in
SC-US.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

An investment in SC-US should not be the sole source of investment for a
shareholder. Rather, an investment in SC-US should be considered as part of an
overall portfolio strategy which includes fixed income and equity securities.
SC-US is designed for long-term investors, including those who wish to use
shares for tax deferred retirement plans and individual retirement accounts, and
not for investors who intend to liquidate their investments after a short period
of time.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-US. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital European
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information dated [_______________,1998], containing additional and more
detailed information about SC-US has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by calling 1-888-SECURITY (toll
free) or by writing SC-US's Sub-Administrator at: Firstar Trust Company, Mutual
Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.

THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY IN ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR
INDIVIDUAL TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

[___________, 1998]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses......................................... 2

Financial Highlights............................. 4

Description of SC-REMFs and SC-US................ 5

Investment Objective and Policies................ 5

Investment Strategy.............................. 6

Risk Factors..................................... 8

Non-Diversified Status; Portfolio Turnover....... 9

Management of SC-US.............................. 9

Investment Advisory Agreement.................... 12

Administrator and Sub-Administrator.............. 12

Distribution and Servicing Plan.................. 13

Determination of Net Asset Value................. 14

Purchase of Shares............................... 14

Redemption of Shares............................. 16

Dividends and Distributions...................... 18

Taxation......................................... 18

Organization and Description of Capital Stock.... 20

Custodian and Transfer and Dividend
Disbursing Agent............................... 20

Reports to Shareholders.......................... 20

Performance Information.......................... 21

Additional Information........................... 21
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-US.

ANNUAL FUND OPERATING EXPENSES

The Class I shares of SC-US pay for certain expenses attributable to Class
I shares directly out of SC-US's Class I assets. These expenses are related to
management of SC-US, administration and other services. For example, SC-US pays
an advisory fee and an administrative fee to SC (US) Management. SC-US also has
other customary expenses for services such as transfer agent fees, custodial
fees paid to the bank that holds its portfolio securities, audit fees and legal
expenses. These operating expenses are subtracted from SC-US's Class I assets to
calculate SC-US's Class I net asset value per share. In this manner,
shareholders pay for these expenses indirectly.

The following table is provided to help shareholders understand the direct
expenses of investing in SC-US and the portion of SC-US's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-US's expenses for the fiscal period ending December 31, 1997.

FEE TABLE (1)
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions.... None
Redemption fee (2)................................................ None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees................................................... .60%
12b-1 fees (3).................................................... .25%
Other expenses (4)................................................ .15%
Total fund operating expenses(5).................................. 1.00%
</TABLE>
____________
(1) SC-US's net investment income and net expenses for the period January 1,
1997 through December 16, 1997, were allocated to each class of shares
based upon the relative outstanding shares of each class as of the close of
business on December 16, 1997, and the results thereof were combined with
the results of operations for each applicable class for the period December
17, 1997 through December 31, 1997.
(2) SC-US's transfer agent charges a service fee of $12.00 for each wire
redemption. In addition, the purchase or redemption of shares through a
securities dealer that has not entered into a sales agreement with Security
Capital Markets Group Incorporated, SC-US's distributor, may be subject to
a transaction fee .
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-US Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-US pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related
to the maintenance of shareholder accounts at the annual rate of 0.25% of
SC-US's Class I average daily net assets. As a result, long-term Class I
shareholders of SC-US may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(4) Other Expenses are based upon the operating experience of SC-US since April
23, 1997, the effective date of its registration statement under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended.
(5) From April 23, 1997 through December 16, 1997, SC (US) Management committed
to waive fees and/or reimburse expenses to maintain SC-US's operating
expenses, other than brokerage fees and commissions, taxes, interest and
other extraordinary expenses at no more than 1.20% of SC-US's average daily
net assets.

2
<PAGE>

Since December 17, 1997 and for the year ending December 31, 1998, SC (US)
Management has committed to waive fees and/or reimburse expenses to
maintain SC-US's Class I total fund operating expenses, other than
brokerage fees and commissions, taxes, interest and other extraordinary
expenses, at no more than 1.00% of the value of SC-US's Class I average
daily net assets. Without such waiver and/or reimbursement, SC-US's actual
total fund operating expenses would have been 1.194% of SC-US's Class I
average daily net assets from April 23, 1997 to December 16, 1997 and
1.166% of SC-US's Class I average daily net assets from December 17, 1997
to December 31, 1997.

The information in the Fee Table has been restated to reflect current fees.

EXAMPLE

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<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
A shareholder would bear the following expenses on
a $1,000 investment, assuming: a five percent annual
return and operating expenses as outlined in the fee
table above............................................ $11 $35 $61 $134
</TABLE>

THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
US'S ASSETS.

3
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES

The following audited financial highlights should be read in conjunction with
the financial information and notes thereto which appear in the Statement of
Additional Information.

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED - CLASS I SHARES /(1)/

FINANCIAL HIGHLIGHTS
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
-----------------
<S> <C>
Net asset value, beginning of period $ 10.15

Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
Total from investment operations 2.80

Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
Total distributions (1.00)

Net asset value, end of period $ 11.95

Total return /(4)/ 29.92%

Supplemental data and ratios:
Net assets, end of period $ 116,560,328

Ratio of expenses to average net assets /(5) (6)/ 1.15%

Ratio of net investment income to average net assets /(5) (6)/ 4.08%

Portfolio turnover rate /(7)/ 82.10%

Average commission rate paid per share /(7)/ $ 0.0595
</TABLE>

(1) On December 16, 1997, the shares held by SC-US's existing shareholders were
split into Class R and Class I shares based on the amount then invested in
SC-US. For the year ended December 31, 1997, the Financial Highlights
ratios of net expenses to average net assets, ratios of net investment
income to average net assets and the per share income from investment
operations are presented on a basis whereby SC-US's net investment income
and net expenses for the period January 1, 1997 through December 16, 1997,
were allocated to each class of shares based upon the relative outstanding
shares of each class as of the close of business on December 16, 1997, and
the results thereof were combined with the results of operations for each
applicable class for the period December 17, 1997 through December 31,
1997.
(2) Date the Fund was effective with the SEC.
(3) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(4) Not annualized for the period April 23, 1997 through December 31, 1997.
(5) Annualized for the period April 23, 1997 through December 31, 1997.
(6) Without expense reimbursements of $30,393 for the period April 23, 1997
through December 31, 1997, $22,063 of which represents the amortization of
organizational expenses attributable to Class I shares, the ratio of
expenses to average net assets would have been 1.19% and the ratio of net
investment income to average net assets would have been 4.04%.
(7) Portfolio turnover and average commissions rate paid are calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued.

See notes to the financial statements.

4
<PAGE>

DESCRIPTION OF SC-US

SC-US is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law on January 23, 1997. SC-REMFs is comprised
of four investment portfolios, SC-US, Security Capital European Real Estate
Shares ("SC-EURO") and Security Capital Real Estate Arbitrage Shares ("SC-
ARBITRAGE") and Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA").

SC-US issues two classes of shares, one of which, Class I shares, includes
investors whose minimum initial investment is $250,000. The second class of
shares, Class R shares, which are offered to all other eligible investors,
offers different services and incurs different expenses than Class I shares,
which would affect performance. See "Purchase of Shares" and "Organization and
Description of Capital Stock." SC-US Class I shares are offered by this
prospectus.

INVESTMENT OBJECTIVE AND POLICIES

SC-US's investment objective is to provide shareholders with above-average
total returns, including current income and capital appreciation, primarily
through investments in real estate securities in the United States. Long term,
SC-US's objective is to achieve top-quartile total returns as compared with
other mutual funds that invest primarily in real estate securities in the United
States, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and modeling techniques. SC-US's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-US's policies, other
than its investment objective and the investment restrictions described in the
Statement of Additional Information, are fundamental and thus may be changed by
SC-US's Board of Directors without shareholder approval. There can be no
assurance that SC-US's investment objective will be achieved.

REAL ESTATE SECURITIES

Under normal circumstances, SC-US will invest at least 80% of its assets in
real estate securities, including real estate investment trusts ("REITs") and
other publicly-traded real estate securities. Such equity securities will
consist of (i) common stocks, (ii) rights or warrants to purchase common stocks,
(iii) securities convertible into common stocks where the conversion feature
represents, in SC (US) Management's view, a significant element of the
securities' value, and (iv) preferred stocks. For purposes of SC-US's investment
policies, a "real estate company" is one that derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial, or residential real estate or that has at least 50% of
its assets invested in such real estate. SC-US may invest in securities issued
by real estate companies that are controlled by Security Capital Group
Incorporated or its affiliates.

REAL ESTATE INVESTMENT TRUSTS

SC-US may invest without limit in shares of REITs. REITs pool investors' funds
for investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to shareholders if
it complies with several requirements relating to its organization, ownership,
assets, and income and a requirement that it distribute to its shareholders at
least 95% of its taxable income (other than net capital gains) for each taxable
year. REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs.

5
<PAGE>

ILLIQUID SECURITIES

SC-US will not invest more than 10% of its net assets in illiquid securities.
For this purpose, illiquid securities include, among others, securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. SC (US) Management will monitor the
liquidity of such restricted securities under the supervision of SC-REMFs's
Board of Directors. If SC-US invests in securities issued by a real estate
company that is controlled by Security Capital Group Incorporated or any of its
affiliates, such securities will be treated as illiquid securities. See the
Statement of Additional Information for further discussion of illiquid
securities.

DEBT SECURITIES AND MONEY MARKET INSTRUMENTS

SC-US may invest in debt securities from time to time, if SC (US) Management
believes investing in such securities might help achieve SC-US's objective. SC-
US may invest in debt securities to the extent consistent with its investment
policies, although SC (US) Management expects that under normal circumstances
the Funds are not likely to invest a substantial portion of their assets in debt
securities.

SC-US will invest only in securities rated "investment grade" or considered by
SC (US) Management to be of comparable quality. Investment grade securities are
rated Baa or higher by Moody's Investors Service, Inc. or BBB or higher by
Standard & Poor's. Descriptions of the securities ratings assigned by Moody's
and Standard & Poor's are described in Appendix A to the Statement of Additional
Information.

When, in the judgment of SC (US) Management, market or general economic
conditions justify a temporary defensive position, SC-US may invest its assets
in high-grade debt securities, including corporate debt securities, U.S.
government securities, and short-term money market instruments, without regard
to whether the issuer is a real estate company. SC-US may also at any time use
funds awaiting investment or held as reserves to satisfy redemption requests or
to pay dividends and other distributions to shareholders in short-term money
market instruments.

SHORT SALES AND SHORT SALES AGAINST THE BOX

SC-US may engage in short sale transactions in securities listed on one or
more national securities exchanges or on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"). Short selling involves the
sale of borrowed securities. At the time a short sale is effected, SC-US incurs
an obligation to replace the security borrowed at whatever its price may be at
the time that SC-US purchases it for delivery to the lender. When a short sale
transaction is closed out by delivery of the securities, any gain or loss on the
transaction is taxable as a short term capital gain or loss. Until the security
is replaced, SC-US is required to pay to the lender amounts equal to any
dividends or interest which accrue during the period of the loan. All short
sales will be fully collateralized. SC-US may also engage in short sales against
the box, which involves selling a security SC-US holds in its portfolio for
delivery at a specified date in the future. SC-US will not engage in short sales
or short sales against the box if immediately following such transaction the
aggregate market value of all securities sold short and sold short against the
box would exceed 10% of SC-US's net assets (taken at market value). See the
Statement of Additional Information for further discussion of short sales and
short sales against the box.

INVESTMENT STRATEGY

SC-US intends to continue to follow its disciplined, research driven
investment strategy, to identify those publicly traded real estate companies
which have the potential to deliver above average cash flow growth. This
investment strategy has been deployed by SC-US since December 20, 1996, its
inception date. As of December 31, 1997, the average annual total return for
Class I shares was 28.84%, after deducting fees and expenses and allocating net
investment income and net expenses to Class I and Class R shares as described in
SC-US's audited financial statements which appear in the Statement of Additional
Information FOR CURRENT RETURN INFORMATION RELATED TO SC-US, CONTACT SC-US AT
1-888-SECURITY (TOLL FREE).
6
<PAGE>

SC-US's investment strategy is also similar to that of Security Capital U.S.
Realty Special Opportunity Investments Portfolio ("USREALTY Special
Opportunity"). USREALTY Special Opportunity is a private investment portfolio
with assets of $344.6 million (at fair market value, as of December 31, 1997)
that invests primarily in publicly traded real estate securities in the United
States. USREALTY Special Opportunity is advised by Security Capital (EU)
Management S.A. SC (US) Management, acting as subadviser to Security Capital
(EU) Management S.A., provides advice to USREALTY Special Opportunity with
respect to investments in publicly traded U.S. REITs, relying on the same
research and analytical tools and models that SC (US) Management will rely on in
making investments on behalf of SC-US. From December 31, 1995 through December
31, 1997, USREALTY Special Opportunity achieved an average annual total return
of approximately 42.61%, after the deduction of fees and expenses. Past
performance is not necessarily indicative of future results. In addition, as a
private investment portfolio, USREALTY Special Opportunity is not subject to the
same regulatory requirements, including the diversification requirements of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, there can
be no assurance that SC-US can achieve results similar to those achieved by
USREALTY Special Opportunity.]

REAL ESTATE INDUSTRY OVERVIEW

SC (US) Management believes that the U.S. real estate industry has experienced
a fundamental transformation in the last six and one-half years which has
created a significant market opportunity. Direct investment of equity capital in
real estate, as was prevalent in the 1980s, has decreased while investments in
publicly traded equity REITs has increased. The increasing securitization of
the U.S. real estate industry, primarily in the form of REITs, offers
significant benefits to shareholders, including enhanced liquidity, real-time
pricing and the opportunity for optimal growth and sustainable rates of return
through a more rational and disciplined approach to capital allocation and
operating management.

SC (US) Management believes that the increasing securitization of the U.S.
real estate industry is still in its initial stages and that this trend will
continue over the next decade. SC-US intends to benefit from this restructuring
by investing in equity REITs that SC (US) Management believes could produce
above-average returns.

In addition to providing greater liquidity than direct real estate
investments, REITs have also generally out-performed direct real estate
investments for each of the past one, five, ten and fifteen year periods ended
December 31, 1997. The following chart reflects the performance of U.S. REITs
compared to SC-US, USREALTY Special Opportunity, an index of direct U.S. real
estate investments (NCREIF) and other indices.

REITS VS. OTHER INVESTMENTS
(AVERAGE ANNUAL TOTAL RETURN)

<TABLE>
<CAPTION>
USREALTY(1) NAREIT(2) NCREIF(3)
--------------- --------------- --------- S&P 500 BONDS(4)
THROUGH DECEMBER 31, 1997 SC-US SC-US SPECIAL EQUITY INDEX INDEX -------- --------
- ------------------------- -------- -------- --------------- --------------- ---------
CLASS I CLASS R OPPORTUNITY
-------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 25.20% 25.19% 25.18% 20.26% 13.71% 33.35% 9.78%
5 years 18.28% 7.77% 20.23% 7.63%
15 years 14.99% 6.74% 17.49% 10.19%
20 years 16.02% 7.94% 16.63% 9.76%
</TABLE>

- --------------
(1) Described under "Investment Strategy."

(3) The National Counsel of Real Estate Investment Fiduciaries Property Index
total return includes appreciation (or depreciation), realized capital gain
(or loss) and income. It is computed by adding income and capital
appreciation return on a quarterly basis.

7
<PAGE>

(4) Merrill Lynch Government/Corporate Bond Index (Master).

The investment results for SC-US, USREALTY Special Opportunity and the
indices shown in the table reflect past performance and are not necessarily
indicative of future results or the returns that shareholders should expect to
receive from SC-US. The results shown represent SC-US's "total return" which
assumes the reinvestment of all capital gains and income dividends. Results
presented for the S&P 500 and the NAREIT equity index also assume the
reinvestment of dividends; however, the indices are not managed and incur no
operating expenses. This information is provided to facilitate a better
understanding of SC-US and does not provide a basis for comparison with other
investments which calculates performance differently.

A RESEARCH-DRIVEN PHILOSOPHY AND APPROACH

SC-US seeks to achieve top-quartile returns by investing primarily in equity
REITs which have the potential to deliver above-average growth. SC (US)
Management believes that these investment opportunities can only be identified
through the integration of extensive property market research and in-depth
operating company cash flow modeling.

Property Market Research. SC-US is uniquely positioned to access meaningful,
proprietary real estate research collected at the market, submarket and property
level. This market research is provided by operating professionals within the
Security Capital Group Incorporated affiliate company network and assists SC
(US) Management in identifying attractive growth markets and property sectors
prior to making investment decisions. Specifically, SC-US endeavors to identify
markets reaching a "marginal turning point." The market research conducted by
SC-US includes a comprehensive evaluation of real estate supply and demand
factors (such as population and economic trends, customer and industry needs,
capital flows and building permit and construction data) on a market and
submarket basis and by product type. Specifically, primary market research
evaluates normalized cash flow lease economics (accounting for capital
expenditures and other leasing costs) to determine whether the core economy of a
real estate market is expected to improve, stabilize or decline. Only through
disciplined real estate market research does SC-US believe it can identify
markets, and thus, real estate operating companies, with the potential for
higher than average growth prospects.

Real Estate Operating Company Evaluation and Cash Flow Modeling. SC (US)
Management believes that analyzing the quality of a company's net cash flow
("NCF") and its potential growth is the appropriate identifier of above-average
return opportunities. Certain REIT valuation models utilized by SC (US)
Management integrate property market research with analysis on specific property
portfolios in order to establish an independent value of the underlying sources
of a company's NCF. Additional valuation models measure and compare the impact
of certain factors, both internal and external, on NCF growth expectations. The
data from these valuation models is ultimately compiled and reviewed in order to
identify real estate operating companies with significant potential for growth.

RISK FACTORS

RISKS OF INVESTMENT IN REAL ESTATE SECURITIES

SC-US will not invest in real estate directly, but only in securities issued
by real estate companies. However, SC-US may be subject to risks similar to
those associated with the direct ownership of real estate (in addition to
securities markets risks) because of its policy of concentration in the
securities of companies in the real estate industry. Such risks include declines
in the value of real estate, risks related to general and local economic
conditions, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increased competition, increases in property
taxes and operating expenses, changes in zoning laws, losses due to costs
resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to customers and changes in interest rates.

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In addition to these risks, equity REITs may be affected by changes in the
value of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. Further, equity and mortgage
REITs are dependent on the management skills of the management of the REIT and
of the operators of the real estate in which the REITs are invested and
generally may not be diversified. Equity and mortgage REITs are also subject to
defaults by borrowers or customers and self-liquidation. REITs also generate
expenses that are separate and apart from those charged by SC-US and therefore,
shareholders will indirectly pay the fees charged by the REITs in which SC-US
invests. In addition, equity and mortgage REITs could possibly fail to qualify
for tax free pass-through of income under the Code, or to maintain their
exemptions from registration under the Investment Company Act of 1940 (the "1940
Act"). The above factors may also adversely affect a borrower's or a customer's
ability to meet its obligations to the REIT. In the event of a default by a
borrower or customer, the REIT may experience delays in enforcing its rights as
a mortgagee or lessor and may incur substantial costs associated with protecting
its investments.

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

SC-US operates as a "non-diversified" investment company under the 1940 Act,
which means SC-US is not limited by the 1940 Act in the proportion of its assets
that may be invested in the securities of a single issuer. However, SC-US
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Code, which generally will relieve SC-US of any
liability for Federal income tax to the extent its earnings are distributed to
shareholders. See "Taxation." To qualify as a regulated investment company,
among other requirements, SC-US will limit its investments so that, at the close
of each quarter of the taxable year, (i) not more than 25% of the market value
of SC-US's total assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer and SC-US will not own more than 10% of the
outstanding voting securities of a single issuer. SC-US's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-US, as a non-diversified investment
company, may invest in a smaller number of individual issuers than a diversified
investment company, an investment in SC-US may present greater risk to an
investor than an investment in a diversified company.

SC-US anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when SC (US)
Management deems portfolio changes appropriate. The turnover rate may vary
greatly from year to year. An annual turnover rate of 150% occurs, for example,
when all of the securities held by SC-US are replaced one and one-half times in
a period of one year. A higher turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses which are borne by SC-US.
High portfolio turnover may result in the realization of net short-term capital
gains by SC-US which, when distributed to shareholders, will be taxable as
ordinary income. See "Taxation."

DIRECTORS, OFFICERS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-US is vested with the
Board of Directors of SC-REMFs. The Board of Directors approves all significant
agreements between SC-REMFs and persons or companies furnishing services to SC-
US, including SC-REMFs's agreements with SC (US) Management, or SC-US's
administrator, custodian and transfer agent. The management of SC-US's day-to-
day operations is delegated to the officers of SC-REMFs, who include the
Managing Directors, SC (US) Management and the administrator, subject always to
the investment objective and policies of SC-US and to general supervision by the
Board of Directors. Although SC-REMFs is not required by law to hold annual
meetings, it may hold shareholder meetings from time to time on important
matters, and shareholders have the right to call a meeting to remove a Director
or to take other action described in SC-REMFs's Articles of Incorporation. The
Directors and officers of SC-REMFs and certain key members of the SC-US
Portfolio Management Committee and their principal occupations are set forth
below.
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Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions,
served as Chief Investment Officer, was Chairman
of the Operations Committee, was a member of the
Investment and Finance Committees of the Board of
Trustees and was President and a Director of the
Loyola Management Company. Mr. Kasbeer received
his J.D. from John Marshall Law School and his
M.A. and B.S. from Northwestern University.

George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $75
billion New York State Common Retirement Fund
since 1982. He has been a Director of the RCB
Trust Company since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, Gulf Resources Corporation, and the
Universal Bond Fund, and is an advisor to
Associated Energy Managers. Mr. Keane also serves
as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
Director and Chairman of the Investment Committee
of the United Negro College Fund. Mr. Keane holds
honorary degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton,
Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers ABR,
Inc. (formerly Abrams Benisch Riker Inc.), a
property management firm. Mr. Abrams was Principal
of Colliers ABR, Inc. from 1978 to 1992 and since
1992, has served as a Consultant. From 1959 to
1978 Mr. Abrams was Executive Vice President and
Director of Cross and Brown Company. Mr. Abrams
also serves as a Director of Greater New York
Mutual Insurance Company and Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of
Security Capital (US) Management since July, 1997.
Prior thereto, Director of Security Capital
Pacific Trust ("PTR") and the PTR REIT Manager
from February 1995 to June 1997 and Senior Vice
President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997 where he
had overall responsibility for asset management
and multifamily dispositions. Prior to joining
Security Capital, Mr. Gardner was with Copley Real
Estate Advisors as a Managing Director and
Principal responsible for portfolio management
from January 1991 to September 1994 and as a Vice
President and Principal of asset management from
December 1984 to

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<PAGE>

December 1990. From July 1977 to November 1984,
Mr. Gardner was a Real Estate Manager with the
John Hancock Companies. Mr. Gardner received his
M.S. in Computer Information Systems from Bentley
College and his B.S. in Accounting from Stonehill
College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-
REMFs. Vice President and Controller of SC (US)
Management since March 1997. Prior thereto, from
June 1988 to March 1997, he was Controller,
Manager of Client Administration and Compliance
Officer at Strong Capital Management, Inc. Mr.
Nellessen is a Certified Public Accountant,
Certified Management Accountant and a Certified
Financial Planner. He received his B.B.A. from the
University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of SC (US) Management since November 1997 where he
is responsible for the development and
implementation of portfolio investment strategy.
Prior thereto, Senior Vice President and Senior
REIT Analyst from July 1996 to October 1997 and
Vice President from May 1995 to June 1996. Prior
to joining Security Capital, Mr. Statz was a Vice
President in the investment research department of
Goldman, Sachs & Co., from February 1993 to
January 1995, concentrating on research and
underwriting for the REIT industry. Prior thereto,
Mr. Statz was a real estate stock portfolio
manager and a managing director of Chancellor
Capital Management from August 1982 to February
1992. Mr. Statz received his M.B.A. and B.B.A.
from the University of Wisconsin, Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of SC (US) Management since November
1997 and Vice President since July 1996, where he
is responsible for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies. Prior to joining SC
(US) Management, Mr. Bedell spent nine years with
LaSalle Partners Limited where he was Equity Vice
President and Portfolio Manager responsible for
the strategic, operational and financial
management of a private REIT with commercial real
estate investments of $600-800 million. Mr. Bedell
received his M.B.A. from the University of Chicago
and his B.A. from Kenyon College.

Albert D. Adriani Member SC-US Portfolio Management Committee; Vice
President of SC (US) Management since April 1996,
where he is responsible for providing portfolio
management analysis. From January 1995 to April
1996, he was Vice President, Security Capital (UK)
Management Limited and SC-USREALTY; from March
1994 to January 1995, he was with Security Capital
Markets Group. Prior thereto, he was an investment
analyst with HAL Investments BV from July 1992 to
January 1994. Mr. Adriani received his M.B.A.,
from the University of Chicago Graduate School of
Business and his B.A. with honors from the
University of Chicago. Mr. Adriani is a Chartered
Financial Analyst.

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SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603, has
been retained to provide investment advice, and, in general, to conduct the
management and investment program of SC-US under the overall supervision and
control of the Directors of SC-REMFs.

SC (US) Management was formed in March 1994, and is registered as an
investment adviser with the Securities and Exchange Commission (the "SEC"). SC
(US) Management's principal officers include Anthony R. Manno Jr., Managing
Director and President, John H. Gardner, Jr., Managing Director, Kenneth D.
Statz, Managing Director, and Kevin W. Bedell, Senior Vice President. SC (US)
Management is a wholly-owned subsidiary of Security Capital Group Incorporated,
a real estate research, investment and management company.

The SC-US Portfolio Management Committee, which is comprised of certain SC-
REMFs officers and SC (US) Management analysts, is primarily responsible for the
construction of SC-US's portfolio.

INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
(US) Management furnishes a continuous investment program for SC-US's portfolio,
makes the day-to-day investment decisions for SC-US, and generally manages SC-
US's investments in accordance with the stated policies of SC-US, subject to the
general supervision of SC-REMFs's Board of Directors. SC (US) Management also
selects brokers and dealers to execute purchase and sale orders for the
portfolio transactions of SC-US. SC (US) Management provides persons
satisfactory to the Directors of SC-REMFs to serve as officers of SC-REMFs. Such
officers, as well as certain other employees and Directors of SC-REMFs, may be
directors, officers, or employees of SC (US) Management.

Under the Advisory Agreement, SC-US Class I shares pay SC (US) Management a
monthly management fee in an amount equal to 1/12th of .60% of the value of SC-
US's Class I average daily net assets (approximately .60% on an annual basis).
SC-US Management also has committed to waive fees and/or reimburse expenses to
maintain SC-US's Class I shares' total operating expenses, other than brokerage
fees and commissions, taxes, interest and other extraordinary expenses at no
more than 1.00% of the value of SC-US's Class I average daily net assets for the
year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-US Class I shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with SC (US) Management, (c) legal and auditing
expenses, (d) costs of printing and postage fees related to preparing and
distributing SC-US's prospectus and shareholder reports, (e) costs of
maintaining SC-REMFs's existence, (f) interest charges, taxes, brokerage fees
and commissions, (g) costs of stationery and supplies, (h) expenses and fees
related to registration and filing with federal and state regulatory
authorities, and (i) upon the approval of SC-REMFs's Board of Directors, costs
of personnel of SC (US) Management or its affiliates rendering clerical,
accounting and other office services. Each class of SC-US shares pays for the
portion SC-US's expenses attributable to its operations. Income, realized gains
and losses, unrealized appreciation and depreciation and certain expenses not
allocated to a particular class are allocated to each class based on the net
assets of that class in relation to the net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

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<PAGE>

bills for payment on behalf of SC-US; (iv) supervising preparation of the
periodic updating of SC-US's Prospectus and Statement of Additional Information;
(v) supervising preparation of quarterly reports to SC-US's shareholders,
notices of dividends, capital gains distributions and tax credits, and attending
to routine correspondence and other communications with individual shareholders;
(vi) supervising the daily pricing of SC-US's investment portfolio and the
publication of the net asset value of SC-US's shares, earnings reports and other
financial data; (vii) monitoring relationships with organizations providing
services to SC-US, including the custodian ("Custodian"), transfer agent
("Transfer Agent") and printers; (viii) providing trading desk facilities for
SC-US; (ix) maintaining books and records for SC-US (other than those maintained
by the Custodian and Transfer Agent) and preparing and filing of tax reports
other than SC-US's income tax returns; and (x) providing executive, clerical and
secretarial help needed to carry out these responsibilities.

In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs's Board of Directors, SC (US) Management has caused SC-
REMFs to retain Firstar Trust Company (the "Sub-Administrator") as sub-
administrator under a fund administration and servicing agreement (the "Sub-
Administration Agreement").

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-US's net asset value and preparing such figures for
publication, maintaining certain of SC-US's books and records that are not
maintained by SC (US) Management, or the custodian or transfer agent, preparing
financial information for SC-US's income tax returns, proxy statements,
quarterly and annual shareholders reports, and SEC filings, and responding to
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .06% of the first $200 million of SC-US's average daily net assets, and at
lower rates on SC-US's average daily net assets in excess of that amount,
subject to an annual minimum fee of $30,000. The Sub-Administrator also serves
as SC-US's Custodian and Transfer Agent. See "Custodian and Transfer and
Dividend Disbursing Agent."

Under the Administration Agreement, SC (US) Management remains responsible for
monitoring and overseeing the performance by the Sub-Administrator of its
obligations to SC-US under the Sub-Administration Agreement, subject to the
overall authority of SC-REMFs's Board of Directors. For its services under the
Administration Agreement, SC (US) Management receives a monthly fee from SC-
REMFs at the annual rate of .02% of the value of SC-US's average daily net
assets.
DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs and the Class I shareholders of SC-US have
adopted a Distribution and Servicing Plan ("Plan") with respect to SC-US's Class
I shares pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. Under the Plan, SC-US pays to Security Capital Markets Group
Incorporated, in its capacity as principal distributor of SC-US's shares (the
"Distributor"), a monthly fee equal to, on an annual basis, .25% of the value of
SC-US's Class I average daily net assets.

The Distributor may use the fee for services performed and expenses incurred
by the Distributor in connection with the distribution of Class I shares and for
providing certain services to Class I shareholders. The Distributor may pay
third parties in respect of these services such amount as it may determine. SC-
US understands that these third parties may also charge fees to their clients
who are beneficial owners of SC-US Class I shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plan.

The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of SC (US) Management. See "Distribution Plan"
in the Statement of Additional Information for a listing of the types of
expenses for which the Distributor and third parties may be compensated under
the Plan. If the fee received by the Distributor exceeds its expenses, the
Distributor may realize a profit from these arrangements. The Plan is reviewed
and is subject to approval annually by the Board of Directors.

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<PAGE>

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class I shares of SC-US, $.01 par value per
share ("Common Stock"), is determined on each day the New York Stock Exchange is
open for trading and on each other day on which there is a sufficient degree of
trading in SC-US's investments to affect the net asset value, as of the close of
trading on the New York Stock Exchange, by adding the market value of all
securities in SC-US's portfolio and other assets represented by Class I shares,
subtracting liabilities, incurred or accrued allocable to Class I shares, and
dividing by the total number Class I shares then outstanding.

For purposes of determining the net asset value per share of Class I shares,
readily marketable portfolio securities listed on the New York Stock Exchange
are valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Directors shall determine in good faith
to reflect its fair market value. Readily marketable securities not listed on
the New York Stock Exchange but listed on other domestic or foreign securities
exchanges or admitted to trading on the NASDAQ National Market are valued in a
like manner. Portfolio securities traded on more than one securities exchange
are valued at the last sale price on the business day as of which such value is
being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.

Readily marketable securities traded in the over-the-counter market, including
listed securities whose primary market is believed by SC (US) Management to be
over-the-counter, but excluding securities admitted to trading on the NASDAQ
National Market, are valued at the mean of the current bid and asked prices as
reported by NASDAQ or, in the case of securities not quoted by NASDAQ, the
National Quotation Bureau or such other comparable sources as the Directors deem
appropriate to reflect their fair market value. Where securities are traded on
more than one exchange and also over-the-counter, the securities will generally
be valued using the quotations the Board of Directors believes reflect most
closely the value of such securities. Any securities, or other assets, for which
market quotations are not readily available are valued in good faith in a manner
determined by the Board of Directors that best reflects the fair value of such
securities or assets.

PURCHASE OF SHARES

Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-US Class I shares may be purchased through Firstar
Trust Company, SC-US's Transfer Agent, or any dealer that has entered into a
sales agreement with the Distributor.

Orders for shares of SC-US will become effective at the net asset value per
share next determined after the receipt of payment. All funds will be invested
in full and fractional shares. A confirmation indicating the details of each
purchase transaction will be sent to you promptly following each transaction.
If a purchase order is placed through a dealer, the dealer must promptly forward
the order, together with payment, to the Transfer Agent. Investors must specify
that Class I shares are being purchased.

If you choose a securities dealer that has not entered into a sales
agreement with the Distributor, such dealer may, nevertheless, offer to place an
order for the purchase of SC-US shares. Such dealer may charge a transaction
fee, as determined by the dealer. That fee may be avoided if shares are
purchased through a dealer who has entered into a sales agreement with the
Distributor or through the Transfer Agent.

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<PAGE>

additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $250,000. Class I shares may be
purchased by check or money order drawn on a U.S. bank, savings and loan, or
credit union by wire transfer. The enclosed application must be completed and
accompanied by payment in U.S. funds to open an account. Checks must be payable
in U.S. dollars and will be accepted subject to collection at full face value.
Note that all applications to purchase shares are subject to acceptance by SC-US
and are not binding until so accepted. SC-US reserves the right to decline to
accept a purchase order application in whole or in part.

MAIL

The following instructions should be used when mailing a check or money
order payable to "Security Capital U.S. Real Estate Shares," via U.S. mail to
the Distributor, a securities dealer or the Transfer Agent:

VIA U.S. MAIL BY OVERNIGHT MAIL
Firstar Trust Company Firststar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0710 615 East Michigan Street
Milwaukee, Wisconsin 53202

SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.

Please note that if your check does not clear, a service charge of $20 will
be charged and you will be responsible for any losses suffered by SC-US as a
result.

WIRE PURCHASES

Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital U.S. Real Estate Shares
(shareholder account number)
(shareholder name/registration)

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handling of funds. SC-US
AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM INCOMPLETE
WIRING INSTRUCTIONS.

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<PAGE>

SUBSEQUENT INVESTMENTS

Additional investments of at least $20,000 may be made by mail, wire or by
telephone. When making an additional purchase by mail, a check payable to
"Security Capital U.S. Real Estate Shares" along with the Additional Investment
Form provided on the lower portion of a shareholder's account statement must be
enclosed. To make an additional purchase by wire, a shareholder may call 1-800-
699-4594 (toll free) for complete wiring instructions.

You may purchase additional shares by moving money from your bank account
to your SC-US account by telephone. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can be
used for telephone transactions. In order for shares to be purchased at the net
asset value determined as of the close of regular trading on a give date, the
Transfer Agent must receive both the purchase order and payment by Electronic
Funds Transfer through the ACH System, before the close of regular trading on
such date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.

EXCHANGE FEATURE

Class I shares of SC-US may be exchanged for Class I shares of SC-
ARBITRAGE, SC-EURO and SC-ASIA. Exchanges of Class I shares will be made at
their relative net asset values. Shares may be exchanged only if the amount
being exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-US, SC-ARBITRAGE, SC-EURO or SC-ASIA
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

REDEMPTION OF SHARES

You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-US
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-US may hold payment on redemption proceeds until it reasonably
satisfied that the check has cleared, which may take up to twelve days.

Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-US
of the Broker or dealer's instruction to redeem shares. In addition, some
brokers or dealers may charge a fee in connection with such redemptions. See
"Determination of Net Asset Value."

Redemption requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class I shares to be redeemed
were issued in certificate form, the certificate must be endorsed for transfer
(or be accompanied by a duly executed stock power) and must be submitted to
Firstar Trust Company together with a redemption request. The following
instructions should be used for the redemption of shares by mail, by wire and by
telephone:

MAIL AND WIRE

For most redemption requests you need only furnish a written, unconditional
request to redeem your Class R shares (for a fixed dollar amount) at net asset
value to Security Capital U.S. Real Estate Shares:

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<PAGE>

Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-US. Do not mail letters by
overnight courier to the post office box. Any written redemption requests
received within 15 days after an address change must be accompanied by a
signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-
699-4594. In order to utilize this procedure, you must have previously elected
this option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-US reserves the right to limit
the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-US will not be liable for any loss, cost or expense
for acting upon a shareholder's telephone instructions or for any unauthorized
telephone redemption. SC-US reserves the right to refuse a telephone redemption
request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-US or Transfer Agent within the last 15 days and (iv) any redemption request
involving $100,000 or more. A signature guarantee may be obtained from any
eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

Unless other instructions are given in proper form, a check for the proceeds
of a redemption will be sent to the shareholder's address of record. The
Custodian may benefit from the use of redemption proceeds until the redemption
check for such proceeds has cleared.

17
<PAGE>

SC-US may suspend the right of redemption during any period when (i) trading
on the New York Stock Exchange is restricted or that Exchange is closed, other
than customary weekend and holiday closings, or (ii) an emergency, as defined by
rules adopted by the SEC, exists making disposal of portfolio securities or
determination of the value of the net assets of SC-US not reasonably
practicable.

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-US in not less than 30 days'
notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
Upon any such termination, a check for the redemption proceeds will be sent to
the account of record within seven business days of the redemption. However, if
a shareholder is affected by the exercise of this right, he or she will be
allowed to make additional investments prior to the date fixed for redemption to
avoid liquidation of the account.

A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-US does not charge a fee to process
conversions. SC-US reserves the right to reject any conversion request in whole
or in part. The conversion feature may be modified or terminated at any time
upon notice to SC-US Class I shareholders.

DIVIDENDS AND DISTRIBUTIONS

Dividends from SC-US's investment income will be declared and distributed
quarterly. SC-US intends to distribute net realized capital gains, if any, at
least annually although SC-US's Board of Directors may in the future determine
to retain realized capital gains and not distribute them to shareholders. For
information concerning the tax treatment of SC-US's distribution policies for
SC-US and its shareholders, see "Taxation."

Distributions will automatically be paid in full and fractional shares of SC-
US based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

TAXATION

The following discussion is intended for general information only.
Shareholders should consult with their own tax advisers as to the tax
consequences of an investment in SC-US, including the status of distributions
under applicable state or local law.

FEDERAL INCOME TAXES

SC-US intends to qualify and elect to be taxed as a "regulated investment
company" under the Code. To the extent that SC-US distributes its taxable income
and net capital gain to its shareholders, qualification as a regulated
investment company relieves SC-US of federal income and excise taxes on that
part of its taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends may be eligible
for the dividends-received deduction, except that the amount eligible for the
deduction is limited to the amount of qualifying dividends received by SC-US,
which does not include distributions received by SC-US from REITs. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-US

18
<PAGE>

at least 46 days. Furthermore, the dividends-received deduction will be
disallowed to the extent a corporation's investment in shares of SC-US is
financed with indebtedness.

The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-US to its shareholders as capital gain
distributions is taxable to the shareholders as long-term capital gain,
irrespective of the length of time a shareholder may have held his or her stock.
Recent legislation reduced the maximum tax rate on capital gains to 20% for
assets held for more than 18 months on the date of the sale or exchange of those
assets. A notice issued by the Internal Revenue Service provides that a
regulated investment company such as SC-US may, but is not required to,
designate which portion of a capital gain distribution qualifies for the reduced
capital gain rate. Long-term capital gain distributions are not eligible for
the dividends-received deduction referred to above.

Under current federal tax law, the amount of an ordinary income dividend or
capital gain distribution declared by SC-US during October, November or December
of a year to shareholders of record as of a specified date in such a month that
is paid during January of the following year is includable in the prior year's
taxable income of shareholders that are calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-US will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of such shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him or her
as described above. If a shareholder held shares for six months or less, and
during that period received a distribution taxable to such shareholder as long-
term capital gain, any loss realized on the sale of such shares during such six-
month period would be a long-term capital loss to the extent of such
distribution.

A dividend or capital gain distribution with respect to shares of SC-US held
by a tax-deferred or qualified plan, such as an individual retirement account,
403(b)(7) retirement plan or corporate pension or profit-sharing plan, will not
be taxable to the plan, except to the extent the shares are debt-financed within
the meaning of Section 514 of the Code. Distributions from such plans will be
taxable to individual participants under applicable tax rules without regard to
the character of the income earned by the qualified plan.

SC-US will be required to withhold 31% of any payments made to a shareholder
if the shareholder has not provided a certified taxpayer identification number
to SC-US, or the Secretary of the Treasury notifies SC-US that the shareholder
has not reported all interest and dividend income required to be shown on the
shareholder's Federal income tax return. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.

Further information relating to tax consequences is contained elsewhere in
this Prospectus and in the Statement of Additional Information.

STATE AND LOCAL TAXES

SC-US distributions also may be subject to state and local taxes. Shareholders
should consult their own tax advisers regarding the particular state and local
tax consequences of an investment in SC-US.

19
<PAGE>

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares Incorporated. On
[___________, 1998], its name was changed to Security Capital Real Estate Mutual
Funds Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-US's
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors
of SC-REMFs has authorized the creation of four investment portfolios, SC-US,
SC-ARBITRAGE, SC-EURO and SC-ASIA, each with two classes of shares: Class I
shares and Class R shares. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-US's Class I shares may not be
modified except by the vote of a majority of the holders of all Class I shares
outstanding. SC-US's Class I shareholders have exclusive voting rights with
respect to matters relating solely to SC-US's Class I shares. SC-US's Class I
shareholders vote separately from SC-US's Class R shareholders and SC-
ARBITRAGE's, SC-EURO's and SC-ASIA's Class I and Class R shareholders on matters
in which the interests of SC-US's Class I shareholders differ from the interests
of SC-US's Class R shareholders and SC-ARBITRAGE's, SC-EURO's and SC-ASIA's
Class I and Class R shareholders.

SC-REMFs is not required to hold regular annual shareholders' meetings. A
shareholders' meeting shall, however, be called by the secretary upon the
written request of the holders of not less than 10% of the outstanding shares of
SC-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.

As of March 31, 1998, SCREALTY Incorporated owned 98.54% of the issued and
outstanding Class I shares of SC-US, and 98.56% of the total issued and
outstanding shares of SC-US, which means that SCREALTY Incorporated controls SC-
REMFs for purposes of the 1940 Act. The effect of SCREALTY Incorporated's
ownership of a controlling interest in SC-US and, therefore, SC-REMFs, is to
dilute the voting power of other SC-US and SC-REMFs shareholders.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

Firstar Trust Company, which has its principal business address at 615 East
Michigan Street, Milwaukee, Wisconsin 53202 has been retained to act as
Custodian of SC-US's investments and to serve as SC-US's transfer and dividend
disbursing agent. Firstar Trust Company does not have any part in deciding SC-
US's investment policies or which securities are to be purchased or sold for SC-
US's portfolio.

20
<PAGE>

REPORTS TO SHAREHOLDERS

The fiscal year of SC-US ends on December 31 of each year. SC-US will send to
its shareholders, at least semi-annually, reports showing the investments and
other information (including unaudited financial statements). An annual report,
containing financial statements audited by SC-US's independent accountants, will
be sent to shareholders each year. Please call 1-888-SECURITY (toll fee) for a
copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-US may advertise the "average annual total return" of
the Class I shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-US's Class I
shares from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of SC-US's Class I
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-US's Class I shares during the period are reinvested in Class I
shares of SC-US. Figures will be given for recent one-, five- and ten-year
periods (when applicable), and may be given for other periods as well (such as
from commencement of SC-US's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-US's Class I annual total return for any one year
in the period might have been greater or less than the average for the entire
period. SC-US also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-US's
Class I shares for the specific period (again reflecting changes in SC-US's
Class I share price and assuming reinvestment of Class I dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).

It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information further describes the methods used to determine SC-US's
performance.

YEAR 2000 RISKS

Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to SC-REMFs's records do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Issue." SC-REMFs is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
that it uses and to obtain satisfactory assurances that comparable steps are
being taken by each of SC-REMFs major service providers. However, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
SC-REMFs, SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA.

ADDITIONAL INFORMATION

Any shareholder inquiries may be directed to SC-REMFs at the address or
telephone number listed on the cover page of this Prospectus. This Prospectus,
including the Statement of Additional Information which is incorporated by
reference herein, does not contain all the information set forth in the
Registration Statement filed by SC-REMFs with the SEC under the Securities Act
of 1933. Copies of the Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge, at

21
<PAGE>

the offices of the SEC in Washington, D.C. or may be obtained from the SEC's
worldwide web site at http://www.sec.gov.

22
<PAGE>

PROSPECTUS

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital U.S. Real Estate Shares ("SC-US") is an investment
portfolio of Security Capital Real Estate Mutual Funds ("SC-REMFs"), an open-end
management investment company organized under Maryland law. SC-US seeks to
provide shareholders with above-average total returns, including current income
and capital appreciation, primarily through investments in real estate
securities in the United States. Long term, SC-US's objective is to achieve top-
quartile total returns as compared with other mutual funds that invest primarily
in real estate securities in the United States, by integrating in-depth
proprietary real estate market research with sophisticated capital markets
research and modeling techniques. Security Capital (US) Management Group
Incorporated ("SC (US) Management") serves as both investment adviser and
administrator to SC-US.

By this Prospectus, Class R shares of SC-US are being offered, SC-US also
offers Class I shares to investors whose minimum initial investment is $250,000.
Class I shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-US's other class
of shares should call 1-888-SECURITY (toll free) or ask their sales
representatives or SC-US's distributor. This Prospectus provides you with
information specific to the Class R shares of SC-US. It contains information you
should know before you invest in SC-US.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-US. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital European
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information dated [_______________,1998], containing additional and more
detailed information about SC-US has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by calling 1-888-SECURITY (toll
free) or writing SC-US's Sub-Administrator at: Firstar Trust Company, Mutual
Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

[_______________, 1998]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses......................................... 2

Financial Highlights............................. 4

Description of SC-REMFs and SC-US................ 5

Investment Objective and Policies................ 5

Investment Strategy.............................. 6

Risk Factors..................................... 9

Non-Diversified Status; Portfolio Turnover....... 9

Management of SC-US.............................. 10

Investment Advisory Agreement.................... 13

Administrator and Sub-Administrator.............. 13

Distribution and Servicing Plan.................. 14

Determination of Net Asset Value................. 15

Purchase of Shares............................... 15

Redemption of Shares............................. 18

Dividends and Distributions...................... 20

Taxation......................................... 20

Organization and Description of Capital Stock.... 21

Custodian and Transfer and Dividend
Disbursing Agent................................. 22

Reports to Shareholders.......................... 22

Performance Information.......................... 22

Additional Information........................... 23
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-US.

ANNUAL FUND OPERATING EXPENSES

The Class R shares of SC-US pay for certain expenses attributable to Class R
shares directly out of SC-US's Class R assets. These expenses are related to
management of SC-US, administration and other services. For example, SC-US pays
an advisory fee and an administrative fee to SC (US) Management. SC-US also has
other customary expenses for services such as transfer agent fees, custodial
fees paid to the bank that holds its portfolio securities, audit fees and legal
expenses. These operating expenses are subtracted from SC-US's Class R assets to
calculate SC-US's Class R net asset value per share. In this manner,
shareholders pay for these expenses indirectly.

FEE TABLE (1)

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions...... None
Redemption fee (2).................................................. None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees..................................................... .60%
12b-1 fees (3)...................................................... .25%
Other expenses (4).................................................. .15%
Total fund operating expenses (5)................................... 1.15%
</TABLE>

____________
(1) SC-US's net investment income and net expenses for the period January 1,
1997 through December 16, 1997, were allocated to each class of shares
based upon the relative outstanding shares of each class as of the close of
business on December 16, 1997, and the results thereof were combined with
the results of operations for each applicable class for the period December
17, 1997 through December 31, 1997.
(2) SC-US's transfer agent charges a service fee of $12.00 for each wire
redemption. In addition, the purchase or redemption of shares through a
securities dealer that has not entered into a sales agreement with Security
Capital Markets Group Incorporated, SC-US's distributor, may be subject to
a transaction fee.
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-US Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-US pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related
to the maintenance of shareholder accounts at the annual rate of 0.25% of
SC-US's Class I average daily net assets. As a result, long-term Class I
shareholders of SC-US may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(4) Other Expenses are based upon the operating experience of SC-US since April
23, 1997, the effective date of its registration statement under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended.

2
<PAGE>

(5) From April 23, 1997 through December 16, 1997, SC (US) Management committed
to waive fees and/or reimburse expenses to maintain SC-US's operating
expenses, other than brokerage fees and commissions, taxes, interest and
other extraordinary expenses at no more than 1.20% of SC-US's average daily
net assets. Since December 17, 1997 and for the year ending December 31,
1998, SC (US) Management has committed to waive fees and/or reimburse
expenses to maintain SC-US's Class R total fund operating expenses, other
than brokerage fees and commissions, taxes, interest and other
extraordinary expenses, at no more than 1.15% of the value of SC-US's Class
R average daily net assets for the year ending December 31, 1998. Without
such waiver and/or reimbursement, SC-US's actual total fund operating
expenses would have been 1.194% of SC-US's Class R average daily net assets
from April 23, 1997 to December 16, 1997 and 1.302% of SC-US's Class R
average daily net assets from December 17, 1997 to December 31, 1997.

The information in the Fee Table has been restated to reflect current fees.

EXAMPLE

THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
US'S ASSETS.

3
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES

The following audited financial highlights should be read in conjunction with
the financial information and notes thereto which appear in the Statement of
Additional Information.

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED - CLASS R SHARES /(1)/

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
-----------------
<S> <C>
Net asset value, beginning of period $ 10.15

Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
Total from investment operations 2.80

Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
Total distributions (1.00)

Net asset value, end of period $ 11.95

Total return /(4)/ 29.91%

Supplemental data and ratios:

Net assets, end of period $671,856

Ratio of expenses to average net assets /(5)/ /(6)/ 1.16%

Ratio of net investment income to average net assets /(5) /(6)/ 4.06%

Portfolio turnover rate /(7)/ 82.10%

Average commission rate paid per share /(7)/ $ 0.0595
</TABLE>

(1) On December 16, 1997, the shares held by SC-US's existing shareholders were
split into Class R and Class I shares based on the amount then invested in
SC-US. For the year ended December 31, 1997, the Financial Highlights
ratios of net expenses to average net assets, ratios of net investment
income to average net assets and the per share income from investment
operations are presented on a basis whereby SC-US's net investment income
and net expenses for the period January 1, 1997 through December 16, 1997,
were allocated to each class of shares based upon the relative outstanding
shares of each class as of the close of business on December 16, 1997, and
the results thereof were combined with the results of operations for each
applicable class for the period December 17, 1997 through December 31,
1997.
(2) Date the Fund was effective with the SEC.
(3) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(4) Not annualized for the period April 23, 1997 through December 16, 1997.
(5) Annualized for the period April 23, 1997 through December 16, 1997.
(6) Without expense reimbursements of $21,285 for the period April 23, 1997
through December 31, 1997, the ratio of expenses to average net assets
would have been 1.20% and the ratio of net investment income to average net
assets would have been 4.02%.
(7) Portfolio turnover and average commission rate paid are caluclated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued.

See notes to the financial statements.

4
<PAGE>

DESCRIPTION OF SC-US

SC-US issues two classes of shares, one of which, Class R shares's offered by
this prospectus. SC-US also issues Class I shares to investors whose minimum
initial investment is $250,000. Class R shares offer different services and
incur different expenses than Class I shares, which would affect performance.
See "Purchase of Shares" and "Organization and Description of Capital Stock."

INVESTMENT OBJECTIVE AND POLICIES

SC-US's investment objective is to provide shareholders with above-average
total returns, including current income and capital appreciation, primarily
through investments in real estate securities in the United States. Long term,
SC-US's objective is to achieve top-quartile total returns as compared with
other mutual funds that invest primarily in real estate securities in the United
States, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and modeling techniques. SC-US's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-US's policies, other
than its investment objective and the investment restrictions described in the
Statement of Additional Information , are fundamental and thus may be changed by
SC-US's Board of Directors without shareholder approval. There can be no
assurance that SC-US's investment objective will be achieved.

REAL ESTATE SECURITIES

REAL ESTATE INVESTMENT TRUSTS

5
<PAGE>

ILLIQUID SECURITIES

DEBT SECURITIES AND MONEY MARKET INSTRUMENTS

When, in the judgment of SC (US) Management, market or general economic
conditions justify a temporary defensive position, SC-US may invest in high-
grade debt securities, including corporate debt securities, U.S. government
securities, and short-term money market instruments, without regard to whether
the issuer is a real estate company. SC-US may also at any time use funds
awaiting investment or held as reserves to satisfy redemption requests or to pay
dividends and other distributions to shareholders in short-term money market
instruments.

SHORT SALES AND SHORT SALES AGAINST THE BOX

INVESTMENT STRATEGY

SC-US intends to continue to follow its disciplined, research driven
investment strategy, to identify those publicly traded real estate companies
which have the potential to deliver above average cash flow growth. This
investment strategy has been deployed by SC-US since December 20, 1996, its
inception date. As of December 31, 1997, the average annual total return for
Class R shares was 28.83%, after deducting fees and expenses and allocating net
investment income and net expense to Class I and Class R shares as

6
<PAGE>

described in SC-US's audited financial statements, which appear in the Statement
of Additional Information. FOR CURRENT RETURN INFORMATION RELATED TO SC-US,
CONTACT SC-US AT 1-888-SECURITY (TOLL FREE).

REAL ESTATE INDUSTRY OVERVIEW

REITS VS. OTHER INVESTMENTS
(AVERAGE ANNUAL TOTAL RETURN)

<TABLE>
<CAPTION>
USREALTY(1) NAREIT(2) NCREIF(3)
THROUGH DECEMBER 31, 1997 SC-US SC-US --------------- --------------- --------- S&P 500 BONDS(4)
- ------------------------- -------- -------- SPECIAL EQUITY INDEX INDEX -------- --------
CLASS I CLASS R OPPORTUNITY --------------- ---------
-------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 25.20% 25.19% 25.18% 20.26% 13.71% 33.35% 9.78%
5 years 18.28% 7.77% 20.23% 7.63%
15 years 14.99% 6.74% 17.49% 10.19%
20 years 16.02% 7.94% 16.63% 9.76%
</TABLE>

_____________
(1) Described under "Investment Strategy."

7
<PAGE>

(2) The National Association of Real Estate Investment Trusts ("NAREIT") equity
index data is based upon the last closing price of the month for all tax-
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System. The data is market-
weighted.
(3) The National Counsel of Real Estate Investment Fiduciaries Property Index
total return includes appreciation (or depreciation), realized capital gain
(or loss) and income. It is computed by adding income and capital
appreciation return on a quarterly basis.
(4) Merrill Lynch Government/Corporate Bond Index (Master).

A RESEARCH-DRIVEN PHILOSOPHY AND APPROACH

8
<PAGE>

RISK FACTORS

RISKS OF INVESTMENT IN REAL ESTATE SECURITIES

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

9
<PAGE>

gains by SC-US which, when distributed to shareholders, will be taxable as
ordinary income. See "Taxation."

DIRECTORS, OFFICERS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-US is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-US, including SC-REMFs's agreements with SC (US) Management, or
SC-US's administrator, custodian and transfer agent. The management of SC-US's
day-to-day operations is delegated to the officers of SC-REMFs, who include the
Managing Directors, SC (US) Management and the administrator, subject always to
the investment objective and policies of SC-US and to general supervision by the
Board of Directors. Although SC-REMFs is not required by law to hold annual
meetings, it may hold shareholder meetings from time to time on important
matters, and shareholders have the right to call a meeting to remove a Director
or to take other action described in SC-REMFs's Articles of Incorporation. The
Directors and officers of SC-REMFs and the certain key members of the SC-US
Portfolio Management Committee and their principal occupations are set forth
below.

Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior
Vice President for Administration and
Treasurer of Loyola University, Chicago
from 1981 to July 1994, where he was
responsible for administration,
investment, real estate and treasurer
functions, served as Chief Investment
Officer, was Chairman of the Operations
Committee, was a member of the
Investment and Finance Committees of the
Board of Trustees and was President and
a Director of the Loyola Management
Company. Mr. Kasbeer received his J.D.
from John Marshall Law School and his
M.A. and B.S. from Northwestern
University.

Anthony R. Manno Jr. Chairman of the Board of Directors,
Managing Director and President of SC-
REMFs. Managing Director of SC (US)
Management since March 1997, where he is
responsible for overseeing all
investment and capital allocation
matters for SC (US) Management's public
market securities activities and is also
responsible for company and industry
analysis, market strategy and trading
and reporting; from January 1995 to
March 1997, he was Managing Director of
SC (US) Management, where he performed
the same functions. Mr. Manno was a
member of the Investment Committee of
Security Capital Group Incorporated from
March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was
a Managing Director of LaSalle Partners
Limited from March 1980 to March 1994.
Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of
Business, an M.A. and a B.A. from
Northwestern University and is a
Certified Public Accountant.

10
<PAGE>

educational institutions when he became
President Emeritus of the Common Fund in
1993. He has served as a member of the
Investment Advisory Committee of the $75
billion New York State Common Retirement
Fund since 1982. He has been a Director
of the RCB Trust Company since 1991, a
Trustee of the Nicholas Applegate
Investment Trust since 1993, and a
Director of the Bramwell Funds since
1994. He is also a Director of Universal
Stainless & Alloy Products, Global
Pharmaceutical Corporation, United Water
Resources and United Properties Group,
Gulf Resources Corporation, and the
Universal Bond Fund, and is an advisor
to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma
mater, Fairfield University where he
received his B.A., and as a Director and
Chairman of the Investment Committee of
the United Negro College Fund. Mr. Keane
holds honorary degrees from Loyola
University, Chicago, Illinois and
Lawrence University, Appleton,
Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of
Colliers ABR, Inc. (formerly Abrams
Benisch Riker Inc.), a property
management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from
1978 to 1992 and since 1992, has served
as a Consultant. From 1959 to 1978 Mr.
Abrams was Executive Vice President and
Director of Cross and Brown Company. Mr.
Abrams also serves as a Director of
Greater New York Mutual Insurance
Company and Trustee Emeritus and
Presidential Counselor of his alma
mater, Cornell University. Mr. Abrams
received his M.B.A. from Harvard
University and his B.A. from Cornell
University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director
of Security Capital (US) Management
Group since July, 1997. Prior thereto,
Director of Security Capital Pacific
Trust ("PTR") and the PTR REIT Manager
from February 1995 to June 1997 and
Senior Vice President of Security
Capital Atlantic Incorporated
("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997
where he had overall responsibility for
asset management and multifamily
dispositions. Prior to joining Security
Capital, Mr. Gardner was with Copley
Real Estate Advisors as a Managing
Director and Principal responsible for
portfolio management from January 1991
to September 1994 and as a Vice
President and Principal of asset
management from December 1984 to
December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real
Estate Manager with the John Hancock
Companies. Mr. Gardner received his M.S.
in Computer Information Systems from
Bentley College and his B.S. in
Accounting from Stonehill College.

11
<PAGE>

Officer at Strong Capital Management,
Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management
Accountant and a Certified Financial
Planner. He received his B.B.A. from the
University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing
Director of SC (US) Management since
November 1997 where he is responsible
for the development and implementation
of portfolio investment strategy. Prior
thereto, Senior Vice President and
Senior REIT Analyst from July 1996 to
October 1997 and Vice President from May
1995 to June 1996. Prior to joining
Security Capital, Mr. Statz was a Vice
President in the investment research
department of Goldman, Sachs & Co., from
February 1993 to January 1995,
concentrating on research and
underwriting for the REIT industry.
Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a
managing director of Chancellor Capital
Management from August 1982 to February
1992. Mr. Statz received his M.B.A. and
B.B.A. from the University of Wisconsin,
Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs.
Senior Vice President of SC (US)
Management since November 1997 and Vice
President since July 1996, where he is
responsible for directing the activities
of the industry/company securities
research group and providing in-depth
proprietary research on publicly traded
companies. Prior to joining SC (US)
Management, Mr. Bedell spent nine years
with LaSalle Partners Limited where he
was Equity Vice President and Portfolio
Manager responsible for the strategic,
operational and financial management of
a private REIT with commercial real
estate investments of $600-800 million.
Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from
Kenyon College.

Albert D. Adriani Member, SC-US Portfolio Management
Committee; Vice President of SC (US)
Management since April 1996, where he is
responsible for providing portfolio
management analysis. From January 1995
to April 1996, he was Vice President,
Security Capital (UK) Management Limited
and SC-USREALTY; from March 1994 to
January 1995, he was with Security
Capital Markets Group. Prior thereto, he
was an investment analyst with HAL
Investments BV from July 1992 to January
1994. Mr. Adriani received his M.B.A.
from the University of Chicago Graduate
School of Business and his B.A. with
honors from the University of Chicago.
Mr. Adriani is a Chartered Financial
Analyst.

SC (US) MANAGEMENT

12
<PAGE>

The SC-US Portfolio Management Committee, which is comprised of certain SC-
REMFs officers and SC (US) Management analysts, is primarily responsible for the
construction of SC-US's portfolio.

INVESTMENT ADVISORY AGREEMENT

Under the Advisory Agreement, SC-US Class R shares pay SC (US) Management a
monthly management fee in an amount equal to 1/12th of .60% of the value of SC-
US's Class R average daily net assets (approximately .60% on an annual basis).
SC-US Management also has committed to waive fees and/or reimburse expenses to
maintain SC-US's Class R shares' total operating expenses, other than brokerage
fees and commissions, taxes, interest and other extraordinary expenses at no
more than 1.15% of the value of SC-US's Class R average daily net assets for the
year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-US Class R shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with SC (US) Management, (c) legal and auditing
expenses, (d) costs of printing and postage fees related to preparing and
distributing SC-US's prospectus and shareholder reports, (e) costs of
maintaining SC-REMFs's existence, (f) interest charges, taxes, brokerage fees
and commissions, (g) costs of stationery and supplies, (h) expenses and fees
related to registration and filing with federal and state regulatory
authorities, and (i) upon the approval of SC-REMFs's Board of Directors, costs
of personnel of SC (US) Management or its affiliates rendering clerical,
accounting and other office services. Each class of SC-US shares pays for the
portion SC-US's expenses attributable to its operations. Income, realized gains
and losses, unrealized appreciation and depreciation and certain expenses not
allocated to a particular class are allocated to each class based on the net
assets of that class in relation to the net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

13
<PAGE>

individual shareholders; (vi) supervising the daily pricing of SC-US's
investment portfolio and the publication of the net asset value of SC-US's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-US, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-US; (ix) maintaining books and records
for SC-US (other than those maintained by the Custodian and Transfer Agent) and
preparing and filing of tax reports other than SC-US's income tax returns; and
(x) providing executive, clerical and secretarial help needed to carry out these
responsibilities.

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs and the Class R shareholders of SC-US have
adopted a Distribution and Servicing Plan ("Plan") with respect to SC-US's Class
R shares pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. Under the Plan, SC-US pays to Security Capital Markets Group
Incorporated, in its capacity as principal distributor of SC-US's shares (the
"Distributor"), a monthly fee equal to, on an annual basis, .25% of the value of
SC-US's Class R average daily net assets.

The Distributor may use the fee for services performed and expenses incurred
by the Distributor in connection with the distribution of Class R shares and for
providing certain services to Class R shareholders. The Distributor may pay
third parties in respect of these services such amount as it may determine. SC-
US understands that these third parties may also charge fees to their clients
who are beneficial owners of SC-US Class R shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plan.

14
<PAGE>

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class R shares of SC-US, $.01 par value per
share ("Common Stock"), is determined on each day the New York Stock Exchange is
open for trading and on each other day on which there is a sufficient degree of
trading in SC-US's investments to affect the net asset value, as of the close of
trading on the New York Stock Exchange, by adding the market value of all
securities in SC-US's portfolio and other assets represented by Class R shares,
subtracting liabilities, incurred or accrued allocable to Class R shares, and
dividing by the total number Class R shares then outstanding.

For purposes of determining the net asset value per share of Class R shares,
readily marketable portfolio securities listed on the New York Stock Exchange
are valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Directors shall determine in good faith
to reflect its fair market value. Readily marketable securities not listed on
the New York Stock Exchange but listed on other domestic or foreign securities
exchanges or admitted to trading on the NASDAQ National Market are valued in a
like manner. Portfolio securities traded on more than one securities exchange
are valued at the last sale price on the business day as of which such value is
being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.

PURCHASE OF SHARES

SC-US Class R shares may be purchased through Firstar Trust Company, SC-US's
Transfer Agent, or any dealer that has entered into a sales agreement with the
Distributor.

If you choose a securities dealer that has not entered into a sales agreement
with the Distributor, such dealer may, nevertheless, offer to place an order for
the purchase of SC-US shares. Such dealer may charge a transaction fee, as
determined by the dealer. That fee may be avoided if shares are purchased
through a dealer who has entered into a sales agreement with the Distributor or
through the Transfer Agent.

By investing in SC-US, you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the

15
<PAGE>

Transfer Agent. All fractional shares will be held in book entry form. PLEASE
NOTE THAT IT IS MORE COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $2,500. For individual retirement account
and employee benefit plans qualified under Section 401, 403(b)(7) or 457 of the
Code as well as UGMA or UTMA accounts the minimum initial investment is $1,000.
For investors using the Automatic Investment Plan (described below) the minimum
initial investment is $250. These minimums can be changed or waived by SC-US at
any time. Shareholders will be given at least 30 days notice of any increase in
the minimum dollar amount of subsequent investments.

Class R shares may be purchased by check or money order drawn on a U.S. bank,
savings and loan, or credit union by wire transfer. The enclosed application
must be completed and accompanied by payment in U.S. funds to open an account.
Checks must be payable in U.S. dollars and will be accepted subject to
collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-US and are not binding until so accepted. SC-US
reserves the right to decline to accept a purchase order application in whole or
in part.

MAIL

The following instructions should be used when mailing a check or money order
payable to "Security Capital U.S. Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:

VIA U.S. MAIL VIA OVERNIGHT MAIL
Firstar Trust Company Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202

Please note that if your check does not clear, a service charge of $20 will be
charged and you will be responsible for any losses suffered by SC-US as a
result.

WIRE PURCHASES

Class R shares may be purchased by wire only through the Transfer Agent. The
following instructions should be used when wiring funds to the Transfer Agent
for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital U.S. Real Estate Shares
(shareholder account number)
(shareholder name/account registration)

16
<PAGE>

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handling of Funds. SC-US
AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM INCOMPLETE
WIRING INSTRUCTIONS.

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan allows regular, systematic investments in SC-US
Class R shares from a bank checking or NOW account. SC-US will reduce the
minimum initial investment to $250 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, an investor should
complete the appropriate section in SC-US's application and an existing SC-US
shareholder should call 1-888-SECURITY (toll free) for an automatic investment
plan form. The Automatic Investment Plan can be set up with any financial
institution that is a member of the ACH. Under certain circumstances (such as
discontinuation of the Automatic Investment Plan before the minimum initial
investment is reached, or, after reaching the minimum initial investment, the
account balance is reduced to less than $500), SC-US reserves the right to close
such account. Prior to closing any account for failure to reach the minimum
initial investment, SC-US will give a shareholder written notice and 60 days in
which to reinstate the Automatic Investment Plan or otherwise reach the minimum
initial investment. A shareholder should consider his or her financial ability
to continue in the Automatic Investment Plan until the minimum initial
investment amount is met because SC-US has the right to close such account for
failure to reach the minimum initial investment. Such closing may occur in
periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20.00
will be deducted from a shareholder's SC-US account for any Automatic Investment
Plan purchase that does not clear due to insufficient funds or, if prior to
notifying SC-US in writing or by telephone to terminate the plan, a shareholder
closes his or her bank account or in any manner prevent withdrawal of funds from
the designated bank checking or NOW account.

The Automatic Investment Plan is a method of using dollar cost averaging which
is an investment strategy that involves investing a fixed amount of money at a
regular time interval. However, a program of regular investment cannot ensure a
profit or protect against a loss from declining markets. By always investing the
same amount, a shareholder will be purchasing more shares when the price is low
and fewer shares when the price is high. Since such a program involves
continuous investment regardless of fluctuating share values, a shareholder
should consider his or her financial ability to continue the program through
periods of low share price levels.

SUBSEQUENT INVESTMENTS

Additional investments of at least $250 may be made by mail, wire or by
telephone. When making an additional purchase by mail, a check payable to
"Security Capital U.S. Real Estate Shares" along with the Additional Investment
Form provided on the lower portion of a shareholder's account statement must be
enclosed. To make an additional purchase by wire, a shareholder may call 1-800-
699-4594 (toll free) for complete wiring instructions.

You may purchase additional shares by moving money from your bank account to
your SC-US account by telephone. Only bank accounts held at domestic financial
institutions that are Automated Clearing House ("ACH") members can be used for
telephone transactions. In order for shares to be purchased at the net asset
value determined as of the close of regular trading on a give date, the Transfer
Agent must receive both the purchase order and payment by Electronic Funds
Transfer through the ACH System, before the

17
<PAGE>

close of regular trading on such date. Most transfers are completed within three
business days. TELEPHONE TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF
CLASS R SHARES.

EXCHANGE FEATURE

Class R shares of SC-US may be exchanged for Class R shares of SC-ARBITRAGE,
SC-EURO and SC-ASIA. Exchanges of Class R shares will be made at their relative
net asset values. Shares may be exchanged only if the amount being exchanged
satisfies the minimum investment required. However, you may not exchange your
investment in shares of SC-US, SC-ARBITRAGE, SC-EURO or SC-ASIA more than four
times in any twelve-month period (including the initial exchange of your
investment during that period).

CLASS I SHARES

SC-US also issues Class I shares which offer different services and incur
different expenses which would affect performance. Investors may call the
Distributor at 1-800-699-4594 (toll free) to obtain additional information.

REDEMPTION OF SHARES

You may request redemption of part or all of your Class R shares at any time
by telephone or by mail. The redemption of shares will be at the next determined
net asset value. See "Determination of Net Asset Value." SC-US normally will
mail the redemption proceeds to you on the next business day and, in any event,
no later than seven business days after the receipt of a redemption request in
good order. However, when a purchase has been made by check, SC-US may hold
payment on redemption proceeds until it reasonably satisfied that the check has
cleared, which may take up to twelve days.

Redemption requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class R shares to be redeemed
were issued in certificate form, the certificate must be endorsed for transfer
(or be accompanied by a duly executed stock power) and must be submitted to
Firstar Trust Company together with a redemption request. The following
instructions should be used for the redemption of shares by mail, by wire and by
telephone:

MAIL AND WIRE

VIA U.S. MAIL BY OVERNIGHT MAIL
Firstar Trust Company Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202

18
<PAGE>

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-699-
4594. In order to utilize this procedure, you must have previously elected this
option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-US reserves the right to limit
the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

SIGNATURE GUARANTEES

OTHER REDEMPTION INFORMATION

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

19
<PAGE>

A shareholder's account may be terminated by SC-US in not less than 30 days'
notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 in the case of individual retirement accounts and employee benefit plans
qualified under Sections 401, 403(b)(7) or 457 of the Code). Upon any such
termination, a check for the redemption proceeds will be sent to the account of
record within seven business days of the redemption. However, if a shareholder
is affected by the exercise of this right, he or she will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.

DIVIDENDS AND DISTRIBUTIONS

TAXATION

FEDERAL INCOME TAXES

20
<PAGE>

specified date in such a month that is paid during January of the following year
is includable in the prior year's taxable income of shareholders that are
calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-US will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of such shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him or her
as described above. If a shareholder held shares six months or less, and during
that period received a distribution taxable to such shareholder as long-term
capital gain, any loss realized on the sale of such shares during such six-month
period would be a long-term capital loss to the extent of such distribution.

Further information relating to tax consequences is contained elsewhere in
this Prospectus and in the Statement of Additional Information.

STATE AND LOCAL TAXES

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On [___________,
1998], its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-US's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, each with two classes of shares:
Class I shares and Class R shares. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

21
<PAGE>

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-US's Class R shares may not be
modified except by the vote of a majority of the holders of all Class R shares
outstanding. SC-US's Class R shareholders have exclusive voting rights with
respect to matters relating solely to SC-US's Class R shares. SC-US's Class R
shareholders vote separately from SC-US's Class I shareholders and SC-
ARBITRAGE's, SC-EURO's and SC-ASIA's Class I and Class R shareholders on matters
in which the interests of SC-US's Class R shareholders differ from the interests
of SC-US's Class I shareholders and SC-ARBITRAGE's, SC-EURO's and SC-ASIA's
Class I and Class R shareholders.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

REPORTS TO SHAREHOLDERS

The fiscal year of SC-US ends on December 31 of each year. SC-US will send to
its shareholders, at least semi-annually, reports showing the investments and
other information (including unaudited financial statements). An annual report,
containing financial statements audited by SC-US's independent accountants, will
be sent to shareholders each year. Please call 1-888-SECURITY (toll free) for a
copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-US may advertise the "average annual total return" of
the Class R shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-US's Class R
shares from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of SC-US's Class R
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-US's Class R shares during the period are reinvested in Class R
shares of SC-US. Figures will be given for recent one-, five- and ten-year
periods (when applicable), and may be given for other periods as well (such as
from commencement of SC-US's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-US's Class R annual total return for any one year
in the period might have been greater or less than the average for the entire
period. SC-US also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an

22
<PAGE>

investment in SC-US's Class R shares for the specific period (again reflecting
changes in SC-US's Class R share price and assuming reinvestment of Class R
dividends and distributions). Aggregate total returns may be shown by means of
schedules, charts or graphs, and may indicate subtotals of the various
components of total return (that is, the change in value of initial investment,
income dividends and capital gains distributions).

YEAR 2000 RISKS

ADDITIONAL INFORMATION

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<PAGE>

PROSPECTUS

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ARBITRAGE seeks to provide shareholders with maximum returns by
engaging in various arbitrage transactions in real estate securities in the
United States. Security Capital (US) Management Group Incorporated ("SC (US)
Management") serves as both investment adviser and administrator to SC-
ARBITRAGE.

By this Prospectus, Class I shares of SC-ARBITRAGE are being offered. Class I
shares are offered to investors whose minimum investment is $250,000. See
"Purchase of Shares." SC-ARBITRAGE also offers Class R shares to investors
whose minimum initial investment is $2,500. Class R shares have different
expenses than Class I shares which would affect performance. Investors desiring
to obtain information about SC-ARBITRAGE's other class of shares should call
1-888-SECURITY (toll free) or ask their sales representatives or SC-ARBITRAGE's
distributor.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

An investment in SC-ARBITRAGE should not be the sole source of investment for
a shareholder. Rather, an investment in SC-ARBITRAGE should be considered as
part of an overall portfolio strategy which includes fixed income and equity
securities.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ARBITRAGE. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, European Real Estate shares, and Security Capital
Asia/Pacific Real Estate Shares. A Statement of Additional Information dated
[_______________,1998], containing additional and more detailed information
about SC-ARBITRAGE has been filed with the Securities and Exchange Commission
and is hereby incorporated by reference into this Prospectus. It is available
without charge and can be obtained by calling 1-888-SECURITY (toll free) or
writing SC-ARBITRAGE's Sub-Administrator at: Firstar Trust Company, Mutual Fund
Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.

THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
IN ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR
INDIVIDUAL TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

[_______________, 1998]
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses........................................... 2

Description of SC-REMFs and SC-ARBITRAGE........... 4

Investment Objectives and Policies................. 4

Trading and Investment Strategies.................. 6

Risk Factors....................................... 8

Non-Diversified Status; Portfolio Turnover......... 10

Management of SC-ARBITRAGE......................... 11

Investment Advisory Agreements..................... 14

Administrator and Sub-Administrator................ 15

Determination of Net Asset Value................... 16

Purchase of Shares................................. 17

Redemption of Shares............................... 18

Dividends and Distributions........................ 21

Taxation........................................... 21

Organization and Description of Capital Stock...... 22

Custodian and Transfer and Dividend
Disbursing Agent................................. 23

Reports to Shareholders............................ 23

Performance Information............................ 23

Additional Information............................. 24
</TABLE>
<PAGE>

EXPENSES

Shareholder Transaction Expenses

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ARBITRAGE.

ANNUAL FUND OPERATING EXPENSES

The Class I shares of SC-ARBITRAGE pay for certain expenses attributable to
Class I shares directly out of SC-US's Class I assets. These expenses are
related to management of SC-ARBITRAGE, administration and other services. For
example, SC-ARBITRAGE pays an advisory fee and an administrative fee to SC (US)
Management. SC-ARBITRAGE also has other customary expenses for services such as
transfer agent fees, custodial fees paid to the bank that holds its portfolio
securities, audit fees and legal expenses. These operating expenses are
subtracted from SC-ARBITRAGE's Class I assets to calculate SC-ARBITRAGE's Class
I net asset value per share. In this manner, shareholders pay for these expenses
indirectly.

The following table is provided to help shareholders understand the direct
expenses of investing in SC-ARBITRAGE and the portion of SC-ARBITRAGE's
operating expenses that they might expect to bear indirectly. The numbers
reflected below are based on SC-ARBITRAGE's projected expenses for its current
fiscal period ending December 31, 1998, assuming that SC-ARBITRAGE's average
annual net assets for such fiscal year are $100 million.

FEE TABLE

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions..... None
Redemption fee (1)................................................. None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees (2)................................................ 2.00%
12b-1 fees......................................................... None
Other expenses (3)................................................. .15%
Total fund operating expenses...................................... 2.15%
</TABLE>

(2) The 2.00% management fee is a "fulcrum fee" that will be applied to SC-
ARBITRAGE's net assets in accordance with Securities and Exchange Commission
regulations. After the first three full months of operations, SC-ARBITRAGE
will pay a monthly advisory fee to SC (US) Management which varies between
an annual rate of 0.50% and 3.50% of SC-ARBITRAGE's average daily net assets
based on the SC-ARBITRAGE's total return investment performance for the
prior twelve-month period relative to the percentage change in Wilshire Real
Estate Index ("WAREIT") for the same period (the "Index Return"). Until SC-
ARBITRAGE completes twelve full calendar months of operations, the
performance adjustment, which is 10% of the difference between the
investment performance of SC-ARBITRAGE and the investment performance of
WAREIT, will be measured from the date of inception. The advisory fee is
structured so that it will be 2.00% if SC-ARBITRAGE's investment performance
for

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<PAGE>

the preceding twelve months (net of fees and expenses, including the
advisory fee) equals the Index Return.

(3) Other Expenses are based estimated amounts for the current fiscal year.

EXAMPLE

<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
---- -----
<S> <C> <C>
A shareholder would bear the following expenses on
a $1,000 investment, assuming: a five percent annual
return, operating expenses as outlined in the fee
table above and redemption at the end of each period.... $24 $75
</TABLE>

THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
ARBITRAGE'S ASSETS.

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<PAGE>

DESCRIPTION OF SC-ARBITRAGE

SC-ARBITRAGE is a non-diversified investment portfolio of Security Capital
Real Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management
investment company organized under Maryland law on January 23, 1997. SC-REMFs
is comprised of four investment portfolios, SC-ARBITRAGE, Security Capital U.S.
Real Estate Shares ("SC-US"), Security Capital European Real Estate Shares
("SC-EURO") and Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA").

SC-ARBITRAGE issues two classes of shares, one of which, Class I shares,
includes investors whose minimum initial investment is $250,000. The second
class of shares, Class R shares, which are offered to all other eligible
investors, offers different services and incurs different expenses than Class I
shares, which would affect performance. See "Purchase of Shares" and
"Organization and Description of Capital Stock." SC-ARBITRAGE Class I shares
are offered by this prospectus.

INVESTMENT OBJECTIVE AND POLICIES

SC-ARBITRAGE's investment objective is to provide shareholders with maximum
returns by engaging in various arbitrage transactions in real estate securities
in the United States. SC-ARBITRAGE's investment focus will be real estate
securities which are undergoing initial public offerings, secondary offerings,
mergers and acquisitions and restructurings. SC-ARBITRAGE's investment strategy
may cause SC-ARBITRAGE to take positions in real estate securities that are
different than those taken by SC-US, another SC-REMFs investment portfolio.

SC-ARBITRAGE's investment objective is "fundamental" and cannot be changed
without approval of a majority of its outstanding voting securities. None of SC-
ARBITRAGE's policies, other than its investment objective and the investment
restrictions described in the Statement of Additional Information, are
fundamental and thus may be changed by SC-ARBITRAGE's Board of Directors without
shareholder approval. There can be no assurance that SC-ARBITRAGE's investment
objective will be achieved.

REAL ESTATE SECURITIES

Under normal circumstances, SC-ARBITRAGE will invest at least 80% of its
assets in real estate securities. Such equity securities will consist of (i)
common stocks, (ii) rights or warrants to purchase common stocks, (iii)
securities convertible into common stocks where the conversion feature
represents, in SC (US) Management's view, a significant element of the
securities' value, and (iv) preferred stocks. For purposes of SC-ARBITRAGE's
investment policies, a "real estate company" is one that derives at least 50% of
its revenues from the ownership, construction, financing, management or sale of
commercial, industrial, or residential real estate or that has at least 50% of
its assets invested in such real estate. SC-ARBITRAGE may invest in securities
issued by real estate companies that are controlled by Security Capital Group
Incorporated or its affiliates.

REAL ESTATE INVESTMENT TRUSTS

SC-ARBITRAGE may invest without limit in shares of REITs. REITs pool
investors' funds for investment primarily in income producing real estate or
real estate related loans or interests. A REIT is not taxed on income
distributed to shareholders if it complies with several requirements relating to
its organization, ownership, assets, and income and a requirement that it
distribute to its shareholders at least 95% of its taxable income (other than
net capital gains) for each taxable year. REITs can generally be classified as
equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which invest the
majority of their assets directly in real property, derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income primarily
from interest payments on

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<PAGE>

real estate mortgages in which they are invested. Hybrid REITs combine the
characteristics of both equity REITs and mortgage REITs.

ILLIQUID SECURITIES

SC-ARBITRAGE will not invest more than 10% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. SC (US) Management will
monitor the liquidity of such restricted securities under the supervision of SC-
REMFs's Board of Directors. If SC-ARBITRAGE invests in securities issued by a
real estate company that is controlled by Security Capital Group Incorporated or
any of its affiliates, such securities will be treated as illiquid securities.
See the Statement of Additional Information for further discussion of illiquid
securities.

CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES

SC-ARBITRAGE may invest in convertible securities, preferred stock, warrants
and other securities exchangeable under certain circumstances for shares of
common stock. Warrants are instruments giving holders the right but not the
obligation, to buy shares of a company at a given price during a specified
period.

SC-ARBITRAGE also may invest in equity-linked securities, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. The advantage of using equity-linked securities
over traditional equity and debt securities is that the former are income
producing vehicles that may provide a higher income than the dividend income on
the underlying securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities. The
return on equity-linked securities depends on the creditworthiness of the
issuer. See Risk Factors.

DEBT SECURITIES AND MONEY MARKET INSTRUMENTS

SC-ARBITRAGE may invest in debt securities from time to time, if SC (US)
Management believes investing in such securities might help achieve SC-
ARBITRAGE's objective. SC-ARBITRAGE may invest in debt securities to the extent
consistent with its investment policies, although SC (US) Management expects
that under normal circumstances the Funds are not likely to invest a substantial
portion of their assets in debt securities.

SC-ARBITRAGE may invest in lower-quality, high-yielding debt securities.
Lower-rated debt securities (commonly called "junk bonds") are considered to be
of poor standing and predominantly speculative. Securities in the lowest rating
categories may have extremely poor prospects of attaining any real investment
standing, and some of those securities in which a Fund may invest may be in
default. The rating services' descriptions of securities in the lower rating
categories, including their speculative characteristics, are set forth in
Appendix A to the Statement of Additional Information.

SC-ARBITRAGE will not necessarily dispose of a security when its debt rating
is reduced below its rating at the time of purchase, although SC (US) Management
will monitor the investment to determine whether continued investment in the
security will assist in meeting the Fund's investment objective. If a security's
rating is reduced below investment grade, an investment in that security may
entail the risks of lower-rated securities described below. See Risk Factors.

5
<PAGE>

When, in the judgment of SC (US) Management, market or general economic
conditions justify a temporary defensive position, SC-ARBITRAGE will deviate
from its investment objective and invest all or any portion of its assets in
high-grade debt securities, including corporate debt securities, U.S. government
securities, and short-term money market instruments, without regard to whether
the issuer is a real estate company. SC-ARBITRAGE may also at any time invest
funds awaiting investment or held as reserves to satisfy redemption requests or
to pay dividends and other distributions to shareholders in short-term money
market instruments.

TRADING AND INVESTMENT STRATEGIES

ARBITRAGE TRANSACTIONS

SC-ARBITRAGE seeks to achieve maximum returns by engaging in short-term
trading, risk and convertible arbitrage transactions. SC-ARBITRAGE's short-term
trading and arbitrage transactions will focus primarily on real estate
securities which are undergoing initial public offerings, secondary offerings,
mergers and acquisitions and restructurings. SC (US) Management relies on a
dynamic integration of quantitative analysis in combination with SC (US)
Management's Integrated Valuation Matrix to identify unique arbitrage and other
short-term opportunities for SC-ARBITRAGE's portfolio.

. MERGERS AND ACQUISITIONS ARBITRAGE. SC-ARBITRAGE will engage in
arbitrage transactions involving purchases of the securities of a real
estate company that is being acquired and sales of the securities of
the acquiror.

. LIQUIDITY ARBITRAGE. SC-ARBITRAGE will engage in liquidity arbitrage
transactions, involving the purchase and immediate sale of blocks of
real estate securities. SC (US) Management's valuation methodologies
facilitate liquidity arbitrage by SC-ARBITRAGE enabling SC-ARBITRAGE
to respond quickly to block opportunities as they arise.

. CAPITAL ISSUANCE ARBITRAGE. SC-ARBITRAGE will engage in arbitrage
transactions associated with REIT capital raising activities.

. EVENT ARBITRAGE. SC-ARBITRAGE will engage in event arbitrage
transactions in the securities of real estate companies which are
undergoing a restructuring, spin-off or other structured event.

SHORT SALES AND SHORT SALES AGAINST THE BOX

SC-ARBITRAGE may engage in short sale transactions in securities listed on one
or more national securities exchanges or on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") to effect
arbitrage transactions. Short selling involves the sale of borrowed securities.
At the time a short sale is effected, SC-ARBITRAGE incurs an obligation to
replace the security borrowed at whatever its price may be at the time that SC-
ARBITRAGE purchases it for delivery to the lender. When a short sale transaction
is closed out by delivery of the securities, any gain or loss on the transaction
is taxable as a short term capital gain or loss. Until the security is replaced,
SC-ARBITRAGE is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. SC-ARBITRAGE generally will
engage in short sales only to effect arbitrage transactions. All short sales
will be fully collateralized. SC-ARBITRAGE may also engage in short sales
against the box, which involves selling a security SC-ARBITRAGE holds in its
portfolio for delivery at a specified date in the future. SC-ARBITRAGE will not
engage in short sales or short sales against the box if immediately following
such transaction the aggregate market value of all securities sold short and
sold short against the box would

6
<PAGE>

exceed 100% of SC-ARBITRAGE's net assets (taken at market value). See the
Statement of Additional Information for further discussion of short sales and
short sales against the box.

BORROWING AND LEVERAGE

SC-ARBITRAGE may borrow money in order to invest in additional portfolio
securities and engage in liquidity arbitrage transactions. This practice, known
as "leverage," increases SC-ARBITRAGE's market exposure and its risk. When SC-
ARBITRAGE has borrowed money for leverage and its investments increase or
decrease in value, SC-ARBITRAGE's net asset value will normally increase or
decrease more than if it had not borrowed money. The interest SC-ARBITRAGE must
pay on borrowed money will reduce the amount of any potential gains or increase
any losses. SC-ARBITRAGE generally will not employ leverage in the absence of
liquidity arbitrage opportunities. The amount of money borrowed by SC-ARBITRAGE
for leverage may generally not exceed one-third of SC-ARBITRAGE's assets
(including the amount borrowed).

SC-ARBITRAGE may at times borrow money by means of reverse repurchase
agreements. Reverse repurchase agreements generally involve the sale by SC-
ARBITRAGE of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. The investment by SC-
ARBITRAGE of the proceeds of a reverse repurchase agreement is the speculative
leverage component of the transaction. SC-ARBITRAGE will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement.

SECURITIES LOANS AND REPURCHASE AGREEMENTS

SC-ARBITRAGE may lend portfolio securities to broker-dealers and may enter
into repurchase agreements with brokers, dealers or banks that meet the credit
guidelines of SC-REMFs's Board of Directors. These transactions must be fully
collateralized at all time.

In a repurchase agreement, SC-ARBITRAGE buys a security from a seller that has
agreed to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The term of these
agreements is generally from overnight to one week and never exceeds one year.
SC-ARBITRAGE always receives securities as collateral with a market value at
least equal to the purchase price, including accrued interest, and this value is
maintained during the term of the agreement.

OPTIONS AND FUTURES

SC-ARBITRAGE may buy and sell call and put options to hedge against changes in
net asset value or to attempt to realize a greater current return. Through the
purchase and sale of futures contracts and related options, SC-ARBITRAGE may at
times seek to hedge against fluctuations in net asset value and to attempt to
increase its investment return. SC-ARBITRAGE also may write a call or put
option in return for a premium, which is retained by SC-ARBITRAGE whether or not
the option is exercised.

SC-ARBITRAGE's ability to engage in options and futures strategies will depend
on the availability of liquid markets in such instruments. It is difficult to
predict the amount of trading interest that may exist in various types of
options or futures contracts. Therefore, there is no assurance that SC-
ARBITRAGE will be able to utilize these instruments effectively for the purposes
stated above. Options and futures transactions involve certain risks which are
described below and in the Statement of Additional Information.

Transactions in options and futures contracts involve brokerage costs and may
require SC-ARBITRAGE to segregate assets to cover its outstanding positions.
For more information, see the Statement of Additional Information.

7
<PAGE>

INDEX FUTURES AND OPTIONS

SC-ARBITRAGE may buy and sell index futures contracts ("index futures") and
options on index futures and on indices (or may purchase investments whose
values are based on the value from time to time of one or more securities
indices) for hedging purposes. An index future is a contract to buy or sell
units of a particular bond or stock index at an agreed price on a specified
future date. Depending on the change in value of the index between the time
when SC-ARBITRAGE enters into and terminates an index futures or option
transaction, SC-ARBITRAGE realizes a gain or loss. SC-ARBITRAGE may also buy and
sell index futures and options to increase its investment return.

RISK FACTORS

REAL ESTATE SECURITIES

SC-ARBITRAGE will not invest in real estate directly, but only in securities
issued by real estate companies. However, SC-ARBITRAGE may be subject to risks
similar to those associated with the direct ownership of real estate (in
addition to securities markets risks) because of its policy of concentration in
the securities of companies in the real estate industry. Such risks include
declines in the value of real estate, risks related to general and local
economic conditions, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition, increases
in property taxes and operating expenses, changes in zoning laws, losses due to
costs resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to customers and changes in interest rates.

DEBT SECURITIES

Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. In addition, the
lower ratings of such securities reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. Changes by
recognized rating services in their ratings of any fixed-income security and in
the ability or perceived inability of an issuer to make payments of interest and
principal may also affect the value of these investments. See Appendix A to the
Statement of Additional Information.

8
<PAGE>

EQUITY-LINKED SECURITIES

Equity-linked securities are convertible into, or based upon the value of,
underlying equity securities. Trading prices of the underlying common stock will
be influenced by the issuer's operational results, by complex, interrelated
political, economic, financial or other factors affecting the capital markets,
the stock exchanges on which the underlying common stock is traded and the
market segment of which the issuer is a part. In addition, it is not possible
to predict how equity-linked securities will trade in the secondary market which
is fairly developed and liquid. The market for such securities may be shallow,
however, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities.

SHORT SALES AND SHORT SALES AGAINST THE BOX

A short sale is a transaction in which SC-ARBITRAGE sells securities it does
not own, but has borrowed, in anticipation of a decline in the market value of
the securities. A short sale against the box is a transaction in which SC-
ARBITRAGE sells securities it owns or has the right to acquire, also in
anticipation of a decline in market value. An increase in the value of
securities sold short or sold short against the box by SC-ARBITRAGE will result
in a loss to SC-ARBITRAGE, and there can be no assurance that SC-ARBITRAGE will
be able to limit the amount of its loss on a short position by closing out the
position at any particular time or at an acceptable price.

BORROWING AND LEVERAGE

SC-ARBITRAGE may borrow money to invest in additional portfolio securities in
connection with liquidity arbitrage transactions. The interest SC-ARBITRAGE
must pay on borrowed money will reduce the amount of any potential gains or
increase any losses. Successful use of leverage depends on SC (US) Management's
ability to predict market movements correctly. SC-ARBITRAGE may at times borrow
money by means of reverse repurchase agreements, which will increase SC-
ARBITRAGE's overall investment exposure and may result in losses if interest
rates rise during the term of such an agreement. Additionally, if the purchaser
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the buyer or its trustee or receiver may receive an extension
of time to determine whether to enforce the SC-ARBITRAGE's repurchase
obligation, and SC-ARBITRAGE's use of proceeds under the agreement may
effectively be restricted pending such decision.

SECURITIES LOANS AND REPURCHASE AGREEMENTS

A repurchase agreement may be viewed as a fully collateralized loan of money
by SC-ARBITRAGE to the seller. If the seller defaults and the value of the
collateral declines, SC-ARBITRAGE might incur a loss. If bankruptcy proceedings
are commenced with respect to the seller, SC-ARBITRAGE's realization of gain
upon the collateral may be delayed or limited. Repurchase agreements with
durations or maturities over seven days in length are considered to be illiquid
securities.

RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES

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<PAGE>

ARBITRAGE will enter into options and futures transactions only if SC (US)
Management believes that a liquid secondary market exists for such option or
futures contract, there can be no assurance that SC-ARBITRAGE will be able to
effect closing transactions at any particular time or at an acceptable price.
Certain provisions of the Internal Revenue Code may limit SC-ARBITRAGE's ability
to engage in options and futures transactions.

SC-ARBITRAGE expects that its options and futures transactions generally will
be conducted on recognized exchanges. SC-ARBITRAGE may in certain instances
purchase and sell options in the over-the-counter markets. SC-ARBITRAGE's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options, and such transactions also involve the risk
that securities dealers participating in such transactions would be unable to
meet their obligations to the Fund. SC-ARBITRAGE will, however, engage in over-
the-counter transactions only when appropriate exchange-traded transactions are
unavailable and when, in the opinion of SC (US) Management, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.

SC-ARBITRAGE will not purchase futures or options on futures or sell futures
if, as a result, the sum of the initial margin deposits on SC-ARBITRAGE's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of SC-ARBITRAGE's assets. (For options that are "in-
the-money" at the time of purchase, the amount by which the option is "in-the-
money" is excluded from this calculation.)

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

SC-ARBITRAGE operates as a "non-diversified" investment company under the 1940
Act, which means SC-ARBITRAGE is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer.
However, SC-ARBITRAGE intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Code, which generally will
relieve SC-ARBITRAGE of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Taxation." To qualify as a
regulated investment company, among other requirements, SC-ARBITRAGE will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of SC-ARBITRAGE's total assets will be
invested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and SC-
ARBITRAGE will not own more than 10% of the outstanding voting securities of a
single issuer. SC-ARBITRAGE's investments in securities issued by the U.S.
Government, its agencies and instrumentalities are not subject to these
limitations. Because SC-ARBITRAGE, as a non-diversified investment company, may
invest in a smaller number of individual issuers than a diversified investment
company, an investment in SC-ARBITRAGE may present greater risk to an investor
than an investment in a diversified company.

SC-ARBITRAGE anticipates that its annual portfolio turnover rate will not
exceed 400%, but the turnover rate will not be a limiting factor when SC (US)
Management deems portfolio changes appropriate. The turnover rate may vary
greatly from year to year. An annual turnover rate of 400% occurs, for example,
when all of the securities held by SC-ARBITRAGE are replaced 4 times in a period
of one year. A higher turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses which are borne by SC-ARBITRAGE.
High portfolio turnover may result in the realization of net short-term capital
gains by SC-ARBITRAGE which, when distributed to shareholders, will be taxable
as ordinary income. See "Taxation."

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OFFICERS, DIRECTORS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-ARBITRAGE is vested
with the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ARBITRAGE, including SC-REMFs's agreements with SC (US)
Management, or SC-ARBITRAGE's administrator, custodian and transfer agent. The
management of SC-ARBITRAGE's day-to-day operations is delegated to the officers
of SC-REMFs, who include the Managing Directors, SC (US) Management and the
administrator, subject always to the investment objective and policies of SC-
ARBITRAGE and to general supervision by the Board of Directors. Although SC-
REMFs is not required by law to hold annual meetings, it may hold shareholder
meetings from time to time on important matters, and shareholders have the right
to call a meeting to remove a Director or to take other action described in SC-
REMFs's Articles of Incorporation. The Directors and Officers of SC-REMFs and
certain key members of SC-ARBITRAGE's Portfolio Management Committee and their
principal occupations are set forth below.

Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July
1994, where he was responsible for
administration, investment, real estate and
treasurer functions, served as Chief
Investment Officer, was Chairman of the
Operations Committee, was a member of the
Investment and Finance Committees of the
Board of Trustees and was President and a
Director of the Loyola Management Company.
Mr. Kasbeer received his J.D. from John
Marshall Law School and his M.A. and B.S.
from Northwestern University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director of SC (US) Management since March
1997, where he is responsible for overseeing
all investment and capital allocation matters
for SC (US) Management's public market
securities activities and is also responsible
for company and industry analysis, market
strategy and trading and reporting; from
January 1995 to March 1997, he was Managing
Director of SC (US) Management, where he
performed the same functions. Mr. Manno was a
member of the Investment Committee of
Security Capital Group Incorporated from
March 1994 to June 1996. Prior to joining
Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received
his M.B.A. from the University of Chicago
Graduate School of Business, an M.A. and a
B.A. from Northwestern University and is a
Certified Public Accountant.

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the Common Fund in 1993. He has served as a
member of the Investment Advisory Committee
of the $75 billion New York State Common
Retirement Fund since 1982. He has been a
Director of the RCB Trust Company since 1991,
a Trustee of the Nicholas Applegate
Investment Trust since 1993, and a Director
of the Bramwell Funds since 1994. He is also
a Director of Universal Stainless & Alloy
Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, Gulf Resources Corporation, and the
Universal Bond Fund, and is an advisor to
Associated Energy Managers. Mr. Keane also
serves as a Trustee of his alma mater,
Fairfield University where he received his
B.A., and as a Director and Chairman of the
Investment Committee of the United Negro
College Fund. Mr. Keane holds honorary
degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton,
Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers
ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams
was Principal of Colliers ABR, Inc. from 1978
to 1992 and since 1992, has served as a
Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of
Cross and Brown Company. Mr. Abrams also
serves as a Director of Greater New York
Mutual Insurance Company and Trustee Emeritus
and Presidential Counselor of his alma mater,
Cornell University. Mr. Abrams received his
M.B.A. from Harvard University and his B.A.
from Cornell University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of
Security Capital (US) Management since July,
1997. Prior thereto, Director of Security
Capital Pacific Trust ("PTR") and the PTR
REIT Manager from February 1995 to June 1997
and Senior Vice President of Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR and
the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility
for asset management and multifamily
dispositions. Prior to joining Security
Capital, Mr. Gardner was with Copley Real
Estate Advisors as a Managing Director and
Principal responsible for portfolio
management from January 1991 to September
1994 and as a Vice President and Principal of
asset management from December 1984 to
December 1990. From July 1977 to November
1984, Mr. Gardner was a Real Estate Manager
with the John Hancock Companies. Mr. Gardner
received his M.S. in Computer Information
Systems from Bentley College and his B.S. in
Accounting from Stonehill College.

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a Certified Public Accountant, Certified
Management Accountant and a Certified
Financial Planner. He received his B.B.A.
from the University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing
Director of SC (US) Management since November
1997 and Senior REIT Analyst where he is
responsible for the development and
implementation of portfolio investment
strategy. Prior thereto, Senior Vice
President from July 1996 to October 1997 and
Vice President from May 1995 to June 1996.
Prior to joining Security Capital, Mr. Statz
was a Vice President in the investment
research department of Goldman, Sachs & Co.,
from February 1993 to January 1995,
concentrating on research and underwriting
for the REIT industry. Prior thereto, Mr.
Statz was a real estate stock portfolio
manager and a managing director of Chancellor
Capital Management from August 1982 to
February 1992. Mr. Statz received his M.B.A.
and B.B.A. from the University of Wisconsin,
Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior
Vice President of SC (US) Management since
November 1997 and Vice President since July
1996, where he is responsible for directing
the activities of the industry/company
securities research group and providing in-
depth proprietary research on publicly traded
companies with office and industrial sectors.
Prior to joining SC (US) Management, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President
and Portfolio Manager responsible for the
strategic, operational and financial
management of a private REIT with commercial
real estate investments of $600-800 million.
Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from
Kenyon College.

Albert D. Adriani Member, SC-ARBITRAGE Portfolio Management
Committee; Vice President of SC (US)
Management since April 1996, where he is
responsible for providing portfolio
management analysis. From January 1995 to
April 1996, he was Vice President, Security
Capital (UK) Management Limited and SC-
USREALTY; from March 1994 to January 1995, he
was with Security Capital Markets Group.
Prior thereto, he was an investment analyst
with HAL Investments BV from July 1992 to
January 1994. Mr. Adriani received his M.B.A.
from the University of Chicago Graduate
School of Business and his B.A. with honors
from the University of Chicago. Mr. Adriani
is a Chartered Financial Analyst.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603, has
been retained to provide investment advice, and, in general, to conduct the
management and investment program of SC-ARBITRAGE under the overall supervision
and control of the Directors of SC-REMFs.

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<PAGE>

SC (US) Management was formed in March 1994, and is registered as an
investment adviser with the Securities and Exchange Commission (the "SEC"). SC
(US) Management's principal officers include Anthony R. Manno Jr., Managing
Director and President, John H. Gardner, Jr., Managing Director, Kenneth D.
Statz, Managing Director and Kevin W. Bedell, Senior Vice President. SC (US)
Management is a wholly-owned subsidiary of Security Capital Group Incorporated,
a real estate research, investment and management company.

The SC-ARBITRAGE Portfolio Management Committee, which is comprised of certain
SC-REMFs officers and SC (US) Management analysts, is primarily responsible for
the construction of SC-ARBITRAGE's portfolio.

INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
(US) Management furnishes a continuous investment program for SC-ARBITRAGE's
portfolio, makes the day-to-day investment decisions for SC-ARBITRAGE, and
generally manages SC-ARBITRAGE's investments in accordance with the stated
policies of SC-ARBITRAGE, subject to the general supervision of SC-REMFs's Board
of Directors. SC (US) Management also selects brokers and dealers to execute
purchase and sale orders for the portfolio transactions of SC-ARBITRAGE. SC
(US) Management provides persons satisfactory to the Directors of SC-REMFs to
serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-ARBITRAGE, may be directors, officers, or
employees of SC (US) Management.

Under the Advisory Agreement, SC-ARBITRAGE's Class I shares pay SC (US)
Management a monthly management fee in an amount equal to 1/12th of 2.00% of the
value of SC-ARBITRAGE's Class I average daily net assets (approximately 2.00% on
an annual basis). After the first three full months of operations, SC-ARBITRAGE
Class I shares will pay SC (US) Management an annual investment advisory fee
which increases or decreases from a "fulcrum fee" of 2.00% of SC-ARBITRAGE's
Class I average daily net assets based on the total return investment
performance of SC-ARBITRAGE for the prior twelve-month period. Until SC-
ARBITRAGE completes twelve full months of operations, the performance adjustment
will be measured from the date of inception relative to the percentage change in
the Wilshire Real Estate Index (the "Index") for the same period (the "Index
Return"). A general description of the index is included in the Statement of
Additional Information.

The advisory fee will be paid monthly, at an annual rate which varies between
0.50% and 3.50% of SC-ARBITRAGE's average net assets. The advisory fee is
structured so that it will be 2.00% of SC-ARBITRAGE's average net assets if SC-
ARBITRAGE's investment performance for the preceding twelve months (net of all
fees and expenses, including the advisory fee) equals the Index Return. The
advisory fee increases or decreases from the "fulcrum fee" of 2.00% by 10
percent of the difference between SC-ARBITRAGE's investment performance during
the preceding twelve months and the Index Return during that period, up to the
maximum fee of 3.50% or down to the minimum fee of 0.50%. The following table
shows examples of the advisory fees which would be applicable at the stated
levels of the Fund's performance relative to the Index Return for a particular
twelve-month period.

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<PAGE>

ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
(NET OF FEES AND EXPENSES) DAILY NET ASSETS)*

Index Return + 15% 3.50%
Index Return + 10 3.00
Index Return + 5 2.50
Index Return + 3 2.30
Index Return + 1 2.10
Index Return 2.00
Index Return - 1 1.90
Index Return - 3 1.70
Index Return - 5 1.50
Index Return - 10 1.00
Index Return - 15 0.50

* The advisory fee increases or decreases from a "fulcrum fee" of 2.00%.

The "fulcrum fee" of 2.00% is higher than the fees paid by most other
investment companies and, accordingly, the fee paid by SC-ARBITRAGE may exceed
the advisory fees paid by most other investment companies, even if the
investment performance of SC-ARBITRAGE is less than the Index Return. Also, SC
(US) Management may receive the maximum fee even if the Fund's absolute
performance is negative and may receive the minimum fee in instances where SC-
ARBITRAGE experience significant positive performance.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-ARBITRAGE's Class I shares pay certain other costs of
operations including (a) administration, custodian and transfer agency fees, (b)
fees of Directors who are not affiliated with SC (US) Management, (c) legal and
auditing expenses, (d) costs of printing and postage fees related to preparing
and distributing SC-ARBITRAGE's prospectus and shareholder reports, (e) costs of
maintaining SC-REMFs's existence, (f) interest charges, taxes, brokerage fees
and commissions, (g) costs of stationery and supplies, (h) expenses and fees
related to registration and filing with federal and state regulatory
authorities, and (i) upon the approval of SC-REMFs's Board of Directors, costs
of personnel of SC (US) Management or its affiliates rendering clerical,
accounting and other office services. Each class of SC-ARBITRAGE shares pays
for the portion SC-ARBITRAGE's expenses attributable to its operations. Income,
realized gains and losses, unrealized appreciation and depreciation and certain
expenses not allocated to a particular class are allocated to each class based
on the net assets of that class in relation to the net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC (US) Management has also entered into a fund accounting and administration
agreement with SC-REMFs (the "Administration Agreement") under which SC (US)
Management performs certain administrative functions for SC-ARBITRAGE, including
(i) providing office space, telephone, office equipment and supplies for SC-
REMFs; (ii) paying compensation of SC-REMFs's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of SC-ARBITRAGE; (iv) supervising preparation of the periodic updating of SC-
ARBITRAGE's Prospectus and Statement of Additional Information; (v) supervising
preparation of quarterly reports to SC-ARBITRAGE's shareholders, notices of
dividends, capital gains distributions and tax credits, and attending to routine
correspondence and other communications with individual shareholders; (vi)
supervising the daily pricing of SC-ARBITRAGE's investment portfolio and the
publication of the net asset value of SC-ARBITRAGE's shares, earnings reports
and other financial data; (vii) monitoring relationships with organizations
providing services to SC-ARBITRAGE, including the custodian ("Custodian"),
transfer agent ("Transfer Agent") and printers; (viii) providing trading desk
facilities for SC-ARBITRAGE; (ix) maintaining books and records for SC-ARBITRAGE
(other than those maintained by the Custodian and Transfer Agent) and preparing
and filing of tax reports other than SC-ARBITRAGE's income tax returns; and (x)
providing executive, clerical and secretarial help needed to carry out these
responsibilities.

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<PAGE>

as sub-administrator under a fund administration and servicing agreement
(the "Sub-Administration Agreement").

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-ARBITRAGE's net asset value and preparing such figures
for publication, maintaining certain of SC-ARBITRAGE's books and records that
are not maintained by SC (US) Management, or the custodian or transfer agent,
preparing financial information for SC-ARBITRAGE's income tax returns, proxy
statements, quarterly and annual shareholders reports, and SEC filings, and
responding to shareholder inquiries. Under the terms of the Sub-Administration
Agreement, SC-REMFs pays the Sub-Administrator a monthly administration fee at
the annual rate of .06% of the first $200 million of SC-ARBITRAGE's average
daily net assets, and at lower rates on SC-ARBITRAGE's average daily net assets
in excess of that amount, subject to an annual minimum fee of $30,000. The Sub-
Administrator also serves as SC-ARBITRAGE's Custodian and Transfer Agent. See
"Custodian and Transfer and Dividend Disbursing Agent."

Under the Administration Agreement, SC (US) Management remains responsible for
monitoring and overseeing the performance by the Sub-Administrator of its
obligations to SC-ARBITRAGE under the Sub-Administration Agreement, subject to
the overall authority of SC-REMFs's Board of Directors. For its services under
the Administration Agreement, SC (US) Management receives a monthly fee from SC-
REMFs at the annual rate of .02% of the value of SC-ARBITRAGE's average daily
net assets.

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class I shares of SC-ARBITRAGE, $.01 par value
per share ("Common Stock"), is determined on each day the New York Stock
Exchange is open for trading and on each other day on which there is a
sufficient degree of trading in SC-ARBITRAGE's investments to affect the net
asset value, as of the close of trading on the New York Stock Exchange, by
adding the market value of all securities in SC-ARBITRAGE's portfolio and other
assets represented by Class I shares, subtracting liabilities, incurred or
accrued allocable to Class I shares, and dividing by the total number Class I
shares then outstanding.

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<PAGE>

PURCHASE OF SHARES

Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-ARBITRAGE Class I shares may be purchased through
Firstar Trust Company, SC-ARBITRAGE's Transfer Agent, or any dealer that has
entered into a sales agreement with the Distributor.

Orders for shares of SC-ARBITRAGE will become effective at the net asset
value per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details
of each purchase transaction will be sent to you promptly following each
transaction. If a purchase order is placed through a dealer, the dealer must
promptly forward the order, together with payment, to the Transfer Agent.
Investors must specify that Class I shares are being purchased.

If you choose a securities dealer that has not entered into a sales
agreement with the Distributor, such dealer may, nevertheless, offer to place an
order for the purchase of SC-ARBITRAGE shares. Such dealer may charge a
transaction fee, as determined by the dealer. That fee may be avoided if shares
are purchased through a dealer who has entered into a sales agreement with the
Distributor or through the Transfer Agent.

By investing in SC-ARBITRAGE, you appoint the Transfer Agent as your agent
to establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $250,000. Class I shares may be
purchased by check or money order drawn on a U.S. bank, savings and loan, or
credit union by wire transfer. The enclosed application must be completed and
accompanied by payment in U.S. funds to open an account. Checks must be payable
in U.S. dollars and will be accepted subject to collection at full face value.
Note that all applications to purchase shares are subject to acceptance by SC-
ARBITRAGE and are not binding until so accepted. SC-ARBITRAGE reserves the right
to decline to accept a purchase order application in whole or in part.

MAIL

The following instructions should be used when mailing a check or money
order payable to "Security Capital Real Estate Arbitrage Shares," via U.S. mail
to the Distributor, a securities dealer or the Transfer Agent:

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<PAGE>

Please note that if your check does not clear, a service charge of $20 will
be charged and you will be responsible for any losses suffered by SC-ARBITRAGE
as a result.

WIRE PURCHASES

Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital Real Estate Arbitrage Shares
(shareholder account number)
(shareholder name/registration)

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handling of funds. SC-
ARBITRAGE AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF
DELAYS RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM
INCOMPLETE WIRING INSTRUCTIONS.

SUBSEQUENT INVESTMENTS

You may purchase additional shares by moving money from your bank account
to your SC-ARBITRAGE account by telephone. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can be
used for telephone transactions. In order for shares to be purchased at the net
asset value determined as of the close of regular trading on a give date, the
Transfer Agent must receive both the purchase order and payment by Electronic
Funds Transfer through the ACH System, before the close of regular trading on
such date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.

EXCHANGE FEATURE

Class I shares of SC-ARBITRAGE may be exchanged for Class I shares of SC-
US, SC-EURO and SC-ASIA. Exchanges of Class I shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-ARBITRAGE, SC-US, SC-EURO or SC-ASIA
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

REDEMPTION OF SHARES

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<PAGE>

day and, in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-ARBITRAGE may hold payment on redemption proceeds until it reasonably
satisfied that the check has cleared, which may take up to twelve days.

Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-
ARBITRAGE of the Broker or dealer's instruction to redeem shares. In addition,
some brokers or dealers may charge a fee in connection with such redemptions.
See "Determination of Net Asset Value."

MAIL AND WIRE

For most redemption requests you need only furnish a written, unconditional
request to redeem your Class I shares (for a fixed dollar amount) at net asset
value to Security Capital Real Estate Arbitrage Shares:

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-ARBITRAGE. Do not mail
letters by overnight courier to the post office box. Any written redemption
requests received within 15 days after an address change must be accompanied by
a signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-
699-4594. In order to utilize this procedure, you must have previously elected
this option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or submit
a written request to the Transfer Agent. No telephone redemptions will be
allowed within 15 days of such a change. SC-ARBITRAGE reserves the right to
limit the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

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<PAGE>

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-ARBITRAGE will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-ARBITRAGE reserves the right to refuse a
telephone redemption request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-ARBITRAGE or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

SC-ARBITRAGE may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is closed,
other than customary weekend and holiday closings, or (ii) an emergency, as
defined by rules adopted by the SEC, exists making disposal of portfolio
securities or determination of the value of the net assets of SC-ARBITRAGE not
reasonably practicable.

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-ARBITRAGE in not less than 30
days' notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
Upon any such termination, a check for the redemption proceeds will be sent to
the account of record within seven business days of the redemption. However, if
a shareholder is affected by the exercise of this right, he or she will be
allowed to make additional investments prior to the date fixed for redemption to
avoid liquidation of the account.

A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-ARBITRAGE does not charge a fee to process
conversions. SC-ARBITRAGE reserves the right to reject any conversion request in
whole or in part. The conversion feature may be modified or terminated at any
time upon notice to SC-ARBITRAGE Class I shareholders.

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DIVIDENDS AND DISTRIBUTIONS

Dividends from SC-ARBITRAGE's investment income will be declared and
distributed annually. SC-ARBITRAGE intends to distribute net realized capital
gains, if any, at least annually although SC-ARBITRAGE's Board of Directors may
in the future determine to retain realized capital gains and not distribute them
to shareholders. For information concerning the tax treatment of SC-ARBITRAGE's
distribution policies for SC-ARBITRAGE and its shareholders, see "Taxation."

Distributions will automatically be paid in full and fractional shares of SC-
ARBITRAGE based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

TAXATION

The following discussion is intended for general information only.
Shareholders should consult with their own tax advisers as to the tax
consequences of an investment in SC-ARBITRAGE, including the status of
distributions under applicable state or local law.

FEDERAL INCOME TAXES

SC-ARBITRAGE intends to qualify and elect to be taxed as a "regulated
investment company" under the Code. To the extent that SC-ARBITRAGE distributes
its taxable income and net capital gain to its shareholders, qualification as a
regulated investment company relieves SC-ARBITRAGE of federal income and excise
taxes on that part of its taxable income including net capital gains which it
pays out to its shareholders. Dividends out of net ordinary income and
distributions of net short-term capital gains are taxable to the recipient
shareholders as ordinary income. In the case of corporate shareholders, such
dividends may be eligible for the dividends-received deduction, except that the
amount eligible for the deduction is limited to the amount of qualifying
dividends received by SC-ARBITRAGE, which does not include distributions
received by SC-ARBITRAGE from REITs. A corporation's dividends-received
deduction will be disallowed unless the corporation holds shares in SC-ARBITRAGE
at least 46 days. Furthermore, the dividends-received deduction will be
disallowed to the extent a corporation's investment in shares of SC-ARBITRAGE is
financed with indebtedness.

The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-ARBITRAGE to its shareholders as capital
gain distributions is taxable to the shareholders as long-term capital gain,
irrespective of the length of time a shareholder may have held his or her stock.
Recent legislation reduced the maximum tax rate on capital gains to 20% for
assets held for more than 18 months on the date of the sale or exchange of those
assets. A notice issued by the Internal Revenue Service provides that a
regulated investment company such as SC-ARBITRAGE may, but is not required to,
designate which portion of a capital gain distribution qualifies for the reduced
capital gain rate. Long-term capital gain distributions are not eligible for
the dividends-received deduction referred to above.

Under current federal tax law, the amount of an ordinary income dividend or
capital gain distribution declared by SC-ARBITRAGE during October, November or
December of a year to shareholders of record as of a specified date in such a
month that is paid during January of the following year is includable in the
prior year's taxable income of shareholders that are calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-
ARBITRAGE will have the effect of reducing the net asset value of such shares by
the amount of such dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of such shares by a shareholder,
although in effect a return of capital to that particular shareholder, would be
taxable to him or her as described above. If a shareholder held shares for six
months or less, and during that period received a

21
<PAGE>

distribution taxable to such shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term capital loss to the extent of such distribution.

A dividend or capital gain distribution with respect to shares of SC-ARBITRAGE
held by a tax-deferred or qualified plan, such as an individual retirement
account, 403(b)(7) retirement plan or corporate pension or profit-sharing plan,
will not be taxable to the plan, except to the extent the shares are debt-
financed within the meaning of Section 514 of the Code. Distributions from such
plans will be taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the qualified plan.

SC-ARBITRAGE will be required to withhold 31% of any payments made to a
shareholder if the shareholder has not provided a certified taxpayer
identification number to SC-ARBITRAGE, or the Secretary of the Treasury notifies
SC-ARBITRAGE that the shareholder has not reported all interest and dividend
income required to be shown on the shareholder's Federal income tax return. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.

Further information relating to tax consequences is contained elsewhere in
this Prospectus and in the Statement of Additional Information.

STATE AND LOCAL TAXES

SC-ARBITRAGE distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular
state and local tax consequences of an investment in SC-ARBITRAGE.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-US's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA each with two classes of shares: Class
I shares and Class R shares. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-ARBITRAGE's Class I shares may
not be modified except by the vote of a majority of the holders of all Class I
shares outstanding. SC-ARBITRAGE's Class I shareholders have exclusive voting
rights with respect to matters relating solely to SC-ARBITRAGE's Class I shares.
SC-ARBITRAGE's Class I shareholders vote separately from SC-ARBITRAGE's Class R
shareholders and SC-US's, SC-EURO's, and SC-ASIA's Class I and Class R
shareholders on matters in which the interests of

22
<PAGE>

SC-ARBITRAGE's Class I shareholders differ from the interests of SC-ARBITRAGE's
Class R shareholders and SC-US's, SC-EURO's, and SC-ASIA's Class I and Class R
shareholders.

As of March 31, 1998, SCREALTY Incorporated owned 98.54% of the issued and
outstanding Class I shares of SC-US, and 96.56% of the total issued and
outstanding shares of SC-US, which means that SCREALTY Incorporated controls SC-
REMFs for purposes of the 1940 Act. The effect of SCREALTY Incorporated's
ownership of a controlling interest in SC-US and, therefore, SC-REMFs, is to
dilute the voting power of other SC-US and SC-REMFs shareholders.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

Firstar Trust Company, which has its principal business address at 615 East
Michigan Street, Milwaukee, Wisconsin 53202 has been retained to act as
Custodian of SC-ARBITRAGE's investments and to serve as SC-ARBITRAGE's transfer
and dividend disbursing agent. Firstar Trust Company does not have any part in
deciding SC-ARBITRAGE's investment policies or which securities are to be
purchased or sold for SC-ARBITRAGE's portfolio.

REPORTS TO SHAREHOLDERS

The fiscal year of SC-ARBITRAGE ends on December 31 of each year. SC-ARBITRAGE
will send to its shareholders, at least semi-annually, reports showing the
investments and other information (including unaudited financial statements). An
annual report, containing financial statements audited by SC-ARBITRAGE's
independent accountants, will be sent to shareholders each year. Please call
1-888-SECURITY (toll free) for a copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-ARBITRAGE may advertise the "average annual total
return" of the Class I shares over various periods of time. This total return
figure shows the average percentage change in value of an investment in SC-
ARBITRAGE's Class I shares from the beginning date of the measuring period to
the ending date of the measuring period. The figure reflects changes in the
price of SC-ARBITRAGE's Class I shares and assumes that any income, dividends
and/or capital gains distributions made by SC-ARBITRAGE's Class I shares during
the period are reinvested in Class I shares of SC-ARBITRAGE. Figures will be
given for recent one-, five- and ten-year periods (when applicable), and may be
given for other periods as well (such as from commencement of SC-ARBITRAGE's
operations, or on a year-by-year basis). When considering "average" total
return figures for periods longer than one year, investors should note that SC-
ARBITRAGE's Class I annual total return for any one year in the period might
have been greater or less than the average for the entire period. SC-ARBITRAGE
also may use "aggregate" total return figures for various periods, representing
the cumulative change in value of an investment in SC-ARBITRAGE's Class I shares
for the specific period (again reflecting changes in SC-ARBITRAGE's Class I
share price and assuming reinvestment of Class I dividends and distributions).
Aggregate total returns may be shown by means of schedules, charts or graphs,
and may indicate subtotals of the various components of total return (that is,
the change in value of initial investment, income dividends and capital gains
distributions).

23
<PAGE>

YEAR 2000 RISKS

ADDITIONAL INFORMATION

Any shareholder inquiries may be directed to SC-ARBITRAGE at the address or
telephone number listed on the cover page of this Prospectus. This Prospectus,
including the Statement of Additional Information which is incorporated by
reference herein, does not contain all the information set forth in the
Registration Statement filed by SC-ARBITRAGE with the SEC under the Securities
Act of 1933. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the
offices of the SEC in Washington, D.C. or may be obtained from the SEC's
worldwide web site at http://www.sec.gov.

24
<PAGE>

PROSPECTUS

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ARBITRAGE seeks to provide shareholders with maximum returns by engaging
in various arbitrage transactions in real estate securities in the United
States. Security Capital (US) Management Group Incorporated ("SC (US)
Management") serves as both investment adviser and administrator to SC-
ARBITRAGE.

By this Prospectus, Class R shares of SC-ARBITRAGE are being offered. SC-
ARBITRAGE also offers Class I shares to investors whose minimum investment is
$250,000. Class I shares have different expenses than Class R shares which would
affect performance. Investors desiring to obtain information about SC-
ARBITRAGE's Class I shares should call 1-888-SECURITY (toll free) or ask their
sales representatives or SC-ARBITRAGE's distributor.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

An investment in SC-ARBITRAGE should not be the sole source of investment
for a shareholder. Rather, an investment in SC-ARBITRAGE should be considered as
part of an overall portfolio strategy which includes fixed income and equity
securities.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ARBITRAGE. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital European Real Estate Shares and Security
Capital Asia/Pacific Real Estate Shares. A Statement of Additional Information
dated [_______________,1998], containing additional and more detailed
information about SC-ARBITRAGE has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by calling 1-888-SECURITY (toll
free) or writing or calling SC-ARBITRAGE's Sub-Administrator at: Firstar Trust
Company, Mutual Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

[_______________, 1998]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses............................................... 2

Description of SC-REMFs and SC-ARBITRAGE............... 4

Investment Objectives and Policies..................... 4

Trading and Investment Strategies...................... 6

Risk Factors........................................... 8

Non-Diversified Status; Portfolio Turnover............. 10

Management of SC-ARBITRAGE............................. 10

Investment Advisory Agreements......................... 14

Administrator and Sub-Administrator.................... 15

Distribution and Servicing Plan........................ 16

Determination of Net Asset Value....................... 16

Purchase of Shares..................................... 17

Redemption of Shares................................... 20

Dividends and Distributions............................ 21

Taxation............................................... 22

Organization and Description of Capital Stock.......... 23

Custodian and Transfer and Dividend
Disbursing Agent..................................... 24

Reports to Shareholders................................ 24

Performance Information................................ 24

Additional Information................................. 25
</TABLE>
<PAGE>

EXPENSES

Shareholder Transaction Expenses

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ARBITRAGE.

ANNUAL FUND OPERATING EXPENSES

The Class R shares of SC-ARBITRAGE pay for certain expenses attributable to
Class R shares directly out of SC-US's Class R assets. These expenses are
related to management of SC-ARBITRAGE, administration and other services. For
example, SC-ARBITRAGE pays an advisory fee and an administrative fee to SC (US)
Management. SC-ARBITRAGE also has other customary expenses for services such as
transfer agent fees, custodial fees paid to the bank that holds its portfolio
securities, audit fees and legal expenses. These operating expenses are
subtracted from SC-ARBITRAGE's Class R assets to calculate SC-ARBITRAGE's Class
R net asset value per share. In this manner, shareholders pay for these expenses
indirectly.

FEE TABLE

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions........ None
Redemption fee (1).................................................... None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees(2).................................................... 2.00%
12b-1 fees(3)......................................................... .25%
Other expenses (4).................................................... .30%
Total fund operating expenses......................................... 2.55%
</TABLE>

____________
(1) SC-US's transfer agent charges a service fee of $12.00 for each wire
redemption. In addition, the purchase or redemption of shares through a
securities dealer that has not entered into a sales agreement with Security
Capital Markets Group Incorporated, SC-ARBITRAGE's distributor, may be
subject to a transaction fee.
(2) The 2.00% management fee is a "fulcrum fee" that will be applied to SC-
ARBITRAGE's net assets in accordance with Securities and Exchange Commission
regulations. After the first three full months of operations, SC-ARBITRAGE
will pay a monthly advisory fee to SC (US) Management which varies between
an annual rate of 0.50% and 3.50% of SC-ARBITRAGE's average daily net assets
based on the SC-ARBITRAGE's total return investment performance for the
prior twelve-month period relative to the percentage change in Wilshire Real
Estate Index ("WAREIT") for the same period (the "Index Return"). Until SC-
ARBITRAGE completes twelve full calendar months of operations the
performance adjustment, which is 10% of the difference between the
investment performance of SC-ARBITRAGE and the investment performance of
WAREIT, will be measured from the date of inception. The advisory fee is
structured so that it will be 2.00% if SC-ARBITRAGE's investment performance
for

<PAGE>

the preceding twelve months (net of fees and expenses, including the
advisory fee) equals the Index Return.
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-ARBITRAGE Class
R shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-US pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related to
the maintenance of shareholder accounts at the annual rate of 0.25% of SC-
ARBITRAGE's Class R average daily net assets. As a result, long-term Class
R shareholders of SC-ARBITRAGE may pay more than the economic equivalent of
the maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(4) Other Expenses are based estimated amounts for the current fiscal year.

EXAMPLE

<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
---- -----
<S>
A shareholder would bear the following expenses on <C> <C>
a $1,000 investment, assuming: a five percent annual
return, operating expenses as outlined in the fee
table above and redemption at the end of each period... [$____] [$___]
</TABLE>

THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
ARBITRAGE'S ASSETS.

3
<PAGE>

DESCRIPTION OF SC-ARBITRAGE

SC-ARBITRAGE issues two classes of shares, one of which, Class R shares, is
offered by this prospectus. SC-ARBITRAGE also issues Class I shares to
investors whose minimum initial investment is $250,000. Class R shares offer
different services and incur different expenses than Class I shares, which would
affect performance. See "Purchase of Shares" and "Organization and Description
of Capital Stock."

INVESTMENT OBJECTIVE AND POLICIES

REAL ESTATE SECURITIES

REAL ESTATE INVESTMENT TRUSTS

4
<PAGE>

real estate mortgages in which they are invested. Hybrid REITs combine the
characteristics of both equity REITs and mortgage REITs.

ILLIQUID SECURITIES

CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES

DEBT SECURITIES AND MONEY MARKET INSTRUMENTS

SC-ARBITRAGE will not necessarily dispose of a security when its debt rating
is reduced below its rating at the time of purchase, although SC (US) Management
will monitor the investment to determine whether continued investment in the
security will assist in meeting the Fund's investment objective. If a
security's rating is reduced below investment grade, an investment in that
security may entail the risks of lower-rated securities described below.
See Risk Factors.

5
<PAGE>

TRADING AND INVESTMENT STRATEGIES

ARBITRAGE TRANSACTIONS

SC-ARBITRAGE seeks to achieve maximum returns by engaging in short-term
trading, risk and convertible arbitrage transactions. SC-ARBITRAGE's short-term
trading and arbitrage transactions will focus primarily on real estate
securities which are undergoing initial public offerings, secondary offerings,
mergers and acquisitions and restructurings. SC (US) Management relies on a
dynamic integration of quantitative analysis in combination with SC(US)
Management's Integrated Valuation Matrix to identify unique arbitrage and other
short-term opportunities for SC-ARBITRAGE's portfolio.

. MERGERS AND ACQUISITIONS ARBITRAGE. SC-ARBITRAGE will engage in
arbitrage transactions involving purchases of the securities of a
real estate company that is being acquired and sales of the
securities of the acquiror.

. LIQUIDITY ARBITRAGE. SC-ARBITRAGE will engage in liquidity
arbitrage transactions, involving the purchase and immediate sale
of blocks of real estate securities. SC(US) Management's
valuation methodologies facilitate liquidity arbitrage by SC-
ARBITRAGE enabling SC-ARBITRAGE to respond quickly to block
opportunities as they arise.

. CAPITAL ISSUANCE ARBITRAGE. SC-ARBITRAGE will engage in
arbitrage transactions associated with REIT capital raising
activities.

. EVENT ARBITRAGE. SC-ARBITRAGE will engage in event arbitrage
transactions in the securities of real estate companies which are
undergoing a restructuring, spin-off or other structured event.

SHORT SALES AND SHORT SALES AGAINST THE BOX

6
<PAGE>

BORROWING AND LEVERAGE

SECURITIES LOANS AND REPURCHASE AGREEMENTS

OPTIONS AND FUTURES

7
<PAGE>

INDEX FUTURES AND OPTIONS

SC-ARBITRAGE may buy and sell index futures contracts ("index futures") and
options on index futures and on indices (or may purchase investments whose
values are based on the value from time to time of one or more securities
indices) for hedging purposes. An index future is a contract to buy or sell
units of a particular bond or stock index at an agreed price on a specified
future dated. Depending on the change in value of the index between the time
when SC-ARBITRAGE enters into and terminates an index futures or option
transaction, SC-ARBITRAGE realizes a gain or loss. SC-ARBITRAGE may also buy and
sell index futures and options to increase its investment return.

RISK FACTORS

REAL ESTATE SECURITIES

DEBT SECURITIES

EQUITY-LINKED SECURITIES

8
<PAGE>

complex, interrelated political, economic, financial or other factors affecting
the capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. in addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities

SHORT SALES AND SHORT SALES AGAINST THE BOX

BORROWING AND LEVERAGE

SC-ARBITRAGE may borrow money to invest in additional portfolio securities in
connection with liquidity arbitrage transactions. The interest SC-ARBITRAGE
must pay on borrowed money will reduce the amount of any potential gains or
increase any losses. Successful use of leverage depends on SC (US) Management's
ability to predict market movements correctly. SC-ARBITRAGE may at times borrow
money by means of reverse repurchase agreements, which will increase SC-
ARBITRAGE's overall investment exposure and may result in losses if interest
rates rise during the term of such an agreement. Additionally, if the purchaser
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the buyer or its trustee or receiver may receive an extension
of time to determine whether to enforce the SC-ARBITRAGE's repurchase obligation
and SC-ARBITRAGE's use of proceeds under the agreement may effectively be
restricted pending such decision.

SECURITIES LOANS AND REPURCHASE AGREEMENTS

RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES

Options and futures transactions involve costs and may result in losses.
Certain risks arise because of the possibility of imperfect correlations between
movements in the prices of futures and options and movements in the prices of
the underlying security or index of the securities held by a Fund that are the
subject of a hedge. The successful use by SC-ARBITRAGE of the strategies
described above further depends on the ability of SC (US) Management to forecast
market movements correctly. Other risks arise from SC-ARBITRAGE's potential
inability to close out futures or options positions. Although SC-ARBITRAGE will
enter into options and futures transactions only if SC (US) Management believes
that a liquid secondary market exists for such option or futures contract, there
can be no assurance that SC-ARBITRAGE will be able to effect closing
transactions at any particular time or at an acceptable price.

9
<PAGE>

Certain provisions of the Internal Revenue Code may limit SC-ARBITRAGE's ability
to engage in options and futures transactions.

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

OFFICERS, DIRECTORS AND OTHER PERSONNEL

10
<PAGE>

of SC-ARBITRAGE's day-to-day operations is delegated to the officers of SC-
REMFs, who include the Managing Directors, SC (US) Management and the
administrator, subject always to the investment objective and policies of SC-
ARBITRAGE and to general supervision by the Board of Directors. Although SC-
REMFs is not required by law to hold annual meetings, it may hold shareholder
meetings from time to time on important matters, and shareholders have the right
to call a meeting to remove a Director or to take other action described in SC-
REMFs's Articles of Incorporation. The Directors and Officers of SC-REMFs and
certain key members of SC-ARBITRAGE's Portfolio Management Committee and their
principal occupations are set forth below.

Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice President
for Administration and Treasurer of Loyola University,
Chicago from 1981 to July 1994, where he was
responsible for administration, investment, real estate
and treasurer functions, served as Chief Investment
Officer, was Chairman of the Operations Committee, was
a member of the Investment and Finance Committees of
the Board of Trustees and was President and a Director
of the Loyola Management Company. Mr. Kasbeer received
his J.D. from John Marshall Law School and his M.A. and
B.S. from Northwestern University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director of SC (US)
Management since March 1997, where he is responsible
for overseeing all investment and capital allocation
matters for SC (US) Management's public market
securities activities and is also responsible for
company and industry analysis, market strategy and
trading and reporting; from January 1995 to March 1997,
he was Managing Director of SC (US) Management, where
he performed the same functions. Mr. Manno was a member
of the Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to
March 1994. Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

11
<PAGE>

United Properties Group, Gulf Resources Corporation,
and the Universal Bond Fund, and is an advisor to
Associated Energy Managers. Mr. Keane also serves as a
Trustee of his alma mater, Fairfield University where
he received his B.A., and as a Director and Chairman of
the Investment Committee of the United Negro College
Fund. Mr. Keane holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers ABR, Inc.
(formerly Abrams Benisch Riker Inc.), a property
management firm. Mr. Abrams was Principal of Colliers
ABR, Inc. from 1978 to 1992 and since 1992, has served
as a Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and
Brown Company. Mr. Abrams also serves as a Director of
Greater New York Mutual Insurance Company and Trustee
Emeritus and Presidential Counselor of his alma mater,
Cornell University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of Security
Capital (US) Management since July, 1997. Prior
thereto, Director of Security Capital Pacific Trust
("PTR") and the PTR REIT Manager from February 1995 to
June 1997 and Senior Vice President of Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR and the PTR
REIT Manager from September 1994 to June 1997 where he
had overall responsibility for asset management and
multifamily dispositions. Prior to joining Security
Capital, Mr. Gardner was with Copley Real Estate
Advisors as a Managing Director and Principal
responsible for portfolio management from January 1991
to September 1994 and as a Vice President and Principal
of asset management from December 1984 to December
1990. From July 1977 to November 1984, Mr. Gardner was
a Real Estate Manager with the John Hancock Companies.
Mr. Gardner received his M.S. in Computer Information
Systems from Bentley College and his B.S. in Accounting
from Stonehill College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of SC (US) Management
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong Capital
Management, Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A.
from the University of Wisconsin, Madison.

12
<PAGE>

President and Senior REIT Analyst from July 1996 to
October 1997 and Vice President from May 1995 to June
1996. Prior to joining Security Capital, Mr. Statz was
a Vice President in the investment research department
of Goldman, Sachs & Co., from February 1993 to January
1995, concentrating on research and underwriting for
the REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing director
of Chancellor Capital Management from August 1982 to
February 1992. Mr. Statz received his M.B.A. and B.B.A.
from the University of Wisconsin, Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of SC (US) Management since November 1997 and
Vice President since July 1996, where he is responsible
for directing the activities of the industry/company
securities research group and providing in-depth
proprietary research on publicly traded companies with
office and industrial sectors. Prior to joining SC (US)
Management, Mr. Bedell spent nine years with LaSalle
Partners Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private REIT
with commercial real estate investments of $600-800
million. Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from Kenyon College.

Albert D. Adriani Member, SC-ARBITRAGE Portfolio Management Committee;
Vice President of SC (US) Management since April 1996,
where he is responsible for providing portfolio
management analysis. From January 1995 to April 1996,
he was Vice President, Security Capital (UK) Management
Limited and SC-USREALTY; from March 1994 to January
1995, he was with Security Capital Markets Group. Prior
thereto, he was an investment analyst with HAL
Investments BV from July 1992 to January 1994. Mr.
Adriani received his M.B.A. from the University of
Chicago Graduate School of Business and his B.A. with
honors from the University of Chicago. Mr. Adriani is a
Chartered Financial Analyst.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603, has
been retained to provide investment advice, and, in general, to conduct the
management and investment program of SC-ARBITRAGE under the overall supervision
and control of the Directors of SC-REMFs.

SC (US) Management was formed in March 1994 and is registered as an investment
adviser with the Securities and Exchange Commission (the "SEC"). SC (US)
Management's principal officers include Anthony R. Manno Jr., Managing Director
and President, John H. Gardner, Jr., Managing Director, Kenneth D. Statz,
Managing Director and Kevin W. Bedell, Senior Vice President. SC (US) Management
is a wholly-owned subsidiary of Security Capital Group Incorporated, a real
estate research, investment and management company.

13
<PAGE>

INVESTMENT ADVISORY AGREEMENT

Under the Advisory Agreement, SC-ARBITRAGE's Class R shares pay SC (US)
Management a monthly management fee in an amount equal to 1/12th of 2.00% of the
value of SC-ARBITRAGE's Class R average daily net assets (approximately 2.00% on
an annual basis). After the first three full months of operations, SC-ARBITRAGE
Class R shares will pay SC (US) Management an annual investment advisory fee
which increases or decreases from a "fulcrum fee" of 2.00% of SC-ARBITRAGE's
Class R average daily net assets based on the total return investment
performance of SC-ARBITRAGE for the prior twelve-month period. Until SC-
ARBITRAGE completes twelve full months of operations, the performance adjustment
will be measured from the date of inception relative to the percentage change in
the Wilshire Real Estate Index (the "Index") for the same period (the "Index
Return"). A general description of the index is included in the Statement of
Additional Information.

The advisory fee is paid monthly, at an annual rate which varies between 0.50%
and 3.50% of SC-ARBITRAGE's average net assets. The advisory fee is structured
so that it will be 2.00% of SC-ARBITRAGE's average net assets if SC-ARBITRAGE's
investment performance for the preceding twelve months (net of all fees and
expenses, including the advisory fee) equals the Index Return. The advisory fee
increases or decreases from the "fulcrum fee" of 2.00% by 10 percent of the
difference between SC-ARBITRAGE's investment performance during the preceding
twelve months and the Index Return during that period, up to the maximum fee of
3.50% or down to the minimum fee of 0.50%. The following table shows examples
of the advisory fees which would be applicable at the stated levels of the
Fund's performance relative to the Index Return for a particular twelve-month
period.

<TABLE>
<CAPTION>
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
(NET OF FEES AND EXPENSES) DAILY NET ASSETS)*
<S> <C>
Index Return + 15% 3.50%
Index Return + 10 3.00
Index Return + 5 2.50
Index Return + 3 2.30
Index Return + 1 2.10
Index Return 2.00
Index Return - 1 1.90
Index Return - 3 1.70
Index Return - 5 1.50
Index Return - 10 1.00
Index Return - 15 0.50

</TABLE>

14
<PAGE>

* The advisory fee increases or decreases from a "fulcrum fee" of 2.00%.

In addition to the payments to SC (US) Management under the Advisory
Agreement described above, SC-ARBITRAGE's Class R shares pay certain other costs
of operations including (a) administration, custodian and transfer agency fees,
(b) fees of Directors who are not affiliated with SC (US) Management, (c) legal
and auditing expenses, (d) costs of printing and postage fees related to
preparing and distributing SC-ARBITRAGE's prospectus and shareholder reports,
(e) costs of maintaining SC-REMFs's existence, (f) interest charges, taxes,
brokerage fees and commissions, (g) costs of stationery and supplies, (h)
expenses and fees related to registration and filing with federal and state
regulatory authorities, and (i) upon the approval of SC-REMFs's Board of
Directors, costs of personnel of SC (US) Management or its affiliates rendering
clerical, accounting and other office services. Each class of SC-ARBITRAGE
shares pays for the portion SC-ARBITRAGE's expenses attributable to its
operations. Income, realized gains and losses, unrealized appreciation and
depreciation and certain expenses not allocated to a particular class are
allocated to each class based on the net assets of that Class R relation to the
net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

financial information for SC-ARBITRAGE's income tax returns, proxy statements,
quarterly and annual shareholders reports, and SEC filings, and responding to
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .06% of the first $200 million of SC-ARBITRAGE's average daily net assets,
and at lower rates on SC-ARBITRAGE's average daily net assets in excess of that
amount, subject to an annual minimum fee of $30,000. The Sub-Administrator also
serves as SC-ARBITRAGE's Custodian and Transfer Agent. See "Custodian and
Transfer and Dividend Disbursing Agent."

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs has adopted a Distribution and Servicing
Plan ("Plan") with respect to SC-ARBITRAGE's Class R shares pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended. Under the Plan, SC-
ARBITRAGE pays to Security Capital Markets Group Incorporated, in its capacity
as principal distributor of SC-ARBITRAGE's shares (the "Distributor"), a monthly
fee equal to, on an annual basis, .25% of the value of SC-ARBITRAGE's Class R
average daily net assets.

The Distributor may use the fee for services performed and expenses incurred
by the Distributor in connection with the distribution of Class R shares and for
providing certain services to Class R shareholders. The Distributor may pay
third parties in respect of these services such amount as it may determine. SC-
ARBITRAGE understands that these third parties may also charge fees to their
clients who are beneficial owners of SC-ARBITRAGE Class R shares in connection
with their client accounts. These fees would be in addition to any amounts
which may be received by them from the Distributor under the Plan.

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class R shares of SC-ARBITRAGE, $.01 par value
per share ("Common Stock"), is determined on each day the New York Stock
Exchange is open for trading and on each other day on which there is a
sufficient degree of trading in SC-ARBITRAGE's investments to affect the net
asset value, as of the close of trading on the New York Stock Exchange, by
adding the market value of all securities in SC-ARBITRAGE's portfolio and other
assets represented by Class R shares, subtracting liabilities, incurred or
accrued allocable to Class R shares, and dividing by the total number Class R
shares then outstanding.

16
<PAGE>

Exchange but listed on other domestic or foreign securities exchanges or
admitted to trading on the NASDAQ National Market are valued in a like manner.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price on the business day as of which such value is being
determined as reflected on the tape at the close of the exchange representing
the principal market for such securities.

PURCHASE OF SHARES

SC-ARBITRAGE Class R shares may be purchased through Firstar Trust Company,
SC-ARBITRAGE's Transfer Agent, or any dealer that has entered into a sales
agreement with the Distributor.

If you choose a securities dealer that has not entered into a sales agreement
with the Distributor, such dealer may, nevertheless, offer to place an order for
the purchase of SC-ARBITRAGE shares. Such dealer may charge a transaction fee,
as determined by the dealer. That fee may be avoided if shares are purchased
through a dealer who has entered into a sales agreement with the Distributor or
through the Transfer Agent.

By investing in SC-ARBITRAGE, you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $2,500. For individual retirement account
and employee benefit plans qualified under Section 401, 403(b)(7) or 457 of the
Code as well as UGMA or UTMA accounts the minimum initial investment is $1,000.
For investors using the Automatic Investment Plan (described below) the minimum
initial investment is $250. These minimums can be changed or waived by SC-
ARBITRAGE at any time. Shareholders will be given at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.

17
<PAGE>

and are not binding until so accepted. SC-ARBITRAGE reserves the right
to decline to accept a purchase order application in whole or in part.

MAIL

The following instructions should be used when mailing a check or money order
payable to "Security Capital Real Estate Arbitrage Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:

Please note that if your check does not clear, a service charge of $20 will be
charged and you will be responsible for any losses suffered by SC-ARBITRAGE as a
result.

WIRE PURCHASES

Class R shares may be purchased by wire only through the Transfer Agent. The
following instructions should be used when wiring funds to the Transfer Agent
for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital Real Estate Arbitrage Shares
(shareholder account number)
(shareholder name/account registration)

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan allows regular, systematic investments in SC-
ARBITRAGE Class R shares from a bank checking or NOW account. SC-ARBITRAGE will
reduce the minimum initial investment to $250 if a shareholder elects to use the
Automatic Investment Plan. To establish the Automatic Investment Plan, an
investor should complete the appropriate section in SC-ARBITRAGE's application
and an existing SC-ARBITRAGE shareholder should call 1-888-SECURITY (toll free)
for an automatic investment plan form. The Automatic Investment Plan can be set
up with any financial institution that is a member of the ACH. Under certain
circumstances (such as discontinuation of the Automatic Investment Plan before
the minimum initial investment is reached, or, after reaching the minimum
initial investment, the account balance is reduced to less than $500), SC-
ARBITRAGE reserves the right to close such account. Prior to closing any account
for failure to reach the minimum initial investment, SC-ARBITRAGE will give a
shareholder written notice and 60 days

18
<PAGE>

in which to reinstate the Automatic Investment Plan or otherwise reach the
minimum initial investment. A shareholder should consider his or her financial
ability to continue in the Automatic Investment Plan until the minimum initial
investment amount is met because SC-ARBITRAGE has the right to close such
account for failure to reach the minimum initial investment. Such closing may
occur in periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20.00
will be deducted from a shareholder's SC-ARBITRAGE account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-ARBITRAGE in writing or by telephone to terminate the
plan, a shareholder closes his or her bank account or in any manner prevent
withdrawal of funds from the designated bank checking or NOW account.

SUBSEQUENT INVESTMENTS

Additional investments of at least $500 may be made by mail, wire or by
telephone. When making an additional purchase by mail, a check payable to
"Security Capital U.S. Real Estate Shares" along with the Additional Investment
Form provided on the lower portion of a shareholder's account statement must be
enclosed. To make an additional purchase by wire, a shareholder may call 1-800-
699-4594 (toll free) for complete wiring instructions.

You may purchase additional shares by moving money from your bank account to
your SC-ARBITRAGE account by telephone. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can be
used for telephone transactions. In order for shares to be purchased at the net
asset value determined as of the close of regular trading on a give date, the
Transfer Agent must receive both the purchase order and payment by Electronic
Funds Transfer through the ACH System, before the close of regular trading on
such date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS R SHARES.

EXCHANGE FEATURE

Class R shares of SC-ARBITRAGE may be exchanged for Class R shares of SC-US,
SC-EURO and SC-ASIA. Exchanges of Class R shares will be made at their relative
net asset values. Shares may be exchanged only if the amount being exchanged
satisfies the minimum investment required. However, you may not exchange your
investment in shares of SC-ARBITRAGE, SC-US, SC-EURO or SC-ASIA more than four
times in any twelve-month period (including the initial exchange of your
investment during that period).

CLASS I SHARES

SC-ARBITRAGE also issues Class I shares which offer different services and
incur different expenses which would affect performance. Investors may call the
Distributor at 1-800-699-4594 (toll free) to obtain additional information.

19
<PAGE>

REDEMPTION OF SHARES

You may request redemption of part or all of your Class R shares at any time
by telephone or by mail. The redemption of shares will be at the next determined
net asset value. See "Determination of Net Asset Value." SC-ARBITRAGE normally
will mail the redemption proceeds to you on the next business day and, in any
event, no later than seven business days after the receipt of a redemption
request in good order. However, when a purchase has been made by check, SC-
ARBITRAGE may hold payment on redemption proceeds until it reasonably satisfied
that the check has cleared, which may take up to twelve days.

Redemption requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class R shares to be redeemed
were issued in certificate form, the certificate must be endorsed for transfer
(or be accompanied by a duly executed stock power) and must be submitted to
Firstar Trust Company together with a redemption request. The following
instructions should be used for the redemption of shares by mail, by wire and by
telephone:

MAIL AND WIRE

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-ARBITRAGE. Do not mail
letters by overnight courier to the post office box. Any written redemption
requests received within 15 days after an address change must be accompanied by
a signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-699-
4594. In order to utilize this procedure, you must have previously elected this
option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-ARBITRAGE reserves the right to
limit the number of telephone redemptions by a shareholder. Once made,
telephone redemption requests may not be modified or canceled.

20
<PAGE>

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-ARBITRAGE will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-ARBITRAGE reserves the right to refuse a
telephone redemption request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-ARBITRAGE or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-ARBITRAGE in not less than 30
days' notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 in the case of individual retirement accounts and employee benefit plans
qualified under Sections 401, 403(b)(7) or 457 of the Code). Upon any such
termination, a check for the redemption proceeds will be sent to the account of
record within seven business days of the redemption. However, if a shareholder
is affected by the exercise of this right, he or she will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.

DIVIDENDS AND DISTRIBUTIONS

21
<PAGE>

TAXATION

FEDERAL INCOME TAXES

22
<PAGE>

dividend income required to be shown on the shareholder's Federal income tax
return. Any amounts withheld may be credited against the shareholder's U.S.
federal income tax liability.

Further information relating to tax consequences is contained elsewhere in
this Prospectus and in the Statement of Additional Information.

STATE AND LOCAL TAXES

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-US's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA each with two classes of shares: Class
R shares and Class R shares. Class R shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-ARBITRAGE's Class R shares may
not be modified except by the vote of a majority of the holders of all Class R
shares outstanding. SC-ARBITRAGE's Class R shareholders have exclusive voting
rights with respect to matters relating solely to SC-ARBITRAGE's Class R shares.
SC-ARBITRAGE's Class R shareholders vote separately from SC-ARBITRAGE's Class I
shareholders and SC-US's, SC-EURO's, and SC-ASIA's Class I and Class R
shareholders on matters in which the interests of SC-ARBITRAGE's Class R
shareholders differ from the interests of SC-ARBITRAGE's Class I shareholders
and SC-US's, SC-EURO's, and SC-ASIA's Class I and Class R shareholders.

23
<PAGE>

Incorporated's ownership of a controlling interest in SC-US and,
therefore, SC-REMFs, is to dilute the voting power of other SC-US and SC-REMFs
shareholders.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

REPORTS TO SHAREHOLDERS

PERFORMANCE INFORMATION

From time to time, SC-ARBITRAGE may advertise the "average annual total
return" of the Class R shares over various periods of time. This total return
figure shows the average percentage change in value of an investment in SC-
ARBITRAGE's Class R shares from the beginning date of the measuring period to
the ending date of the measuring period. The figure reflects changes in the
price of SC-ARBITRAGE's Class R shares and assumes that any income, dividends
and/or capital gains distributions made by SC-ARBITRAGE's Class R shares during
the period are reinvested in Class R shares of SC-ARBITRAGE. Figures will be
given for recent one-, five- and ten-year periods (when applicable), and may be
given for other periods as well (such as from commencement of SC-ARBITRAGE's
operations, or on a year-by-year basis). When considering "average" total
return figures for periods longer than one year, investors should note that SC-
ARBITRAGE's Class R annual total return for any one year in the period might
have been greater or less than the average for the entire period. SC-ARBITRAGE
also may use "aggregate" total return figures for various periods, representing
the cumulative change in value of an investment in SC-ARBITRAGE's Class R shares
for the specific period (again reflecting changes in SC-ARBITRAGE's Class R
share price and assuming reinvestment of Class R dividends and distributions).
Aggregate total returns may be shown by means of schedules, charts or graphs,
and may indicate subtotals of the various components of total return (that is,
the change in value of initial investment, income dividends and capital gains
distributions).

YEAR 2000 RISKS

24
<PAGE>

with respect to the computer systems that it uses and to obtain satisfactory
assurances that comparable steps are being taken by each of SC-REMFs major
service providers. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on SC-REMFs, SC-US, SC-ARBITRAGE, SC-EURO
and SC-ASIA.

ADDITIONAL INFORMATION

25
<PAGE>

PROSPECTUS
----------

LOGO
----

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital European Real Estate Shares ("SC-EURO") is an investment
portfolio of Security Capital Real Estate Mutual Funds Incorporated ("SC-
REMFs"), an open-end management investment company organized under Maryland law.
SC-EURO seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in European countries. Long-term, SC-EURO's objective is to achieve
top-quartile returns as compared with other mutual funds that invest in
publicly-traded real estate companies organized principally in European
countries, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and investment modeling techniques.
Security Capital (US) Management Group Incorporated ("SC (US) Management")
serves as both investment adviser and administrator to SC-EURO. Security Capital
(EU) Management Group S.A. ("SC (EU) Management") provides real estate research
and analytical services to SC (US) Management in connection with the management
of SC-EURO's investment portfolio.

By this Prospectus, Class I shares of SC-EURO are being offered. Class I
shares are offered to investors whose minimum investment is $250,000. See
"Purchase of Shares." SC-EURO also offers Class R shares to investors whose
minimum initial investment is $2,500. Class R shares have different expenses
than Class I shares which would affect performance. Investors desiring to obtain
information about SC-EURO's other class of shares should call 1-888-SECURITY
(toll free) or ask their sales representatives or SC-EURO's distributor.

An investment in SC-EURO should not be the sole source of investment for a
shareholder. Rather, an investment in SC-EURO should be considered as part of an
overall portfolio strategy which includes fixed income and equity securities.
SC-EURO is designed for long-term investors, and not for investors who intend to
liquidate their investments after a short period of time.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-EURO. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information ("SAI") dated [_______, 1998], containing additional and more
detailed information about SC-EURO has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference into
this Prospectus. It is available without charge and can be obtained by calling
1-888-SECURITY (toll free) or writing SC-EURO's Sub-Administrator at:
[___________].

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

[ ________, 1998 ]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses......................................... 2

Description of SC-REMFs and SC-EURO.............. 4

Investment Objectives and Policies............... 4

Investment Strategy.............................. 5

Hedging and Other Portfolio Strategies........... 6

Risk Factors..................................... 8

Non-Diversified Status; Portfolio Turnover....... 11

Management of SC-EURO............................ 11

Investment Advisory Agreement and Research
Services Agreement............................... 15

Administrator and Sub-Administrator.............. 16

Distribution and Servicing Plan.................. 16

Determination of Net Asset Value................. 17

Purchase of Shares............................... 17

Redemption of Shares............................. 19

Dividends and Distributions...................... 21

Taxation......................................... 22

Organization and Description of Capital Stock.... 23

Custodian and Transfer Agent..................... 24

Reports to Shareholders.......................... 24

Performance Information.......................... 24

Additional Information........................... 25
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-EURO.

ANNUAL SC-EURO OPERATING EXPENSES

The Class I shares of SC-EURO pay for certain expenses attributable to Class I
shares directly out of SC-EURO's Class I assets. These expenses are related to
management of SC-EURO, administration and other services. For example, SC-EURO
pays an advisory fee and an administrative fee to SC (US) Management. SC-EURO
also has other customary expenses for services such as transfer agent fees,
custodial fees paid to the bank that holds its portfolio securities, audit fees
and legal expenses. These operating expenses are subtracted from SC-EURO's Class
I assets to calculate SC-EURO's Class I net asset value per share. In this
manner, shareholders pay for these expenses indirectly.

The following table is provided to help shareholders understand the direct
expenses of investing in SC-EURO and the portion of SC-EURO's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-EURO's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-EURO's average annual net assets for such fiscal year
are $250 million. The actual expenses in future years may be more or less than
the numbers in the table, depending on a number of factors, including the actual
value of SC-EURO's assets.

FEE TABLE

<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions.. None
Redemption fee (1).............................................. None
Annual SC-EURO Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees................................................. 1.20%
12b-1 fees (2).................................................. .25%
Other expenses.................................................. .15%
Total SC-EURO operating expenses (3)............................ 1.60%
</TABLE>

________
(1) SC-EURO's transfer agent charges a service fee of [$____] for each wire
redemption.
(2) SC-REMFs has adopted a Distribution and Service Plan for SC-EURO Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-EURO pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related to
the maintenance of shareholder accounts at the annual rate of 0.25% of SC-
EURO's Class I average daily net assets. As a result, long-term Class I
shareholders of SC-EURO may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(3) SC (US) Management has committed to waive fees and/or reimburse expenses to
maintain SC-EURO's Class I total operating expenses, other than brokerage
fees and commissions, interest, taxes and other extraordinary expenses at no
more than [___%] of the value of SC-EURO's average daily net assets for
Class I shares for the year ending December 31, 1998. SC-EURO estimates that
without such

2
<PAGE>

waiver and/or reimbursement, actual total fund operating expenses would be
[____%] of the value of SC-EURO's Class I average daily net assets.

EXAMPLE

<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
---- -----
<S> <C> <C>
A shareholder would bear the following expenses
on a $1,000 investment, assuming a five percent
annual return and operating expenses as outlined
in the fee table above.............................
$_____ $_____
</TABLE>

[TO BE FILED BY AMENDMENT.]

THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
US'S ASSETS.

3
<PAGE>

DESCRIPTION OF SC-EURO

SC-EURO is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law on January 23, 1997. SC-REMFs is comprised
of four investment portfolios, SC-EURO, Security Capital U.S. Real Estate Shares
("SC-US"), Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") and
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA").

SC-EURO issues two classes of shares, one of which, Class I shares, includes
investors whose minimum initial investment is $250,000. The second class of
shares, Class R shares, which are offered to all other eligible investors,
offers different services and incurs different expenses than Class I shares,
which would affect performance. See "Purchase of Shares" and "Organization and
Description of Capital Stock." SC-EURO Class I shares are offered by this
prospectus.

INVESTMENT OBJECTIVES AND POLICIES

SC-EURO's investment objective is to provide shareholders with above-average
total returns, including current income and capital appreciation, primarily
through investments in equity securities of publicly-traded real estate
companies organized principally in European countries. Long-term, SC-EURO's
objective is to achieve top-quartile results as compared to other mutual funds
that invest in publicly-traded real estate companies organized principally in
European countries, by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and investment modeling
techniques. SC-EURO's investment objective is "fundamental" and cannot be
changed without approval of a majority of its outstanding voting securities.
None of SC-EURO's policies, other than its investment objective and the
investment restrictions described below, are fundamental; these non-fundamental
policies may be changed by SC-EURO's Board of Directors without shareholder
approval. There can be no assurance that SC-EURO's investment objective will be
achieved.

Under normal conditions, SC-EURO will invest at least 80% of its assets in the
equity securities of publicly-traded real estate companies located primarily in
European nations. Such equity securities will consist of (1) common stocks, (2)
rights or warrants to purchase common stocks, (3) securities convertible into
common stocks where the conversion feature represents, in SC (US) Management's
view, a significant element of the security's value, and (4) preferred stocks.
SC-EURO will invest only in real estate companies that derive at least 50% of
their revenues from the ownership, construction, financing, management or sale
of commercial, industrial or residential real estate and hotels or that have at
least 50% of their assets invested in such real estate. SC-EURO also may invest
in securities issued by real estate companies that are controlled by Security
Capital Group Incorporated ("Security Capital") or its affiliates.

SC-EURO may, from time to time, invest in debt securities of issuers in the
real estate industry. Debt securities purchased by SC-EURO will be rated no
lower than A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poors
Corporation ("S&P") or, if not so rated, believed by SC (US) Management to be of
comparable quality, and may have an average weighted maturity of up to 30 years.

When, in the judgment of SC (US) Management, market or general economic
conditions justify a temporary defensive position, SC-EURO will deviate from its
investment objective and invest without limit in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country, such as: short-term (less
than 12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. Government or the
government of a foreign country, their agencies or instrumentalities; finance
company

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and corporate commercial paper and other short-term corporate obligations, in
each case rated Prime-1 by Moody's, or A or better by S&P or, if unrated, of
comparable quality as determined by SC (US) Management; and repurchase
agreements with banks and broker-dealers with respect to such securities. For
temporary defensive purposes, SC-EURO also may invest up to 25% of its total
assets in obligations (including certificates of deposit, time deposits and
bankers' acceptances) of banks; provided that SC-EURO will limit its investment
in time deposits for which there is a penalty for early withdrawal to 10% of its
total assets.

SC-EURO is subject to certain investment restrictions that are fundamental
and, therefore, may not be changed without shareholder approval. Among other
things, SC-EURO will not invest more than 10% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. SC (US) Management will
monitor the liquidity of such restricted securities under the supervision of SC-
EURO's Board of Directors. If SC-EURO invests in securities issued by a real
estate company that is controlled by Security Capital Group Incorporated or any
of its affiliates, such securities will be treated as illiquid securities. SC-
EURO also may not invest directly in real estate. See SC-EURO's SAI for further
discussion of SC-EURO's fundamental investment restrictions.

INVESTMENT STRATEGY

REAL ESTATE SECURITIES INDUSTRY OUTLOOK

SC (US) Management believes that the real estate industry throughout Europe
will experience the same fundamental transformation as experienced in the last
seven years in the U.S., which will create significant opportunities. Direct
investment of equity capital in real estate will decrease further while
investments in publicly-traded real estate operating companies are increasing.
The aggregate equity market capitalization of real estate in Europe has
increased from $100 billion at December 31, 1992 to [$____] billion at [_______,
1997]. This increasing securitization of the real estate industry through
Europe, primarily in the form of real estate operating companies, offers
significant benefits to shareholders, including enhanced liquidity, real-time
pricing and the opportunity for optimal growth and sustainable rates of return
through a more rational and disciplined approach to capital allocation and
operating management.

A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH

SC-EURO seeks to achieve top-quartile returns by investing primarily in
European real estate operating companies which have the potential to deliver
above-average growth. SC (US) Management believes that these investment
opportunities can only be identified through the integration of top down
economic and real estate market research and bottom up operating company cash
flow modeling.

Top Down Economic and Real Estate Market Research. SC (US) Management is
uniquely positioned to access meaningful, proprietary economic and real estate
research collected at the country market, city sub-market and property-specific
level. Non-U.S. country market research and analysis, which is provided to SC
(US) Management by SC (EU) Management and other operating professionals within
the Security Capital affiliate company network, assists SC (US) Management in
identifying attractive growth in country markets and real estate sectors. This
research and analysis is instrumental to SC (US) Management's ability to make
investment decisions for SC-EURO's portfolio and to identify country markets
reaching a "marginal turning point." The country market research conducted by
SC-EURO includes a comprehensive evaluation of real estate supply and demand
factors such as population and economic trends, customer and industry needs,
capital flows and building permit and construction data on a country market and
city sub-market basis

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and by product type. Specifically, primary country market research evaluates
normalized cash flow lease economics -- accounting for capital costs -- to
determine whether the core economy of a country market is expected to improve,
stabilize or decline. Only through disciplined real estate market research does
SC (US) Management believe it can identify country markets and/or city sub-
markets, and thus, real estate operating companies, with potential for higher
than average growth prospects.

Bottom Up Real Estate Operating Company Cash Flow Modeling. SC (US)
Management believes that analyzing the cash flow profile -- the quality and
growth potential -- of a real estate company, both historically and
prospectively, is another fundamental step toward identifying above-average
growth opportunities. SC (US) Management believes that cash flow is helpful in
understanding a real estate portfolio in that such calculation reflects cash
flow from operations and the real estate's ability to support interest payments
and general operating expenses before the impact of certain activities, such as
gains or losses from sales of real estate and changes in accounts receivable and
accounts payable. The real estate operating valuation models utilized by SC
(US) Management integrate real estate market research with analysis on specific
real estate portfolios in order to establish an independent value of the
underlying sources of a real estate company's cash flow. Certain models measure
and compare the impact of specific factors on cash flow growth expectations.
The data from all valuation models is ultimately integrated and reviewed in
order to identify real estate operating companies with significant potential for
growth.

HEDGING AND OTHER PORTFOLIO STRATEGIES

SC-EURO also may from time to time use certain of the investment techniques
described below to achieve its objectives. Although these strategies are
regularly used by some investment companies and other institutional investors in
various markets, some of these strategies cannot at the present time be used to
a significant extent by SC-EURO in some of the markets in which SC-EURO will
invest and SC-EURO does not expect to use them extensively.

Repurchase Agreements. When SC-EURO acquires a security from a bank or a
registered broker-dealer, it may simultaneously enter into a repurchase
agreement, wherein the seller agrees to repurchase the security at a specified
time and price. The repurchase price is in excess of the purchase amount which
reflects an agreed-upon rate of return, and is not tied to the coupon rate on
the underlying security.

Borrowing. SC-EURO may borrow up to 33-1/3% of the value of its assets to
increase its holdings of portfolio securities. Under the Investment Company Act
of 1940, as amended ("1940 Act"), SC-EURO is required to maintain continuous
asset coverage of 300% with respect to such borrowings and to sell (within three
days) sufficient portfolio holdings to restore such coverage if it should
decline to less than 300% due to market fluctuations or otherwise, even if such
liquidations of SC-EURO's portfolio are disadvantageous from an investment
standpoint.

Loans of Portfolio Securities. SC-EURO may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-EURO may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-EURO
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.

Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-EURO may write (i.e.,
sell) covered put and

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call options and purchase put and call options on securities or stock indices
that are traded on U.S. and foreign exchanges or in the over-the-counter
markets. An option on a security is a contract that gives the purchaser the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a stock index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option. SC-EURO may write a call or put option only if the
option is "covered." This means that so long as SC-EURO is obligated as the
writer of a call option, it will own the underlying securities subject to the
call, or hold a call at the same or lower exercise price, for the same exercise
period, and on the same securities as the written call. A put is covered if SC-
EURO maintains liquid assets with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal or
greater exercise price. The value of the underlying securities on which options
may be written at any one time will not exceed 15% of the total assets of SC-
EURO. SC-EURO will not purchase put or call options if the aggregate premium
paid for such options would exceed 5% of its total assets at the time of
purchase.

Forward Foreign Currency Contracts. SC-EURO may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-EURO from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-
EURO will enter into forward contracts only under two circumstances. First,
when SC-EURO enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when SC (US) Management believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, SC-EURO may enter into a forward contract to sell or buy the amount of
the former foreign currency (or another currency which acts as a proxy for that
currency) approximating the value of some or all of SC-EURO's portfolio
securities denominated in such foreign currency. The second investment practice
is in general referred to as "cross-hedging." SC-EURO's forward transactions
may call for the delivery of one foreign currency in exchange for another
foreign currency and may at times not involve currencies in which its portfolio
securities are denominated.

Futures Contracts. For hedging purposes only, SC-EURO may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.

When SC-EURO enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. In addition, when SC-EURO enters into a futures contract, it will
segregate assets or "cover" its position in accordance with the 1940 Act. See
"Investment Objectives and Policies--Futures Contracts" in the SAI.

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SC-EURO may not commit more than 5% of its total assets to initial margin
deposits on futures contracts. The value of the underlying securities on which
futures will be written at any one time may not exceed 25% of the total assets
of SC-EURO.

Depositary Receipts. SC-EURO may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.

Short Sales. SC-EURO reserves the right to engage in short sale transactions in
securities listed on one or more foreign or U.S. securities exchanges. Short
selling involves the sale of borrowed securities. At the time a short sale is
effected, SC-EURO incurs an obligation to replace the security borrowed at
whatever its price may be at the time that SC-EURO purchases it for delivery to
the lender. When a short sale transaction is closed out by delivery of the
securities, any gain or loss on the transaction is taxable as a short term
capital gain or loss. Until the security is replaced, SC-EURO is required to
pay to the lender amounts equal to any dividends or interest which accrue during
the period of the loan. All short sales will be fully collateralized. SC-EURO
may also engage in short sales against the box, which involves selling a
security SC-EURO holds in its portfolio for delivery at a specified date in the
future. SC-EURO will not engage in short sales or short sales against the box
if immediately following such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of SC-
EURO's net assets (taken at market value). See SC-EURO's SAI for further
discussion of short sales and short sales against the box.

RISK FACTORS

Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in SC-EURO, nor can
there be an assurance that SC-EURO's investment objectives will be attained. As
with any investment in securities, the value of, and income from, an investment
in SC-EURO can decrease as well as increase depending on a variety of factors
which may affect the values and income generated by SC-EURO's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-EURO will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-EURO is invested may also be
reflected in declines in the price of shares of SC-EURO. Changes in currency
valuations will also affect the price of shares of SC-EURO. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-EURO generally will vary inversely with changes in prevailing
interest rates. Additionally, investment decisions made by SC (US) Management
will not always be profitable or prove to have been correct. SC-EURO is
intended as an investment vehicle for those investors seeking long term capital
growth and is not intended as a complete investment program.

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<PAGE>

with the direct ownership of real estate (in addition to securities markets
risks) because of its policy of concentration in the securities of companies in
the real estate industry. Such risks include declines in the value of real
estate, risks related to general and local economic conditions, possible lack of
availability of mortgage funds, overbuilding, extended vacancies of properties,
increased competition, increases in real estate taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the clean-up of
environmental problems, liability to third parties for damages resulting from
environmental problems, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to customers and
changes in interest rates.

Additionally, SC-EURO could conceivably own real estate directly as a result
of a default on debt securities that it owns. If SC-EURO has rental income or
income from the disposition of such real estate, the receipt of such income may
adversely affect its ability to retain its tax status as a regulated investment
company. See "Taxation."

Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
EURO may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.

Brokerage commissions, custodial services and other costs relating to
investment in European countries are generally more expensive than in the U.S.
European securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of SC-EURO are uninvested and no return is earned
thereon. The inability of SC-EURO to make intended security purchases due to
settlement problems could cause SC-EURO to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to SC-EURO due to subsequent declines in
value of the portfolio security or, if SC-EURO has entered into a contract to
sell the security, could result in possible liability to the purchaser.

In many foreign countries, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the U.S. There is an increased risk, therefore, of uninsured
loss due to lost, stolen, or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which SC-EURO may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the U.S.

Prior governmental approval of foreign investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters

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of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.

Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. SC-EURO could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.

Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.

SC-EURO usually effects currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange (to cover service charges) will be incurred
when SC-EURO converts assets from one currency to another.

Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-EURO may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.

Borrowing. SC-EURO may borrow to the extent permitted above. Borrowing may
exaggerate the effect on SC-EURO's net asset value of any increase or decrease
in the value of SC-EURO's portfolio securities. Money borrowed will be subject
to interest and other costs (which may include commitment fees and/or the cost
of maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.

Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any
future or options contract may not be available when a futures position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or foreign currency on which the futures or options
contract is based and movements in the securities or currency in SC-EURO's
portfolio. Successful use of futures or options contracts is further dependent
on SC (US) Management's ability to correctly predict movements in the securities
or foreign currency markets and no assurance can be given that its judgment will
be correct. Successful use of options on securities or stock indices is subject
to similar risk considerations.

Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored
or unsponsored programs. In sponsored programs, an issuer has made arrangements
to have its securities traded in the form of Depositary Receipts. In
unsponsored programs, the issuer may not be directly involved in the creation of
the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-
EURO's investment policies, SC-EURO's investment in Depositary Receipts will be
deemed to be investments in the underlying securities.

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Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the SAI.

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

SC-EURO intends to operate as a "non-diversified" investment company under the
1940 Act, which means SC-EURO is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer.
However, SC-EURO intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-EURO of any
liability for Federal income tax to the extent its earnings are distributed to
shareholders. See "Taxation." To qualify as a regulated investment company,
among other requirements, SC-EURO will limit its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the market
value of SC-EURO's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and SC-EURO will not own more than 10% of the
outstanding voting securities of a single issuer. SC-EURO's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-EURO, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-EURO may present greater
risk to an investor than an investment in a diversified company.

SC-EURO anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when SC (US)
Management deems portfolio changes appropriate. The turnover rate may vary
greatly from year to year. An annual turnover rate of 150% occurs, for example,
when all of the securities held by SC-EURO are replaced one and one half times
in a period of one year. A higher turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses which are borne
by SC-EURO. High portfolio turnover may result in the realization of net short-
term capital gains by SC-EURO which, when distributed to shareholders, will be
taxable as ordinary income. See "Taxation."

DIRECTORS, OFFICERS AND OTHER PERSONNEL

BOARD OF DIRECTORS

The overall management of the business and affairs of SC-EURO is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-EURO, including SC-REMFs's agreements with SC (US) Management,
its custodian and transfer agent. The management of SC-EURO's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and SC (US) Management, subject always to the investment objectives
and policies of SC-EURO and to general supervision by the Board of Directors.
Although SC-REMFs is not required by law to hold annual meetings, it may hold
shareholder meetings from time to time on important matters, and shareholders
have the right to call a meeting to remove a Director or to take other action
described in SC-REMFs's Articles of Incorporation. The Directors and principal
officers of SC-REMFs and certain key members of SC-EURO's Portfolio Management
Committee and their principal occupations are set forth below.

Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice President
for Administration and Treasurer of Loyola University,
Chicago from 1981

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to July 1994, where he was responsible for
administration, investment, real estate and treasurer
functions, served as Chief Investment Officer, was
Chairman of the Operations Committee, was a member of
the Investment and Finance Committees of the Board of
Trustees and was President and a Director of the Loyola
Management Company. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S. from
Northwestern University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director of SC (US)
Management since March 1997, where he is responsible for
overseeing all investment and capital allocation matters
for SC (US) Management's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting; from January 1995 to March 1997, he was
Managing Director of SC (US) Management, where he
performed the same functions. Mr. Manno was a member of
the Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to
March 1994. Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

George F. Keane Director of SC-REMFs. Chairman of the Board of Trigen
Energy Corporation since 1994. As founding chief
executive of The Common Fund in 1971 and Endowment
Realty Investors in 1988, Mr. Keane for many years
headed an investment management service for colleges,
universities and independent schools that managed $15
billion for 1,200 educational institutions when he
became President Emeritus of the Common Fund in 1993. He
has served as a member of the Investment Advisory
Committee of the $75 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the RCB Trust Company since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993, and a
Director of the Bramwell Funds since 1994. He is also a
Director of Universal Stainless & Alloy Products, Global
Pharmaceutical Corporation, United Water Resources and
United Properties Group, Gulf Resources Corporation, and
the Universal Bond Fund, and is an advisor to Associated
Energy Managers. Mr. Keane also serves as a Trustee of
his alma mater, Fairfield University where he received
his B.A., and as a Director and Chairman of the
Investment Committee of the United Negro College Fund.
Mr. Keane holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University, Appleton,
Wisconsin.

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Insurance Company and Trustee Emeritus and Presidential
Counselor of his alma mater, Cornell University. Mr.
Abrams received his M.B.A. from Harvard University and
his B.A. from Cornell University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of Security
Capital (US) Management since July, 1997. Prior thereto,
Director of Security Capital Pacific Trust ("PTR") and
the PTR REIT Manager from February 1995 to June 1997 and
Senior Vice President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT Manager
from September 1994 to June 1997 where he had overall
responsibility for asset management and multifamily
dispositions. Prior to joining Security Capital, Mr.
Gardner was with Copley Real Estate Advisors as a
Managing Director and Principal responsible for
portfolio management from January 1991 to September 1994
and as a Vice President and Principal of asset
management from December 1984 to December 1990. From
July 1977 to November 1984, Mr. Gardner was a Real
Estate Manager with the John Hancock Companies. Mr.
Gardner received his M.S. in Computer Information
Systems from Bentley College and his B.S. in Accounting
from Stonehill College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of SC (US) Management
since March 1997. Prior thereto, from June 1988 to March
1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong Capital
Management, Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A. from
the University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of SC
(US) Management since November 1997 where he is
responsible for the development and implementation of
portfolio investment strategy. Prior thereto, Senior
Vice President and Senior REIT Analyst from July 1996 to
October 1997 and Vice President from May 1995 to June
1996. Prior to joining Security Capital, Mr. Statz was a
Vice President in the investment research department of
Goldman, Sachs & Co., from February 1993 to January
1995, concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing director
of Chancellor Capital Management from August 1982 to
February 1992. Mr. Statz received his M.B.A. and B.B.A.
from the University of Wisconsin, Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice President
of SC (US) Management since November 1997 and Vice
President since July 1996, where he is responsible for
directing the activities of the industry/company
securities research group and providing in-depth
proprietary research on publicly traded companies with
office and industrial sectors. Prior to joining SC (US)
Management, Mr. Bedell spent nine years with LaSalle
Partners Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,

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<PAGE>

operational and financial management of a private REIT
with commercial real estate investments of $600-800
million. Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from Kenyon College.

Gerios J.M. Rovers Member, SC-EURO Portfolio Management Committee; Mr. Rovers
has served as ______________ of SC (US) Management since
April 1997, where he is responsible for [the development
and implementation of portfolio investment strategy]. From
July 1988 to April 1997, Mr. Rovers was associated with
GIM Algemeen Vermogensbeheer and served as an associate
director and a portfolio manager of global real estate
securities on behalf of domestic and foreign clients. Mr.
Rovers graduated from the University of Tilburg in The
Netherlands.

W. Joseph Houlihan Member, SC-EURO Portfolio Management Committee;
Mr. Houlihan has served as a Managing Director of SC (US)
Management since April 1997 where he is responsible for
[overseeing all investment and capital allocation
recommendations for SC (US) Management's public market
securities activities, and also responsible for company
and industry analysis, market strategy and trading and
reporting]. Prior to joining Security Capital, Mr.
Houlihan was the Director of the Institutional Investment
Management Group and executive vice president of GIM
Algemeen Vermogensbeheer, a prominent Dutch investment
management company, where he specialized in real estate
investments and was responsible for developing GIM's real
estate securities investment process and client base.
Prior to joining GIM, Mr. Houlihan was a vice president at
John G. Wood and Associates, a diversified real estate
development and investment company located in Florida, and
with Chase Manhattan Bank's trust department. Mr. Houlihan
is an Advisory Director of Security Capital US Realty and
a member of the Investment Property Forum. Mr. Houlihan
received his M.B.A. from the University of Leuven,
Belgium, and his B.S. from New York University.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603 and 34
Boulevard de La Wolune, Brussels, Belgium, has been retained to provide
investment advice, and, in general, to conduct the management and investment
program of SC-EURO under the overall supervision and control of the Directors of
SC-EURO.

SC (US) Management was formed in March 1994, and is registered as an
investment adviser with the SEC. SC (US) Management's principal officers
include Anthony R. Manno, Jr., Managing Director and President, John H.
Gardner, Jr., Managing Director, Kenneth D. Statz, Managing Director and Kevin
W. Bedell, Senior Vice President. SC (US) Management is a wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.

The SC-EURO Portfolio Management Committee, which is comprised of certain
officers of SC-REMFs, SC (US) Management analysts and SC (EU) Management
analysts, is primarily responsible for the ongoing construction of SC-EURO's
portfolio.

SC (EU) MANAGEMENT

Security Capital (EU) Management Group S.A. ("SC (EU) Management") has been
retained by SC (US) Management to provide SC (US) Management with proprietary
real estate research and on-going analysis of opportunities for investment in
the equity securities of European issuers. SC (EU) Management is a corporation
organized under Belgian law and an indirect, wholly-owned subsidiary of Security
Capital Group Incorporated.

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<PAGE>

INVESTMENT ADVISORY AGREEMENT AND
RESEARCH SERVICES AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
(US) Management furnishes a continuous investment program for SC-EURO's
portfolio, subject to the general supervision of SC-REMFs's Board of Directors.
SC (US) Management also provides persons satisfactory to the Directors of SC-
REMFs to serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-REMFs, may be directors, officers, or employees of
SC (US) Management.

Under the Advisory Agreement, SC-EURO Class I shares pay SC (US) Management a
monthly management fee in an amount equal to 1.20% of the average daily net
assets of SC-EURO Class I shares (approximately 1.20% on an annual basis).
Under a separate agreement SC (US) Management has committed to waive fees and/or
reimburse expenses to maintain SC-EURO's Class I total operating expenses, other
than brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than [___%] of the value of SC-EURO's average daily net
assets for the year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-EURO Class I shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with SC (US) Management, (c) clerical,
accounting and other office costs, (d) costs of printing SC-EURO's prospectus
for existing shareholders and shareholder reports, (e) costs of maintaining SC-
REMFs's existence, (f) interest charges, taxes, brokerage fees and commissions,
(g) costs of stationery and supplies, (h) expenses and fees related to
registration and filing with federal and state regulatory authorities, and (i)
upon the approval of SC-REMFs's Board of Directors, costs of personnel of SC
(US) Management or its affiliates rendering clerical, accounting and other
office services. Each class of SC-EURO shares pays the portion of SC-EURO
expenses attributable to its operations. Income, realized gains and losses,
unrealized appreciation and depreciation and certain expenses not allocated to a
particular class are allocated to each class based on the net assets of that
class in relation to the net assets of SC-REMFs.

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<PAGE>

investment decisions for SC-EURO's portfolio. SC (US) Management pays SC (EU)
Management for the provision of such research and analytical services. Payment
of this fee is an obligation of SC (US) Management and not a direct obligation
of SC-EURO.

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC (US) Management has also entered into a fund accounting and administration
agreement with SC-REMFs (the "Administration Agreement") under which SC (US)
Management performs certain administrative functions for SC-EURO, including (i)
providing office space, telephone, office equipment and supplies for SC-REMFs;
(ii) paying compensation of SC-REMFs's officers for services rendered as such;
(iii) authorizing expenditures and approving bills for payment on behalf of SC-
EURO; (iv) supervising preparation of the periodic updating of SC-EURO's
Prospectus and SAI for existing shareholders; (v) supervising preparation of
quarterly reports to SC-EURO's shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine correspondence and other
communications with individual shareholders; (vi) supervising the daily pricing
of SC-EURO's investment portfolio and the publication of the net asset value of
SC-EURO's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-EURO, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-EURO; (ix) maintaining books and
records for SC-EURO (other than those maintained by the Custodian and Transfer
Agent) and preparing and filing of tax reports other than SC-EURO's income tax
returns; and (x) providing executive, clerical and secretarial help needed to
carry out these responsibilities.

In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs's Board of Directors, SC (US) Management has caused SC-
REMFs to retain [_______] (the "Sub-Administrator") as sub-administrator under a
service agreement ("Sub-Administration Agreement").

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-EURO's net asset value and preparing such figures for
publication, maintaining certain of SC-EURO's books and records that are not
maintained by SC (US) Management, or the Custodian, preparing financial
information for SC-EURO's income tax returns, proxy statements, quarterly and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of
[______%]. The Sub-Administrator also serves as SC-EURO's Custodian and Transfer
Agent. See "Custodian and Transfer and Dividend Disbursing Agent."

Under the Administration Agreement, SC (US) Management remains responsible for
monitoring and overseeing the performance by the Sub-Administrator of its
obligations to SC-EURO under the Sub-Administration Agreement, subject to the
overall authority of SC-REMFs's Board of Directors. For its services under the
Administration Agreement, SC (US) Management receives a monthly fee from SC-
REMFs at the annual rate of 0.2% of the value of the average daily net assets of
the Fund.

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs and SC-EURO's sole Class I shareholder have
adopted a Distribution and Servicing Plan ("Plan") with respect to SC-EURO's
Class I shares pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended. Under the Plan, SC-EURO pays to Security Capital Markets Group
Incorporated, in its capacity as principal distributor of SC-EURO's shares (the

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<PAGE>

"Distributor"), a monthly fee equal to, on an annual basis, .25% of the value of
SC-EURO's average daily net assets for Class I shares.

The Distributor may use the fee for services performed and expenses incurred
by the Distributor in connection with the distribution of Class I shares and for
providing certain services to Class I shareholders. The Distributor may pay
third parties in respect of these services such amount as it may determine. SC-
EURO understands that these third parties may also charge fees to their clients
who are beneficial owners of SC-EURO Class I shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plan.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of SC-EURO's Class I shares is determined as of
the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-EURO's portfolio and other assets
represented by Class I shares, subtracting liabilities incurred or accrued
allocable to Class I shares, and dividing by the total number of SC-EURO's
Class I shares then outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock exchange or quoted on a quotation system
of a national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled closing time
of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, New York time, on the day the value of the foreign
security is determined. If no sale is reported at that time, the mean between
the current bid and asked price is used. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of SC-EURO's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the current bid and asked price. Foreign securities that are not
traded on an exchange, securities for which market quotations are not readily
available and other assets are valued at fair value as determined by SC-EURO's
management and approved in good faith by the Board of Directors.

PURCHASE OF SHARES

Class I shares are being offered to investors whose minimum initial investment
is $250,000. SC-EURO Class I shares may be purchased through Firstar Trust
Company, SC-ARBITRAGE's Transfer Agent, or any dealer that has entered into a
sales agreement with the Distributor.

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<PAGE>

details of each purchase transaction will be sent to you promptly following each
transaction. If a purchase order is placed through a dealer, the dealer must
promptly forward the order, together with payment, to the Transfer Agent.
Investors must specify that Class I shares are being purchased.

If you choose a securities dealer that has not entered into a sales agreement
with the Distributor, such dealer may, nevertheless, offer to place an order for
the purchase of SC-EURO shares. Such dealer may charge a transaction fee, as
determined by the dealer. That fee may be avoided if shares are purchased
through a dealer who has entered into a sales agreement with the Distributor or
through the Transfer Agent.

By investing in SC-EURO you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $250,000. Class I shares may be purchased
by check or money order drawn on a U.S. bank, savings and loan, or credit union
by wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S.
dollars and will be accepted subject to collection at full face value. Note
that all applications to purchase shares are subject to acceptance by SC-EURO
and are not binding until so accepted. SC-EURO reserves the right to decline to
accept a purchase order application in whole or in part.

MAIL

The following instructions should be used when mailing a check or money order
payable to "Security Capital European Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:

Please note that if your check does not clear, a service charge of $20 will be
charged and you will be responsible for any losses suffered by SC-EURO as a
result.

WIRE PURCHASES

Class I shares may be purchased by wire only through the Transfer Agent. The
following instructions should be used when wiring funds to the Transfer Agent
for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

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<PAGE>

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital European Real Estate Shares
(shareholder account number)
(shareholder name/registration)

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handing of funds. SC-EURO
AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM INCOMPLETE
WIRING INSTRUCTIONS.

SUBSEQUENT INVESTMENTS

You may purchase additional shares by moving money from your bank account to
your SC-EURO account by telephone. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can be
used for telephone transactions. In order for shares to be purchased at the net
asset value determined as of the close of regular trading on a give date, the
Transfer Agent must receive both the purchase order and payment by Electronic
Funds Transfer through the ACH System, before the close of regular trading on
such date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.

EXCHANGE FEATURE

Class I shares of SC-EURO may be exchanged for Class I shares of SC-ARBITRAGE,
SC-US and SC-ASIA. Exchanges of Class I shares will be made at their relative
net asset values. Shares may be exchanged only if the amount being exchanged
satisfies the minimum investment required. However, you may not exchange your
investment in shares of SC-EURO, SC-ARBITRAGE, SC-US or SC-ASIA more than four
times in any twelve-month period (including the initial exchange of your
investment during that period).

REDEMPTION OF SHARES

You may request redemption of part or all of your Class I shares at any time
by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-EURO
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-EURO may hold payment on redemption proceeds until it reasonably
satisfied that the check has cleared, which may take up to twelve days.

Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-EURO
of the Broker or dealer's instruction to redeem shares. In addition, some
brokers or dealers may charge a fee in connection with such redemptions. See
"Determination of Net Asset Value."

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<PAGE>

MAIL AND WIRE

Via U.S. Mail By Overnight Mail
Firstar Trust Company Firststar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0710 615 East Michigan Street
Milwaukee, Wisconsin 53202

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-EURO. Do not mail letters by
overnight courier to the post office box. Any written redemption requests
received within 15 days after an address change must be accompanied by a
signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-699-
4594. In order to utilize this procedure, you must have previously elected this
option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-EURO reserves the right to limit
the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-EURO will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-EURO reserves the right to refuse a
telephone redemption request if so advised.

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<PAGE>

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-EURO or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

SC-EURO may suspend the right of redemption during any period when (i) trading
on the New York Stock Exchange is restricted or that Exchange is closed, other
than customary weekend and holiday closings, or (ii) an emergency, as defined by
rules adopted by the SEC, exists making disposal of portfolio securities or
determination of the value of the net assets of SC-EURO not reasonably
practicable.

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-EURO in not less than 30 days'
notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
Upon any such termination, a check for the redemption proceeds will be sent to
the account of record within seven business days of the redemption. However, if
a shareholder is affected by the exercise of this right, he or she will be
allowed to make additional investments prior to the date fixed for redemption to
avoid liquidation of the account.

A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-EURO does not charge a fee to process
conversions. SC-EURO reserves the right to reject any conversion request in
whole or in part. The conversion feature may be modified or terminated at any
time upon notice to SC-EURO Class I shareholders.

DIVIDENDS AND DISTRIBUTIONS

Dividends from SC-EURO's investment income will be declared and distributed
quarterly. SC-EURO intends to distribute net realized capital gains, if any, at
least annually although SC-EURO's Board of Directors may in the future determine
to retain net realized capital gains and not distribute them to shareholders.
For information concerning the tax treatment of SC-EURO's distribution policies
for SC-EURO and its shareholders, see "Taxation."

Distributions will automatically be paid in full and fractional shares of SC-
EURO based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

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<PAGE>

TAXATION

The following discussion is intended for general information only.
Shareholders should consult with their own tax advisers as to the tax
consequences of an investment in SC-EURO, including the status of distributions
under applicable state or local law.

FEDERAL INCOME TAXES

SC-EURO intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-EURO distributes its taxable income and
net capital gains to its shareholders, qualification as a regulated investment
company relieves SC-EURO of federal income and excise taxes on that part of its
taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends may be eligible
for the dividends-received deduction, except that the amount eligible for the
deduction is limited to the amount of qualifying dividends received by SC-EURO.
A corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-EURO at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-EURO is financed with indebtedness.

The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-EURO to its shareholders as capital gains
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held his or her stock.
Long-term capital gains distributions are not eligible for the dividends-
received deduction referred to above.

Under the current federal tax law, the amount of an income dividend or capital
gains distribution declared by SC-EURO during October, November or December of a
year to shareholders of record as of a specified date in such a month that is
paid during January of the following year is includable in the prior year's
taxable income of shareholders that are calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-EURO
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of such shares by a shareholder, although in
effect a return of capital to that particular shareholder, would be taxable to
him or her as described above. If a shareholder held shares for six months or
less, and during that period received a distribution taxable to such shareholder
as long-term capital gain, any loss realized on the sale of such shares during
such six-month period would be a long-term capital loss to the extent of such
distribution.

A dividend or capital gains distribution with respect to shares of SC-EURO
held by a tax-deferred or qualified plan, such as an individual retirement
account, 403(b)(7) retirement plan or corporate pension or profit-sharing plan,
will not be taxable to the plan, except to the extent the shares are debt-
financed within the meaning of Section 514 of the Code. Distributions from such
plans will be taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the qualified plan.

SC-EURO will be required to withhold 31% of any payments made to a shareholder
if the shareholder has not provided a certified taxpayer identification number
to SC-EURO, or the Secretary of the Treasury notifies SC-EURO that the
shareholder has not reported all interest and dividend income required to be
shown on the shareholder's Federal income tax return. Any amounts withheld may
be credited against the shareholder's U.S. federal income tax liability.

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<PAGE>

Further information relating to tax consequences is contained in the SAI.

STATE AND LOCAL TAXES

SC-EURO distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular tax
consequences of an investment in SC-EURO.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On [___________,
1998], its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, each with two classes of shares: Class
I shares and Class R shares. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-EURO's Class I shares may not be
modified except by the vote of a majority of the holders of all SC-EURO's Class
I shares outstanding. SC-EURO's Class I shareholders have exclusive voting
rights with respect to matters relating solely to SC-EURO's Class I shares. SC-
EURO's Class I shareholders vote separately from SC-EURO's Class R shareholders
and SC-ARBITRAGE's, SC-ASIA's and SC-US's Class I and Class R shareholders on
matters in which the interests of SC-EURO's Class I shareholders differ from the
interests of SC-EURO's Class R shareholders and SC-ARBITRAGE's, SC-ASIA's and
SC-US's Class I and Class R shareholders.

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<PAGE>

CUSTODIAN AND TRANSFER AGENT

[______________], which has its principal business address at
[__________________], has been retained to act as Custodian of SC-EURO's
investments. [_______________], which has its principal business address at
[___________________], has been retained to serve as SC-EURO's Transfer Agent.
Neither [_____________] nor [_____________] have any part in deciding SC-EURO's
investment policies or which securities are to be purchased or sold for SC-
EURO's portfolio.

REPORTS TO SHAREHOLDERS

The fiscal year of SC-EURO ends on December 31 of each year. SC-EURO will send
to its shareholders, at least semi-annually, reports showing the investments and
other information (including unaudited financial statements). An annual report,
containing financial statements audited by SC-EURO's independent accountants,
will be sent to shareholders each year. Please call 1-888-SECURITY (toll free)
for a copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-EURO may advertise its "average annual total return" of
the Class I shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-EURO Class I
shares from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of SC-EURO's Class I
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-EURO during the period are reinvested in Class I shares of SC-EURO.
Figures will be given for recent one-, five- and ten-year periods (when
applicable), and may be given for other periods as well (such as from
commencement of SC-EURO's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-EURO's Class I annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-EURO also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-
EURO's Class I shares for the specific period (again reflecting changes in SC-
EURO's Class I share price and assuming reinvestment of Class I dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).

It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The SAI further
describes the methods used to determine SC-EURO's performance.

YEAR 2000 RISKS

Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs's records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable

24
<PAGE>

steps are being taken by each of SC-REMFs major service providers. However,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on SC-REMFs and SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA.

ADDITIONAL INFORMATION

Any shareholder inquiries may be directed to SC-REMFs at the address or
telephone number listed on the cover page of this Prospectus. This Prospectus,
including the SAI which is incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by SC-REMFs
with the SEC under the Securities Act of 1933, as amended. Copies of the
Registration Statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the offices of the SEC in Washington, D.C.
or may be obtained from the SEC's worldwide web site at http://www.sec.gov.

25
<PAGE>

PROSPECTUS

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital European Real Estate Shares ("SC-EURO") is an investment
portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-EURO seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in European countries. Long-term, SC-EURO's objective is to achieve
top-quartile returns as compared with other mutual funds that invest in
publicly-traded real estate companies organized principally in European
countries, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and investment modeling techniques.
Security Capital (US) Management Group Incorporated ("SC (US) Management")
serves as both investment adviser and administrator to SC-EURO.

By this Prospectus, SC-EURO is offering Class R shares. SC-EURO also offers
Class I shares to investors whose minimum initial investment is $250,000. Class
I shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-EURO's other
class of shares should call 1-888-SECURITY (toll free) or ask their sales
representatives or SC-EURO's distributor. This Prospectus provides you with
information specific to the Class R shares of SC-EURO. It contains information
you should know before you invest in SC-EURO.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-EURO. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information ("SAI") dated [________, 1998], containing additional and more
detailed information about SC-EURO has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference into
this Prospectus. It is available without charge and can be obtained by calling
1-888-SECURITY (toll free) or writing SC-EURO's Sub-Administrator at:
[_______________].

THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY IN
ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR INDIVIDUAL
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.

[ ________, 1997 ]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses.............................................. 2

Description of SC-REMFs and SC-EURO................... 4

Investment Objectives and Policies.................... 4

Investment Strategy................................... 5

Hedging and Other Portfolio Strategies................ 6

Risk Factors.......................................... 8

Non-Diversified Status; Portfolio Turnover............ 11

Management of SC-EURO................................. 11

Investment Advisory Agreement and Research Services
Agreement............................................. 15

Administrator and Sub-Administrator................... 16

Distribution and Servicing Plan....................... 16

Determination of Net Asset Value...................... 17

Purchase of Shares.................................... 17

Redemption of Shares.................................. 20

Dividends and Distributions........................... 22

Taxation.............................................. 22

Organization and Description of Capital Stock......... 23

Custodian and Transfer Agent.......................... 24

Reports to Shareholders............................... 24

Performance Information............................... 25

Additional Information................................ 25
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-EURO.

ANNUAL SC-EURO OPERATING EXPENSES

The Class R shares of SC-EURO pay for certain expenses attributable to Class R
shares directly out of SC-EURO's Class R assets. These expenses are related to
management of SC-EURO, administration and other services. For example, SC-EURO
pays an advisory fee and an administrative fee to SC (US) Management. SC-EURO
also has other customary expenses for services such as transfer agent fees,
custodial fees paid to the bank that holds its portfolio securities, audit fees
and legal expenses. These operating expenses are subtracted from SC-EURO's Class
R assets to calculate SC-EURO's Class R net asset value per share. In this
manner, shareholders pay for these expenses indirectly.

FEE TABLE

<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions....... None
Redemption fee (1)................................................... None
Annual SC-EURO Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees...................................................... 1.20%
12b-1 fees (2)....................................................... .25%
Other expenses....................................................... .30%
Total SC-EURO operating expenses (3)................................. 1.75%
</TABLE>

___________
(1) SC-EURO's transfer agent charges a service fee of [$_______] for each wire
redemption.
(2) SC-REMFs has adopted a Distribution and Service Plan for SC-EURO Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-EURO pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related to
the maintenance of shareholder accounts at the annual rate of 0.25% of SC-
EURO's Class R average daily net assets. As a result, long-term Class R
shareholders of SC-EURO may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(3) SC (US) Management has committed to waive fees and/or reimburse expenses to
maintain SC-EURO's Class R total operating expenses, other than brokerage
fees and commissions, taxes, interest and other extraordinary expenses, at
no more than [___%] of the value of SC-EURO's Class R average daily net
assets for the year ending December 31, 1998. SC-EURO estimates that without
such waiver and/or

2
<PAGE>

reimbursement, actual total fund operating expenses would be [___%] of the
value of SC-EURO's Class R average daily net assets.

EXAMPLES

[TO BE FILED BY AMENDMENT]

The actual expenses in future years may be more or less than the numbers in
the example, depending on a number of factors, including the actual value of SC-
US's assets.

3
<PAGE>

DESCRIPTION OF SC-EURO

SC-EURO issues two classes of shares, one of which, Class R shares, is offered
by this prospectus. SC-EURO also issues Class I shares to investors whose
minimum initial investment is $250,000. Class R shares offer different services
and incur different expenses than Class I shares, which would affect
performance. See "Purchase of Shares" and "Organization and Description of
Capital Stock."

INVESTMENT OBJECTIVES AND POLICIES

4
<PAGE>

Moody's, or A or better by S&P or, if unrated, of comparable quality as
determined by SC (US) Management; and repurchase agreements with banks and
broker-dealers with respect to such securities. For temporary defensive
purposes, SC-EURO also may invest up to 25% of its total assets in obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
banks; provided that SC-EURO will limit its investment in time deposits for
which there is a penalty for early withdrawal to 10% of its total assets.

INVESTMENT STRATEGY

REAL ESTATE SECURITIES INDUSTRY OUTLOOK

SC (US) Management believes that the real estate industry throughout Europe
will experience the same fundamental transformation as experienced in the last
seven years in the U.S., which will create significant opportunities. Direct
investment of equity capital in real estate will decrease further while
investments in publicly-traded real estate operating companies are increasing.
The aggregate equity market capitalization of real estate in Europe has
increased from $100 billion at December 31, 1992 to [$____] billion at ________,
1997]. This increasing securitization of the real estate industry throughout
Europe, primarily in the form of real estate operating companies, offers
significant benefits to shareholders, including enhanced liquidity, real-time
pricing and the opportunity for optimal growth and sustainable rates of return
through a more rational and disciplined approach to capital allocation and
operating management.

A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH

5
<PAGE>

economics -- accounting for capital costs -- to determine whether the core
economy of a country market is expected to improve, stabilize or decline. Only
through disciplined real estate market research does SC (US) Management believe
it can identify country markets and/or city sub-markets, and thus, real estate
operating companies, with potential for higher than average growth prospects.

Bottom Up Real Estate Operating Company Cash Flow Modeling.
SC (US) Management believes that analyzing the cash flow profile -- the quality
and growth potential -- of a real estate company, both historically and
prospectively, is another fundamental step toward identifying above-average
growth opportunities. SC (US) Management believes that cash flow is helpful in
understanding a real estate portfolio in that such calculation reflects cash
flow from operations and the real estate's ability to support interest payments
and general operating expenses before the impact of certain activities, such as
gains or losses from sales of real estate and changes in accounts receivable and
accounts payable. The real estate operating valuation models utilized by SC (US)
Management integrate real estate market research with analysis on specific real
estate portfolios in order to establish an independent value of the underlying
sources of a real estate company's cash flow. Certain models measure and compare
the impact of specific factors on cash flow growth expectations. The data from
all valuation models is ultimately integrated and reviewed in order to identify
real estate operating companies with significant potential for growth.

HEDGING AND OTHER PORTFOLIO STRATEGIES

Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-EURO may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the

6
<PAGE>

over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, the right to buy a
specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a stock index
gives the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option. SC-EURO may write a call or
put option only if the option is "covered." This means that so long as SC-EURO
is obligated as the writer of a call option, it will own the underlying
securities subject to the call, or hold a call at the same or lower exercise
price, for the same exercise period, and on the same securities as the written
call. A put is covered if SC-EURO maintains liquid assets with a value equal to
the exercise price in a segregated account or holds a put on the same underlying
security at an equal or greater exercise price. The value of the underlying
securities on which options may be written at any one time will not exceed 15%
of the total assets of SC-EURO. SC-EURO will not purchase put or call options
if the aggregate premium paid for such options would exceed 5% of its total
assets at the time of purchase.

7
<PAGE>

RISK FACTORS

Investment in Real Estate Securities. SC-EURO will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
EURO may be subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities markets risks) because of
its policy of concentration in the securities of companies in the real estate
industry. Such risks include declines in the value of real estate, risks
related to general and local economic conditions, possible lack of availability
of mortgage funds, overbuilding, extended vacancies of properties, increased
competition, increases in real

8
<PAGE>

estate taxes and operating expenses, changes in zoning laws, losses due to costs
resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to customers and changes in interest rates.

In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
EURO may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.

Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. SC-EURO could be adversely

9
<PAGE>

affected by delays in or a refusal to grant any required governmental
registration or approval for such repatriation.

Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-
EURO's investment policies, SC-EURO's investment in Depositary Receipts will be
deemed to be investments in the underlying securities.

Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the SAI.

10
<PAGE>

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

SC-EURO intends to operate as a "non-diversified" investment company under
the 1940 Act, which means SC-EURO is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. However, SC-EURO intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-EURO of any
liability for Federal income tax to the extent its earnings are distributed to
shareholders. See "Taxation." To qualify as a regulated investment company,
among other requirements, SC-EURO will limit its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the market
value of SC-EURO's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and SC-EURO will not own more than 10% of the
outstanding voting securities of a single issuer. SC-EURO's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-EURO, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-EURO may present greater
risk to an investor than an investment in a diversified company.

DIRECTORS, OFFICERS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-EURO is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-EURO, including SC-REMFs's agreements with SC (US) Management,
its custodian and transfer agent. The management of SC-EURO's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and SC (US) Management, subject always to the investment objectives
and policies of SC-EURO and to general supervision by the Board of Directors.
Although SC-REMFs is not required by law to hold annual meetings, it may hold
shareholder meetings from time to time on important matters, and shareholders
have the right to call a meeting to remove a Director or to take other action
described in SC-REMFs's Articles of Incorporation. The Directors and Officers of
SC-REMFs and certain key members of SC-EURO's Portfolio Management Committee and
their principal occupations are set forth below.

Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice President
for Administration and Treasurer of Loyola University,
Chicago from 1981 to July 1994, where he was
responsible for administration, investment, real estate
and treasurer functions, served as Chief Investment
Officer, was Chairman of the Operations Committee, was
a member of the Investment and Finance Committees of
the Board of Trustees and was President and a Director
of the Loyola Management Company.

11
<PAGE>

Mr. Kasbeer received his J.D. from John Marshall Law
School and his M.A. and B.S. from Northwestern
University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director of SC (US)
Management since March 1997, where he is responsible
for overseeing all investment and capital allocation
matters for SC (US) Management's public market
securities activities and is also responsible for
company and industry analysis, market strategy and
trading and reporting; from January 1995 to March 1997,
he was Managing Director of SC (US) Management, where
he performed the same functions. Mr. Manno was a member
of the Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to
March 1994. Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

George F. Keane Director of SC-REMFs. Chairman of the Board of Trigen
Energy Corporation since 1994. As founding chief
executive of The Common Fund in 1971 and Endowment
Realty Investors in 1988, Mr. Keane for many years
headed an investment management service for colleges,
universities and independent schools that managed $15
billion for 1,200 educational institutions when he
became President Emeritus of the Common Fund in 1993.
He has served as a member of the Investment Advisory
Committee of the $75 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the RCB Trust Company since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993, and a
Director of the Bramwell Funds since 1994. He is also a
Director of Universal Stainless & Alloy Products,
Global Pharmaceutical Corporation, United Water
Resources and United Properties Group, Gulf Resources
Corporation, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane also
serves as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
Director and Chairman of the Investment Committee of
the United Negro College Fund. Mr. Keane holds honorary
degrees from Loyola University, Chicago, Illinois and
Lawrence University, Appleton, Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers ABR, Inc.
(formerly Abrams Benisch Riker Inc.), a property
management firm. Mr. Abrams was Principal of Colliers
ABR, Inc. from 1978 to 1992 and since 1992, has served
as a Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and
Brown Company. Mr. Abrams also serves as a Director of
Greater New York Mutual Insurance Company and Trustee
Emeritus and Presidential Counselor of his alma mater,
Cornell University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.

12
<PAGE>

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of Security
Capital (US) Management since July, 1997. Prior
thereto, Director of Security Capital Pacific Trust
("PTR") and the PTR REIT Manager from February 1995 to
June 1997 and Senior Vice President of Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR and the PTR
REIT Manager from September 1994 to June 1997 where he
had overall responsibility for asset management and
multifamily dispositions. Prior to joining Security
Capital, Mr. Gardner was with Copley Real Estate
Advisors as a Managing Director and Principal
responsible for portfolio management from January 1991
to September 1994 and as a Vice President and Principal
of asset management from December 1984 to December
1990. From July 1977 to November 1984, Mr. Gardner was
a Real Estate Manager with the John Hancock Companies.
Mr. Gardner received his M.S. in Computer Information
Systems from Bentley College and his B.S. in Accounting
from Stonehill College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of SC (US) Management
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong Capital
Management, Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A.
from the University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of SC
(US) Management since November 1997 where he is
responsible for the development and implementation of
portfolio investment strategy. Prior thereto, Senior
Vice President and Senior REIT Analyst from July 1996
to October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr. Statz
was a Vice President in the investment research
department of Goldman, Sachs & Co., from February 1993
to January 1995, concentrating on research and
underwriting for the REIT industry. Prior thereto, Mr.
Statz was a real estate stock portfolio manager and a
managing director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received his
M.B.A. and B.B.A. from the University of Wisconsin,
Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of SC (US) Management since November 1997 and
Vice President since July 1996, where he is responsible
for directing the activities of the industry/company
securities research group and providing in-depth
proprietary research on publicly traded companies with
office and industrial sectors. Prior to joining SC (US)
Management, Mr. Bedell spent nine years with LaSalle
Partners Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private REIT
with commercial real estate investments of $600-800
million. Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from Kenyon College.

13
<PAGE>

Gerios J.M. Rovers Member, SC-EURO Portfolio Management Committee; Mr.
Rovers has served as of SC (US)
--------------
Management since April, 1997, where he is responsible
for [the development and implementation of portfolio
investment strategy]. From July 1988 to April 1997, Mr.
Rovers was associated with GIM Algemeen Vermogensbeheer
and served as an associate director and a portfolio
manager of global real estate securities on behalf of
domestic and foreign clients. Mr. Rovers graduated from
the University of Tilburg in The Netherlands.

W. Joseph Houlihan Member, SC-EURO Portfolio Management Committee;
Mr. Houlihan has served as a Managing Director of SC
(US) Management since April 1997 where he is
responsible for [overseeing all investment and capital
allocation recommendations for SC (US) Management's
public market securities activities, and also
responsible for company and industry analysis, market
strategy and trading and reporting]. Prior to joining
Security Capital, Mr. Houlihan was the Director of the
Institutional Investment Management Group and executive
vice president of GIM Algemeen Vermogensbeheer, a
prominent Dutch investment management company, where he
specialized in real estate investments and was
responsible for developing GIM's real estate securities
investment process and client base. Prior to joining
GIM, Mr. Houlihan was a vice president at John G. Wood
and Associates, a diversified real estate development
and investment company located in Florida, and with
Chase Manhattan Bank's trust department. Mr. Houlihan
is an Advisory Director of Security Capital US Realty
and a member of the Investment Property Forum. Mr.
Houlihan received his M.B.A. from the University of
Leuven, Belgium, and his B.S. from New York University.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603 and 34
Boulevard, de La Wolune Brussels, Belgium, has been retained to provide
investment advice, and, in general, to conduct the management and investment
program of SC-EURO under the overall supervision and control of the Directors of
SC-EURO.

SC (EU) MANAGEMENT

14
<PAGE>

INVESTMENT ADVISORY AGREEMENT AND
RESEARCH SERVICES AGREEMENT

Under the Advisory Agreement, SC-EURO Class R shares pay SC (US) Management a
monthly management fee in an amount equal to 1.20% of the average daily net
assets of SC-EURO Class R shares (approximately 1.20% on an annual basis).
Under a separate agreement SC (US) Management has committed to waive fees and/or
reimburse expenses to maintain SC-EURO's Class R total operating expenses, other
than brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than [___%] of the value of SC-EURO's average daily net
assets for the year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-EURO Class R shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with SC (US) Management, (c) clerical,
accounting and other office costs, (d) costs of printing SC-EURO's prospectus
for existing shareholders and shareholder reports, (e) costs of maintaining SC-
REMFs's existence, (f) interest charges, taxes, brokerage fees and commissions,
(g) costs of stationery and supplies, (h) expenses and fees related to
registration and filing with federal and state regulatory authorities, and (i)
upon the approval of SC-REMFs's Board of Directors, costs of personnel of SC
(US) Management or its affiliates rendering clerical, accounting and other
office services. Each class of SC-EURO shares pays the portion of SC-EURO
expenses attributable to its operations. Income, realized gains and losses,
unrealized appreciation and depreciation and certain expenses not allocated to a
particular class are allocated to each class based on the net assets of that
class in relation to the net assets of SC-REMFs.

SC (US) Management has entered into a research services agreement ("Research
Services Agreement") with SC (EU) Management pursuant to which SC (EU)
Management provides SC (US) Management with proprietary real estate research and
ongoing analysis of opportunities for investment in the equity securities of
European issuers. This research is analyzed by SC (US) Management in
identifying attractive growth in country markets and real estate sectors and is
instrumental to SC (US) Management's ability to make investment decisions for
SC-EURO's portfolio. SC (US) Management pays SC (EU) Management for the
provision of such research and analytical services. Payment of this fee is an
obligation of SC (US) Management and not a direct obligation of SC-EURO.

15
<PAGE>

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC (US) Management has also entered into a fund accounting and administration
agreement with SC-REMFs (the "Administration Agreement") under which SC (US)
Management performs certain administrative functions for SC-EURO, including (i)
providing office space, telephone, office equipment and supplies for SC-REMFs;
(ii) paying compensation of SC-REMFs's officers for services rendered as such;
(iii) authorizing expenditures and approving bills for payment on behalf of SC-
EURO; (iv) supervising preparation of the periodic updating of SC-EURO's
Prospectus and SAI for existing shareholders; (v) supervising preparation of
quarterly reports to SC-EURO's shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine correspondence and other
communications with individual shareholders; (vi) supervising the daily pricing
of SC-EURO's investment portfolio and the publication of the net asset value of
SC-EURO's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-EURO, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-EURO; (ix) maintaining books and
records for SC-EURO (other than those maintained by the Custodian and Transfer
Agent) and preparing and filing of tax reports other than SC-EURO's income tax
returns; and (x) providing executive, clerical and secretarial help needed to
carry out these responsibilities.

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-EURO's net asset value and preparing such figures for
publication, maintaining certain of SC-EURO's books and records that are not
maintained by SC (US) Management, or the Custodian, preparing financial
information for SC-EURO's income tax returns, proxy statements, quarterly and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of
[______%]. The Sub-Administrator also serves as SC-EURO's Custodian and Transfer
Agent. See "Custodian and Transfer and Dividend Disbursing Agent."

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs have adopted a Distribution and Servicing
Plan ("Plan") with respect to SC-EURO's Class R shares pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. Under the Plan, SC-EURO
pays to Security Capital Markets Group Incorporated, in its capacity as
principal distributor of SC-EURO's shares (the "Distributor"), a monthly fee
equal to, on an annual basis, .25% of the value of SC-EURO's average daily net
assets for Class R shares.

16
<PAGE>

The Distributor may pay third parties in respect of these services such amount
as it may determine. SC-EURO understands that these third parties may also
charge fees to their clients who are beneficial owners of SC-EURO Class R shares
in connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.

The Distributor, with offices located at 125 Lincoln Avenue, Santa Fe, New
Mexico 87501, is an affiliate of SC (US) Management. See "Distribution Plan"
in the Statement of Additional Information for a listing of the types of
expenses for which the Distributor and third parties may be compensated under
the Plan. If the fee received by the Distributor exceeds its expenses, the
Distributor may realize a profit from these arrangements. The Plan is reviewed
and is subject to approval annually by the Board of Directors.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of SC-EURO's Class R shares is determined as of
the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-EURO's portfolio and other assets
represented by Class R shares, subtracting liabilities incurred or accrued
allocable to Class R shares, and dividing by the total number of SC-EURO's
Class R shares then outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock exchange or quoted on a quotation system
of a national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled closing time
of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, New York time, on the day the value of the foreign
security is determined. If no sale is reported at that time, the mean between
the current bid and asked price is used. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of SC-EURO's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the current bid and asked price. Foreign securities that are not
traded on an exchange, securities for which market quotations are not readily
available and other assets are valued at fair value as determined by SC-EURO's
management and approved in good faith by the Board of Directors.

PURCHASE OF SHARES

SC-EURO Class R shares may be purchased through Firstar Trust Company, SC-
EURO's Transfer Agent, or any dealer that has entered into a sales agreement
with the Distributor.

Orders for shares of SC-EURO will become effective at the net asset value per
share next determined after the receipt of payment. All funds will be invested
in full and fractional shares. A confirmation indicating the details of each
purchase transaction will be sent to you promptly following each transaction.
If a purchase order is placed through a dealer, the dealer must promptly forward
the order, together with payment, to the Transfer Agent. Investors must specify
that Class R shares are being purchased.

17
<PAGE>

a transaction fee, as determined by the dealer. That fee may be avoided if
shares are purchased through a dealer who has entered into a sales agreement
with the Distributor or through the Transfer Agent.

By investing in SC-EURO, you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $2,500. For individual retirement account
and employee benefit plans qualified under Section 401, 403(b)(7) or 457 of the
Code as well as UGMA or UTMA accounts the minimum initial investment is $1,000.
For investors using the Automatic Investment Plan (described below) the minimum
initial investment is $250. These minimums can be changed or waived by SC-EURO
at any time. Shareholders will be given at least 30 days notice of any increase
in the minimum dollar amount of subsequent investments.

Class R shares may be purchased by check or money order drawn on a U.S. bank,
savings and loan, or credit union by wire transfer. The enclosed application
must be completed and accompanied by payment in U.S. funds to open an account.
Checks must be payable in U.S. dollars and will be accepted subject to
collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-EURO and are not binding until so accepted. SC-
EURO reserves the right to decline to accept a purchase order application in
whole or in part.

MAIL

Please note that if your check does not clear, a service charge of $20 will be
charged and you will be responsible for any losses suffered by SC-EURO as a
result.

WIRE PURCHASES

Class R shares may be purchased by wire only through the Transfer Agent. The
following instructions should be used when wiring funds to the Transfer Agent
for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

18
<PAGE>

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital European Real Estate Shares
(shareholder account number)
(shareholder name/account registration)

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handling of funds. SC-
EURO AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM INCOMPLETE
WIRING INSTRUCTIONS.

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan allows regular, systematic investments in SC-
EURO Class R shares from a bank checking or NOW account. SC-EURO will reduce
the minimum initial investment to $250 if a shareholder elects to use the
Automatic Investment Plan. To establish the Automatic Investment Plan, an
investor should complete the appropriate section in SC-EURO's application and an
existing SC-EURO shareholder should call 1-888-SECURITY (toll free) for an
automatic investment plan form. The Automatic Investment Plan can be set up with
any financial institution that is a member of the ACH. Under certain
circumstances (such as discontinuation of the Automatic Investment Plan before
the minimum initial investment is reached, or, after reaching the minimum
initial investment, the account balance is reduced to less than $500), SC-EURO
reserves the right to close such account. Prior to closing any account for
failure to reach the minimum initial investment, SC-EURO will give a shareholder
written notice and 60 days in which to reinstate the Automatic Investment Plan
or otherwise reach the minimum initial investment. A shareholder should consider
his or her financial ability to continue in the Automatic Investment Plan until
the minimum initial investment amount is met because SC-EURO has the right to
close such account for failure to reach the minimum initial investment. Such
closing may occur in periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20.00
will be deducted from a shareholder's SC-EURO account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-EURO in writing or by telephone to terminate the plan, a
shareholder closes his or her bank account or in any manner prevent withdrawal
of funds from the designated bank checking or NOW account.

SUBSEQUENT INVESTMENTS

19
<PAGE>

EXCHANGE FEATURE

Class R shares of SC-EURO may be exchanged for Class R shares of SC-US, SC-
ARBITRAGE and SC-ASIA. Exchanges of Class R shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-EURO, SC-US, SC-ARBITRAGE or SC-ASIA
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

CLASS I SHARES

SC-EURO also issues Class I shares which offer different services and incur
different expenses which would affect performance. Investors may call the
Distributor at 1-800-699-4594 (toll free) to obtain additional information.

REDEMPTION OF SHARES

You may request redemption of part or all of your Class R shares at any time
by telephone or by mail. The redemption of shares will be at the next determined
net asset value. See "Determination of Net Asset Value." SC-EURO normally will
mail the redemption proceeds to you on the next business day and, in any event,
no later than seven business days after the receipt of a redemption request in
good order. However, when a purchase has been made by check, SC-EURO may hold
payment on redemption proceeds until it reasonably satisfied that the check has
cleared, which may take up to twelve days.

Redemption requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class R shares to be redeemed
were issued in certificate form, the certificate must be endorsed for transfer
(or be accompanied by a duly executed stock power) and must be submitted to
Firstar Trust Company together with a redemption request. The following
instructions should be used for the redemption of shares by mail, by wire and by
telephone:

MAIL AND WIRE

20
<PAGE>

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-EURO. Do not mail letters by
overnight courier to the post office box. Any written redemption requests
received within 15 days after an address change must be accompanied by a
signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-699-
4594. In order to utilize this procedure, you must have previously elected this
option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-EURO reserves the right to limit
the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-EURO will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-EURO reserves the right to refuse a
telephone redemption request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-EURO or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

21
<PAGE>

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-EURO in not less than 30 days'
notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 in the case of individual retirement accounts and employee benefit plans
qualified under Sections 401, 403(b)(7) or 457 of the Code). Upon any such
termination, a check for the redemption proceeds will be sent to the account of
record within seven business days of the redemption. However, if a shareholder
is affected by the exercise of this right, he or she will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.

DIVIDENDS AND DISTRIBUTIONS

TAXATION

FEDERAL INCOME TAXES

22
<PAGE>

Further information relating to tax consequences is contained in the SAI.

STATE AND LOCAL TAXES

SC-EURO distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular tax
consequences of an investment in SC-EURO.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On [___________,
1998], its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

23
<PAGE>

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. Pursuant to
this authority, the Board of Directors of SC-REMFs has authorized the creation
of four investment portfolios; SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, each
with two classes of shares: Class I shares and Class R shares. Class I shares
offer different services to shareholders and incur different expenses than Class
R shares. Each class pays its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-EURO's Class R shares may not be
modified except by the vote of a majority of the holders of all SC-EURO's Class
R shares outstanding. SC-EURO's Class R shareholders have exclusive voting
rights with respect to matters relating solely to SC-EURO's Class R shares. SC-
EURO's Class R shareholders vote separately from SC-EURO's Class I shareholders
and SC-ARBITRAGE's, SC-ASIA's and SC-US's Class I and Class R shareholders on
matters in which the interests of SC-EURO's Class R shareholders differ from the
interests of SC-EURO's Class I shareholders and SC-ARBITRAGE's, SC-ASIA's and
SC-US's Class I and Class R shareholders.

CUSTODIAN AND TRANSFER AGENT

[________________], which has its principal business address at
[________________], has been retained to act as Custodian of SC-EURO's
investments. [________________], which has its principal business address at
[________________], has been retained to serve as SC-EURO's Transfer Agent.
Neither [________________] nor [________________] have any part in deciding SC-
EURO's investment policies or which securities are to be purchased or sold for
SC-EURO's portfolio.

REPORTS TO SHAREHOLDERS

24
<PAGE>

PERFORMANCE INFORMATION

From time to time, SC-EURO may advertise its "average annual total return" of
the Class R shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-EURO Class R
shares from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of SC-EURO's Class R
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-EURO during the period are reinvested in Class R shares of SC-EURO.
Figures will be given for recent one-, five- and ten-year periods (when
applicable), and may be given for other periods as well (such as from
commencement of SC-EURO's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-EURO's Class R annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-EURO also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-
EURO's Class R shares for the specific period (again reflecting changes in SC-
EURO's Class R share price and assuming reinvestment of Class R dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).

YEAR 2000 RISKS

Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs's records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA.

ADDITIONAL INFORMATION

25
<PAGE>

PROSPECTUS
----------

LOGO
----

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ASIA seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in countries in the Asia/Pacific region. Long-term, SC-ASIA's
objective is to achieve top-quartile returns as compared with other mutual funds
that invest in publicly-traded real estate companies organized principally in
countries in the Asia/Pacific region, by integrating in-depth proprietary real
estate market research with sophisticated capital markets research and
investment modeling techniques. Security Capital (US) Management Group
Incorporated ("SC (US) Management") serves as both investment adviser and
administrator to SC-ASIA.

By this Prospectus, Class I shares of SC-ASIA are being offered. Class I
shares are offered to investors whose minimum investment is $250,000. See
"Purchase of Shares." SC-ASIA also offers Class R shares to investors whose
minimum initial investment is $2,500. Class R shares have different expenses
than Class I shares which would affect performance. Investors desiring to obtain
information about SC-ASIA's other class of shares should call 1-888-SECURITY
(toll free) or ask their sales representatives or SC-ASIA's distributor.

An investment in SC-ASIA should not be the sole source of investment for a
shareholder. Rather, an investment in SC-ASIA should be considered as part of an
overall portfolio strategy which includes fixed income and equity securities.
SC-ASIA is designed for long-term investors, and not for investors who intend to
liquidate their investments after a short period of time.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ASIA. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital European Real Estate Shares and Security
Capital Real Estate Arbitrage Shares. A Statement of Additional Information
("SAI") dated [________, 1998], containing additional and more detailed
information about SC-ASIA has been filed with the Securities and Exchange
Commission (the "SEC") and is hereby incorporated by reference into this
Prospectus. It is available without charge and can be obtained by calling 1-888-
SECURITY (toll free) or writing SC-ASIA's Sub-Administrator at:
[_______________].

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY IN
ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR INDIVIDUAL
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.

[ ________, 1998 ]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses......................................... 2

Description of SC-REMFs and SC-ASIA.............. 4

Investment Objectives and Policies............... 4

Investment Strategy.............................. 5

Hedging and Other Portfolio Strategies........... 6

Risk Factors..................................... 8

Non-Diversified Status; Portfolio Turnover....... 11

Management of SC-ASIA............................ 11

Investment Advisory Agreement and Research
Services Agreement............................... 15

Administrator and Sub-Administrator.............. 15

Distribution and Servicing Plan.................. 16

Determination of Net Asset Value................. 16

Purchase of Shares............................... 17

Redemption of Shares............................. 19

Dividends and Distributions...................... 21

Taxation......................................... 21

Organization and Description of Capital Stock.... 22

Custodian and Transfer Agent..................... 23

Reports to Shareholders.......................... 23

Performance Information.......................... 23

Additional Information........................... 24
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ASIA.

ANNUAL SC-ASIA OPERATING EXPENSES

The Class I shares of SC-ASIA pay for certain expenses attributable to
Class I shares directly out of SC-ASIA's Class I assets. These expenses are
related to management of SC-ASIA, administration and other services. For
example, SC-ASIA pays an advisory fee and an administrative fee to SC (US)
Management. SC-ASIA also has other customary expenses for services such as
transfer agent fees, custodial fees paid to the bank that holds its portfolio
securities, audit fees and legal expenses. These operating expenses are
subtracted from SC-ASIA's Class I assets to calculate SC-ASIA's Class I net
asset value per share. In this manner, shareholders pay for these expenses
indirectly.

The following table is provided to help shareholders understand the direct
expenses of investing in SC-ASIA and the portion of SC-ASIA's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-ASIA's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-ASIA's average annual net assets for such fiscal year
are $250 million. The actual expenses in future years may be more or less than
the numbers in the table, depending on a number of factors, including the actual
value of SC-ASIA's assets.

FEE TABLE

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions .. None
Redemption fee (1) .............................................. None
Annual SC-ASIA Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees ................................................. 1.20%
12b-1 fees (2) .................................................. .25%
Other expenses .................................................. .15%
Total SC-ASIA operating expenses (3) ............................ 1.60%
</TABLE>

________
(1) SC-ASIA's transfer agent charges a service fee of [$____] for each wire
redemption.
(2) SC-ASIA has adopted a Distribution and Service Plan for SC-ASIA Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-ASIA pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related
to the maintenance of shareholder accounts at the annual rate of 0.25% of
SC-ASIA's Class I average daily net assets. As a result, long-term Class I
shareholders of SC-ASIA may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(3) SC (US) Management has committed to waive fees and/or reimburse expenses to
maintain SC-ASIA's Class I total operating expenses, other than brokerage
fees and commissions, interest, taxes and other extraordinary expenses at
no more than [___%] of the value of SC-ASIA's average daily net assets for
Class I shares for the year ending December 31, 1998. SC-ASIA estimates
that without such waiver

2
<PAGE>

and/or reimbursement, actual total fund operating expenses would be [___%]
of the value of SC-ASIA's Class I average daily net assets.

EXAMPLE

<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
------ ------
<S> <C> <C>
A shareholder would bear the following expenses
on a $1,000 investment, assuming a five percent
annual return and operating expenses as outlined
in the fee table above .................................
$_____ $_____
</TABLE>

[TO BE FILED BY AMENDMENT.]

The actual expenses in future years may be more or less than the numbers in
the example, depending on a number of factors, including the actual value of SC-
US's assets.

3
<PAGE>

DESCRIPTION OF SC-ASIA

SC-ASIA is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law on January 23, 1997. SC-REMFs is comprised
of four investment portfolios, SC-ASIA, Security Capital U.S. Real Estate Shares
("SC-US"), Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") and
Security Capital European Real Estate Shares ("SC-EURO").

SC-ASIA issues two classes of shares, one of which, Class I shares,
includes investors whose minimum initial investment is $250,000. The second
class of shares, Class R shares, which are offered to all other eligible
investors, offers different services and incurs different expenses than Class I
shares, which would affect performance. See "Purchase of Shares" and
"Organization and Description of Capital Stock." SC-ASIA Class I shares are
offered by this prospectus.

INVESTMENT OBJECTIVES AND POLICIES

SC-ASIA's investment objective is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in equity securities of publicly-traded real
estate companies organized principally in countries in the Asia/Pacific region.
Long-term, SC-ASIA's objective is to achieve top-quartile results as compared to
other mutual funds that invest in publicly-traded real estate companies
organized principally in countries in the Asia/Pacific region, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and investment modeling techniques. SC-ASIA's investment
objective is "fundamental" and cannot be changed without approval of a majority
of its outstanding voting securities. None of SC-ASIA's policies, other than its
investment objective and the investment restrictions described below, are
fundamental; these non-fundamental policies may be changed by SC-ASIA's Board of
Directors without shareholder approval. There can be no assurance that SC-ASIA's
investment objective will be achieved.

Under normal conditions, SC-ASIA will invest at least 80% of its assets in
the equity securities of publicly-traded real estate companies located primarily
in nations in the Asia/Pacific region, including Hong Kong, Singapore, Japan and
Australia. Such equity securities will consist of (1) common stocks, (2) rights
or warrants to purchase common stocks, (3) securities convertible into common
stocks where the conversion feature represents, in SC (US) Management's view, a
significant element of the security's value, and (4) preferred stocks. SC-ASIA
will invest only in real estate companies that derive at least 50% of their
revenues from the ownership, construction, financing, management or sale of
commercial, industrial or residential real estate and hotels or that have at
least 50% of their assets invested in such real estate. SC-ASIA also may invest
in securities issued by real estate companies that are controlled by Security
Capital Group Incorporated ("Security Capital") or its affiliates.

SC-ASIA may, from time to time, invest in debt securities of issuers in the
real estate industry. Debt securities purchased by SC-ASIA will be rated no
lower than A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poors
Corporation ("S&P") or, if not so rated, believed by SC (US) Management to be of
comparable quality, and may have an average weighted maturity of up to 30 years.

When, in the judgment of SC (US) Management, market or general economic
conditions justify a temporary defensive position, SC-ASIA will deviate from its
investment objective and invest without limit in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country, such as: short-term (less
than 12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S.

4
<PAGE>

Government or the government of a foreign country, their agencies or
instrumentalities; finance company and corporate commercial paper and other
short-term corporate obligations, in each case rated Prime-1 by Moody's, or A or
better by S&P or, if unrated, of comparable quality as determined by SC (US)
Management; and repurchase agreements with banks and broker-dealers with respect
to such securities. For temporary defensive purposes, SC-ASIA also may invest up
to 25% of its total assets in obligations (including certificates of deposit,
time deposits and bankers' acceptances) of banks; provided that SC-ASIA will
limit its investment in time deposits for which there is a penalty for early
withdrawal to 10% of its total assets.

SC-ASIA is subject to certain investment restrictions that are fundamental
and, therefore, may not be changed without shareholder approval. Among other
things, SC-ASIA will not invest more than 10% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. SC (US) Management will
monitor the liquidity of such restricted securities under the supervision of SC-
ASIA's Board of Directors. If SC-ASIA invests in securities issued by a real
estate company that is controlled by Security Capital Group Incorporated or any
of its affiliates, such securities will be treated as illiquid securities. SC-
ASIA also may not invest directly in real estate. See SC-ASIA's SAI for further
discussion of SC-ASIA's fundamental investment restrictions.

INVESTMENT STRATEGY

REAL ESTATE SECURITIES INDUSTRY OUTLOOK

SC (US) Management believes that over the long term, the real estate
industry in the Asia/Pacific region will experience strong growth driven by high
economic growth rates based on strong demographic trends and trade expansion.
The large and young population base as well as massive urbanization trends in
the emerging Asia/Pacific region will create strong and sustainable demand for
housing in major metropolitan areas. Economic growth in the region is expected
to lead to strong demand in the commercial real estate sector as well. SC (US)
Management expects real estate markets in the Asia/Pacific region to continue to
follow the trend of higher levels of real estate securitization into the future.
In the more mature markets such as Japan, the real estate market could
experience a transformation to a more securitized real estate market similar to
the U.S. The combination of all these factors should create significant
investment opportunities over the long term.

A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH

SC-ASIA seeks to achieve top-quartile returns by investing primarily in
Asia/Pacific real estate operating companies which have the potential to deliver
above-average growth. SC (US) Management believes that these investment
opportunities can only be identified through the integration of top down
economic and real estate market research and bottom up operating company cash
flow modeling.

Top Down Economic and Real Estate Market Research. SC (US) Management is
uniquely positioned to access meaningful, proprietary economic and real estate
research collected at the country market, city sub-market and property-specific
level. Non-U.S. country market research and analysis, which is provided to SC
(US) Management by other operating professionals within the Security Capital
affiliate company network, assists SC (US) Management in identifying attractive
growth in country markets and real estate sectors. This research and analysis
is instrumental to SC (US) Management's ability to make investment decisions for
SC-ASIA's portfolio and to identify country markets reaching a "marginal turning
point." The country market research conducted by SC-ASIA includes a
comprehensive evaluation of real estate supply

5
<PAGE>

and demand factors such as population and economic trends, customer and industry
needs, capital flows and building permit and construction data on a country
market and city sub-market basis and by product type. Specifically, primary
country market research evaluates normalized cash flow lease economics --
accounting for capital costs -- to determine whether the core economy of a
country market is expected to improve, stabilize or decline. Only through
disciplined real estate market research does SC (US) Management believe it can
identify country markets and/or city sub-markets, and thus, real estate
operating companies, with potential for higher than average growth prospects.

HEDGING AND OTHER PORTFOLIO STRATEGIES

SC-ASIA also may from time to time use certain of the investment techniques
described below to achieve its objectives. Although these strategies are
regularly used by some investment companies and other institutional investors in
various markets, some of these strategies cannot at the present time be used to
a significant extent by SC-ASIA in some of the markets in which SC-ASIA will
invest and SC-ASIA does not expect to use them extensively.

Repurchase Agreements. When SC-ASIA acquires a security from a bank or a
registered broker-dealer, it may simultaneously enter into a repurchase
agreement, wherein the seller agrees to repurchase the security at a specified
time and price. The repurchase price is in excess of the purchase amount which
reflects an agreed-upon rate of return, and is not tied to the coupon rate on
the underlying security.

Borrowing. SC-ASIA may borrow up to 33-1/3% of the value of its assets to
increase its holdings of portfolio securities. Under the Investment Company Act
of 1940, as amended ("1940 Act"), SC-ASIA is required to maintain continuous
asset coverage of 300% with respect to such borrowings and to sell (within three
days) sufficient portfolio holdings to restore such coverage if it should
decline to less than 300% due to market fluctuations or otherwise, even if such
liquidations of SC-ASIA's portfolio are disadvantageous from an investment
standpoint.

Loans of Portfolio Securities. SC-ASIA may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-ASIA may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-ASIA
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.

6
<PAGE>

Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-ASIA may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, the right to buy a
specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a stock index gives
the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option. SC-ASIA may write a call or
put option only if the option is "covered." This means that so long as SC-ASIA
is obligated as the writer of a call option, it will own the underlying
securities subject to the call, or hold a call at the same or lower exercise
price, for the same exercise period, and on the same securities as the written
call. A put is covered if SC-ASIA maintains liquid assets with a value equal to
the exercise price in a segregated account or holds a put on the same underlying
security at an equal or greater exercise price. The value of the underlying
securities on which options may be written at any one time will not exceed 15%
of the total assets of SC-ASIA. SC-ASIA will not purchase put or call options
if the aggregate premium paid for such options would exceed 5% of its total
assets at the time of purchase.

Forward Foreign Currency Contracts. SC-ASIA may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-ASIA from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-
ASIA will enter into forward contracts only under two circumstances. First,
when SC-ASIA enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when SC (US) Management believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, SC-ASIA may enter into a forward contract to sell or buy the amount of
the former foreign currency (or another currency which acts as a proxy for that
currency) approximating the value of some or all of SC-ASIA's portfolio
securities denominated in such foreign currency. The second investment practice
is in general referred to as "cross-hedging." SC-ASIA's forward transactions
may call for the delivery of one foreign currency in exchange for another
foreign currency and may at times not involve currencies in which its portfolio
securities are denominated.

Futures Contracts. For hedging purposes only, SC-ASIA may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.

When SC-ASIA enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when SC-ASIA enters into a futures contract, it
will segregate assets or "cover" its position in accordance with the 1940 Act.
See "Investment Objectives and Policies--Futures Contracts" in the SAI.

7
<PAGE>

SC-ASIA may not commit more than 5% of its total assets to initial margin
deposits on futures contracts. The value of the underlying securities on which
futures will be written at any one time may not exceed 25% of the total assets
of SC-ASIA.

Depositary Receipts. SC-ASIA may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.

Short Sales. To the extent permitted by other countries, SC-ASIA reserves the
right to engage in short sale transactions in securities listed on one or more
foreign or U.S. securities exchanges. Short selling involves the sale of
borrowed securities. At the time a short sale is effected, SC-ASIA incurs an
obligation to replace the security borrowed at whatever its price may be at the
time that SC-ASIA purchases it for delivery to the lender. When a short sale
transaction is closed out by delivery of the securities, any gain or loss on the
transaction is taxable as a short term capital gain or loss. Until the security
is replaced, SC-ASIA is required to pay to the lender amounts equal to any
dividends or interest which accrue during the period of the loan. All short
sales will be fully collateralized. SC-ASIA may also engage in short sales
against the box, which involves selling a security SC-ASIA holds in its
portfolio for delivery at a specified date in the future. SC-ASIA will not
engage in short sales or short sales against the box if immediately following
such transaction the aggregate market value of all securities sold short and
sold short against the box would exceed 10% of SC-ASIA's net assets (taken at
market value). See SC-ASIA's SAI for further discussion of short sales and
short sales against the box.

RISK FACTORS

Shareholders should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in SC-ASIA, nor
can there be an assurance that SC-ASIA's investment objectives will be attained.
As with any investment in securities, the value of, and income from, an
investment in SC-ASIA can decrease as well as increase depending on a variety of
factors which may affect the values and income generated by SC-ASIA's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-ASIA will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-ASIA is invested may also be
reflected in declines in the price of shares of SC-ASIA. Changes in currency
valuations will also affect the price of shares of SC-ASIA. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-ASIA generally will vary inversely with changes in prevailing
interest rates. Additionally, investment decisions made by SC (US) Management
will not always be profitable or prove to have been correct. SC-ASIA is intended
as an investment vehicle for those investors seeking long term capital growth
and is not intended as a complete investment program.

Investment in Real Estate Securities. SC-ASIA will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
ASIA may be subject to risks similar to those associated with

8
<PAGE>

the direct ownership of real estate (in addition to securities markets risks)
because of its policy of concentration in the securities of companies in the
real estate industry. Such risks include declines in the value of real estate,
risks related to general and local economic conditions, possible lack of
availability of mortgage funds, overbuilding, extended vacancies of properties,
increased competition, increases in real estate taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the clean-up of
environmental problems, liability to third parties for damages resulting from
environmental problems, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to customers and
changes in interest rates.

Additionally, SC-ASIA could conceivably own real estate directly as a
result of a default on debt securities that it owns. If SC-ASIA has rental
income or income from the disposition of such real estate, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. See "Taxation."

Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
ASIA may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.

Brokerage commissions, custodial services and other costs relating to
investment in European countries are generally more expensive than in the U.S.
European securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of SC-ASIA are uninvested and no return is earned
thereon. The inability of SC-ASIA to make intended security purchases due to
settlement problems could cause SC-ASIA to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to SC-ASIA due to subsequent declines in
value of the portfolio security or, if SC-ASIA has entered into a contract to
sell the security, could result in possible liability to the purchaser.

In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
ASIA may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.

9
<PAGE>

of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.

Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. SC-ASIA could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.

Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may continue
to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.

SC-ASIA usually effects currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when SC-ASIA converts assets from one currency to another.

Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-ASIA may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.

Borrowing. SC-ASIA may borrow to the extent permitted above. Borrowing may
exaggerate the effect on SC-ASIA's net asset value of any increase or decrease
in the value of SC-ASIA's portfolio securities. Money borrowed will be subject
to interest and other costs (which may include commitment fees and/or the cost
of maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.

Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any future
or options contract may not be available when a futures position is sought to be
closed. In addition, there may be an imperfect correlation between movements in
the securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency in SC-ASIA's portfolio.
Successful use of futures or options contracts is further dependent on SC (US)
Management's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. Successful use of options on securities or stock indices is subject to
similar risk considerations.

Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-ASIA's
investment policies, SC-ASIA's investment in Depositary Receipts will be deemed
to be investments in the underlying securities.

10
<PAGE>

Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the SAI.

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

SC-ASIA intends to operate as a "non-diversified" investment company under
the 1940 Act, which means SC-ASIA is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. However, SC-ASIA intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-ASIA of any
liability for Federal income tax to the extent its earnings are distributed to
shareholders. See "Taxation." To qualify as a regulated investment company,
among other requirements, SC-ASIA will limit its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the market
value of SC-ASIA's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and SC-ASIA will not own more than 10% of the
outstanding voting securities of a single issuer. SC-ASIA's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-ASIA, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-ASIA may present greater
risk to an investor than an investment in a diversified company.

SC-ASIA anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when SC (US)
Management deems portfolio changes appropriate. The turnover rate may vary
greatly from year to year. An annual turnover rate of 150% occurs, for example,
when all of the securities held by SC-ASIA are replaced one and one-half times
in a period of one year. A higher turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses which are borne
by SC-ASIA. High portfolio turnover may result in the realization of net short-
term capital gains by SC-ASIA which, when distributed to shareholders, will be
taxable as ordinary income. See "Taxation."

DIRECTORS, OFFICERS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-ASIA is vested
with the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ASIA, including SC-REMFs's agreements with SC (US) Management,
its custodian and transfer agent. The management of SC-ASIA's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and SC (US) Management, subject always to the investment objectives
and policies of SC-ASIA and to general supervision by the Board of Directors.
Although SC-REMFs is not required by law to hold annual meetings, it may hold
shareholder meetings from time to time on important matters, and shareholders
have the right to call a meeting to remove a Director or to take other action
described in SC-REMFs's Articles of Incorporation. The Directors and Officers of
SC-REMFs and certain key members of SC-ASIA's Portfolio Management Committee and
their principal occupations are set forth below.

11
<PAGE>

was Chairman of the Operations Committee, was a member
of the Investment and Finance Committees of the Board of
Trustees and was President and a Director of the Loyola
Management Company. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S. from
Northwestern University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director of SC (US)
Management since March 1997, where he is responsible for
overseeing all investment and capital allocation matters
for SC (US) Management's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting; from January 1995 to March 1997, he was
Managing Director of SC (US) Management, where he
performed the same functions. Mr. Manno was a member of
the Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to
March 1994. Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

George F. Keane Director of SC-REMFs. Chairman of the Board of Trigen
Energy Corporation since 1994. As founding chief
executive of The Common Fund in 1971 and Endowment
Realty Investors in 1988, Mr. Keane for many years
headed an investment management service for colleges,
universities and independent schools that managed $15
billion for 1,200 educational institutions when he
became President Emeritus of the Common Fund in 1993. He
has served as a member of the Investment Advisory
Committee of the $75 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the RCB Trust Company since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993, and a
Director of the Bramwell Funds since 1994. He is also a
Director of Universal Stainless & Alloy Products, Global
Pharmaceutical Corporation, United Water Resources and
United Properties Group, Gulf Resources Corporation, and
the Universal Bond Fund, and is an advisor to Associated
Energy Managers. Mr. Keane also serves as a Trustee of
his alma mater, Fairfield University where he received
his B.A., and as a Director and Chairman of the
Investment Committee of the United Negro College Fund.
Mr. Keane holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University, Appleton,
Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers ABR, Inc.
(formerly Abrams Benisch Riker Inc.), a property
management firm. Mr. Abrams was Principal of Colliers
ABR, Inc. from 1978 to 1992 and since 1992, has served
as a Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and Brown
Company. Mr. Abrams also serves as a Director of Greater
New York Mutual Insurance Company and Trustee Emeritus
and Presidential Counselor of

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his alma mater, Cornell University. Mr. Abrams received
his M.B.A. from Harvard University and his B.A. from
Cornell University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of Security
Capital (US) Management since July, 1997. Prior thereto,
Director of Security Capital Pacific Trust ("PTR") and
the PTR REIT Manager from February 1995 to June 1997 and
Senior Vice President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT Manager
from September 1994 to June 1997 where he had overall
responsibility for asset management and multifamily
dispositions. Prior to joining Security Capital, Mr.
Gardner was with Copley Real Estate Advisors as a
Managing Director and Principal responsible for
portfolio management from January 1991 to September 1994
and as a Vice President and Principal of asset
management from December 1984 to December 1990. From
July 1977 to November 1984, Mr. Gardner was a Real
Estate Manager with the John Hancock Companies. Mr.
Gardner received his M.S. in Computer Information
Systems from Bentley College and his B.S. in Accounting
from Stonehill College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of SC (US) Management
since March 1997. Prior thereto, from June 1988 to March
1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong Capital
Management, Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A. from
the University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of SC
(US) Management since November 1997 where he is
responsible for the development and implementation of
portfolio investment strategy. Prior thereto, Senior
Vice President and Senior REIT Analyst from July 1996 to
October 1997 and Vice President from May 1995 to June
1996. Prior to joining Security Capital, Mr. Statz was a
Vice President in the investment research department of
Goldman, Sachs & Co., from February 1993 to January
1995, concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing director
of Chancellor Capital Management from August 1982 to
February 1992. Mr. Statz received his M.B.A. and B.B.A.
from the University of Wisconsin, Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice President
of SC (US) Management since November 1997 and Vice
President since July 1996, where he is responsible for
directing the activities of the industry/company
securities research group and providing in-depth
proprietary research on publicly traded companies with
office and industrial sectors. Prior to joining SC (US)
Management, Mr. Bedell spent nine years with LaSalle
Partners Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private REIT
with

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<PAGE>

commercial real estate investments of $600-800 million.
Mr. Bedell received his M.B.A. from the University of
Chicago and his B.A. from Kenyon College.

Michelle H. Lord Member, SC-ASIA Portfolio Management Committee; Vice
President of SC (US) Management, where she conducts
real estate securities analysis in the Asia/Pacific
region for the firm. Previously, Ms. Lord was with
Security Capital Industrial Trust where she was
responsible for research on special investment
opportunities. Previously, Ms. Lord was in the
Management Development Program with Security Capital
Group Incorporated, working in six-month rotational
assignments with Managing Directors of the firm. Prior
to joining Security Capital, Ms. Lord was with Societe
Generale Securities, (North Pacific) in Tokyo where she
was a member of the Japanese Government Bond futures
and options brokerage desk. Previously, Ms. Lord was a
currency trader with Asahi Bank in Tokyo. Ms. Lord
received her M.B.A. from the University of Chicago
Graduate School of Business and her B.A. from Smith
College.

Michael C. Montelibano Member, SC-ASIA Portfolio Management Committee; Vice
President of SC (US) Management, where he conducts real
estate securities analysis in the Asia/Pacific region
for the firm. Mr. Montelibano was in the Management
Development Program with Security Capital Group
Incorporated, where he worked in six-month rotational
assignments with Managing Directors of the firm. Prior
to joining Security Capital, Mr. Montelibano was a
consultant for Ayala Land, Incorporated in the
Philippines where he conducted financial analyses of
office and residential development projects, and for
Bank of America in Malaysia where he conducted market
research studies on retail banking. Previously, Mr.
Montelibano was a senior consultant with Andersen
Consulting where he focused on the telecommunications
and financial sectors. Mr. Montelibano received his
M.B.A. from the University of California, Berkeley and
his B.S. in Mechanical Engineering from the University
of California, San Diego.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603, has
been retained to provide investment advice, and, in general, to conduct the
management and investment program of SC-ASIA under the overall supervision and
control of the Directors of SC-ASIA.

SC (US) Management was formed in March 1994, and is registered as an
investment adviser with the SEC. SC (US) Management's principal officers include
Anthony R. Manno, Jr., Managing Director and President, John H. Gardner, Jr.,
Managing Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell,
Senior Vice President. SC (US) Management is a wholly-owned subsidiary of
Security Capital Group Incorporated, a real estate research, investment and
management company.

The SC-ASIA Portfolio Management Committee, which is comprised of certain
officers of SC-REMFs and SC (US) Management analysts, is primarily responsible
for the construction of SC-ASIA's portfolio.

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<PAGE>

INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
(US) Management furnishes a continuous investment program for SC-ASIA's
portfolio, subject to the general supervision of SC-REMFs's Board of Directors.
SC (US) Management also provides persons satisfactory to the Directors of SC-
REMFs to serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-REMFs, may be directors, officers, or employees of
SC (US) Management.

Under the Advisory Agreement, SC-ASIA Class I shares pay SC (US) Management
a monthly management fee in an amount equal to 1.20% of the average daily net
assets of SC-ASIA Class I shares (approximately 1.20% on an annual basis). Under
a separate agreement SC (US) Management has committed to waive fees and/or
reimburse expenses to maintain SC-ASIA's Class I total operating expenses, other
than brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than [___%] of the value of SC-ASIA's average daily net
assets for the year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory
Agreement described above, SC-ASIA Class I shares pay certain other costs of
operations including (a) administration, custodian and transfer agency fees, (b)
fees of Directors who are not affiliated with SC (US) Management, (c) clerical,
accounting and other office costs, (d) costs of printing SC-ASIA's prospectus
for existing shareholders and shareholder reports, (e) costs of maintaining SC-
REMFs's existence, (f) interest charges, taxes, brokerage fees and commissions,
(g) costs of stationery and supplies, (h) expenses and fees related to
registration and filing with federal and state regulatory authorities, and (i)
upon the approval of SC-REMFs's Board of Directors, costs of personnel of SC
(US) Management or its affiliates rendering clerical, accounting and other
office services. Each class of SC-ASIA shares pays the portion of SC-ASIA
expenses attributable to its operations. Income, realized gains and losses,
unrealized appreciation and depreciation and certain expenses not allocated to a
particular class are allocated to each class based on the net assets of that
class in relation to the net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC (US) Management has also entered into a fund accounting and
administration agreement with SC-REMFs (the "Administration Agreement") under
which SC (US) Management performs certain administrative functions for SC-ASIA,
including (i) providing office space, telephone, office equipment and supplies
for SC-REMFs; (ii) paying compensation of SC-REMFs's officers for services
rendered as such; (iii) authorizing expenditures and approving bills for payment
on behalf of SC-ASIA; (iv) supervising preparation of the periodic updating of
SC-ASIA's Prospectus and SAI for existing shareholders; (v) supervising
preparation of quarterly reports to SC-ASIA's shareholders, notices of
dividends, capital gains distributions and tax credits, and attending to routine
correspondence and other communications with individual shareholders; (vi)
supervising the daily pricing of SC-ASIA's investment portfolio and the
publication of the net asset value of SC-ASIA's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-ASIA, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk facilities
for SC-ASIA; (ix) maintaining books and records for SC-ASIA (other than those
maintained by the Custodian and Transfer Agent) and preparing and filing of tax
reports other than SC-ASIA's income tax returns; and (x) providing executive,
clerical and secretarial help needed to carry out these responsibilities.

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<PAGE>

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-ASIA's net asset value and preparing such figures for
publication, maintaining certain of SC-ASIA's books and records that are not
maintained by SC (US) Management, or the Custodian, preparing financial
information for SC-ASIA's income tax returns, proxy statements, quarterly and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of
[______%]. The Sub-Administrator also serves as SC-ASIA's Custodian and Transfer
Agent. See "Custodian and Transfer and Dividend Disbursing Agent."

Under the Administration Agreement, SC (US) Management remains responsible
for monitoring and overseeing the performance by the Sub-Administrator of its
obligations to SC-ASIA under the Sub-Administration Agreement, subject to the
overall authority of SC-REMFs's Board of Directors. For its services under the
Administration Agreement, SC (US) Management receives a monthly fee from SC-
REMFs at the annual rate of 0.2% of the value of the average daily net assets of
the Fund.

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs and SC-ASIA's sole Class I shareholder
have adopted a Distribution and Servicing Plan ("Plan") with respect to SC-
ASIA's Class I shares pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended. Under the Plan, SC-ASIA pays to Security Capital Markets Group
Incorporated, in its capacity as principal distributor of SC-ASIA's shares (the
"Distributor"), a monthly fee equal to, on an annual basis, .25% of the value of
SC-ASIA's average daily net assets for Class I shares.

The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class I
shares and for providing certain services to Class I shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-ASIA understands that these third parties may also charge fees
to their clients who are beneficial owners of SC-ASIA Class I shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of SC-ASIA's Class I shares is determined as
of the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-ASIA's portfolio and other assets
represented by Class I shares, subtracting liabilities incurred or accrued
allocable to Class I shares, and dividing by the total number of SC-ASIA's Class
I shares then outstanding, adjusted to the nearest whole cent. A security listed
or traded on a recognized stock exchange or quoted on a quotation system of a
national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading

16
<PAGE>

on the foreign exchange on which it is traded or as of the scheduled closing
time of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and
that value is then converted into its U.S. dollar equivalent at the foreign
exchange rate in effect at noon, New York time, on the day the value of the
foreign security is determined. If no sale is reported at that time, the mean
between the current bid and asked price is used. Occasionally, events which
affect the values of such securities and such exchange rates may occur between
the times at which they are determined and the close of the NYSE and will
therefore not be reflected in the computation of SC-ASIA's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at fair value as determined by the
management and approved in good faith by the Board of Directors. All other
securities for which over-the-counter market quotations are readily available
are valued at the mean between the current bid and asked price. Foreign
securities that are not traded on an exchange, securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by SC-ASIA's management and approved in good faith by the Board of
Directors.

PURCHASE OF SHARES

Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-ASIA Class I shares may be purchased through Firstar
Trust Company, SC-ASIA's Transfer Agent, or any dealer that has entered into a
sales agreement with the Distributor.

Orders for shares of SC-ASIA will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details of
each purchase transaction will be sent to you promptly following each
transaction. If a purchase order is placed through a dealer, the dealer must
promptly forward the order, together with payment, to the Transfer Agent.
Investors must specify that Class I shares are being purchased.

If you choose a securities dealer that has not entered into a sales
agreement with the Distributor, such dealer may, nevertheless, offer to place an
order for the purchase of SC-ASIA shares. Such dealer may charge a transaction
fee, as determined by the dealer. That fee may be avoided if shares are
purchased through a dealer who has entered into a sales agreement with the
Distributor or through the Transfer Agent.

By investing in SC-ASIA you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $250,000. Class I shares may be purchased
by check or money order drawn on a U.S. bank, savings and loan, or credit union
by wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S. dollars
and will be accepted subject to collection at full face value. Note that all
applications to purchase shares are subject to acceptance by SC-ASIA and are not
binding until so accepted. SC-ASIA reserves the right to decline to accept a
purchase order application in whole or in part.

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<PAGE>

MAIL

The following instructions should be used when mailing a check or money
order payable to "Security Capital Asia/Pacific Real Estate Shares," via U.S.
mail to the Distributor, a securities dealer or the Transfer Agent:

Please note that if your check does not clear, a service charge of $20 will
be charged and you will be responsible for any losses suffered by SC-ASIA as a
result.

WIRE PURCHASES

Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital Asia/Pacific Real Estate Shares
(shareholder account number)
(shareholder name/registration)

Please call 1-800-699-4594 prior to wiring any funds in order to obtain a
confirmation number and to ensure prompt and accurate handling of funds. SC-
ASIA AND ITS TRANSFER AGENT ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM OR FROM INCOMPLETE
WIRING INSTRUCTIONS.

SUBSEQUENT INVESTMENTS

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<PAGE>

value determined as of the close of regular trading on a give date, the Transfer
Agent must receive both the purchase order and payment by Electronic Funds
Transfer through the ACH System, before the close of regular trading on such
date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.

EXCHANGE FEATURE

Class I shares of SC-ASIA may be exchanged for Class I shares of SC-
ARBITRAGE, SC-US and SC-EURO. Exchanges of Class I shares will be made at
their relative net asset values. Shares may be exchanged only if the amount
being exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-ASIA, SC-ARBITRAGE, SC-EURO or SC-US
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

REDEMPTION OF SHARES

You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-ASIA
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-ASIA may hold payment on redemption proceeds until it reasonably
satisfied that the check has cleared, which may take up to twelve days.

Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-ASIA
of the Broker or dealer's instruction to redeem shares. In addition, some
brokers or dealers may charge a fee in connection with such redemptions. See
"Determination of Net Asset Value."

MAIL AND WIRE

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other

19
<PAGE>

independent delivery services to be its agents. Therefore, deposit in the mail
or with such services, or receipt at the Transfer Agent's post office box, of
redemption requests does not constitute receipt by the Transfer Agent or by SC-
ASIA. Do not mail letters by overnight courier to the post office box. Any
written redemption requests received within 15 days after an address change must
be accompanied by a signature guarantee.

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-
699-4594. In order to utilize this procedure, you must have previously elected
this option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or submit
a written request to the Transfer Agent. No telephone redemptions will be
allowed within 15 days of such a change. SC-ASIA reserves the right to limit the
number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-ASIA will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-ASIA reserves the right to refuse a
telephone redemption request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed
or wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-ASIA or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

Unless other instructions are given in proper form, a check for the
proceeds of a redemption will be sent to the shareholder's address of record.
The Custodian may benefit from the use of redemption proceeds until the
redemption check for such proceeds has cleared.

SC-ASIA may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is closed,
other than customary weekend and holiday closings, or (ii) an emergency, as
defined by rules adopted by the SEC, exists making disposal of portfolio
securities or determination of the value of the net assets of SC-ASIA not
reasonably practicable.

The proceeds of redemption may be more or less than the amount invested
and, therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-ASIA in not less than 30
days' notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
Upon any such termination, a check for the redemption proceeds will be sent to
the account of record within seven business days of the redemption. However, if
a shareholder is affected by

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<PAGE>

the exercise of this right, he or she will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.

A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-ASIA does not charge a fee to process
conversions. SC-ASIA reserves the right to reject any conversion request in
whole or in part. The conversion feature may be modified or terminated at any
time upon notice to SC-ASIA Class I shareholders.

DIVIDENDS AND DISTRIBUTIONS

Dividends from SC-ASIA's investment income will be declared and distributed
quarterly. SC-ASIA intends to distribute net realized capital gains, if any, at
least annually although SC-ASIA's Board of Directors may in the future determine
to retain net realized capital gains and not distribute them to shareholders.
For information concerning the tax treatment of SC-ASIA's distribution policies
for SC-ASIA and its shareholders, see "Taxation."

Distributions will automatically be paid in full and fractional shares of
SC-ASIA based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

TAXATION

The following discussion is intended for general information only.
Shareholders should consult with their own tax advisers as to the tax
consequences of an investment in SC-ASIA, including the status of distributions
under applicable state or local law.

FEDERAL INCOME TAXES

SC-ASIA intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-ASIA distributes its taxable income and
net capital gains to its shareholders, qualification as a regulated investment
company relieves SC-ASIA of federal income and excise taxes on that part of its
taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends may be eligible
for the dividends-received deduction, except that the amount eligible for the
deduction is limited to the amount of qualifying dividends received by SC-ASIA.
A corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-ASIA at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-ASIA is financed with indebtedness.

The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-ASIA to its shareholders as capital gains
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held his or her stock.
Long-term capital gains distributions are not eligible for the dividends-
received deduction referred to above.

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<PAGE>

Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-ASIA during October, November or
December of a year to shareholders of record as of a specified date in such a
month that is paid during January of the following year is includable in the
prior year's taxable income of shareholders that are calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-ASIA
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of such shares by a shareholder, although in
effect a return of capital to that particular shareholder, would be taxable to
him or her as described above. If a shareholder held shares for six months or
less, and during that period received a distribution taxable to such shareholder
as long-term capital gain, any loss realized on the sale of such shares during
such six-month period would be a long-term capital loss to the extent of such
distribution.

A dividend or capital gains distribution with respect to shares of SC-ASIA
held by a tax-deferred or qualified plan, such as an individual retirement
account, 403(b)(7) retirement plan or corporate pension or profit-sharing plan,
will not be taxable to the plan, except to the extent the shares are debt-
financed within the meaning of Section 514 of the Code. Distributions from such
plans will be taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the qualified plan.

SC-ASIA will be required to withhold 31% of any payments made to a
shareholder if the shareholder has not provided a certified taxpayer
identification number to SC-ASIA, or the Secretary of the Treasury notifies SC-
ASIA that the shareholder has not reported all interest and dividend income
required to be shown on the shareholder's Federal income tax return. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability.

Further information relating to tax consequences is contained in the SAI.

STATE AND LOCAL TAXES

SC-ASIA distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular tax
consequences of an investment in SC-ASIA.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On [___________,
1998], its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, each with two

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<PAGE>

classes of shares: Class I shares and Class R shares. Class I shares offer
different services to shareholders and incur different expenses than Class R
shares. Each class pays its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-ASIA's Class I shares may not be
modified except by the vote of a majority of the holders of all SC-ASIA's Class
I shares outstanding. SC-ASIA's Class I shareholders have exclusive voting
rights with respect to matters relating solely to SC-ASIA's Class I shares. SC-
ASIA's Class I shareholders vote separately from SC-ASIA's Class R shareholders
and SC-ARBITRAGE's, SC-EURO's and SC-US's Class I and Class R shareholders on
matters in which the interests of SC-ASIA's Class I shareholders differ from the
interests of SC-ASIA's Class R shareholders and SC-ARBITRAGE's, SC-EURO's and
SC-US's Class I and Class R shareholders.

CUSTODIAN AND TRANSFER AGENT

[______________], which has its principal business address at
[__________________], has been retained to act as Custodian of SC-ASIA's
investments. [_______________], which has its principal business address at
[___________________], has been retained to serve as SC-ASIA's Transfer Agent.
Neither [_____________] nor [_____________] have any part in deciding SC-ASIA's
investment policies or which securities are to be purchased or sold for SC-
ASIA's portfolio.

REPORTS TO SHAREHOLDERS

The fiscal year of SC-ASIA ends on December 31 of each year. SC-ASIA will
send to its shareholders, at least semi-annually, reports showing the
investments and other information (including unaudited financial statements). An
annual report, containing financial statements audited by SC-ASIA's independent
accountants, will be sent to shareholders each year. Please call 1-888-SECURITY
(toll free) for a copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-ASIA may advertise its "average annual total return"
of the Class I shares over various periods of time. This total return figure
shows the average percentage change in value of an investment in SC-ASIA Class I
shares from the beginning date of the measuring period to the ending date

23
<PAGE>

of the measuring period. The figure reflects changes in the price of SC-ASIA's
Class I shares and assumes that any income, dividends and/or capital gains
distributions made by SC-ASIA during the period are reinvested in Class I shares
of SC-ASIA. Figures will be given for recent one-, five- and ten-year periods
(when applicable), and may be given for other periods as well (such as from
commencement of SC-ASIA's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-ASIA's Class I annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-ASIA also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-
ASIA's Class I shares for the specific period (again reflecting changes in SC-
ASIA's Class I share price and assuming reinvestment of Class I dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).

YEAR 2000 RISKS

Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs's records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA.

ADDITIONAL INFORMATION

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<PAGE>

PROSPECTUS

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

By this Prospectus, SC-ASIA is offering Class R shares. SC-ASIA also offers
Class I shares to investors whose minimum initial investment is $250,000. Class
I shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-ASIA's other
class of shares should call 1-888-SECURITY (toll free) or ask their sales
representatives or SC-ASIA's distributor. This Prospectus provides you with
information specific to the Class R shares of SC-ASIA. It contains information
you should know before you invest in SC-ASIA.

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY IN
ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR INDIVIDUAL
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.

[ ________, 1997 ]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses.............................................. 2

Description of SC-REMFs and SC-ASIA................... 4

Investment Objectives and Policies.................... 4

Investment Strategy................................... 5

Hedging and Other Portfolio Strategies................ 6

Risk Factors.......................................... 8

Non-Diversified Status; Portfolio Turnover............ 11

Management of SC-ASIA................................. 11

Investment Advisory Agreement and Research Services
Agreement............................................. 15

Administrator and Sub-Administrator................... 15

Distribution and Servicing Plan....................... 16

Determination of Net Asset Value...................... 16

Purchase of Shares.................................... 17

Redemption of Shares.................................. 20

Dividends and Distributions........................... 22

Taxation.............................................. 22

Organization and Description of Capital Stock......... 23

Custodian and Transfer Agent.......................... 24

Reports to Shareholders............................... 24

Performance Information............................... 24

Additional Information................................ 25
</TABLE>
<PAGE>

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ASIA.

ANNUAL SC-ASIA OPERATING EXPENSES

The Class R shares of SC-ASIA pay for certain expenses attributable to Class R
shares directly out of SC-ASIA's Class R assets. These expenses are related to
management of SC-ASIA, administration and other services. For example, SC-ASIA
pays an advisory fee and an administrative fee to SC (US) Management. SC-ASIA
also has other customary expenses for services such as transfer agent fees,
custodial fees paid to the bank that holds its portfolio securities, audit fees
and legal expenses. These operating expenses are subtracted from SC-ASIA's Class
R assets to calculate SC-ASIA's Class R net asset value per share. In this
manner, shareholders pay for these expenses indirectly.

The following table is provided to help shareholders understand the direct
expenses of investing in SC-ASIA and the portion of SC-ASIA's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-ASIA's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-ASIA's average annual net assets for such fiscal year
are $50 million. The actual expenses in future years may be more or less than
the numbers in the table, depending on a number of factors, including the actual
value of SC-ASIA's assets.

FEE TABLE

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions.............................. None
Redemption fee (1).......................................................................... None
Annual SC-ASIA Operating Expenses (after expense waivers and/or reimbursements, as a
percentage of average net assets):
Management fees............................................................................. 1.20%
12b-1 fees (2).............................................................................. .25%
Other expenses.............................................................................. .30%
Total SC-ASIA operating expenses (3)........................................................ 1.75%
</TABLE>

__________________
(1) SC-ASIA's transfer agent charges a service fee of [$_______] for each wire
redemption.
(2) SC-ASIA has adopted a Distribution and Service Plan for SC-ASIA Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-ASIA pays Security Capital Markets Group
Incorporated a fee for distribution-related services and services related to
the maintenance of shareholder accounts at the annual rate of 0.25% of SC-
ASIA's Class I average daily net assets. As a result, long-term Class R
shareholders of SC-ASIA may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD").
(3) SC (US) Management has committed to waive fees and/or reimburse expenses to
maintain SC-ASIA's Class R total operating expenses, other than brokerage
fees and commissions, taxes, interest and other extraordinary expenses, at
no more than [___%] of the value of SC-ASIA's Class R average daily net
assets for the year ending December 31, 1998. SC-ASIA estimates that without
such waiver and/or

2
<PAGE>

reimbursement, actual total fund operating expenses would be [___%] of the
value of SC-ASIA's Class R average daily net assets.

EXAMPLES

[TO BE FILED BY AMENDMENT]

The actual expenses in future years may be more or less than the numbers in
the example, depending on a number of factors, including the actual value of SC-
US's assets.

3
<PAGE>

DESCRIPTION OF SC-ASIA

SC-ASIA is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law on January 23, 1997. SC-REMFs is comprised
of four investment portfolios, SC-ASIA, Security Capital U.S. Real Estate Shares
("SC-US") and Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") and
Security Capital European Real Estate Shares ("SC-EURO").

SC-ASIA issues two classes of shares, one of which, Class R shares, is offered
by this prospectus. SC-ASIA also issues Class I shares to investors whose
minimum initial investment is $250,000. Class R shares offer different services
and incur different expenses than Class I shares, which would affect
performance. See "Purchase of Shares" and "Organization and Description of
Capital Stock."

INVESTMENT OBJECTIVES AND POLICIES

SC-ASIA's investment objective is to provide shareholders with above-average
total returns, including current income and capital appreciation, primarily
through investments in equity securities of publicly-traded real estate
companies organized principally in countries in the Asia/Pacific region. Long-
term, SC-ASIA's objective is to achieve top-quartile results as compared to
other mutual funds that invest in publicly-traded real estate companies
organized principally in countries in the Asia/Pacific region, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and investment modeling techniques. SC-ASIA's investment
objective is "fundamental" and cannot be changed without approval of a majority
of its outstanding voting securities. None of SC-ASIA's policies, other than
its investment objective and the investment restrictions described below, are
fundamental; these non-fundamental policies may be changed by SC-ASIA's Board of
Directors without shareholder approval. There can be no assurance that SC-
ASIA's investment objective will be achieved.

Under normal conditions, SC-ASIA will invest at least 80% of its assets in the
equity securities of publicly-traded real estate companies located primarily in
nations in the Asia/Pacific region, including Hong Kong, Singapore, Japan and
Australia. Such equity securities will consist of (1) common stocks, (2) rights
or warrants to purchase common stocks, (3) securities convertible into common
stocks where the conversion feature represents, in SC (US) Management's view, a
significant element of the security's value, and (4) preferred stocks. SC-ASIA
will invest only in real estate companies that derive at least 50% of their
revenues from the ownership, construction, financing, management or sale of
commercial, industrial or residential real estate and hotels or that have at
least 50% of their assets invested in such real estate. SC-ASIA also may invest
in securities issued by real estate companies that are controlled by Security
Capital Group Incorporated ("Security Capital") or its affiliates.

4
<PAGE>

and corporate commercial paper and other short-term corporate obligations, in
each case rated Prime-1 by Moody's, or A or better by S&P or, if unrated, of
comparable quality as determined by SC (US) Management; and repurchase
agreements with banks and broker-dealers with respect to such securities. For
temporary defensive purposes, SC-ASIA also may invest up to 25% of its total
assets in obligations (including certificates of deposit, time deposits and
bankers' acceptances) of banks; provided that SC-ASIA will limit its investment
in time deposits for which there is a penalty for early withdrawal to 10% of its
total assets.

INVESTMENT STRATEGY

REAL ESTATE SECURITIES INDUSTRY OUTLOOK

SC (US) Management believes that over the long term, the real estate industry
in the Asia/Pacific region will experience strong growth driven by high economic
growth rates based on strong demographic trends and trade expansion. The large
and young population base as well as massive urbanization trends in the emerging
Asia/Pacific region will create strong and sustainable demand for housing in
major metropolitan areas. Economic growth in the region is expected to lead to
strong demand in the commercial real estate sector as well. SC (US) Management
expects real estate markets in the Asia/Pacific region to continue to follow the
trend of higher levels of real estate securitization into the future. In the
more mature markets such as Japan, the real estate market could experience a
transformation to a more securitized real estate market similar to the U.S. The
combination of all these factors should create significant investment
opportunities over the long term.

A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH

Top Down Economic and Real Estate Market Research. SC (US) Management is
uniquely positioned to access meaningful, proprietary economic and real estate
research collected at the country market, city sub-market and property-specific
level. Non-U.S. country market research and analysis, which is provided to SC
(US) Management by other operating professionals within the Security Capital
affiliate company network, assists SC (US) Management in identifying attractive
growth in country markets and real estate sectors. This research and analysis
is instrumental to SC (US) Management's ability to make investment decisions for
SC-ASIA's portfolio and to identify country markets reaching a "marginal turning
point." The country market research conducted by SC-ASIA includes a
comprehensive evaluation of real estate supply and demand factors such as
population and economic trends, customer and industry needs, capital flows and

5
<PAGE>

building permit and construction data on a country market and city sub-market
basis and by product type. Specifically, primary country market research
evaluates normalized cash flow lease economics -- accounting for capital
costs -- to determine whether the core economy of a country market is expected
to improve, stabilize or decline. Only through disciplined real estate market
research does SC (US) Management believe it can identify country markets and/or
city sub-markets, and thus, real estate operating companies, with potential for
higher than average growth prospects.

HEDGING AND OTHER PORTFOLIO STRATEGIES

6
<PAGE>

When SC-ASIA enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. In addition, when SC-ASIA enters into a futures contract, it will
segregate assets or "cover" its position in accordance with the 1940 Act. See
"Investment Objectives and Policies--Futures Contracts" in the SAI.

7
<PAGE>

RISK FACTORS

Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in SC-ASIA, nor can
there be an assurance that SC-ASIA's investment objectives will be attained. As
with any investment in securities, the value of, and income from, an investment
in SC-ASIA can decrease as well as increase depending on a variety of factors
which may affect the values and income generated by SC-ASIA's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-ASIA will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-ASIA is invested may also be
reflected in declines in the price of shares of SC-ASIA. Changes in currency
valuations will also affect the price of shares of SC-ASIA. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-ASIA generally will vary inversely with changes in prevailing
interest rates. Additionally, investment decisions made by SC (US) Management
will not always be profitable or prove to have been correct. SC-ASIA is
intended as an investment vehicle for those investors seeking long term capital
growth and is not intended as a complete investment program.

8
<PAGE>

Additionally, SC-ASIA could conceivably own real estate directly as a result
of a default on debt securities that it owns. If SC-ASIA has rental income or
income from the disposition of such real estate, the receipt of such income may
adversely affect its ability to retain its tax status as a regulated investment
company. See "Taxation."

Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
ASIA may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.

Brokerage commissions, custodial services and other costs relating to
investment in European countries are generally more expensive than in the U.S.
European securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of SC-ASIA are uninvested and no return is earned
thereon. The inability of SC-ASIA to make intended security purchases due to
settlement problems could cause SC-ASIA to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to SC-ASIA due to subsequent declines in
value of the portfolio security or, if SC-ASIA has entered into a contract to
sell the security, could result in possible liability to the purchaser.

In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
ASIA may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.

9
<PAGE>

of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.

Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. SC-ASIA could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.

SC-ASIA usually effects currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange (to cover service charges) will be incurred
when SC-ASIA converts assets from one currency to another.

Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-ASIA may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.

Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any
future or options contract may not be available when a futures position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or foreign currency on which the futures or options
contract is based and movements in the securities or currency in SC-ASIA's
portfolio. Successful use of futures or options contracts is further dependent
on SC (US) Management's ability to correctly predict movements in the securities
or foreign currency markets and no assurance can be given that its judgment will
be correct. Successful use of options on securities or stock indices is subject
to similar risk considerations.

Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-
ASIA's investment policies, SC-ASIA's investment in Depositary Receipts will be
deemed to be investments in the underlying securities.

10
<PAGE>

Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the SAI.

NON-DIVERSIFIED STATUS & PORTFOLIO TURNOVER

DIRECTORS AND OFFICERS AND OTHER PERSONNEL

The overall management of the business and affairs of SC-ASIA is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ASIA, including SC-REMFs's agreements with SC (US) Management,
its custodian and transfer agent. The management of SC-ASIA's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and SC (US) Management, subject always to the investment objectives
and policies of SC-ASIA and to general supervision by the Board of Directors.
Although SC-REMFs is not required by law to hold annual meetings, it may hold
shareholder meetings from time to time on important matters, and shareholders
have the right to call a meeting to remove a Director or to take other action
described in SC-REMFs's Articles of Incorporation. The Directors and officers of
SC-REMFs and certain key members of SC-ASIA's Portfolio Management Committee,
and their principal occupations are set forth below.

11
<PAGE>

real estate and treasurer functions, served as Chief
Investment Officer, was Chairman of the Operations
Committee, was a member of the Investment and Finance
Committees of the Board of Trustees and was President
and a Director of the Loyola Management Company. Mr.
Kasbeer received his J.D. from John Marshall Law School
and his M.A. and B.S. from Northwestern University.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director of SC (US)
Management since March 1997, where he is responsible
for overseeing all investment and capital allocation
matters for SC (US) Management's public market
securities activities and is also responsible for
company and industry analysis, market strategy and
trading and reporting; from January 1995 to March 1997,
he was Managing Director of SC (US) Management, where
he performed the same functions. Mr. Manno was a member
of the Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to
March 1994. Mr. Manno received his M.B.A. from the
University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

George F. Keane Director of SC-REMFs. Chairman of the Board of Trigen
Energy Corporation since 1994. As founding chief
executive of The Common Fund in 1971 and Endowment
Realty Investors in 1988, Mr. Keane for many years
headed an investment management service for colleges,
universities and independent schools that managed $15
billion for 1,200 educational institutions when he
became President Emeritus of the Common Fund in 1993.
He has served as a member of the Investment Advisory
Committee of the $75 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the RCB Trust Company since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993, and a
Director of the Bramwell Funds since 1994. He is also a
Director of Universal Stainless & Alloy Products,
Global Pharmaceutical Corporation, United Water
Resources and United Properties Group, Gulf Resources
Corporation, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane also
serves as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
Director and Chairman of the Investment Committee of
the United Negro College Fund. Mr. Keane holds honorary
degrees from Loyola University, Chicago, Illinois and
Lawrence University, Appleton, Wisconsin.

Robert H. Abrams Director of SC-REMFs. Founder of Colliers ABR, Inc.
(formerly Abrams Benisch Riker Inc.), a property
management firm. Mr. Abrams was Principal of Colliers
ABR, Inc. from 1978 to 1992 and since 1992, has served
as a Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and
Brown Company. Mr. Abrams also serves as a Director of
Greater New York Mutual Insurance Company and Trustee
Emeritus and Presidential Counselor of

12
<PAGE>

his alma mater, Cornell University. Mr. Abrams received
his M.B.A. from Harvard University and his B.A. from
Cornell University.

John H. Gardner, Jr. Director of SC-REMFs. Managing Director of Security
Capital (US) Management since July, 1997. Prior
thereto, Director of Security Capital Pacific Trust
("PTR") and the PTR REIT Manager from February 1995 to
June 1997 and Senior Vice President of Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR and the PTR
REIT Manager from September 1994 to June 1997 where he
had overall responsibility for asset management and
multifamily dispositions. Prior to joining Security
Capital, Mr. Gardner was with Copley Real Estate
Advisors as a Managing Director and Principal
responsible for portfolio management from January 1991
to September 1994 and as a Vice President and Principal
of asset management from December 1984 to December
1990. From July 1977 to November 1984, Mr. Gardner was
a Real Estate Manager with the John Hancock Companies.
Mr. Gardner received his M.S. in Computer Information
Systems from Bentley College and his B.S. in Accounting
from Stonehill College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of SC (US) Management
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong Capital
Management, Inc. Mr. Nellessen is a Certified Public
Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A.
from the University of Wisconsin, Madison.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of SC
(US) Management since November 1997 where he is
responsible for the development and implementation of
portfolio investment strategy. Prior thereto, Senior
Vice President and Senior REIT Analyst from July 1996
to October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr. Statz
was a Vice President in the investment research
department of Goldman, Sachs & Co., from February 1993
to January 1995, concentrating on research and
underwriting for the REIT industry. Prior thereto, Mr.
Statz was a real estate stock portfolio manager and a
managing director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received his
M.B.A. and B.B.A. from the University of Wisconsin,
Madison.

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of SC (US) Management since November 1997 and
Vice President since July 1996, where he is responsible
for directing the activities of the industry/company
securities research group and providing in-depth
proprietary research on publicly traded companies with
office and industrial sectors. Prior to joining SC (US)
Management, Mr. Bedell spent nine years with LaSalle
Partners Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private REIT
with

13
<PAGE>

commercial real estate investments of $600-800 million.
Mr. Bedell received his M.B.A. from the University of
Chicago and his B.A. from Kenyon College.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated ("SC (US) Management"),
with offices located at 11 South LaSalle Street, Chicago, Illinois 60603, has
been retained to provide investment advice, and, in general, to conduct the
management and investment program of SC-ASIA under the overall supervision and
control of the Directors of SC-ASIA.

SC (US) Management was formed in March 1994, and is registered as an
investment adviser with the SEC. SC (US) Management's principal officers include
Anthony R. Manno, Jr., Managing Director and President, John H. Gardner, Jr.,
Managing Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell,
Senior Vice President. SC (US) Management is a wholly-owned subsidiary of
Security Capital Group Incorporated, a real estate research, investment and
management company.

The SC-ASIA Portfolio Management Committee, which is comprised of certain
officers of SC-REMFs and SC (US) Management analysts, is primarily responsible
for the construction of SC-ASIA's portfolio.

14
<PAGE>

INVESTMENT ADVISORY AGREEMENT

Under the Advisory Agreement, SC-ASIA Class R shares pay SC (US) Management a
monthly management fee in an amount equal to 1.20% of the average daily net
assets of SC-ASIA Class R shares (approximately 1.20% on an annual basis).
Under a separate agreement SC (US) Management has committed to waive fees and/or
reimburse expenses to maintain SC-ASIA's Class R total operating expenses, other
than brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than [___%] of the value of SC-ASIA's average daily net
assets for the year ending December 31, 1998.

In addition to the payments to SC (US) Management under the Advisory Agreement
described above, SC-ASIA Class R shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with SC (US) Management, (c) clerical,
accounting and other office costs, (d) costs of printing SC-ASIA's prospectus
for existing shareholders and shareholder reports, (e) costs of maintaining SC-
REMFs's existence, (f) interest charges, taxes, brokerage fees and commissions,
(g) costs of stationery and supplies, (h) expenses and fees related to
registration and filing with federal and state regulatory authorities, and (i)
upon the approval of SC-REMFs's Board of Directors, costs of personnel of SC
(US) Management or its affiliates rendering clerical, accounting and other
office services. Each class of SC-ASIA shares pays the portion of SC-ASIA
expenses attributable to its operations. Income, realized gains and losses,
unrealized appreciation and depreciation and certain expenses not allocated to a
particular class are allocated to each class based on the net assets of that
class in relation to the net assets of SC-REMFs.

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC (US) Management has also entered into a fund accounting and administration
agreement with SC-REMFs (the "Administration Agreement") under which SC (US)
Management performs certain administrative functions for SC-ASIA, including (i)
providing office space, telephone, office equipment and supplies for SC-REMFs;
(ii) paying compensation of SC-REMFs's officers for services rendered as such;
(iii) authorizing expenditures and approving bills for payment on behalf of SC-
ASIA; (iv) supervising preparation of the periodic updating of SC-ASIA's
Prospectus and SAI for existing shareholders; (v) supervising preparation of
quarterly reports to SC-ASIA's shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine correspondence and other
communications with individual shareholders; (vi) supervising the daily pricing
of SC-ASIA's investment portfolio and the publication of the net asset value of
SC-ASIA's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-ASIA, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-ASIA; (ix) maintaining books and
records for SC-ASIA (other than those maintained by the Custodian and Transfer
Agent) and preparing and filing of tax reports other than SC-ASIA's income tax
returns; and (x) providing executive, clerical and secretarial help needed to
carry out these responsibilities.

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<PAGE>

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-ASIA's net asset value and preparing such figures for
publication, maintaining certain of SC-ASIA's books and records that are not
maintained by SC (US) Management, or the Custodian, preparing financial
information for SC-ASIA's income tax returns, proxy statements, quarterly and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of
[______%]. The Sub-Administrator also serves as SC-ASIA's Custodian and Transfer
Agent. See "Custodian and Transfer and Dividend Disbursing Agent."

Under the Administration Agreement, SC (US) Management remains responsible for
monitoring and overseeing the performance by the Sub-Administrator of its
obligations to SC-ASIA under the Sub-Administration Agreement, subject to the
overall authority of SC-REMFs's Board of Directors. For its services under the
Administration Agreement, SC (US) Management receives a monthly fee from SC-
REMFs at the annual rate of 0.2% of the value of the average daily net assets of
the Fund.

DISTRIBUTION AND SERVICING PLAN

The Board of Directors of SC-REMFs have adopted a Distribution and Servicing
Plan ("Plan") with respect to SC-ASIA's Class R shares pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. Under the Plan, SC-ASIA
pays to Security Capital Markets Group Incorporated, in its capacity as
principal distributor of SC-ASIA's shares (the "Distributor"), a monthly fee
equal to, on an annual basis, .25% of the value of SC-ASIA's average daily net
assets for Class R shares.

The Distributor may use the fee for services performed and expenses incurred
by the Distributor in connection with the distribution of Class R shares and for
providing certain services to Class R shareholders. The Distributor may pay
third parties in respect of these services such amount as it may determine. SC-
ASIA understands that these third parties may also charge fees to their clients
who are beneficial owners of SC-ASIA Class R shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plan.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of SC-ASIA's Class R shares is determined as of
the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-ASIA's portfolio and other assets
represented by Class R shares, subtracting liabilities incurred or accrued
allocable to Class R shares, and dividing by the total number of SC-ASIA's
Class R shares then outstanding, adjusted to the nearest whole

16
<PAGE>

cent. A security listed or traded on a recognized stock exchange or quoted on a
quotation system of a national securities association is valued at its last sale
price on the principal exchange on which the security is traded. The value of a
foreign security is determined in its national currency as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
closing time of the NYSE (generally 4:00 p.m., New York time), if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
mean between the current bid and asked price is used. Occasionally, events which
affect the values of such securities and such exchange rates may occur between
the times at which they are determined and the close of the NYSE and will
therefore not be reflected in the computation of SC-ASIA's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at fair value as determined by the
management and approved in good faith by the Board of Directors. All other
securities for which over-the-counter market quotations are readily available
are valued at the mean between the current bid and asked price. Foreign
securities that are not traded on an exchange, securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by SC-ASIA's management and approved in good faith by the Board of
Directors.

PURCHASE OF SHARES

SC-ASIA Class R shares may be purchased through Firstar Trust Company, SC-
ASIA's Transfer Agent, or any dealer that has entered into a sales agreement
with the Distributor.

Orders for shares of SC-ASIA will become effective at the net asset value per
share next determined after the receipt of payment. All funds will be invested
in full and fractional shares. A confirmation indicating the details of each
purchase transaction will be sent to you promptly following each transaction.
If a purchase order is placed through a dealer, the dealer must promptly forward
the order, together with payment, to the Transfer Agent. Investors must specify
that Class R shares are being purchased.

If you choose a securities dealer that has not entered into a sales agreement
with the Distributor, such dealer may, nevertheless, offer to place an order for
the purchase of SC-ASIA shares. Such dealer may charge a transaction fee, as
determined by the dealer. That fee may be avoided if shares are purchased
through a dealer who has entered into a sales agreement with the Distributor or
through the Transfer Agent.

By investing in SC-ASIA, you appoint the Transfer Agent as your agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gain distributions that are paid in
additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book entry form. PLEASE NOTE THAT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.

INITIAL INVESTMENT

The minimum initial investment is $2,500. For individual retirement account
and employee benefit plans qualified under Section 401, 403(b)(7) or 457 of the
Code as well as UGMA or UTMA accounts the minimum initial investment is $1,000.
For investors using the Automatic Investment Plan (described below) the minimum
initial investment is $250. These minimums can be changed or waived by SC-ASIA
at any time. Shareholders will be given at least 30 days notice of any increase
in the minimum dollar amount of subsequent investments.

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<PAGE>

U.S. funds to open an account. Checks must be payable in U.S. dollars and will
be accepted subject to collection at full face value. Note that all applications
to purchase shares are subject to acceptance by SC-ASIA and are not binding
until so accepted. SC-ASIA reserves the right to decline to accept a purchase
order application in whole or in part.

MAIL

The following instructions should be used when mailing a check or money order
payable to "Security Capital Real Estate Mutual Funds Incorporated, payable to
"Security Capital Asia/Pacific Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:

Please note that if your check does not clear, a service charge of $20 will be
charged and you will be responsible for any losses suffered by SC-ASIA as a
result.

WIRE PURCHASES

Class R shares may be purchased by wire only through the Transfer Agent. The
following instructions should be used when wiring funds to the Transfer Agent
for the purchase of shares:

Wire to: Firstar Bank
ABA Number 075000022

Credit: Firstar Trust Company
Account 112-952-137

Further Credit: Security Capital Asia/Pacific Real Estate Shares
(shareholder account number)
(shareholder name/account registration)

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan allows regular, systematic investments in SC-
ASIA Class R shares from a bank checking or NOW account. SC-ASIA will reduce
the minimum initial investment to $250 if a shareholder elects to use the
Automatic Investment Plan. To establish the Automatic Investment Plan, an
investor should complete the appropriate section in SC-ASIA's application and an
existing SC-ASIA

18
<PAGE>

shareholder should call 1-888-SECURITY (toll free) for an automatic investment
plan form. The Automatic Investment Plan can be set up with any financial
institution that is a member of the ACH. Under certain circumstances (such as
discontinuation of the Automatic Investment Plan before the minimum initial
investment is reached, or, after reaching the minimum initial investment, the
account balance is reduced to less than $500), SC-ASIA reserves the right to
close such account. Prior to closing any account for failure to reach the
minimum initial investment, SC-ASIA will give a shareholder written notice and
60 days in which to reinstate the Automatic Investment Plan or otherwise reach
the minimum initial investment. A shareholder should consider his or her
financial ability to continue in the Automatic Investment Plan until the minimum
initial investment amount is met because SC-ASIA has the right to close such
account for failure to reach the minimum initial investment. Such closing may
occur in periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20.00
will be deducted from a shareholder's SC-ASIA account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-ASIA in writing or by telephone to terminate the plan, a
shareholder closes his or her bank account or in any manner prevent withdrawal
of funds from the designated bank checking or NOW account.

SUBSEQUENT INVESTMENTS

You may purchase additional shares by moving money from your bank account to
your SC-ASIA account by telephone. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can be
used for telephone transactions. In order for shares to be purchased at the net
asset value determined as of the close of regular trading on a give date, the
Transfer Agent must receive both the purchase order and payment by Electronic
Funds Transfer through the ACH System, before the close of regular trading on
such date. Most transfers are completed within three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS R SHARES.

EXCHANGE FEATURE

Class R shares of SC-ASIA may be exchanged for Class R shares of SC-US, SC-
ARBITRAGE and SC-EURO. Exchanges of Class R shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-ASIA, SC-US, SC-EURO or SC-ARBITRAGE
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

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<PAGE>

CLASS I SHARES

SC-ASIA also issues Class I shares which offer different services and incur
different expenses which would affect performance. Investors may call the
Distributor at 1-800-699-4594 (toll free) to obtain additional information.

REDEMPTION OF SHARES

You may request redemption of part or all of your Class R shares at any time
by telephone or by mail. The redemption of shares will be at the next determined
net asset value. See "Determination of Net Asset Value." SC-ASIA normally will
mail the redemption proceeds to you on the next business day and, in any event,
no later than seven business days after the receipt of a redemption request in
good order. However, when a purchase has been made by check, SC-ASIA may hold
payment on redemption proceeds until it reasonably satisfied that the check has
cleared, which may take up to twelve days.

Redemption requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class R shares to be redeemed
were issued in certificate form, the certificate must be endorsed for transfer
(or be accompanied by a duly executed stock power) and must be submitted to
Firstar Trust Company together with a redemption request. The following
instructions should be used for the redemption of shares by mail, by wire and by
telephone:

MAIL AND WIRE

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges as $12.00 service fee for wire redemptions.

Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
does not consider the U.S. Postal Service or other independent delivery services
to be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of redemption requests does not
constitute receipt by the Transfer Agent or by SC-ASIA. Do not mail letters by
overnight courier to the post office box. Any written redemption requests
received within 15 days after an address change must be accompanied by a
signature guarantee.

20
<PAGE>

TELEPHONE

You may redeem shares by telephone by calling the Transfer Agent at 1-800-699-
4594. In order to utilize this procedure, you must have previously elected this
option in writing, which election will be reflected in the Transfer Agent's
records and the redemption proceeds will be mailed directly to you or
transferred to a predesignated account. To change the designated account, a
written request with signature(s) guaranteed must be sent to the Transfer Agent.
See "Signature Guarantees" below. To change that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-ASIA reserves the right to limit
the number of telephone redemptions by a shareholder. Once made, telephone
redemption requests may not be modified or canceled.

The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include
requiring some form of personal identification prior to acting upon telephone
instructions, providing written confirmations of all such transactions and/or
tape recording all telephone instructions. Assuming procedures such as the
above have been followed, SC-ASIA will not be liable for any loss, cost or
expense for acting upon a shareholder's telephone instructions or for any
unauthorized telephone redemption. SC-ASIA reserves the right to refuse a
telephone redemption request if so advised.

SIGNATURE GUARANTEES

Signature guarantees are required for: (i) redemption requests to be mailed or
wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received by
SC-ASIA or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and others.

OTHER REDEMPTION INFORMATION

SC-ASIA may suspend the right of redemption during any period when (i) trading
on the New York Stock Exchange is restricted or that Exchange is closed, other
than customary weekend and holiday closings, or (ii) an emergency, as defined by
rules adopted by the SEC, exists making disposal of portfolio securities or
determination of the value of the net assets of SC-ASIA not reasonably
practicable.

The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.

A shareholder's account may be terminated by SC-ASIA in not less than 30 days'
notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 in the case of individual retirement accounts and employee benefit plans
qualified under Sections 401, 403(b)(7) or 457 of the Code). Upon any such
termination, a check for the redemption proceeds will be sent to the account of
record within seven business days of the redemption. However, if a shareholder
is affected by the exercise of this right, he or she will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.

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<PAGE>

DIVIDENDS AND DISTRIBUTIONS

Distributions will automatically be paid in full and fractional shares of SC-
ASIA based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

TAXATION

FEDERAL INCOME TAXES

Under the current federal tax law, the amount of an income dividend or capital
gains distribution declared by SC-ASIA during October, November or December of a
year to shareholders of record as of a specified date in such a month that is
paid during January of the following year is includable in the prior year's
taxable income of shareholders that are calendar year taxpayers.

Any dividend or distribution received by a shareholder on shares of SC-ASIA
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of such shares by a shareholder, although in
effect a return of capital to that particular shareholder, would be taxable to
him or her as described above. If a shareholder held shares six months or less
and during that period received a distribution taxable to such shareholder as
long-term capital gain, any loss realized on the sale of such shares during such
six-month period would be a long-term capital loss to the extent of such
distribution.

22
<PAGE>

SC-ASIA will be required to withhold 31% of any payments made to a shareholder
if the shareholder has not provided a certified taxpayer identification number
to SC-ASIA, or the Secretary of the Treasury notifies SC-ASIA that the
shareholder has not reported all interest and dividend income required to be
shown on the shareholder's Federal income tax return. Any amounts withheld may
be credited against the shareholder's U.S. federal income tax liability.

Further information relating to tax consequences is contained in the SAI.

STATE AND LOCAL TAXES

SC-ASIA distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular tax
consequences of an investment in SC-ASIA.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name was
changed to Security Capital U.S. Real Estate Shares. On [___________, 1998], its
name was changed to Security Capital Real Estate Mutual Funds Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs's
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-ASIA and SC-EURO, each with two classes of shares:
Class I shares and Class R shares. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs's expenses.

All classes of each series of SC-REMFs's shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-ASIA's Class R shares may not be
modified except by the vote of a majority of the holders of all SC-ASIA's Class
R shares outstanding. SC-ASIA's Class R shareholders have exclusive voting
rights with respect to matters relating solely to SC-ASIA's Class R shares. SC-
ASIA's Class R shareholders vote separately from SC-ASIA's Class I shareholders
and SC-ARBITRAGE's and SC-EURO's Class I and Class R shareholders on matters in
which the interests of SC-ASIA's Class R shareholders differ

23
<PAGE>

from the interests of SC-ASIA's Class I shareholders and SC-EURO's, SC-ARBITRAGE
and SC-US's Class I and Class R shareholders.

CUSTODIAN AND TRANSFER AGENT

[________________], which has its principal business address at
[________________], has been retained to act as Custodian of SC-ASIA's
investments. [________________], which has its principal business address at
[________________], has been retained to serve as SC-ASIA's Transfer Agent.
Neither [________________] nor [________________] have any part in deciding SC-
ASIA's investment policies or which securities are to be purchased or sold for
SC-ASIA's portfolio.

REPORTS TO SHAREHOLDERS

The fiscal year of SC-ASIA ends on December 31 of each year. SC-ASIA will send
to its shareholders, at least semi-annually, reports showing the investments and
other information (including unaudited financial statements). An annual report,
containing financial statements audited by SC-ASIA's independent accountants,
will be sent to shareholders each year. Please call 1-888-SECURITY (toll free)
for a copy of the most recent semi-annual report.

PERFORMANCE INFORMATION

From time to time, SC-ASIA may advertise its "average annual total return" of
the Class R shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-ASIA Class R
shares from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of SC-ASIA's Class R
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-ASIA during the period are reinvested in Class R shares of SC-ASIA.
Figures will be given for recent one-, five- and ten-year periods (when
applicable), and may be given for other periods as well (such as from
commencement of SC-ASIA's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that SC-ASIA's Class R annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-ASIA also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-
ASIA's Class R shares for the specific period (again reflecting changes in SC-
ASIA's Class R share price and assuming reinvestment of Class R dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various

24
<PAGE>

components of total return (that is, the change in value of initial investment,
income dividends and capital gains distributions).

YEAR 2000 RISKS

Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs's records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA.

ADDITIONAL INFORMATION

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<PAGE>

LOGO

11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603

STATEMENT OF ADDITIONAL INFORMATION

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES

[__________________, 1998]

Security Capital Real Estate Mutual Funds Incorporated ("SC-REMFs") is an
open-end management investment company organized under Maryland law with four
investment portfolios ("Funds"): Security Capital U.S. Real Estate Shares ("SC-
US"), Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE"), Security
Capital European Real Estate Shares ("SC-EURO") and Security Capital
Asia/Pacific Real Estate Shares ("SC-ASIA"). Security Capital (US) Management
Group Incorporated ("SC (US) Management") serves as both investment adviser and
administrator to the Funds.

This Statement of Additional Information is not a prospectus and is
authorized for distribution only when preceded or accompanied by the prospectus
of SC-US, SC-ARBITRAGE, SC-EURO, and/or SC-ASIA dated [ , 1998] (each, a
---------
"Prospectus"). This Statement of Additional Information contains additional and
more detailed information than that set forth in a Prospectus and should be read
in conjunction with the applicable Prospectus, additional copies of which may be
obtained without charge by writing or calling SC-US's Sub-Administrator at:
Firstar Trust Company, Mutual Fund Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701; telephone number 1-800-699-4594 (toll free).

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.

Table of Contents

<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies....................... 2
Investment Restrictions................................. 15
Management of SC-REMFs.................................. 18
Distribution and Servicing Plans........................ 28
Determination of Net Asset Value........................ 29
Redemption of Shares.................................... 29
Portfolio Transactions and Brokerage.................... 29
Taxation................................................ 30
Organization and Description of Capital Stock........... 35
Distributor............................................. 37
Custodian and Transfer and Dividend Disbursing Agent.... 37
Performance Information................................. 37
Counsel and Independent Accountants..................... 39
Financial Statements.................................... 39
</TABLE>
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The following discussion of the investment objectives and policies of the
Funds supplements, and should be read in conjunction with, the information
regarding each Fund's investment objectives and policies set forth in the
Fund's Prospectus. This discussion includes supplemental information regarding
investments and investment strategies that SC-EURO, SC-ARBITRAGE and SC-ASIA may
use and the risks they entail. Certain of these may not be available to other
Funds. Except as otherwise provided below under "Investment Restrictions," the
Funds' investment policies are not fundamental and may be changed by SC-REMFs's
Board of Directors without the approval of the shareholders; however, a Fund
will not change its investment policies without written notice to shareholders.

ILLIQUID SECURITIES

A Fund will not invest in illiquid securities if immediately after such
investment more than 10% of the Fund's net assets (taken at market value) would
be invested in such securities. For this purpose, illiquid securities include,
among others, securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and securities which are otherwise not readily marketable. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven business days. A mutual fund might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.

If a Fund invests in securities issued by a real estate company that is
controlled by Security Capital Group Incorporated ("Security Capital Group
Incorporated") or any of its affiliates (a "Security Capital controlled real
estate company"), the Fund may be considered an affiliate of the issuer of such
securities and therefore an underwriter as such term is defined in the
Securities Act. A Fund's ability to resell such securities without registration
may, therefore, be limited. In addition, because SC-REMFs is an affiliate of
Security Capital Group Incorporated, a Fund's purchases and sales of securities
issued by a Security Capital controlled real estate company may be netted
against sales and purchases by Security Capital and any of its other affiliates
of securities of the same issuer during the six months preceding or following a
Fund's "opposite way" transactions for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). If such netting results
in a profit to Security Capital Group Incorporated or any of its affiliates
(including the Funds), Security Capital or its affiliates, as the case may be,
will be required to disgorge such "profits" to the issuer of such securities. In
addition, because SC-REMFs is an affiliate of Security Capital Group
Incorporated, a Fund's purchases and sales of securities issued by a Security
Capital controlled real estate company could raise issues under Section 17(d) of
the 1940 Act. Depending upon the timing of purchases and sales of securities of
such an issuer by Security Capital Group Incorporated and its affiliates, in
order to avoid Security Capital Group Incorporated or its affiliates (including
a Fund) having to disgorge "profits" to the issuer of such securities, or in
order to avoid violations of Section 17(d) of the 1940 Act, a Fund may not be
able to purchase or sell securities of a Security Capital controlled real estate

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company, even when it might otherwise be advantageous for the Fund to do so. As
a result, the Funds will treat such securities as illiquid securities.

In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. The Securities and Exchange Commission (the "SEC") has adopted Rule
144A which allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act of resales of certain securities to qualified institutional buyers.

SC (US) Management will monitor the liquidity of restricted securities in the
Funds' portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, SC (US) Management will consider, among other factors, the
following: (1) the frequency of trades and quotes for the security; (2) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).

LOWER-RATED DEBT SECURITIES

SC-ARBITRAGE may purchase lower-rated debt securities, sometimes referred to
as "junk bonds" (those rated BB or lower by Standard & Poor's ("S&P") or Ba or
lower by Moody's Investor Service, Inc. ("Moody's")). See Appendix A for a
description of these ratings. SC-ARBITRAGE does not intend, under current
circumstances, to purchase such securities if, as a result, more than 35% of the
Fund's assets would be invested in securities rated below BB or Ba.

The lower ratings of certain securities that may be held by SC-ARBITRAGE
reflect a greater possibility that adverse changes in the financial condition of
the issuer, or in general economic conditions, or both, or an unanticipated rise
in interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximately the values the Fund had placed on
such securities. It is possible that legislation may be adopted in the future
limiting the ability of certain financial institutions to purchase lower rated
securities; such legislation may adversely affect the liquidity of such
securities. In the absence of a liquid trading market for securities held by
it, the Fund may be unable at times to establish the fair market value of such
securities. The rating assigned to a security by Moody's or S&P does not
reflect an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security.

Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates generally will result in an increase in the value of the
Fund's fixed-income securities. Conversely, during periods of rising interest
rates, the value of the Fund's fixed-income securities generally will decline.
In addition, the values of such securities are also affected by changes in
general economic conditions and business conditions affecting the specific
industries of their issuers. Changes by recognized rating services in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these

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<PAGE>

investments. Changes in the value of portfolio securities generally will not
affect cash income derived from such securities, but will affect the fund's net
asset value. SC-ARBITRAGE will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although SC (US)
Management will monitor the investment to determine whether continued investment
in the security will assist in meeting the Fund's investment objective.

Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. In addition, such
issuers may not have more traditional methods of financing available to them,
and may be unable to repay debt at maturity by refinancing. The risk of loss
due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the lower-
rated securities in which SC-ARBITRAGE may invest are issued to raise funds in
connection with the acquisition of a company, in so-called "leveraged buy-out"
transactions. The highly leveraged capital structure of such issuers may make
them especially vulnerable to adverse changes in economic conditions.

Under adverse market or economic conditions or in the event of adverse changes
in the financial condition of the issuer, a SC-ARBITRAGE could find it more
difficult to sell lower-rated securities when SC (US) Management believes it
advisable to do so or may be able to sell such securities only at prices lower
than if such securities were more widely held. In many cases, such securities
may be purchased in private placements and, accordingly, will be subject to
restrictions on resale as a matter of contract or under securities laws. Under
such circumstances, it may also be more difficult to determine the fair value of
such securities for purposes of computing SC-ARBITRAGE's net asset value. In
order to enforce its rights in the event of a default under such securities, SC-
ARBITRAGE may be required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the Fund's net asset value. The Fund may also be
limited in its ability to enforce its rights and may incur greater costs in
enforcing its rights in the event an issuer becomes the subject of bankruptcy
proceedings.

Certain securities held by SC-ARBITRAGE may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by AG during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.

EQUITY-LINKED SECURITIES

SC-ARBITRAGE may invest in equity-linked securities, including, among others,
PERCS, ELKS, or LYONs, which are securities that are convertible into, or the
value of which is based upon the value of, equity securities upon certain terms
and conditions. The amount received by an investor at maturity of such
securities is not fixed but is based on the price of the underlying common
stock. It is not possible to predict how equity-linked securities will trade in
the secondary market or whether such market will be liquid or illiquid. The
following are three examples of equity-linked securities. The Fund may invest
in the securities described below or other similar equity-linked securities.
There are certain risks of loss of principal in connection with investing in
equity-linked securities, as described in the following examples of certain
equity-linked securities.

Preferred Equity Redemption Cumulative Stock ("PERCS") convert into common
stock within three years regardless of the price at which the common stock
trades. If the common stock is trading at a price that is at or below the cap,
the Fund receives one share of common stock for each PERCS share. If the common
stock is trading at a price that is above the cap, the Fund receives less than
one share, with the

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conversion ratio adjusted so that the market value of the common stock received
by the Fund equals the cap. Accordingly, the Fund is subject to the risk that if
the price of the common stock is above the cap price at the maturity of the
PERCS, the Fund will lose the amount of the difference between the price of the
common stock and the cap. Such a loss could substantially reduce the Fund's
initial investment in the PERCS and any dividends that were paid on the PERCS.
PERCS also present risks based on payment expectations. If a PERCS issuer
redeems the PERCS, the Fund may have to replace the PERCS with a lower yielding
security, resulting in a decreased return for investors.

The principal amount that Equity-Linked Securities ("ELKS") holder receives at
maturity is based on the price of the underlying common stock. If the common
stock is trading at a price that is at or below the cap, the Fund receives for
each ELKS share an amount equal to the average price of the common stock. If the
common stock is trading at a price that is above the cap, the Fund receives the
cap amount. Accordingly, the Fund is subject to the risk that if the price of
the common stock is above the cap price at the maturity of the ELKS, the Fund
will lose the amount of the difference between the price of the common stock and
cap. Such a loss could substantially reduce the Fund's initial investment in
the ELKS and any dividends that were paid on the ELKS. An additional risk is
that the issuer may "reopen" the issue of ELKS and issue additional ELKS at a
later time or issue additional debt securities or other securities with terms
similar to those of the ELKS, and such issuances may affect the trading value of
the ELKS.

The principal amount that Liquid Yield Option Notes ("LYONs") holders receive
for LYONs, other than the lower-than-market yield at maturity, is based on the
price of underlying common stock. If the common stock is trading at a price
that is at or below the purchase price of the LYONs plus accrued original issue
discount, the Fund receives only the lower-than-market yield, assuming the LYONs
are not in default. If the common stock is trading at a price that is above the
purchase price of the LYONs plus accrued original issue discount, the Fund will
receive an amount above the lower-than-market yield on the LYONs, based on how
well the underlying common stock performs. LYONs also present risks based on
payment expectations. If a LYONs issuer redeems the LYONs, the Fund may have to
replace the LYONs with a lower yielding security, resulting in a decreased
return for investors.

FOREIGN SECURITIES

SC-EURO and SC-ASIA may invest in foreign securities. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published about companies in the U.S. Accounting or financial
reporting standards, and auditing practices are generally not consistent among
countries. As a result, foreign companies may be subject to requirements that
are not comparable to those applicable to other foreign companies or to U.S.
companies. Some foreign markets have substantially less volume than the New York
Stock Exchange ("NYSE") and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commission rates
in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of stock exchanges, brokers
and listed companies than in the U.S.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict SC-
EURO's and SC-ASIA's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed legal structures governing
private or foreign investment or allowing for judicial redress for injury to
private real estate; (vi) the absence, until recently in certain Eastern

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<PAGE>

European countries, of a capital market structure or market-oriented economy;
(vii) fluctuations in foreign currencies; and (viii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.

In addition, developing countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. The
economies of certain developing countries also may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position.

SC-EURO and SC-ASIA endeavor to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when SC-EURO and SC-ASIA
change investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent SC-EURO
and SC-ASIA from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation of
trading on national exchanges, expropriation, nationalization or confiscatory
taxation, withholding and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments which
could affect investments in securities of issuers in foreign nations.

SC-EURO and SC-ASIA may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which SC-EURO and SC-ASIA may
invest may also have fixed or managed currencies that are not free-floating
against the U.S. dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which SC-EURO's and SC-ASIA's portfolio securities are denominated may have a
detrimental impact on SC-EURO and SC-ASIA. SC-REMFs's management endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time it places SC-EURO's and SC-ASIA's
investments.

The exercise of this flexible policy may include decisions to
purchase securities with substantial risk characteristics and other decisions
such as changing the emphasis on investments from one nation to another and
from one type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if any,
will exceed losses.

SC-REMFs's Board of Directors considers at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions which
would affect the liquidity of SC-EURO's and SC-ASIA's assets maintained with
custodians in foreign countries, as well as the degree of risk from political
acts of foreign governments to which such assets may be exposed. The Board
also considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence on the part of SC
(US) Management, any losses resulting from the holding of SC-EURO's and SC-
ASIA's portfolio securities in foreign countries and/or with securities
depositories will be at the risk of the shareholders. No assurance can be given
that SC-EURO's and SC-ASIA's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign
governments might not occur.

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<PAGE>

OPTIONS

SC-ARBITRAGE, SC-EURO and SC-ASIA may purchase and sell put and call options
on its portfolio securities to enhance investment performance and to protect
against changes in market prices. There is no assurance that SC-ARBITRAGE's,
SC-EURO's and/or SC-ASIA's use of put and call options will achieve its desired
objective, and a Fund's use of options may result in losses to the Fund.

Call Options

SC-ARBITRAGE, SC-ASIA and SC-EURO may write call options on their securities
to realize a greater current return through the receipt of premiums than they
would realize on their securities alone. Such option transactions may also be
used as a limited form of hedging against a decline in the price of securities
owned by a Fund.

A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated as
a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the right
to acquire such securities through immediate conversion of securities. If a
call option is not covered, then the Fund will establish a segregated account
with cash and liquid assets in an amount that, when added to the amount in a
related margin account, equals the market value of the call option.

In return for the premium received when it writes a call option, a Fund gives
up some or all of the opportunity to profit from an increase in the market price
of the securities covering the call option during the life of the option. The
Fund retains the risk of loss should the price of such securities decline. If
the option expires unexercised, the Fund realizes a gain equal to the premium,
which may be offset by a decline in price of the underlying security. If the
option is exercised, the Fund realizes a gain or loss equal to the difference
between the Fund's cost for the underlying security and the proceeds of sale
(exercise price minus commissions) plus the amount of the premium.

A Fund may terminate a call option that it has written before it expires by
entering into a closing purchase transaction. The Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from a closing purchase transaction may be offset by a
decline in the value of the underlying security. Conversely, because increases
in the market price of the underlying security, any loss resulting from a
closing purchase transaction is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Fund.

Put Options

SC-ARBITRAGE, SC-EURO and SC-ASIA may write covered and uncovered put options
in order to enhance their current returns. Such options transactions may also
be used as a limited form of hedging against an increase in the price of
securities that the Fund plans to purchase. A put option gives the holder the
right to sell, and obligates the writer to buy, a security at the exercise price
at any time before the expiration date. A put option is "covered" if the writer
segregates cash and high-grade short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised. If a put
option is not covered, then the Fund will establish a segregated account with
cash and liquid assets in an amount equal to the strike price of the put option
less any margin on deposit.

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In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Fund also receives
interest on the cash and debt securities maintained to cover the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may
be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss unless
the security later appreciates in value.

A Fund may terminate a put option that it has written before it expires by a
closing purchase transaction. Any loss from this transaction may be partially
or entirely offset by the premium received on the terminated option.

Purchasing Put and Call Options

SC-ARBITRAGE, SC-EURO and SC-ASIA may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts for
the life of the put option because the Fund, as a holder of the option, may sell
the underlying security at the exercise price regardless of any decline in its
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs that the Fund must pay. These costs
will reduce any profit the Fund might have realized had it sold the underlying
security instead of buying the put option.

SC-ARBITRAGE, SC-EURO and SC-ASIA may purchase call options to hedge against
an increase in the price of securities that the Fund wants ultimately to buy.
Such hedge protection is provided during the life of the call option since the
Fund, as holder of the call option, is able to buy the underlying security at
the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. These costs will reduce any profit the Fund
might have realized had it bought the underlying security at the time it
purchased the call option.

SC-ARBITRAGE, SC-EURO and SC-ASIA may also purchase put and call options to
attempt to enhance their current returns.

Risks Involved in the Sale of Options

Options transactions involve certain risks, including the risks that SC (US)
Management will not forecast interest rate or market movements correctly, that
the Fund may be unable at times to close out such positions, or that hedging
transactions may not accomplish their purpose because of imperfect market
correlations. The successful use of these strategies depends on the ability of
SC (US) Management to forecast market and interest rate movements correctly.

An exchange-listed option may be closed out only on an exchange which provides
a secondary market for an option of the same series. There is no assurance that
a liquid secondary market on an exchange will exist for any particular option or
at any particular time. If no secondary market were to exist, it would be
impossible to enter into a closing transaction to close out an option position.
As a result, SC-ARBITRAGE, SC-EURO or SC-ASIA may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when SC (US) Management believes it is advisable to do so.

Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict SC-ARBITRAGE's,
SC-EURO's or SC-ASIA's use of options. The exchanges have established

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<PAGE>

limitations on the maximum number of calls and puts of each class that may be
held or written by an investor or group of investors acting in concern. It is
possible that SC-ARBITRAGE, SC-EURO, SC-ASIA and other clients of SC (US)
Management may be considered such a group. These position limits may restrict a
Fund's ability to purchase or sell options on particular securities.

Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that reason, it
may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchases of listed options by The Options Clearing Corporation.

Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Funds' use of options.

Special Expiration Price Options

SC-ARBITRAGE may purchase over-the-counter ("OTC") puts and calls with respect
to specified securities ("special expiration price options") pursuant to which
the Fund in effect may create a custom index relating to the real estate
industry or sector. In exchange for a premium, the counterparty, whose
performance is guaranteed by a broker--dealer, agrees to purchase (or sell) a
specified number of shares of a particular stock at a specified price and
further agrees to cancel the option at a specified price that decreases straight
line over the term of the option. Thus, the value of the special expiration
price option is comprised of the market value of the applicable underlying
security relative to the option exercise price and the value of the remaining
premium. However, if the value of the underlying security increases (or
decreases) by a prenegotiated amount, the special expiration price option is
canceled and becomes worthless. A portion of the dividends during the term of
the option are applied to reduce the exercise price if the options are
exercised. Brokerage commissions and other transaction costs will reduce SC-
ARBITRAGE's profits if the special expiration price options are exercised. SC-
ARBITRAGE will not purchase special expiration price options with respect to
more than 25% of the value of its net assets, and will limit premiums paid for
such options in accordance with state securities laws.

FUTURES CONTRACTS

Index Futures Contracts and Options

SC-ARBITRAGE, SC-EURO and SC-ASIA may buy and sell stock index futures
contracts and related options for hedging purposes or to attempt to increase
investment return. A stock index futures contract is a contract to buy or sell
units of a stock index at a specified future date at a price agreed upon when
the contract is made. A unit is the current value of the stock index.

The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100 Index")
is composed of 100 selected common stocks, most of which are listed on the New
York Stock Exchange. The S&P 100 Index assigns relative weightings to the
common stocks included in the Index, and the Index fluctuates with changes in
the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x 180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if SC-ARBITRAGE, SC-EURO or SC-ASIA enters into a
futures contract to by 100 units of the S&P 100 Index at a specified future date
at a contract price of $180 and the S&P 100 Index

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<PAGE>

is at $184 on that future date, the Fund will gain $400 (100 units x gain of
$4). If the Fund enters into a futures contract to sell 100 units of the stock
index at a specified future date at a contract price of $180 and the S&P 100
Index is at $182 on that future date, the Fund will lose $200 (100 units x loss
of $2).

Positions in index futures may be closed out only on an exchange or board of
trade which provides a secondary market for such features.

In order to hedge its investments successfully using futures contracts and
related options, a Fund must invest in futures contracts with respect to indexes
or sub-indexes the movements of which will, in its judgment, have a significant
correlation with movements in the prices of the Fund's securities.

Options on index futures contracts give the purchaser the right, in return for
the premium paid, to assume a position in an index futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the holder would assume the underlying futures position
and would receive a variation margin payment of cash or securities approximately
the increase in the value of the holder's option position. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash based on the difference between the
exercise price of the option and the closing level of the index on which the
futures contract is based on the expiration date. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.

As an alternative to purchasing and selling call and put options on index
futures contracts, SC-ARBITRAGE, SC-EURO and SC-ASIA may purchase and sell call
and put options on the underlying indexes themselves to the extent that such
options are traded on national securities exchanges. Index options are similar
to options on individual securities in that the purchaser of an index option
acquires the right to buy (in the case of a call) or sell (in the case of a
put), and the writer undertakes the obligation to sell or buy (as the case may
be), units of an index at a stated exercise price during the term of the option.
Instead of giving the right to take or make actually delivery of securities, the
holder of an index option has the right to receive a cash "exercise settlement
amount." This amount is equal to the amount by which the fixed exercise price
of the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of the exercise,
multiplied by a fixed "index multiplier."

SC-ARBITRAGE, SC-EURO and SC-ASIA may purchase or sell options on stock
indices in order to close out its outstanding positions in options on stock
indices which it has purchased. The Funds may also allow such options to expire
unexercised.

Compared to the purchase or sale of future contracts, the purchase of call or
put options on an index involves less potential risk to a Fund because the
maximum amount of risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar
to those risks relating to the purchase or sale of index futures contracts.

Margin Payments

When SC-ARBITRAGE, SC-EURO or SC-ASIA purchases or sells a futures contract,
it is required to deposit with its custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the amount
of the futures contract. This amount is known as "initial margin." The nature
of initial margin is different from that of margin in security transactions in
that it does not involve borrowing money to finance transactions. Rather,
initial margin is similar to a performance bond or good faith deposit that is
returned to a Fund upon termination of the contract, assuming the Fund satisfies
its contractual obligations.

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Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market." These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when a Fund sells a futures contract and the price of the underlying
index rises above the delivery price, the Fund's position declines in value.
The Fund then pays the broker a variation margin payment equal to the difference
between the delivery price of the futures contract and the value of the index
underlying the futures contract. Conversely, if the price of the underlying
index falls below the delivery price of the contract, the Fund's futures
position increases in value. The broker then must take a variation margin
payment equal to the difference between the delivery price of the futures
contract and the value of the index underlying the futures contract.

When a Fund terminates a position in a futures contract, a final determination
of variation margin is made, additional cash is paid by or to the Fund, and the
Fund realizes a loss or a gain. Such closing transactions involve additional
commission costs.

COMBINED TRANSACTIONS

SC-ARBITRAGE, SC-EURO and SC-ASIA may engage in multiples of the forwards,
futures and options transactions described above in which it is permitted to
engage, including multiple options transactions, multiple futures transactions,
and any combination of forwards, futures and options transactions, instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
SC (US) Management, it is in the best interest of the Fund to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.

SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS

Liquidity Risks

Positions in futures contracts may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although SC-
ARBITRAGE, SC-EURO and SC-ASIA intend to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.

The ability of a Fund to establish and close out positions in options on
futures contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such market will develop. Although a
Fund generally will purchase only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option or at any particular time. In
the event no such market exits for particular options, it might not be possible
to effect closing transactions in such options, with the result that the Fund
would have to exercise the options in order to realize any profit.

11
<PAGE>

Hedging Risks

There are several risks in connection with the use by SC-ARBITRAGE, SC-EURO,
and SC-ASIA of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the prices
of the futures contracts and options and movements in the underlying securities
or index or movements in the prices of a Fund's securities which are the subject
of a hedge. SC (US) Management will, however, attempt to reduce this risk by
purchasing and selling, to the extent possible, futures contracts and related
options on securities and indexes the movements of which will, in its judgment,
correlate closely with movements in the prices of the underlying securities or
index and the Fund's portfolio securities sought to be hedged.

Successful use of futures contracts and options by SC-ARBITRAGE for hedging
purposes is also subject to SC (US) Management's ability to predict correctly
movements in the direction of the market. It is possible that, where SC-
ARBITRAGE has purchased puts on futures contracts to hedge its portfolio against
a decline in the market, the securities or index on which the puts are purchased
may increase in value and the value of securities held in the portfolio may
decline. If this occurred, the Fund would lose money on the puts and also
experience a decline in value in its portfolio securities. In addition, the
prices of futures, for a number of reasons, may not correlate perfectly with
movements in the underlying securities or index due to certain market
distortions. First, all participants in the futures market are subject to
margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous than
margin requirements in the securities markets in general, and as a result the
futures markets may attract more speculators than the securities markets do.
Increased participation by speculators in the futures markets may also cause
temporary price distortions. Due to the possibility of price distortion, even a
correct forecast of general market trends by SC (US) Management still may not
result in a successful hedging transaction over a very short time period.

Other Risks

SC-ARBITRAGE, SC-EURO and SC-ASIA will incur brokerage fees in connection with
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Fund may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance of the Fund than if it had not entered into any futures contracts or
options transactions. Moreover, in the event of an imperfect correlation
between the futures position and the portfolio position which is intended to be
protected, the desired protection may not be obtained and the Fund may be
exposed to risk of loss.

FOREIGN CURRENCY HEDGING TRANSACTIONS

In order to hedge against foreign currency exchange rate risks, SC-EURO and
SC-ASIA may enter into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call options on foreign
currencies, as described below. SC-EURO and SC-ASIA may also conduct its
foreign currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market.

SC-EURO and SC-ASIA may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to SC-EURO and SC-ASIA
from adverse changes in the

12
<PAGE>

relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. SC-EURO or SC-ASIA may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when SC-EURO or SC-ASIA
believes that a foreign currency may suffer or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell an amount
of the former foreign currency approximating the value of some or all of SC-
EURO's or SC-ASIA's portfolio securities denominated in such foreign currency.
This second investment practice is generally referred to as "cross-hedging."
Because in connection with SC-EURO's or SC-ASIA's forward contracts an amount of
SC-EURO's or SC-ASIA's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, SC-EURO or SC-ASIA
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis.

SC-EURO and SC-ASIA may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and SC-EURO or SC-ASIA could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuation in exchange rates
although, in the event of rate movements adverse to SC-EURO's or SC-ASIA's
position, SC-EURO or SC-ASIA may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written or
purchased by SC-EURO or SC-ASIA will be traded on U.S. and foreign exchanges or
over-the-counter.

SC-EURO and SC-ASIA may enter into exchange-traded contracts for the purchase
or sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
SC-EURO's or SC-ASIA's portfolio securities or adversely affect the prices of
securities that SC-EURO or SC-ASIA intends to purchase at a later date. The
successful use of currency futures will usually depend on SC (US) Management's
ability to forecast currency exchange rate movements correctly. Should exchange
rates move in an unexpected manner, SC-EURO or SC-ASIA may not achieve the
anticipated benefits of foreign currency futures or may realize losses.

Forward contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), however, the CFTC may in the future assert authority to
regulate forward contracts. In such event, SC-EURO's and SC-ASIA's ability to
utilize forward contracts in the to hedge foreign currency risks may be
restricted. Forward contracts may limit potential gain from a positive change in
the relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for SC-EURO
or SC-ASIA than if it had not engaged in such contracts.

Additional risks may be involved with SC-EURO's and SC-ASIA's special
investment techniques, including borrowing for investment purposes. These risks
are described under the heading "Risk Factors" in SC-EURO's and SC-ASIA's
Prospectuses.

13
<PAGE>

REPURCHASE AGREEMENTS

SC-ARBITRAGE, SC-EURO and SC-ASIA may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). Repurchase
agreements may also be viewed as loans made by a Fund which are collateralized
by the securities subject to repurchase. SC (US) Management will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, a Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale including accrued interest are less than the resale price provided in the
agreement including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, a Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate.

LEVERAGE

SC-ARBITRAGE may leverage its portfolio in connection with liquidity arbitrage
transactions and SC-EURO and SC-ASIA may use leverage to increase their holdings
of portfolio securities. Leverage creates an opportunity for increased net
income but, at the same time, creates special risk considerations. For example,
leveraging may exaggerate changes in the net asset value of SC-ARBITRAGE shares
and in the yield on the Fund's portfolio. Although the principal of such
borrowings will be fixed, SC-ARBITRAGE's assets may change in value during the
time the borrowing is outstanding. Since any decline in value of SC-ARBITRAGE's
investments will be borne entirely by the Fund's shareholders (and not by those
persons providing the leverage to the Fund), the effect of leverage in a
declining market would be a greater decrease in net asset value than if the Fund
were not so leveraged. Leveraging will create interest expenses for SC-
ARBITRAGE, which can exceed the investment return from the borrowed funds. To
the extent the investment return derived from securities purchased with borrowed
funds exceeds the interest SC-ARBITRAGE will have to pay, SC-ARBITRAGE's
investment return will be greater than if leveraging were not used. Conversely,
if the investment return from the assets retained with borrowed funds is not
sufficient to cover the cost of leveraging, the investment return of the Fund
will be less than if leveraging were not used.

REVERSE REPURCHASE AGREEMENTS

In connection with their leveraging activities, SC-ARBITRAGE, SC-EURO and SC-
ASIA may enter into reverse repurchase agreements, in which a Fund sells
securities and agrees to repurchase them at a mutually agreed date and price. A
reverse repurchase agreement may be viewed as a borrowing by a Fund, secured by
the security which is the subject of the agreement. In addition to the general
risks involved in leveraging, reverse repurchase agreements involve the risk
that, in the event of the bankruptcy or insolvency of a Fund's counterparty, the
Fund would be unable to recover the security which is the subject of the
agreement, that the amount of cash or other property transferred by the
counterparty to the Fund under the agreement prior to such insolvency or
bankruptcy is less than the value of the security subject to the agreement, or
that the Fund may be delayed or prevented, due to such insolvency or bankruptcy,
from using such cash or property or may be required to return it to the
counterparty or its trustee or receiver.

SECURITIES LENDING

SC-ARBITRAGE, SC-EURO and SC-ASIA may lend portfolio securities, provided: (1)
the loan is secured continuously by collateral consisting of U.S. Government
securities, cash, or cash equivalents

14
<PAGE>

adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) a Fund may at any time call the loan and regain
the securities loaned within 5 business days; (3) the Fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities of the Fund loaned will not at any time exceed one-
third (or such other limit as the Board of Directors may establish) of the total
assets of the Fund. In addition, it is anticipated that SC-ARBITRAGE may share
with the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan.

Before the Fund enters into a loan, SC (US) Management considers relevant
facts and circumstances, including the creditworthiness of the borrower. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Although voting
rights or rights to consent with respect to the loaned securities pass to the
borrower, the Fund retains the right to call the loans at any time on reasonable
notice, and it will do so in order that the securities may be voted by the Fund
if the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. SC-ARBITRAGE will not lend portfolio
securities to borrowers affiliated with the Fund.

SHORT SALES AND SHORT SALES AGAINST THE BOX

SC-US, SC-ARBITRAGE, SC-EURO, and SC-ASIA, to the extent permitted by other
countries, may engage in short sales and short sales against the box. SC-US,
SC-EURO and SC-ASIA will not engage in a short sale or a short sale against the
box if immediately after such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of a
Fund's net assets (taken at market value). SC-ARBITRAGE will not engage in
short sales and short sales against the box if immediately after such
transaction, the aggregate market value of all securities sold short and sold
short against the box would exceed 100% of SC-ARBITRAGE's net assets (taken at
market value).

Short Sales

The Funds may seek to realize gains through short sale transactions in
securities listed on one or more national securities exchanges or on the
National Association of Securities Dealers, Inc. Automated Quotation System.
Short selling involves the sale of borrowed securities. At the time a short sale
is effected, a Fund incurs an obligation to replace the security borrowed at
whatever its price may be at the time that the Fund purchases it for delivery to
the lender. When a short sale transaction is closed out by delivery of the
securities, any gain or loss on the transaction is taxable as a short term
capital gain or loss. Until the security is replaced, the Fund is required to
pay to the lender amounts equal to any dividends or interest which accrue during
the period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. Until a Fund
replaces a borrowed security in connection with a short sale, the Fund will: (a)
maintain daily a segregated account containing cash or liquid securities, at
such a level that (i) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will equal the current value of
the security sold short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will not be less than
the market value of the security at the time it was sold short; or (b) otherwise
cover its short position.

Since short selling can result in profits when stock prices generally decline,
the Funds in this manner, can, to a certain extent, hedge the market risk to the
value of its other investments and protect its equity in a declining market.
However, the Funds could, at any given time, suffer both a loss on the purchase
or retention of one security, if that security should decline in value, and a
loss on a short sale of another security, if the security sold short should
increase in value. Moreover, to the extent that in a generally rising market the
Funds maintain short positions in securities rising with the market, the net
asset value of the

15
<PAGE>

Funds would be expected to increase to a lesser extent than the net asset value
of an investment company that does not engage in short sales.

Short Sales Against the Box

When SC (US) Management believes that the price of a particular security in a
Fund's portfolio may decline, it may sell the security short against the box
which involves selling the security for delivery at a specified date in the
future. If, for example, a Fund bought 100 shares of XYZ REIT at $40 per share
in January and the price appreciates to $50 in March, the Fund might "sell
short" the 100 shares at $50 for delivery the following July. Thereafter, if the
price of the stock declines to $45, it will realize the full $1,000 gain rather
than the $500 gain it would have received had it sold the stock in the market.
On the other hand, if the price appreciates to $55 per share, the Fund would be
required to sell at $50 and thus receive a $1,000 gain rather than the $1,500
gain it would have received had it sold the stock in the market. A Fund may also
be required to pay a premium for short sales against the box which would
partially offset its gain. Under a recent legislative change, a short sale
against the box will result in a constructive sale of the underlying security at
the time when the short sale is entered into, thus reducing the benefit of these
transactions.

INVESTMENT RESTRICTIONS

The Funds are subject to certain investment restrictions which are deemed
fundamental policies of the Fund. Such fundamental policies are those which
cannot be changed without the approval of the holders of a majority of a Fund's
outstanding shares which means the vote of (i) 67% or more of a Fund's shares
present at a meeting, if the holders of more than 50% of the outstanding shares
of a Fund are present or represented by proxy, or (ii) more than 50% of the
Fund's outstanding shares, whichever is less.

SC-US may not:

1. Make loans except through the purchase of debt obligations in accordance
with its investment objective and policies;

2. Borrow money, except that SC-US may borrow money from banks for temporary
or emergency purposes, including the meeting of redemption requests which might
require the untimely disposition of securities, but not in an aggregate amount
exceeding 33-1/3% of the value of SC-US's total assets (including the amount
borrowed) less liabilities (not including the amount borrowed) at the time the
borrowing is made. Outstanding borrowings in excess of 5% of the value of SC-
US's total assets will be repaid before any subsequent investments are made;

3. Invest in illiquid securities, as defined in "Investment Objective and
Policies," if immediately after such investment more than 10% of SC-US's net
assets (taken at market value) would be invested in such securities;

4. Engage in short sales or short sales against the box if immediately
following such transaction the aggregate market value of all securities sold
short and sold short against the box would exceed 10% of SC-US's net assets
(taken at market value); or

5. Purchase or sell real estate, except that SC-US may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.

16
<PAGE>

6. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings;

7. Participate on a joint or joint and several basis in any securities
trading account;

8. Invest in companies for the purpose of exercising control;

9. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), SC-US would own
any securities of an open-end investment company or more than 3% of the value of
SC-US's total assets would be invested in securities of any closed-end
investment company or more than 10% of such value in closed-end investment
companies in general; or

10. (a) purchase or sell commodities or commodity contracts; (b) invest in
interests in oil, gas, or other mineral exploration or development programs; (c)
purchase securities on margin, except for such short-term credits as may be
necessary for the clearance of transactions and except for borrowings in an
amount not exceeding 33 1/3% of the value of SC-US's total assets; or (d) act as
an underwriter of securities, except that SC-US may acquire restricted
securities under circumstances in which, if such securities were sold, SC-US
might be deemed to be an underwriter for purposes of the Securities Act.

SC-ARBITRAGE may not:

1. Borrow money, except that SC-ARBITRAGE may borrow money from banks for
temporary or emergency purposes, including the meeting of redemption requests
which might require the untimely disposition of securities, or in connection
with otherwise permissible leverage activities, but not in an aggregate amount
exceeding 33 1/2% (one-third) of the value of SC-ARBITRAGE's total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made;

2. Invest in illiquid securities, as defined in "Investment Objective and
Policies," if immediately after such investment more than 10% of SC-ARBITRAGE's
net assets (taken at market value) would be invested in such securities;

3. Engage in short sales or short sales against the box if immediately
following such transaction the aggregate market value of all securities sold
short and sold short against the box would exceed 100% of SC-ARBITRAGE's net
assets (taken at market value);

4. With respect to 50% of its total assets, invest in the securities of any
one issuer (other than the U.S. Government and its agencies and
instrumentalities), if immediately after and as a result of such investment more
than 5% of the total assets of SC-ARBITRAGE would be invested in such issuer
(the remaining 50% of its total assets may be invested without restriction
except to the extent other investment restrictions may be applicable);

5. Pledge, hypothecate, mortgage, or otherwise encumber its assets, except
to secure permitted borrowings including reverse repurchase agreements, short
sales, financial options and other hedging activities;

6. Make loans of SC-ARBITRAGE's assets, including loans of securities in
excess of one-third of SC-ARBITRAGE's total assets;

17
<PAGE>

7. Purchase or sell real estate, except that SC-ARBITRAGE may purchase
securities issued by companies in the real estate industry and will, as a matter
of fundamental policy concentrate its investments in such securities;

8. Participate on a joint or joint and several basis in any securities
trading account;

9. Invest in companies for the purpose of exercising control;

10. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any otherwise
permissible borrowings, mortgages or pledges, or entering into permissible
reverse repurchase agreements, and options and futures transactions;

11. Make short sales or purchases on margin, although it may obtain short-
term credit necessary for the clearance of purchases and sales of its portfolio
securities and except as required in connection with permissible options,
futures, short selling and leverage activities as described elsewhere in the
Prospectus and this Statement;

12. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), SC-ARBITRAGE
would own any securities of an open-end investment company or more than 3% of
the value of SC-ARBITRAGE's total assets would be invested in securities of any
closed-end investment company or more than 10% of such value in closed-end
investment companies in general; or

13. (a) purchase or sell commodities or commodity contracts; (b) invest in
interests in oil, gas, or other mineral exploration or development programs; (c)
purchase securities on margin, except for such short-term credits as may be
necessary for the clearance of transactions and except for borrowings in an
amount not exceeding 33/1//3% of the value of SC-ARBITRAGE's total assets; or
(d) act as an underwriter of securities, except that SC-ARBITRAGE may acquire
restricted securities under circumstances in which, if such securities were
sold, SC-ARBITRAGE might be deemed to be an underwriter for purposes of the
Securities Act.

SC-EURO may not:

1. Invest directly in real estate or interests in real estate (although
it may purchase securities secured by real estate or interests therein,
or issued by companies or investment trusts which invest in real estate
or interests therein); invest in interests (other than publicly issued
debentures or equity stock interests) in oil, gas or other mineral
exploration or development programs; or purchase or sell commodity
contracts (except futures contracts as described in SC-EURO's
Prospectus);

2. Invest in any company for the purpose of exercising control or
management;

3. Act as an underwriter or issue senior securities;

4. Loan money apart from the purchase of a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, although SC-EURO may enter into repurchase agreements and
lend its portfolio securities;

5. Invest more than 15% of its net assets in illiquid securities,
including securities of foreign companies that are not listed on a
foreign securities exchange or a recognized U.S. exchange;

18
<PAGE>

6. Borrow money, except that SC-EURO may borrow money from banks in an
amount not exceeding 33-1/3% of the value of SC-EURO's total assets (not
including the amount borrowed), or pledge, mortgage or hypothecate its
assets for any purpose, except to secure borrowings and then only to an
extent not greater than 15% of SC-EURO's total assets. SC-EURO may enter
into repurchase agreements and lend its portfolio securities.
Arrangements with respect to margin for futures contracts are not deemed
to be a pledge of assets;

7. Participate on a joint or a joint and several basis in any trading
account in securities;

8. Invest more than 10% of its total assets in warrants. Warrants
acquired in units or attached to securities are not included in this
restriction.

SC-ASIA may not:

2. Invest in any company for the purpose of exercising control or
management;

3. Act as an underwriter or issue senior securities;

4. Loan money apart from the purchase of a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, although SC-ASIA may enter into repurchase agreements and
lend its portfolio securities;

5. Invest more than 15% of its net assets in illiquid securities,
including securities of foreign companies that are not listed on a
foreign securities exchange or a recognized U.S. exchange;

6. Borrow money, except that SC-ASIA may borrow money from banks in an
amount not exceeding 33-1/3% of the value of SC-ASIA's total assets (not
including the amount borrowed), or pledge, mortgage or hypothecate its
assets for any purpose, except to secure borrowings and then only to an
extent not greater than 15% of SC-ASIA's total assets. SC-ASIA may enter
into repurchase agreements and lend its portfolio securities.
Arrangements with respect to margin for futures contracts are not deemed
to be a pledge of assets;

7. Participate on a joint or a joint and several basis in any trading
account in securities;

8. Invest more than 10% of its total assets in warrants. Warrants
acquired in units or attached to securities are not included in this
restriction.

If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions. The investment restrictions do not preclude a Fund from
purchasing the securities of any issuer pursuant to the exercise of subscription
rights

19
<PAGE>

distributed to the Fund by the issuer, unless such purchase would result in a
violation of a fundamental investment restriction listed above.

MANAGEMENT OF SC-REMFS

The directors and officers of SC-REMFs and their principal occupations
during the past five years are set forth below. Directors deemed to be
"interested persons" of SC-REMFs for purposes of the Investment Company Act of
1940, as amended ("1940 Act") are indicated by an asterisk.

<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATIONS DURING
NAME AND ADDRESS OFFICE AGE THE PAST FIVE YEARS
<S> <C> <C> <C>
Stephen F. Kasbeer Director 72 Retired; Senior Vice President for Administration
8 Bonanza Trail and Treasurer of Loyola University, Chicago from
Santa Fe, New Mexico 87505 1981 to July 1994, where he was responsible for
administration, investment, real estate and treasurer
functions, served as Chief Investment Officer, was
Chairman of the Operations Committee, was a
member of the Investment and Finance Committees
of the Board of Trustees and was President and a
Director of the Loyola Management Company. Mr.
Kasbeer received his J.D. from John Marshall Law
School and his M.A. and B.S. from Northwestern
University.

Anthony R. Manno Jr.* Chairman of 45 Managing Director of SC (US) Management since
11 South LaSalle Street the Board of March 1997, where he is responsible for overseeing
Chicago, Illinois 60603 Directors, all investment and capital allocation matters for SC
Managing (US) Management's public market securities
Director and activities and is also responsible for company and
President industry analysis, market strategy and trading and
reporting; from January 1995 to March 1997, he was
Managing Director of SC (US) Management, where
he performed the same functions. Mr. Manno was a
member of the Investment Committee of Security
Capital Group Incorporated from March 1994 to June
1996. Prior to joining Security Capital, Mr. Manno
was a Managing Director of LaSalle Partners Limited
from March 1980 to March 1994. Mr. Manno
received his M.B.A. from the University of Chicago
Graduate School of Business, an M.A. and a B.A.
from Northwestern University and is a Certified
Public Accountant.
</TABLE>

20
<PAGE>

<TABLE>
<S> <C> <C> <C>
George F. Keane Director 68 Chairman of the Board of Trigen Energy Corporation
7408 Eaton Court since 1994. As founding chief executive of The
University Park, Florida 34201 Common Fund in 1971 and Endowment Realty
Investors in 1988, Mr. Keane for many years headed
an investment management service for colleges,
universities and independent schools that managed
$15 billion for 1,200 educational institutions when he
became President Emeritus of the Common Fund in
1993. He has served as a member of the Investment
Advisory Committee of the $75 billion New York
State Common Retirement Fund since 1982. He has
been a Director of the RCB Trust Company since
1991, a Trustee of the Nicholas Applegate
Investment Trust since 1993, and a Director of the
Bramwell Funds since 1994. He is also a Director of
Universal Stainless & Alloy Products, Global
Pharmaceutical Corporation, United Water Resources
and United Properties Group, Gulf Resources
Corporation, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
Director and Chairman of the Investment Committee
of the United Negro College Fund. Mr. Keane holds
honorary degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton,
Wisconsin.

Robert H. Abrams Director 65 Founder of Colliers ABR, Inc. (formerly Abrams
106 West Sibley Hall Benisch Riker Inc.), a property management firm.
Ithaca, New York 14851 Mr. Abrams was Principal of Colliers ABR, Inc.
from 1978 to 1992 and since 1992, has served as a
Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and
Brown Company. Mr. Abrams also serves as a
Director of Greater New York Mutual Insurance
Company and Trustee Emeritus and Presidential
Counselor of his alma mater, Cornell University.
Mr. Abrams received his M.B.A. from Harvard
University and his B.A. from Cornell University.
</TABLE>

21
<PAGE>

<TABLE>
<S> <C> <C> <C>
John H. Gardner, Jr. Director 43 Managing Director of Security Capital (US)
11 South LaSalle Street Management Group since July, 1997. Prior thereto,
Chicago, Illinois 60603 Director of Security Capital Pacific Trust ("PTR")
and the PTR REIT Manager from February 1995 to
June 1997 and Senior Vice President of Security
Capital Atlantic Incorporated ("ATLANTIC"), PTR
and the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility for
asset management and multifamily dispositions.
Prior to joining Security Capital, Mr. Gardner was
with Copley Real Estate Advisors as a Managing
Director and Principal responsible for portfolio
management from January 1991 to September 1994
and as a Vice President and Principal of asset
management from December 1984 to December
1990. From July 1977 to November 1984, Mr.
Gardner was a Real Estate Manager with the John
Hancock Companies. Mr. Gardner received his M.S.
in Computer Information Systems from Bentley
College and his B.S. in Accounting from Stonehill
College.

Jeffrey C. Nellessen Vice President, 36 Vice President and Controller of SC (US) Management
11 South LaSalle Street Secretary and since March 1997. Prior thereto, from
Chicago, Illinois 60603 Treasurer June 1988 to March 1997, he was Controller,
Manager of Client Administration and Compliance
Officer at Strong Capital Management, Inc. Mr.
Nellessen is a Certified Public Accountant, Certified
Management Accountant and a Certified Financial
Planner. He received his B.B.A. from the University
of Wisconsin, Madison.

Kenneth D. Statz Managing 38 Managing Director of SC (US) Management since
11 South LaSalle Street Director November 1997 where he is responsible for the
Chicago, Illinois 60603 development and implementation of portfolio
investment strategy. Prior thereto, Senior Vice
President and Senior REIT Analyst from July 1996
to October 1997 and Vice President from May 1995
to June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President in the investment research
department of Goldman, Sachs & Co., from February
1993 to January 1995, concentrating on research and
underwriting for the REIT industry. Prior thereto,
Mr. Statz was a real estate stock portfolio manager
and a managing director of Chancellor Capital
Management from August 1982 to February 1992.
Mr. Statz received his M.B.A. and B.B.A. from the
University of Wisconsin, Madison.
</TABLE>

22
<PAGE>

<TABLE>
<S> <C> <C> <C>
Kevin W. Bedell Senior Vice 41 Senior Vice President of SC (US) Management since
President November 1997 and Vice President since July 1996,
where he is responsible for directing the activities of
the industry/company securities research group and
providing in-depth proprietary research on publicly
traded companies with office and industrial sectors.
Prior to joining SC (US) Management, Mr. Bedell
spent nine years with LaSalle Partners Limited where
he was Equity Vice President and Portfolio Manager
responsible for the strategic, operational and financial
management of a private REIT with commercial real
estate investments of $600-800 million. Mr. Bedell
received his M.B.A. from the University of Chicago
and his B.A. from Kenyon College.
</TABLE>

COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS

The Directors of SC-REMFs who are interested persons of SC-REMFs, under the
1940 Act, (which includes persons who are employees of SC (US) Management or
officers or employees of any of its affiliates) receive no remuneration from SC-
REMFs. Each of the other Directors is paid an annual retainer of $28,000, an
additional annual retainer of $1,000 for each committee of the Board of
Directors for which he or she serves as chairperson, and a fee of $1,000 for
each meeting attended and is reimbursed for the expenses of attendance at such
meetings. The following table sets forth information regarding compensation
earned by the Directors by SC-REMFs for the fiscal year ending December 31,
1997.

23
<PAGE>

COMPENSATION TABLE
FISCAL YEAR ENDING DECEMBER 31, 1997

<TABLE>
<CAPTION>
PENSION OR
----------
RETIREMENT
----------
BENEFITS ESTIMATED
-------- ---------
AGGREGATE ACCRUED AS ANNUAL TOTAL
--------- ---------- ------ -----
COMPENSATION PART OF BENEFITS COMPENSATION
------------ ------- -------- ------------
FROM SC-US UPON FROM SC-US
---- ----- ---- ----------
NAME OF PERSON, POSITION SC-US EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------ ----- -------- ---------- -----------------
<S> <C> <C> <C> <C>
George F. Keane
Director........................... $ 3,333 N/A N/A $ 3,333
Stephen F. Kasbeer
Director.......................... $13,500 N/A N/A $13,500
Robert H. Abrams
Director........................... 0 N/A N/A 0
**Anthony R. Manno Jr.
Chairman, Managing Director and
President.......................... 0 N/A N/A 0
**John H. Gardner, Jr. /(1)/
Director....................... 0 N/A N/A 0
</TABLE>

_______________________
** "Interested person," as defined in the 1940 Act, of SC-REMFs.

(1) Elected to serve by the Board of Directors on March 11, 1998.

SC (US) MANAGEMENT

Security Capital (US) Management Group Incorporated, a registered
investment adviser, was formed in March 1994 under law and specializes in the
management of real estate securities portfolios. SC (US) Management is a wholly-
owned subsidiary of Security Capital Group Incorporated, a Maryland corporation.

The following of SC (US) Management analysts assist in the construction of
the Funds' portfolios.

<TABLE>
<S> <C> <C>
Albert D. Adriani Member, SC-US and SC-ARBITRAGE Portfolio Management
Committees; Vice President of SC (US) Management since April 1996,
where he is responsible for providing portfolio management analysis.
From January 1995 to April 1996, he was Vice President, Security
Capital (UK) Management Limited and SC-USREALTY; from March
1994 to January 1995, he was with Security Capital Markets Group.
Prior thereto, he was an investment analyst with HAL Investments BV
from July 1992 to January 1994. Mr. Adriani received his M.B.A. from
the University of Chicago Graduate School of Business and his B.A.
with honors from the University of Chicago. Mr. Adriani is a Chartered
Financial Analyst.
</TABLE>

24
<PAGE>

<TABLE>
<S> <C> <C>
Michelle H. Lord Member, SC-ASIA Portfolio Management Committee; Vice President of SC (US) Management, where she
conducts strategic market and product analyses for affiliates of the firm. Previously, Ms. Lord
was with Security Capital Industrial Trust where she was responsible for research on special
investment opportunities. Previously, Ms. Lord was in the Management Development Program with
Security Capital Group Incorporated, working in six-month rotational assignments with Managing
Directors of the firm. Prior to joining Security Capital, Ms. Lord was with Societe Generale
Securities, (North Pacific) in Tokyo where she was a member of the Japanese Government Bond
futures and options brokerage desk. Previously, Ms. Lord was a currency trader with Asahi Bank in
Tokyo. Ms. Lord received her M.B.A. from the University of Chicago Graduate School of Business and
her B.A. from Smith College.

Michael C. Montelibano Member, SC-ASIA Portfolio Management Committee; Vice President of SC (US) Management, where he
conducts financial and strategic market analysis for affiliates of the firm. Mr. Montelibano was
in the Management Development Program with Security Capital Group Incorporated, where he worked in
six-month rotational assignments with Managing Directors of the firm. Prior to joining Security
Capital, Mr. Montelibano was a consultant for Ayala Land, Incorporated in the Philippines where he
conducted financial analyses of office and residential development projects, and for Bank of
America in Malaysia where he conducted market research studies on retail banking. Previously, Mr.
Montelibano was a senior consultant with Andersen Consulting where he focused on the
telecommunications and financial sectors. Mr. Montelibano received his M.B.A. from the University
of California, Berkeley and his B.S. in Mechanical Engineering from the University of California,
San Diego.
</TABLE>

<TABLE>
<S> <C> <C>
Gerios J.M. Rovers Member, SC-EURO Portfolio Management Committee;
Mr. Rovers has served as Vice President of SC (US) Management since
April, 1997, where he is responsible for the development and
implementation of portfolio investment strategy. From July
1988 to April 1997, Mr. Rovers was associated with GIM
Algemeen Vermogensbeheer and served as an associate director
and a portfolio manager of global real estate securities on
behalf of domestic and foreign clients. Mr. Rovers graduated
from the University of Tilburg in The Netherlands.

W. Joseph Houlihan Member, SC-EURO Portfolio Management Committee;
34 Boulevard de La Wolune Mr. Houlihan has served as a Managing Director of SC (US)
Brussels, Belgium Management since April 1997 where he is responsible for overseeing
all investment and capital allocation recommendations for SC (US)
Management's public market securities activities, and also responsible
for company and industry analysis, market strategy and trading and
reporting. Prior to joining Security Capital, Mr. Houlihan was the
Director of the Institutional Investment Management Group and
executive vice president of GIM Algemeen Vermogensbeheer, a
prominent Dutch investment management company, where he
specialized in real estate investments and was responsible for
developing GIM's real estate securities investment process and client
base. Prior to joining GIM, Mr. Houlihan was a vice president at
John G. Wood and Associates, a diversified real estate development
and investment company located in Florida, and with Chase
Manhattan Bank's trust department. Mr. Houlihan is an Advisory
Director of Security Capital US Realty and a member of the
Investment Property Forum. Mr. Houlihan received his M.B.A. from
the University of Leuven, Belgium, and his B.S. from New York
University.

</TABLE>

INVESTMENT ADVISORY AGREEMENTS

Certain other clients of SC (US) Management may have investment objectives
and policies similar to those of the Funds. SC (US) Management may, from time to
time, make recommendations which result in the purchase or sale of a particular
security by its other clients simultaneously with a Fund. In addition, SC-
ARBITRAGE's investment strategy may cause SC-ARBITRAGE to take positions in
certain real estate

25
<PAGE>

securities that differ from the positions taken by other clients of SC (US)
Management. If transactions on behalf of more than one client during the same
period increase the demand for securities being sold, there may be an adverse
effect on the price of such securities. It is the policy of SC (US) Management
to allocate advisory recommendations and the placing of orders in a manner which
is deemed equitable by SC (US) Management to the accounts involved, including
the Funds. When two or more of the clients of SC (US) Management (including the
Funds) are purchasing or selling the same security on a given day through the
same broker-dealer, such transactions may be averaged as to price.

SC (US) Management's advice to the Funds with respect to purchases or sales
of securities issued by a Security Capital controlled real estate company may be
affected by sales or purchases by Security Capital Group Incorporated or its
affiliates of securities issued by the same issuer. Because SC-REMFs is an
affiliate of Security Capital Group Incorporated, the Funds' purchases and sales
of securities issued by such an issuer may be netted against sales and purchases
by Security Capital Group Incorporated and any of its other affiliates of
securities of such issuer during the six months preceding or following a Fund's
"opposite way" transactions for purposes of Section 16 of the Exchange Act. If
such netting results in a profit to Security Capital Group Incorporated or any
of is affiliates (including a Fund), Security Capital Group Incorporated or its
affiliates, as the case may be, will be required to disgorge such "profits" to
the issuer of such securities. As a result, SC (US) Management's recommendations
to the Funds may be affected by SC (US) Management's desire to avoid the Funds
or Security Capital Group Incorporated or any of its other affiliates having to
disgorge profits to such issuer.

Pursuant to an investment advisory agreement with SC-REMFs with respect to
each Fund (the "Advisory Agreement"), SC (US) Management furnishes a continuous
investment program and makes the day-to-day investment decisions for the Funds,
executes the purchase and sale orders for the portfolio transactions of the
Funds and generally manages the Funds' investments in accordance with their
stated policies, subject to the general supervision of SC-REMFs's Board of
Directors.

Under the Advisory Agreement for SC-US, which is dated December 16, 1997,
each class of SC-US shares pays SC (US) Management a monthly management fee in
an amount equal to 1/12th of .60% of the value of the average daily net assets
of that class of SC-US shares (approximately .60% on an annual basis). Under a
separate agreement, SC (US) Management has agreed to waive advisory fees and/or
reimburse expenses to maintain the total operating expenses, other than
brokerage fees and commissions, interest, taxes and other extraordinary expenses
of SC-US's Class I shares at 1.00% of the value of SC-US's Class R average daily
net assets and SC-US's Class R shares at 1.15% of the value of SC-US's Class R
average daily net assets, for the year ending December 31, 1998. For the period
April 23, 1997 (the effective date of SC-US's initial registration statement)
through December 31, 1997, SC (US) Management earned $607,727, net of waivers of
$30,443 for providing investment management services to SC-US.

Under the Advisory Agreement for SC-ARBITRAGE, dated [__________, 1998],
SC-ARBITRAGE will pay SC (US) Management a monthly management fee in an amount
equal to 1/12th of 2.00% of the value of SC-ARBITRAGE's average daily net assets
for the applicable class of shares (approximately 2.00% on an annual basis).
After the first three full months of SC-ARBITRAGE's operations, each class of
SC-ARBITRAGE's shares will pay SC (US) Management a monthly fulcrum fee of 2.00%
of SC-ARBITRAGE's average daily net assets for the applicable class of shares
that will increase or decrease based on the investment performance of SC-
ARBITRAGE for the prior twelve-month period relative to the investment
performance or the Wilshire Real Estate Index ("WAREIT") (the "Index") for the
same period (the "Index Return"). The performance adjustment will be measured
from the date of inception until the fund has completed twelve full months of
operations.

26
<PAGE>

The management fee will be paid at an annual rate which varies between
0.50% and 3.50% of SC-ARBITRAGE's average net assets. The management fee is
structured so that it will be 2.00% of SC-ARBITRAGE's average net assets if SC-
ARBITRAGE's investment performance for the preceding twelve months (net of all
fees and expenses, including the management fee) equals the Index Return. The
management fee increases or decreases from the "fulcrum fee" of 2.00% by 10
percent of the difference between SC-ARBITRAGE's investment performance during
the preceding twelve months and the Index Return during that period, up to the
maximum fee of 2.00% or down to the minimum fee of 0.50%.

SC (US) Management believes that the WAREIT Index is the real estate
securities market index that is most representative of SC-ARBITRAGE's portfolio.
The WAREIT is a market capitalization-weighted index comprised of publicly-
traded real estate investment trusts ("REITs"). No health care REITs are
included. The Index is rebalanced monthly and reconstituted quarterly. The
Index was developed with a base value or 100 as of December 29, 1989.

Under the Advisory Agreement for SC-EURO, dated [_______, 1998], each class
of SC-EURO's shares pays SC (US) Management a monthly management fee in an
amount equal to 1/12th of 1.20% of the value of the average daily net assets of
that class of SC-US shares (approximately 1.20% on an annual basis). Under a
separate agreement, SC-US Management has agreed to waive advisory fees and/or
reimburse expenses to maintain the total operating expenses, other than
brokerage fees and commissions, interest, taxes and other extraordinary expenses
of SC-EURO's Class I shares at [___%] of the value of SC-EURO's Class R average
daily net assets and SC-EURO's Class R shares at [____%] of the value of SC-
EURO's Class R average daily net assets, for the year ending December 31, 1998.

Under the Advisory Agreement for SC-ASIA, dated [_______, 1998], each class
of SC-ASIA's shares pays SC (US) Management a monthly management fee in an
amount equal to 1/12th of 1.20% of the value of the average daily net assets of
that class of SC-US shares (approximately 1.20% on an annual basis). Under a
separate agreement, SC-US Management has agreed to waive advisory fees and/or
reimburse expenses to maintain the total operating expenses, other than
brokerage fees and commissions, interest, taxes and other extraordinary expenses
of SC-ASIA's Class I shares at [____%] of the value of SC-ASIA's Class R average
daily net assets and SC-ASIA's Class R shares at [____%] of the value of SC-
ASIA's Class R average daily net assets, for the year ending December 31, 1998.

SC (US) Management provides the Funds with such personnel as SC-REMFs may
from time to time request for the performance of clerical, accounting and other
office services, such as coordinating matters with the administrator, the
transfer agent and the custodian, which SC (US) Management is not required to
furnish under the Advisory Agreement. The personnel rendering these services,
who may act as officers of SC-REMFs, may be employees of SC (US) Management or
its affiliates. The cost to SC-REMFs of these services must be agreed to by SC-
REMFs and is intended to be no higher than the actual cost to SC (US) Management
or its affiliates of providing the services. SC-REMFs does not pay for services
performed by officers of SC (US) Management or its affiliates. SC-REMFs may from
time to time hire its own employees or contract to have services performed by
third parties, and the management of SC-US intends to do so whenever it appears
advantageous to SC-REMFs.

In addition to the payments to SC (US) Management under the Advisory
Agreement described above, each class of a Fund's shares pays for certain other
costs of its operations including: (a) administration, custodian and transfer
agency fees, (b) fees of Directors who are not affiliated with SC (US)
Management, (c) legal and auditing expenses, (d) costs of printing and postage
fees relating to preparing each Fund's prospectus and shareholder reports, (e)
costs of maintaining SC-REMFs's existence, (f) interest charges, taxes,
brokerage fees and commissions, (g) costs of stationery and supplies, (h)
expenses and fees related to registration and filing with federal and state
regulatory authorities, (i) distribution fees, and (j) upon the

27
<PAGE>

approval of SC-REMFs's Board of Directors, costs of personnel of SC (US)
Management or its affiliates rendering clerical, accounting and other office
services. Each class of a Fund's shares pays for the portion of SC-REMFs's
expenses attributable to its operations. Income, realized gains and losses,
unrealized appreciation and depreciation and certain expenses not allocated to a
particular class are allocated to each class based on the net assets of that
class in relation to the net assets of SC-REMFs.

The Advisory Agreement for SC-US was approved on November 25, 1997 by SC-
REMFs's Directors, including a majority of the Directors who are not interested
persons (as defined in the 1940 Act) of SC-REMFs or SC (US) Management ("non-
interested Directors"), and by SC-US's shareholders on December 12, 1997. It
continues in effect until December 16, 1999.

The Advisory Agreements for SC-ARBITRAGE and SC-EURO were approved on
[_______, 1998] by SC-REMFs's Directors including a majority of the non-
interested Directors and the Advisory Agreement for SC-EURO was approved by the
written consent of SC-EURO's sole shareholder on [_____, 1998]. The Advisory
Agreements for SC-ARBITRAGE and SC-EURO continue in effect until [______, 2000].
Each Advisory Agreement will continue in effect, provided that its continuance
is specifically approved prior to its initial expiration or annually thereafter,
as the case may be by the Directors or by a vote of the shareholders, and in
either case by a majority of the Directors who are not parties to the Advisory
Agreement or interested persons of any such party, by vote cast in person at a
meeting called for the purpose of voting on such approval.

The Advisory Agreement for each Fund is terminable without penalty by the
Fund on sixty days' written notice when authorized either by majority vote of
its outstanding voting securities or by a vote of a majority of the Directors,
or by SC (US) Management on sixty days' written notice, and will automatically
terminate in the event of its assignment. The Advisory Agreement provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of SC (US) Management, or of reckless disregard of its obligations thereunder,
SC (US) Management shall not be liable for any action or failure to act in
accordance with its duties thereunder.

RESEARCH SERVICES AGREEMENT WITH SC (EU) MANAGEMENT

SC (US) Management has entered into a research services agreement
("Research Services Agreement') with SC (EU) Management. SC (EU) Management was
formed on March 24, 1997 under Belgian law. SC (EU) Management is an indirect,
wholly-owned subsidiary of Security Capital Group Incorporated.

28
<PAGE>

ADMINISTRATOR AND SUB-ADMINISTRATOR

SC-REMFs has also entered into a fund administration and accounting
agreement with SC (US) Management (the "Administration Agreement") under which
SC (US) Management performs certain administrative functions for the Funds,
including (i) providing office space, telephone, office equipment and supplies;
(ii) paying compensation of SC-REMFs's officers for services rendered as such;
(iii) authorizing expenditures and approving bills for payment on behalf of SC-
REMFs; (iv) supervising preparation of the periodic updating of the Funds'
prospectuses and statements of additional information; (v) supervising
preparation of quarterly reports to the Funds' shareholders, notices of
dividends, capital gains distributions and tax credits, and attending to routine
correspondence and other communications with individual shareholders; (vi)
supervising the daily pricing of each Fund's investment portfolio and the
publication of the net asset value of the Funds' shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-REMFs, including the Funds' custodian (the "Custodian")
transfer agent (the "Transfer Agent") and printers; (viii) providing trading
desk facilities for the Funds; (ix) maintaining books and records for the Funds
(other than those maintained by the Custodian and Transfer Agent) and preparing
and filing of tax reports other than the Funds' income tax returns; and (x)
providing executive, clerical and secretarial help needed to carry out these
responsibilities.

29
<PAGE>

inquiries. Under the terms of the Sub-Administration Agreement, each Fund pays
the Sub-Administrator a monthly administration fee at the annual rate of .06% of
the first $200 million of each Fund's average daily net assets, and at lower
rates on the Fund's average daily net assets in excess of that amount, subject
to an annual minimum fee of $30,000. For the period April 23, 1997 (the
effective date of SC-REMFs's initial registration statement) through December
31, 1997, the Sub-Administrator earned $47,791 for providing sub-administration
services to SC-US. The Sub-Administrator also serves as the Custodian and
Transfer Agent. See "Funds' Custodian and Transfer and Dividend Disbursing
Agent."

Under the Administration Agreement, SC (US) Management remains responsible
for monitoring and overseeing the performance by the Sub-Administrator of its
obligations to the Funds under the Sub-Administration Agreement, subject to the
overall authority of SC-REMFs's Board of Directors. For its services under the
Administration Agreement, SC (US) Management receives a monthly fee from each
Fund at the annual rate of .02% of the value of each Fund's average daily net
assets. For the period April 23, 1997 (the effective date of SC-REMFs's initial
registration statement) through December 31, 1997, SC (US) Management earned
$15,930 for providing services to SC-US under the Administration Agreement.

The Administration Agreement is terminable by either party on sixty days'
written notice to the other. The Administration Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of SC
(US) Management, or of reckless disregard of its obligations thereunder, SC (US)
Management shall not be liable for any action or failure to act in accordance
with its duties thereunder.

DISTRIBUTION AND SERVICING PLANS

As described in the Prospectuses, SC-REMFs's Board of Directors has adopted
a Distribution and Servicing Plan with respect to each class of shares
("Plans"), other than SC-ARBITRAGE Class I shares, pursuant to Rule 12b-1 under
the 1940 Act. See "Distribution and Servicing Plan" in each Prospectus. The
Plans have been approved by a vote of the Board of Directors, including a
majority of the Directors who are not interested persons of SC-REMFs and have no
direct or indirect financial interest in the operation of the Plan
("Disinterested Directors"), cast in person at a meeting called for the purposes
of voting on the Plan. The annual compensation payable by SC-US to Security
Capital Markets Group Incorporated ("Distributor") under each Plan is an amount
equal to .25% (on an annual basis) of the value of the average daily net assets
of the class of shares to which the Plan relates.

Under the Plans, the Funds are authorized to pay a distribution fee for
distribution activities in connection with the sale of shares and a service fee
for services provided which are necessary for the maintenance of shareholder
accounts. To the extent such fee exceeds the expenses of these distribution and
shareholder servicing activities, the Distributor may retain such excess as
compensation for its services and may realize a profit from these arrangements.

The Plans are compensation plans which provide for the payment of a
specified distribution and service fee without regard to the distribution and
service expenses actually incurred by the Distributor. If the Plans were to be
terminated by the Board of Directors and no successor Plans were to be adopted,
the Directors would cease to make distribution and service payments to the
Distributor and the Distributor would be unable to recover the amount of any of
its unreimbursed distribution expenditures. However, the Distributor does not
intend to incur distribution and service expenses at a rate that materially
exceeds the rate of compensation received under the Plans.

The types of expenses for which the Distributor and third parties may be
compensated under the Plans include compensation paid to and expenses incurred
by their officers, employees and sales representatives,

30
<PAGE>

allocable overhead, telephone and travel expenses, the printing of prospectuses
and reports for other than existing shareholders, preparation and distribution
of sales literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of shares.
Additional types of expenses covered by the Plans include responding to
shareholder inquiries and providing shareholders with information on their
investments. For the period December 16, 1997 through December 31, 1997, the
Distributor earned $12,396 for providing services under the Class I Plan and
$67.00 for providing services under the Class R Plan.

Under the Plans, the Distributor will provide to the Board of Directors for
its review, and the Board will review at least quarterly, a written report of
the services provided and amounts expended by the Distributor under the Plans
and the purposes for which such services were performed and expenditures were
made.

The Plans for SC-US's Class I shares and Class R shares were approved by
the Board of Directors, including the disinterested Directors, on November 25,
1998 and by SC-US's Class I and Class R shareholders on December 12, 1997. The
Plans for SC-ARBITRAGE's and SC-EURO's Class I shares and Class R shares were
approved by the Board of Directors, including the disinterested Directors, on
March 11, 1998. The Plan for SC-ASIA's Class I and Class R shares was approved
by the Board of Directors, including the disinterested Directors, on [______,
1998]. The Plans remain in effect from year to year, provided such continuance
is approved annually by a vote of the Board of Directors, including a majority
of the disinterested Directors. The Plans may not be amended to increase
materially the amount to be spent for the services described therein as to a
Fund's Class I or Class R share without approval of a majority of the
outstanding class of shares. All material amendments of the Plan must also be
approved by the Board of Directors in the manner described above. The Plans may
be terminated at any time without payment of any penalty by a vote of a majority
of the disinterested Directors or by a vote of a majority of the outstanding
class of shares. So long as a Plan is in effect, the selection and nomination of
disinterested Directors shall be committed to the discretion of the
disinterested Directors. The Board of Directors has determined that in their
judgment there is a reasonable likelihood that the Plans will benefit SC-US, SC-
ARBITRAGE, SC-EURO, SC-ASIA and their shareholders.

DETERMINATION OF NET ASSET VALUE

Net asset value per share for each class of shares is determined by SC-US,
SC-ARBITRAGE, SC-EURO, and SC-ASIA on each day the New York Stock Exchange is
open for trading, and on any other day during which there is a sufficient degree
of trading in the investments of SC-US, SC-ARBITRAGE, SC-EURO and/or SC-ASIA to
affect materially the Fund's net asset value. The New York Stock Exchange is
closed on Saturdays, Sundays, and on New Year's Day, Presidents' Day (the third
Monday in February), Good Friday, Memorial Day (the last Monday in May),
Independence Day, Labor Day (the first Monday in September), Thanksgiving Day
and Christmas Day (collectively, the "Holidays"). When any Holiday falls on a
Saturday, the Exchange is closed the preceding Friday, and when any Holiday
falls on a Sunday, the Exchange is closed the following Monday. No redemptions
will be made on Martin Luther King Day (the third Monday in January), Columbus
Day (the second Monday in October) and Veteran's Day, nor on any of the
Holidays.

Net asset value per share for each class is determined by adding the market
value of all securities in a Fund's portfolio and other assets represented by a
class, subtracting liabilities incurred or accrued that are allocable to the
class, and dividing by the total number shares of that class then outstanding.
Because of

31
<PAGE>

the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.

For purposes of determining a Fund's net asset value per share for each
class, all assets and liabilities initially expressed in foreign currencies will
be converted into U.S. dollars at the mean of the bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank which is a
regular participant in the institutional foreign exchange markets or on the
basis of a pricing service which takes into account the quotes provided by a
number of such major banks.

REDEMPTION OF SHARES

Payment of the redemption price for shares redeemed may be made either in
cash or in portfolio securities (selected in the discretion of SC-REMFs's Board
of Directors and taken at their value used in determining a Fund's net asset
value per share as described in the Prospectus under "Determination of Net Asset
Value"), or partly in cash and partly in portfolio securities. However, payments
will be made wholly in cash unless SC-REMFs's Board of Directors believes that
economic conditions exist which would make such a practice detrimental to the
best interests of the Funds. If payment for shares redeemed is made wholly or
partly in portfolio securities, brokerage costs may be incurred by the investor
in converting the securities to cash. SC-REMFs will not distribute in kind
portfolio securities that are not readily marketable.

SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA have elected to be governed by
Rule 18f-1 under the 1940 Act, which obligates the Funds to redeem shares in
cash, with respect to any one shareholder during any 90-day period, up to the
lesser of $250,000 or 1% of the net assets of a Fund at the beginning of such
period. Although redemptions in excess of this limitation would normally be paid
in cash, SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA reserve the right to make
payments in whole or in part in securities or other assets in case of an
emergency, or if the payment of redemption in cash would be detrimental to the
existing shareholders of a Fund as determined by the board of directors. In such
circumstances, the securities distributed would be valued as set forth in the
Prospectus. Should a Fund distribute securities, a shareholder may incur
brokerage fees or other transaction costs in converting the securities to cash.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the supervision of the Directors, decisions to buy and sell
securities for the Funds and negotiation of its brokerage commission rates are
made by SC (US) Management. Transactions on U.S. stock exchanges involve the
payment by the Funds of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Funds usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Funds may make purchases of
underwritten issues at prices which include underwriting fees.

In selecting a broker to execute each particular transaction, SC (US)
Management will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of a Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to a Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the Directors may
determine, SC (US) Management shall not be deemed to have acted unlawfully or to
have breached any duty solely by reason of it having caused a Fund to pay

32
<PAGE>

a broker that provides research services to SC (US) Management an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if SC (US) Management determines in good faith that such amount of
commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
SC (US) Management's ongoing responsibilities with respect to a Fund. Research
and investment information is provided by these and other brokers at no cost to
SC (US) Management and is available for the benefit of other accounts advised by
SC (US) Management and its affiliates, and not all of the information will be
used in connection with the Funds. While this information may be useful in
varying degrees and may tend to reduce SC (US) Management's expenses, it is not
possible to estimate its value and in the opinion of SC (US) Management it does
not reduce SC (US) Management's expenses in a determinable amount. The extent to
which SC (US) Management makes use of statistical, research and other services
furnished by brokers is considered by SC (US) Management in the allocation of
brokerage business but there is no formula by which such business is allocated.
SC (US) Management does so in accordance with its judgment of the best interests
of the Funds and their shareholders. SC (US) Management may also take into
account payments made by brokers effecting transactions for the Funds to other
persons on behalf of the Funds for services provided to them for which it would
be obligated to pay (such as custodial and professional fees). In addition,
consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, SC (US)
Management may consider sales of shares of the Funds as a factor in the
selection of brokers and dealers to enter into portfolio transactions with the
Funds.

TAXATION

TAXATION OF THE FUNDS

The Funds each intend to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").

To qualify as a regulated investment company, a Fund must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) prior to January 1, 1998, derive less than 30% of
its gross income from the sale or other disposition of certain assets (namely,
(i) stock or securities, (ii) options, futures, and forward contracts (other
than those on foreign currencies), and (iii) foreign currencies (including
options, futures, and forward contracts on such currencies) not directly related
to the Fund's principal business of investing in stock or securities (or options
and futures with respect to stocks or securities)) held less than 3 months for
the year ending December 31, 1997; (c) diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (d) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net short-
term capital gains in excess of net long-term capital losses) each taxable year.

33
<PAGE>

As a regulated investment company, each Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Funds each
intend to distribute to their shareholders, at least annually, substantially all
of their investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by a Fund in October,
November or December with a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.

DISTRIBUTIONS

Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of a Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. Dividends paid by a Fund attributable to dividends received by the
Fund from REITs, however, are not eligible for such deduction. Distributions of
net capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held a
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have taxable income from the receipt of, and a cost
basis in, each such share equal to the net asset value of a share of the Fund on
the reinvestment date. Shareholders will be notified annually as to the U.S.
federal tax status of distributions, and shareholders receiving distributions in
the form of additional shares will receive a report as to the net asset value of
those shares.

The recently enacted Taxpayer Relief Act of 1997 (the "Taxpayer Relief
Act") made certain changes to the Code with respect to taxation of long-term
capital gains earned by taxpayers other than a corporation. In general and
subject to certain transition rules, the maximum tax rate for individual
taxpayers on net long-term capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) is lowered to 20% for most assets
held for more than 18 months at the time of disposition. Capital gains on the
disposition of assets held for more than one year and up to 18 months at the
time of disposition will be taxed as "mid-term gain" at a maximum rate of 28%. A
lower rate of 18% will apply after December 31, 2000 for assets held for more
than 5 years. However, the 18% rate applies only to assets acquired after
December 31, 2000 unless the taxpayer elects to treat an asset held prior to
such date as sold for fair market value on January 1, 2001. In the case of
individuals whose ordinary income is taxed at a 15% rate, the 20% rate for
assets held for more than 18 months is reduced to 10% and the 18% rate for
assets held for more than 5 years is reduced to 8%. According to a notice
recently issued by the Internal Revenue Service, regulated investment companies
such as the Funds are entitled to (but are not required to) designate which
portion of a capital gain distribution will be taxed at a maximum rate of 20%
and which portion will be taxed at a maximum rate of 28%. If a Fund does not
make such a designation, the capital gain will be taxed at a maximum rate of
28%.

34
<PAGE>

The portion of a Fund distribution classified as a return of capital
generally is not taxable to the Fund shareholders, but it will reduce their tax
basis in their shares, which in turn would effect the amount of gain or loss
shareholders would realize on the sale or redemption of their shares. If a
return of capital distribution exceeds a shareholder's tax basis in his shares,
the excess is generally taxed as capital gain to the shareholder assuming the
shares are a capital asset.

REITs do not provide complete information about the taxability of their
distributions (i.e., how much of their distributions represent a return of
capital) until after the calendar year ends. As a result, the Funds may not be
able to determine how much of their annual distributions for a particular year
are taxable to shareholders until after the traditional January 31 deadline for
issuing Form 1099-DIV ("Form 1099''). The Funds in such circumstance may send to
shareholders amended Form 1099s after January 31 or may request permission from
the Internal Revenue Service for an extension permitting the Funds to send the
Form 1099 in February.

SALE OF SHARES

Upon the sale or other disposition of shares of the Funds, a shareholder
may realize a capital gain or loss which will be long-term, mid-term or short-
term, generally depending upon the shareholder's holding period for the shares.
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of a Fund's shares held by
the shareholder for six months or less will be treated as a long-term capital
loss to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.

INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS

The Funds may invest in real estate investment trusts ("REITs") that hold
residual interests in real estate mortgage investment conduits ("REMICs"). Under
Treasury regulations that have not yet been issued, but may apply retroactively,
a portion of a Fund's income from a REIT that is attributable to the REIT's
residual interest in a REMIC (referred to in the Code as an "excess inclusion")
will be subject to federal income tax in all events. These regulations are also
expected to provide that excess inclusion income of a regulated investment
companies, such as the Funds, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related REMIC
residual interest directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income to entities (including a qualified pension plan, an
individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt
entity) subject to tax on unrelated business income, thereby potentially
requiring such an entity that is allocated excess inclusion income, and
otherwise might not be required to file a tax return, to file a tax return and
pay tax on such income, and (iii) in the case of a foreign shareholder, will not
qualify for any reduction in U.S. federal withholding tax. In addition, if at
any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest federal income tax rate
imposed on corporations. SC (US) Management does not intend on behalf of SC-US,
SC-ARBITRAGE and SC-ASIA to invest in REITs, a substantial portion of the assets
of which consists of residual interests in REMICs.

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<PAGE>

BACKUP WITHHOLDING

Except as described below, the Funds are required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability.

FOREIGN SHAREHOLDERS

U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.

Income Not Effectively Connected.

If the income from a Fund is not "effectively connected" with a U.S. trade
or business carried on by the foreign shareholder, distributions of investment
company taxable income will be subject to a U.S. withholding tax of 30% (or
lower treaty rate, except in the case of any excess inclusion income allocated
to the shareholder (see "Taxation--Investments in Real Estate Investment
Trusts," above)), which tax is generally withheld from such distributions.

Distributions of capital gain dividends and any amounts retained by a Fund
which are designated as undistributed capital gains will not be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% withholding tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182-day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would be subject to U.S. income tax on his or her worldwide
income at the graduated rates applicable to U.S. citizens, rather than the 30%
U.S. withholding tax. In the case of a foreign shareholder who is a nonresident
alien individual, a Fund may be required to withhold U.S. income tax at a rate
of 31% of distributions of net capital gains unless the foreign shareholder
certifies his or her non-U.S. status under penalties of perjury or otherwise
establishes an exemption. See "Taxation--Backup Withholding," above. If a
foreign shareholder is a nonresident alien individual, any gain such shareholder
realizes upon the sale or exchange of such shareholder's shares of a Fund in the
United States will ordinarily be exempt from U.S. tax unless (i) the gain is
U.S. source income and such shareholder is physically present in the United
States for more than 182 days during the taxable year and meets certain other
requirements, or is otherwise considered to be a resident alien of the United
States, or (ii) at any time during the shorter of the period during which the
foreign shareholder held shares of a Fund and the five year period ending on the
date of the disposition of those shares, the Fund was a "U.S. real property
holding corporation" (and, if the shares of the Fund are regularly traded on an
established securities market, the foreign shareholder held more than 5% of the
shares of the Fund), in which event the gain would be taxed in the same manner
as for a U.S. shareholder as discussed above and a 10% U.S. withholding tax
would be imposed on the amount realized on the disposition of such shares to be
credited against the foreign shareholder's U.S. income tax liability on such
disposition. A corporation is a "U.S. real property holding corporation" if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the fair market value of such interests plus its interests in real property
located outside the United States plus any other assets used or held for use in
a business. In the case of SC-US and SC-ARBITRAGE,

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<PAGE>

U.S. real property interests include interests in stock in U.S. real property
holding corporations (other than stock of a REIT controlled by U.S. persons and
holdings of 5% or less in the stock of publicly traded U.S. real property
holding corporations) and certain participating debt securities. The Funds do
not expect to be treated as U.S. real property corporations under these rules,
but no assurances can be given.

Income Effectively Connected.

If the income from a Fund is "effectively connected" with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income and capital gain dividends, any amounts retained by the
Fund which are designated as undistributed capital gains and any gains realized
upon the sale or exchange of shares of the Fund will be subject to U.S. income
tax at the graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate shareholders may also be subject to the branch
profits tax imposed by the Code.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Funds.

PASSIVE FOREIGN INVESTMENT COMPANIES

SC-EURO and SC-ASIA may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which SC-EURO or SC-ASIA held the PFIC stock. SC-EURO or SC-ASIA
itself will be subject to tax on the portion, if any, of the excess distribution
that is allocated to SC-EURO's or SC-ASIA's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though SC-EURO and SC-
ASIA distribute the corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.

SC-EURO and SC-ASIA may be able to elect alternative tax treatment with
respect to PFIC stock. Under one such election, SC-EURO and SC-ASIA generally
would be required to include in their gross income their share of the earnings
of a PFIC on a current basis, regardless of whether any distributions are
received from the PFIC. If this election is made, the special rules, discussed
above, relating to the taxation of excess distributions, would not apply. In
addition, other elections may become available that would affect the tax
treatment of PFIC stock held by SC-EURO or SC-ASIA. SC-EURO's or SC-ASIA's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC stock.

Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject SC-EURO or
SC-ASIA itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a mutual fund that does not invest in PFIC stock.

37
<PAGE>

FOREIGN INCOME TAX

Investment income received by SC-EURO or SC-ASIA from sources within
foreign countries may be subject to foreign income taxes withheld at the source.
The U.S. has entered into tax treaties with many foreign countries which entitle
SC-EURO and SC-ASIA to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of SC-EURO's or SC-ASIA's assets to be invested in
various countries is not known.

If more than 50% of the value of SC-EURO's or SC-ASIA's total assets at the
close of each taxable year consists of the stock or securities of foreign
corporations, SC-EURO or SC-ASIA may elect to "pass through" to SC-EURO's or SC-
ASIA's shareholders the amount of foreign income taxes paid by SC-EURO or SC-
ASIA (the "Foreign Tax Election"). Pursuant to the Foreign Tax Election,
shareholders will be required (i) to include in gross income, even though not
actually received, their respective pro-rata shares of the foreign income taxes
paid by SC-EURO or SC-ASIA that are attributable to any distributions they
receive; and (ii) either to deduct their pro-rata share of foreign taxes in
computing their taxable income, or to use it (subject to various Code
limitations) as a foreign tax credit against Federal income tax (but not both).
No deduction for foreign taxes may be claimed by a non-corporate shareholder who
does not itemize deductions or who is subject to alternative minimum tax.

Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to the shareholder's foreign source
taxable income. In determining the source and character of distributions
received from SC-EURO or SC-ASIA for this purpose, shareholders will be required
to allocate SC-EURO or SC-ASIA distributions according to the source of the
income realized by SC-EURO or SC-ASIA. SC-EURO's or SC-ASIA's gains from the
sale of stock and securities and certain currency fluctuation gains and losses
will generally be treated as derived from U.S. sources. In addition, the
limitation on the foreign tax credit is applied separately to foreign source
"passive" income, such as dividend income. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by SC-EURO or SC-ASIA.

OTHER TAXATION

Shareholders of the Funds may be subject to state, local and foreign taxes
on their Fund distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular state and local tax consequences to them
of an investment in a Fund.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On [___________,
1998], its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's shares have no preemptive, conversion, exchange or
redemption rights. Each share of each series has equal voting, dividend,
distribution and liquidation rights. All shares of SC-REMFs, when duly issued,
are fully

38
<PAGE>

paid and nonassessable. Shareholders are entitled to one vote per share. All
voting rights for the election of Directors are noncumulative, which means that
the holders of more than 50% of the shares can elect 100% of the Directors then
nominated for election if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any Directors. The foregoing
description is subject to the provisions contained in SC-REMFs's Articles of
Incorporation and By-Laws which have been filed with the SEC as exhibits to the
registration statement of which this Statement of Additional Information is a
part.

SC-REMFs's Board of Directors may, without shareholder approval, increase
or decrease the number of authorized but unissued shares of SC-REMFs's stock and
reclassify and issue any unissued shares of SC-REMFs. The Board of Directors
also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, each with two classes of shares: Class
I shares and Class R shares. Class I shares are offered to investors whose
initial minimum investment is $250,000 and Class R shares are available for
purchase by all other eligible investors. Class I shares and Class R shares
offer different services to shareholders and incur different expenses. Each
class pays its proportionate share of SC-US's expenses.

At March 31, 1998, there were 9,788,870.369 Class I shares and 200,603.647
Class R shares of SC-US outstanding. At such date the Directors and officers as
a group beneficially owned, directly or indirectly, including the power to vote
or to dispose of, less than 1% of the issued and outstanding shares of SC-US.
Also as of that date, the following persons owned of record 5% or more of SC-
US's outstanding shares:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OF -------------
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
-------------- ---------------- --------- ----------------
<S> <C> <C> <C>
Class I SCREALTY Incorporated 9,646,032.884 98.54%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952

Class R Charles Schwab & Co. Inc. 138,989.688 69.29%
101 Montgomery Street
San Francisco, California 94104-4122

Class R Dennis G. Lopez 20,116.795 10.03%
117 Beekman Street, 4E
New York, New York 10038-2001

Class R Directors, Nominees and 12,093.258 6.03%
Executive Officers as a Group*/
</TABLE>

______________
(*) Anthony R. Manno Jr., Director, Chairman of the Board and President,
beneficially owns 4,863.813 Class R shares, John H. Gardner, Jr., Director,
beneficially owns 1,835.622 Class R shares, Jeffrey C. Nellessen, Vice
President, Secretary and Treasurer beneficially owns 1,135.228 Class R shares
and Kevin W. Bedell, Senior Vice President beneficially owns 4,258.595 Class R
shares.

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<PAGE>

As of March 31, 1998, SCREALTY Incorporated owned 96.56% of the total issued
and outstanding shares of SC-US, which means that SCREALTY Incorporated controls
SC-REMFs for purposes of the 1940 Act. The effect of SCREALTY Incorporated's
ownership of a controlling interest in SC-US is to dilute the voting power of
other SC-REMFs shareholders.

DISTRIBUTOR

Security Capital Markets Group Incorporated ("SCMGI"), an affiliate of SC (US)
Management, serves as the distributor of SC-US's Class I shares and Class R
shares pursuant to a Distribution and Servicing Agreement dated December 16,
1997 ("Agreement") which was approved by the Board of Directors, including a
majority of the disinterested Directors on November 25, 1997. SCMGI also serves
as the distributor of SC-ARBITRAGE's and SC-EURO's Class I and Class R shares
pursuant to a Distribution and Servicing Agreements dated [________, 1998] and
as distributor of SC-ASIA's Class I and Class R shares pursuant to a
Distribution and Servicing Agreement dated [_____, 1998]. The Distributor is
not obligated to sell any specific amount of shares and will sell shares, as
agent, on a best efforts continuous basis only against orders to purchase
shares.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

Firstar Trust Company which has its principal business at 615 East Michigan
Street, Milwaukee, Wisconsin 53202 has been retained to act as Custodian of the
Funds' investments and as the Funds' transfer and dividend disbursing agent.
Firstar Trust Company does not determine the investment policies of the Funds or
decide which securities the Funds will buy or sell.

PERFORMANCE INFORMATION

From time to time, a Fund may quote its total return in advertisements or in
reports and other communications to shareholders. A Fund's performance will vary
from time to time depending upon market conditions, the composition of its
portfolio and its operating expenses. Consequently, any given performance
quotation should not be considered representative of a Fund's performance for
any specified period in the future. In addition, because performance will
fluctuate, it may not provide a basis for comparing an investment in a Fund with
certain bank deposits or other investments that pay a fixed yield for a stated
period of time. Investors comparing a Fund's performance with that of other
mutual funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.

AVERAGE ANNUAL TOTAL RETURN

A Fund's "average annual total return" figures described in the Prospectus are
computed according to a formula. The formula can be expressed as follows:

P(1 + T)/n/ = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years

40
<PAGE>

ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of a
1-, 5-, or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.

AGGREGATE TOTAL RETURNS

A Fund's aggregate total return figures described in the Prospectus represent
the cumulative change in the value of an investment in a Fund for the specified
period and are computed by the following formula.

Aggregate Total Return = (ERV-P)
-------
P

Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of the 1-, 5- or 10-year period at the end of
the 1-, 5- or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.

YIELD

Quotations of yield for a Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

Yield = 2[(a-b + 1)/6/-1]
---
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.

In reports or other communications to shareholders of a Fund or in advertising
materials, a Fund may compare its performance with that of (i) other mutual
funds listed in the rankings prepared by Lipper Analytical Services, Inc.,
publications such as Barron's, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today or other industry or
financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average and other relevant indices and industry
publications. A Fund may also compare the historical volatility of its portfolio
to the volatility of such indices during the same time periods. (Volatility is a
generally accepted barometer of the market risk associated with a portfolio of
securities and is generally measured in comparison to the stock market as a
whole--the beta--or in absolute terms--the standard deviation.)

41
<PAGE>

COUNSEL AND INDEPENDENT ACCOUNTANTS

Legal matters in connection with the issuance of the shares of SC-REMFs
offered hereby will be passed upon by Mayer, Brown & Platt, 2000 Pennsylvania
Ave., NW, Washington, DC, 20006, which will rely as to certain matters of
Maryland law on[______________________].

Arthur Andersen LLP has been appointed as independent accountants for SC-
REMFs.

FINANCIAL STATEMENTS

The audited Financial Statements of Security Capital U.S. Real Estate Shares
Incorporated for the period January 1, 1997 through December 31, 1997, are
included herein.

42
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares
<S> Market Value
COMMON STOCK -- REAL ESTATE <C>
INVESTMENT TRUSTS (REITs) -- 96.7%
Office Properties -- 26.9%

589,240 Equity office Properties Trust
140,000 Prentiss Properties Trust $ 18,597,878
67,900 Crescent Real Estate Equities Company 3,911,250
80,300 Boston Properties, Inc. 2,673,563
65,000 Cornerstone Properties, Inc. 2,654,919
52,500 Cadillac Fairview Corporation # 1,247,187
28,400 Mack-Cali Realty Corporation 1,233,750
1,164,400
------------
Multifamily -- 20.8% 31,482,947
187,700 Apartment Investment & Management Company
150,000 Essex Property Trust, Inc. 6,897,975
145,100 Charles E. Smith Residential Realty, Inc. 5,250,000
95,300 Equity Residential Properties Trust 5,151,050
57,000 Bay Apartment Communities, Inc. 4,818,606
2,223,000
------------
Hotel -- 14.9% 24,340,631
312,500 Innkeepers USA Trust
115,000 FelCor Suite Hotels, Inc. 4,843,750
40,000 ITT Corporation # 4,082,500
125,000 WHG Resorts & Casinos Inc. # 3,315,000
61,000 Capstar Hotel Company # 2,781,250
22,200 Homestead Village, Inc. # + 2,093,062
334,388

------------
17,449,950
</TABLE>

See notes to the financial statements.

43
<PAGE>

SCHEDULE OF INVESTMENTS (CONTINUED)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Market Value
<S> <C>
Storage -- 10.9%
323,200 Public Storage, Inc. $ 9,494,000
100,500 Storage Trust Realty 2,644,406
23,200 Shurgard Storage Centers, Inc. 672,800
------------
12,811,206
Regional Malls -- 8.0%
136,000 Urban Shopping Centers, Inc. 4,743,000
164,100 The Macerich Company 4,676,850
------------
9,419,850
Industrial -- 7.4%
163,000 Pacific Gulf Properties, Inc. 3,871,250
91,500 Liberty Property Trust 2,613,469
110,000 Catellus Development Corporation # 2,200,000
------------
8,684,719
Shopping Centers -- 5.5%
125,000 Developers Diversified Realty Corporation 4,781,250
46,500 Kimco Realty Corporation 1,639,125
------------
6,420,375
Factory Outlets -- 2.3%
70,000 Chelsea GCA Realty, Inc. 2,673,125

Total Common Stock -- Real Estate Investment
------------
Trusts (REITs) (Cost $100,097,665) 113,282,803
</TABLE>

See notes to the financial statements.

44
<PAGE>

SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------

Principal Amount
<S> <C>
SHORT-TERM INVESTMENTS -- 0.3%
Variable Rate Demand Notes* -- 0.3%
$135,576 Warner-Lambert Co., 5.4890% $ 135,576
134,756 Johnson Controls, Inc. 5.3276% 134,756
120,436 General Mills, Inc., 5.3277% 120,436
5,138 Pitney Bowes, Inc., 5.3276% 5,138
------------
Total Short-Term Investments
(Cost $395,906) 395,906
------------
Total Investments -- 97.0% 113,678,709
(Cost $100,493,571)
Other Assets in Excess of
Liabilities -- 3.0% 3,553,475
NET ASSETS 100.0% $117,232,184
============
</TABLE>

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of December 31, 1997.
# Non-income producing security.
+ An affiliate of the Fund.

See notes to the financial statements.

45
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value
(cost $100,493,571) $113,678,709
Deferred organization costs 95,914
Receivable for investment securities sold 3,564,588
Dividends receivable 505,998
Interest receivable 18,954
Other assets 21,560
------------
Total Assets 117,885,723
------------
LIABILITIES:
Payable for investment securities purchased 479,854
Payable to investment adviser 64,882
Accrued expenses and other liabilities 108,803
------------
Total Liabilities 653,539
------------
NET ASSETS $117,232,184
------------
NET ASSETS CONSIST OF:
Capital stock $101,731,755
Accumulated undistributed net realized
gain on investments 2,315,291
Net unrealized appreciation on investments 13,185,138
------------
Total Net Assets $117,232,184
============
CLASS I:
Net assets $116,560,328
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 9,755,880
Net asset value and redemption price
per share $11.95
============
CLASS R:
Net assets $ 671,856
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 56,234
Net asset value and redemption
price per share $11.95
============

</TABLE>

See notes to the financial statements.

46
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENT OF OPERATIONS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:

Dividend income 4,729,653
Interest income 141,838
------------
Total investment income 4,871,491
------------
EXPENSES:
Investment advisory fee 652,224
Administration fee 65,044
Shareholder servicing and accounting costs 43,220
Custody fees 19,550
Federal and state registration 39,320
Professional fees 47,419
Reports to shareholders 10,140
Directors' fees and expenses 17,940
Amortization of organization costs 22,185
Distribution Expense -- Class I 12,396
Distribution Expense -- Class R 67
Other 2,640
------------
Total expenses before reimbursement 932,145
Less: Reimbursement from Adviser -- Class I (30,276)
Less: Reimbursement from Adviser -- Class R (167)
------------
Net expenses 901,702
------------
NET INVESTMENT INCOME: 3,969,789
============
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 8,063,795
Change in unrealized appreciation on investments 12,889,384
------------
Net realized and unrealized gain on investments 20,953,179
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
24,922,968
============
</TABLE>

See notes to the financial statements.

47
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENTS OF CHANGES IN NET ASSETS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year December 20, 1996/(1)/
ended through
December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,969,789 $ 24,188
Net realized gain on investments 8,063,795 0
Change in unrealized appreciation
on investments 12,889,384 295,754
----------------------------------------------------
Net increase in net assets resulting
from operations 24,922,968 319,942

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 92,737,305 9,926,736
Shares issued to holders in reinvestment --
of dividends 2,632,946
Cost of shares redeemed (3,558,444) --
----------------------------------------------------
Net increase in net assets from capital 91,811,807 9,926,736
share transactions

DISTRIBUTIONS TO SHAREHOLDERS: /(2)/
From net investment income (3,626,176) --
DISTRIBUTIONS TO CLASS R
SHAREHOLDERS: /(2)/
From net investment income (2,006) --
From net realized gains (31,388) --
----------------------------------------------------
(33,394) --
DISTRIBUTIONS TO CLASS I
SHAREHOLDERS: /(2)/
From net investment income (372,583) --
From net realized gains (5,717,116) --
----------------------------------------------------
Subtotal (6,089,699) --
TOTAL INCREASE IN NET ASSETS 106,985,506 10,246,678
NET ASSETS:
Beginning of period 10,246,678 --
----------------------------------------------------
End of period (including undistributed
net investment income of $0 and
$24,188, respectively) $117,232,184 $10,246,678
====================================================
</TABLE>

(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were split into
Class R and Class I shares based on the amount then invested in the Fund.
Distributions to shareholders from net investment income reflect activity
for the Fund for the period January 1, 1997 through December 16, 1997 and
for each respective class of shares for the period December 17, 1997
through December 31, 1997.

See notes to the financial statements.

48
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
December 31, 1997 /(2)/ December 20, 1996 /(1)/
---------------------------------
through
Class I Class R December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Data:
Net asset value, beginning of period $ 10.38 $ 10.38 $ 10.00
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.46 /(3)/ 0.46/(3)/ 0.02
Net realized and unrealized gain
on investments 2.11 2.11 0.36
------------------------------------------------------------------------
Total from investment operations 2.57 2.57 0.38
------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.46) (0.46) --
Distributions from net realized gains (0.54) (0.54) --
------------------------------------------------------------------------
Total distributions (1.00) (1.00) --
------------------------------------------------------------------------
Net asset value, end of period $ 11.95 $ 11.95 $ 10.38
========================================================================
Total return /(4)/ 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period $116,560,328 $ 671,856 $10,246,678
Ratio of expenses to average net assets 0.94% 0.95% 0.00%
/(6)/
Ratio of net investment income to
average net assets /(5)(6)/ 4.08% 4.07% 19.71%
Portfolio turnover rate /(7)/ 104.17% 104.17% 0.00%
Average commission rate paid per share/(7)/ $ 0.0574 $ 0.0574 $ 0.0601
</TABLE>

(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were split into
Class R and Class I shares based on the amount then invested in the Fund.
For the year ended December 31, 1997, the Financial Highlights ratios of
net expenses to average net assets, ratios of net investment income to
average net assets and the per share income from investment operations are
presented on a basis whereby the Fund's net investment income and net
expenses for the period January 1, 1997 through December 16, 1997, were
allocated to each class of shares based upon the relative outstanding
shares of each class as of the close of business on December 16, 1997, and
the results thereof combined with the results of operations for each
applicable class for the period December 17, 1997 through December 31,
1997.
(3) Net investment income per share represents net investment income divided by
the average shares outstandind throughout the period.
outstanding throughout the period.
(4) Not annualized for the period December 20, 1996 through December 31, 1996.
(5) Annualized for the period December 20, 1996 through December 31, 1996.
(6) Without expense reimbursements of $30,443 for the year ended December 31,
1997, the ratio of expenses to average net assets would have been 0.97% and
0.98% for Class I and Class R, respectively, and the ratio of net
investment income to average net assets would have been 4.05% and 4.04% for
Class I and Class R, respectively.
(7) Portfolio turnover and average commission rate paid are calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued.

See notes to the financial statements.

49
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Security Capital U.S. Real Estate Shares Incorporated (the "Fund") is a Maryland
corporation, originally formed on December 20, 1996. The Fund is registered as
a non-diversified, no-load, open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"). The investment objective of
the Fund is to provide shareholders with above-average total returns, including
current income and capital appreciation, primarily through investments in real
estate securities in the United States. Long-term, the Fund's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in real estate securities in the United States, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and modeling techniques.

The following is a summary of significant accounting policies consistently
followed by the Fund.

a) Investment Valuation -- Each day, securities are valued at the last sales
price from the principal exchange on which they are traded. Securities that
have not traded on the valuation date, or securities for which sales prices are
not generally reported, are valued at the mean between the last bid and asked
prices. Securities for which market quotations are not readily available are
valued at their fair values determined by, or under the direction of, the Board
of Directors. Temporary cash investments (those with remaining maturities of 60
days or less) are valued at amortized costs, which approximates market value.

Because the Fund may invest a substantial portion of its assets in Real Estate
Investment Trusts ("REITs"), the Fund may be subject to certain risks associated
with direct investments in REITs. REITs may be affected by changes in the value
of their underlying properties and by defaults by borrowers and tenants. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders, and certain REITs have self-liquidation provisions by which
mortgages held may be paid in full and distributions of capital returns may be
made at any time.

b) Federal Income Taxes -- No provision for federal income taxes has been made
since the Fund has complied to date with the provisions of the Internal Revenue
Code available to regulated investment companies and intends to continue to so
comply in future years and to distribute investment company net taxable income
and net capital gains to shareholders.

c) Distributions to Shareholders -- Dividends from net investment income are
declared and paid quarterly. The Fund intends to distribute net realized capital
gains, if any, at least annually, although the Fund's Board of Directors may in
the future determine to retain realized capital gains and not distribute them to
shareholders.

Distributions will automatically be paid in full and fractional shares of the
Fund based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.

The characterization of shareholder distributions for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Fund's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in-capital, depending on the type
of book/tax differences that may exist.

A portion of the dividend income recorded by the Fund is from distributions by
publicly traded REITs and such distributions for tax purposes may consist of
capital gains and return of capital. The actual return of capital and capital
gains portions of such distributions will be determined by formal notifications
from the REITs subsequent to the calendar year-end. Distributions received from
the REITs that are determined to be a return of capital are recorded by the Fund
as a reduction of the cost basis of the securities held. The

50
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

character of such distributions, for tax purposes, is determined by the Fund
based on estimates and information received by the Fund from the REITs.

d) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

e) Other -- Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from the investment transactions,
using the specific identification method for both financial reporting and
federal income tax purposes, by comparing the original cost of the security lot
sold with the net sales proceeds. It is the Fund's practice to first select for
sale those securities that have the highest cost and also qualify for long-term
capital gain or loss treatment for tax purposes. Dividend income is recognized
on the ex-dividend date or as soon as information is available to the Fund, and
interest income is recognized on an accrual basis. Generally accepted accounting
principles require that permanent financial reporting and tax differences be
reclassified to capital stock.

51
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

2. CAPITAL SHARE TRANSACTIONS

On December 16, 1997, the Fund's existing shareholders were split into Class R
and Class I shares based on the amount then invested in the Fund. Transactions
in shares of the Fund were as follows:

Period from 12/17/97 through 12/31/97:
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Amount Shares
-----------------------------
<S> <C> <C>
Class I Shares:
Reclassification of previous class $ 121,005,617 9,836,172
Shares sold -- --
Shares issued to holders in reinvestment of dividends 65,206 5,443
Shares redeemed (1,069,973) (85,735)
------------- ----------
Net increase $ 120,000,850 9,755,880
------------- ----------
Class R Shares:
Reclassification of previous class $ 658,057 53,492
Shares sold 2,500 208
Shares issued to holders in reinvestment of dividends 30,360 2,534
Shares redeemed
------------- ----------
Net increase $ 690,917 6,234
============= ==========
<CAPTION>
Period from 01/01/97 through 12/16/97:
- ------------------------------------------------------------------------------------
Amount Shares
-----------------------------
<S> <C> <C>
Previous Class:
Reclassification to Class I shares $(121,005,617) (9,836,172)
Reclassification to Class R shares (658,057) (53,492)
Shares sold 92,734,805 8,890,183
Shares issued to holders in reinvestment of dividends 2,537,380 236,042
Shares redeemed (2,488,471) (223,984)
------------- ----------
Net (decrease) $ (28,879,960) (987,423)
============= ==========

Period from 12/20/96 through 12/31/96:
Shares sold $ 9,926,736 987,423
Shares issued to holders in reinvestment of dividends -- --
Shares redeemed
------------- ----------
Net increase $ 9,926,736 987,423
============= ==========
</TABLE>

52
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

3. INVESTMENT TRANSACTIONS

The aggregate purchases and sales of investments by the Fund for the year ended
December 31, 1997, were $177,958,403 and $95,319,551, respectively.

At December 31, 1997, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:

Appreciation $ 13,065,970
(Depreciation) (482,022)
---------------
Net appreciation on investments $ 12,583,948
================

At December 31, 1997, the cost of investments for federal income tax purposes
was $101,094,761.

4. INVESTMENT ADVISORY AND OTHER AGREEMENTS

The Fund has entered into an Investment Advisory Agreement with Security Capital
(US) Management Group Incorporated ("SC (US) Management"), formerly Security
Capital Investment Research Group Incorporated. Pursuant to its advisory
agreement with the Fund, the Investment Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 0.60% as applied to
the Fund's daily net assets.

SC (US) Management voluntarily agrees to reimburse its management fee and other
expenses to the extent that total operating expenses (exclusive of interest,
taxes, brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items) exceed the
annual rate of 1.00% and 1.15% of the net assets of the Class I and Class R
Shares, respectively, computed on a daily basis, for the period December 17,
1997 through December 31, 1997. SC (US) Management had voluntarily agreed to
reimburse its management fee and other expenses to the extent the above
mentioned total operating expenses exceeded the annual rate of 1.20% of the net
assets of the Fund for the period April 15, 1997 through December 16, 1997.

SC (US) Management also serves as the Fund's administrator. SC (US) Management
intends to charge the Fund an administrative fee calculated daily and payable
monthly, at the annual rate of 0.02% of the Fund's average daily net assets.

Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, sub-administrator and
accounting services agent for the Fund. Sub-administration fees will be
calculated daily and payable monthly, at an annual rate of 0.06% of the first
$200 million of the Fund's average daily net assets. Custodian, transfer agent
fees and accounting services will be charged by Firstar according to contractual
fee schedules agreed to by the Fund. All such expenses incurred through April
15, 1997 have been paid by SC (US) Management, which does not intend to seek
reimbursement from the Fund.

5. DISTRIBUTION AND SERVICING PLANS

The Fund has adopted plans with respect to the Class I and Class R shares
pursuant to Rule 12b-1 under the 1940 Act ("Plans"). Under the Plans, the Fund
pays to Security Capital Markets Group Incorporated in its capacity as principal
distributor of the Fund's shares (the "Distributor"), a monthly fee equal to, on
an annual basis, 0.25% of the value of each Class' average daily net assets.

The Distributor may use the fee for services performed and expenses incurred by
the Distributor in connection with the distribution of each Class' respective
shares and for providing certain services to each

53
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

Class' respective shareholders. The Distributor may pay third parties in respect
of these services such amount as it may determine. The Fund has made no payments
pursuant to the Plans for the year ended December 31, 1997.

6. FORMATION AND RE-ORGANIZATION

The Fund, formerly Security Capital Employee REIT Fund Incorporated, is a
Maryland corporation, originally formed on December 20, 1996, as SCERF
Incorporated ("SCERF"), a Maryland corporation. On January 23, 1997, all of the
assets and liabilities of SCERF were transferred to the Fund in a reorganization
(the "Reorganization") accounted for as a pooling of interests. The
Reorganization was a taxable event to SCERF and a capital gain of $1,002,746 was
realized for tax purposes. This capital gain will be included in the
consolidated income tax return of the sole shareholder of SCERF and will not
affect the Fund's tax status for 1997. This will result in a lower required
capital gain distribution for the Fund for calendar year 1997. As of December
31, 1997, $443,485 of the capital gain was realized for book purposes. As a
result, at December 31, 1997, the tax basis of securities held was $559,261
higher than their basis for financial reporting purposes.

The costs incurred in connection with the organization, initial registration and
public offering of shares, aggregating $118,099, have been paid by the Adviser.
The Fund will reimburse the Adviser. These costs are being amortized over the
period of benefit, but not to exceed sixty months from the Fund's commencement
of operations. The Adviser has voluntarily agreed to absorb the amortization
expenses in the Fund's first year. The amortization as of December 31, 1997 of
$22,185 will be reimbursed to the Fund.

54
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Directors and Shareholders of
Security Capital U.S. Real Estate Shares Incorporated:

We have audited the accompanying statement of assets and liabilities of Security
Capital U.S. Real Estate Shares Incorporated (a Maryland corporation), including
the schedule of investments, as of December 31, 1997, and the related statement
of operations for the year then ended and the statement of changes in net assets
and financial highlights for the year then ended and the period from December
20, 1996 (date of inception) to December 31, 1996. These financial statements
and financial highlights are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security Capital U.S. Real Estate Shares Incorporated as of December 31, 1997,
the results of its operations for the year then ended and the changes in its net
assets and financial highlights for the year then ended and the period from
December 20, 1996 (date of inception) to December 31, 1996, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 2, 1998

55
<PAGE>

SECURITY CAPITAL (US) REAL ESTATE
SHARES INCORPORATED - I CLASS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

April 23, 1997 /(1)/
through
Per Share Data: December 31, 1997
--------------------------------
<S> <C>
Net asset value, beginning of period $ 10.15
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
Total from investment operations 2.80
Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
Total distributions (1.00)
Net asset value, end of period $ 11.95
Total return /(2)/ 29.92%
Supplemental data and ratios:
Net assets, end of period $116,560,328
Ratio of expenses to average net assets /(3) (4)/ 1.15%
Ratio of net investment income to average net assets /(3) (4)/ 4.08%
Portfolio turnover rate 82.10%
Average commission rate paid per share $ 0.0595
</TABLE>

(1) Date the Fund was effective with the SEC.
(2) Not annualized.
(3) Annualized.
(4) Without expense reimbursements of $30,393 for the period April 23, 1997
through December 31, 1997, the ratio of expenses to average net assets
would have been 1.19% and the ratio of net investment income to average net
assets would have been 4.04%.

56
<PAGE>

SECURITY CAPITAL (US) REAL ESTATE
SHARES INCORPORATED - R CLASS
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
April 23, 1997 /(1)/
through
Per Share Data: December 31, 1997
--------------------------------
<S> <C>
Net asset value, beginning of period $ 10.15
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
Total from investment operations 2.80
Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
Total distributions (1.00)
Net asset value, end of period $ 11.95
Total return /(2)/ 29.91%
Supplemental data and ratios:
Net assets, end of period $671,856
Ratio of expenses to average net assets /(3) (4)/ 1.16%
Ratio of net investment income to average net assets /(3) (4)/ 4.06%
Portfolio turnover rate 82.10%
Average commission rate paid per share $ 0.0595
</TABLE>

(1) Date the Fund was effective with the SEC.
(2) Not annualized.
(3) Annualized.
(4) Without expense reimbursements of $21,285 for the period April 23, 1997
through December 31, 1997, the ratio of expenses to average net assets
would have been 1.20% and the ratio of net investment income to average net
assets would have been 4.02%.

57
<PAGE>

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS

This Appendix describes ratings applied to corporate bonds by Standard & Poor's
("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Investor
Services, Inc. ("Fitch").

S&P'S RATINGS

AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

Debt rated 'BB,' 'B,' 'CCC,' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major exposures to adverse
markets.

BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.

B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.

CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.

CC: The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.

C: The rating 'C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC-' rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

58
<PAGE>

CI: The rating 'CI' is reserved for income bonds on which on interest is being
paid.

D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating will also be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.

MOODY'S RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess may favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

59
<PAGE>

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

FITCH RATINGS

AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA.' Because bonds rate in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F=1+.'

A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the rating of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

BB: Bonds are considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.

B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issues.

CCC: Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

C: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.

C: Bonds are in imminent default in payment of interest or principal.

DDD, DD, and D: Bonds in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D' represents
the lowest potential for recovery.

Note: Fitch ratings (other than 'AAA,' 'DDD,' 'DD,' or 'D' categories) may be
modified by the addition of a plus (+) or minus (-) sign to show relative
position of a credit within the rating category.

60
<PAGE>

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

FORM N-1A

PART C -- OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements.

Included herein.

(b) Exhibits:

A list of exhibits filed herewith is contained on the Exhibit Index
which immediately precedes such exhibits and is incorporated herein by
reference.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

Following is a list of entities that for purposes of the Investment Company
Act of 1940 are controlled by or under common control with Security Capital Real
Estate Mutual Funds Incorporated:

<TABLE>
<CAPTION>
JURISDICTION OF
NAME ORGANIZATION BASIS OF CONTROL
- ----------------------------------------- ---------------------- -----------------------------------
<S> <C> <C>
Security Capital Group Incorporated ("Group") Maryland No entity controls Group
SC Realty Incorporated ("SC Realty") Nevada Ownership by Group of 100% of voting
securities
Security Capital Preferred Growth ("SCPG") Maryland Ownership by SC Realty of 12.86% of voting
securities
Harbor Capital Incorporated Delaware Ownership by SCPG of 100% of voting
securities
East Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
West Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Midwest Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Security Capital Global Capital Management Delaware Ownership by Group of 100% of voting
Group Incorporated ("Global Management") securities
SCERF Incorporated Maryland Ownership by SC Realty of 100% of
voting securities
Security Capital U.S. Real Estate Shares Maryland Ownership by SC Realty of
Incorporated 98% of voting securities
Security Capital EuroPacific Real Estate Shares Maryland Ownership by SC Realty of 100% of
Incorporated voting securities
Security Capital Management Incorporated Delaware Ownership by Group of 100% of voting
securities
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
Belmont Corporation ("Belmont") Delaware Ownership by Group 100% of voting
securities
Belmont One Corporation ("Belmont One") Delaware Ownership by Belmont of 100% of voting
securities
Belmont Two Corporation ("Belmont Two") Delaware Ownership by Belmont of 100% of voting
securities
Belmont Village L.P. Delaware Ownership by Belmont One of 1% general
partnership interest and ownership by Belmont
Two of 99% limited partnership interest
Security Capital BVI Holdings Incorporated Maryland Ownership by Group of 100% of voting
securities
SCGPB Incorporated British Virgin Ownership by Security Capital BVI Holdings
Islands of 100% of voting securities
Security Capital (US) Management Group Delaware Ownership by Global Management of 100%
Incorporated of voting securities
Security Capital Global Strategic Group Maryland Ownership by Global Management of
Incorporated 100% of voting securities
Security Capital Real Estate Research Group Maryland Ownership by Global Management of
Incorporated 100% of voting securities
Security Capital Financial Services Delaware Ownership by Group of 100% of voting
Group Incorporated ("Financial Services") securities
SC Group Incorporated Texas Ownership by Financial Services of 100% of
voting securities
Coast Services Incorporated Maryland Ownership by SC Group Incorporated of
100% of voting securities
Security Capital Markets Group Incorporated Delaware Ownership by Financial Services of 100% of
voting securities
Strategic Hotel Capital Incorporated Delaware Ownership by Group of 49.65% of voting
securities
Strategic Hotel Funding LLC Delaware Ownership by Group of 1005% of voting
securities
ES Philadelphia Airport Joint Venture Pennsylvania Ownership by Strategic Hotel Funding LLC of
90% of voting securities
GH Inn LLC Illinois Ownership by Strategic Hotel Funding LLC of
50% of voting securities
Imobilaris National Mexicana, S.A. de C.V. Mexico Ownership by Propanmer South DC CU. of
99.99% of voting securities
Padres Place Hotel Ventura Louisiana Ownership by Strategic Hotel Funding LLC of
1% of voting securities
Propanmex S.A. de C.V. Mexico Ownership by SHC Mexico Holdings
Incorporated of 99.99% of voting securities
SHC Burbank LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Mortgage Incorporated Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 1 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
</TABLE>

2
<PAGE>

<TABLE>
<S> <C> <C>
SHC Paris - 2 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 3 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 4 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHCI Santa Monica Beach Hotel, L.L.C. Delaware Ownership by Strategic Hotel Funding, LLC
of 100% of voting securities
SHC Paris - 5 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 6 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Phoenix I LLC Delaware Ownership by Strategic Hotel Funding LLC of
60.5% of voting securities
SHC Phoenix II LLC Delaware Ownership by Strategic Hotel Funding LLC of
39.5% of voting securities
SHC Rancho LLC Delaware Ownership by Strategic Hotel Funding LLC of
99% of voting securities
SHC San Francisco LLC Delaware Ownership by Strategic Hotel Capital L.P. of
100% of voting securities
SHC Santa Clara LLC Delaware Ownership by Strategic Hotel Funding LLC of
99% of voting securities
SHC Westward Look LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
Strategic Hotel Capital Limited Partnership Delaware Ownership by Group of 100% of voting
securities
SHC Holdings LLC Delaware Ownership by Group of 49.65% of voting
securities
SHC Philadelphia LLC Delaware Ownership by Group of 49.65% of voting
securities
SHC Santa Clara LLC Delaware Ownership by Group of 49.65% of voting
securities
SHC Laguna Niguel LLC Delaware Ownership by Group of 49.65% of voting
securities
SHC Capitol LLC Delaware Ownership by Group of 49.65% of voting
securities
Westport Inn LLC Delaware Ownership by Group of 49.65% of voting
securities
Westport Plaza LLC Delaware Ownership by Group of 49.65% of voting
securities
SHC Mexico Holdings Incorporated Delaware Ownership by Group of 49.65% of voting
securities
Security Capital (EU) Management Holdings Luxembourg Ownership by Group of 100% of voting
S.A. securities
Security Capital (EU) Management Group S.A Luxembourg Ownership by Security Capital (EU)Holdings
S.A. of 100% of voting securities
</TABLE>

3
<PAGE>

<TABLE>
<S> <C> <C>
Security Capital Global Management S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital (EU) Management S.A. Luxembourg Ownership by Group of 100% of voting
securities
Security Capital (UK) Management Limited United Kingdom Ownership by Security Capital (EU)
Management S.A. of 100% of voting
securities
Security Capital (EU) Holdings S.A. Luxembourg Ownership by Security Capital (UK)
Management Limited of 100% of voting
securities
Security Capital International Limited United Kingdom 100% Ownership by Security Capital (UK)
Management Limited
CarrAmerica Realty Corporation Maryland Ownership by US Realty of 44.1% of
voting securities
Storage USA, Inc. Tennessee Ownership by US Realty of 38.3% of
voting securities
Regency Realty Corporation Florida Ownership by US Realty of 47% of
voting securities
Pacific Retail Trust Maryland Ownership by US Realty of 74.2% of
voting securities
UGPT - Skypark, Inc. Delaware Ownership by Urban Growth Property Trust
of 99% of voting securities
Urban Growth Property Trust Maryland Ownership by US Realty of 100% of
voting securities
Urban Growth Property Limited Partnership Delaware Sole general partnership interest owned by
Urban Growth Property Trust
LWP Associates LLC Maryland Ownership by Urban Growth Property Trust
of 50% of voting securities
Van Wells Realty Company, LLC Maryland Ownership by Urban Growth Property Trust
of 50% of voting securities
City Center Retail Trust Maryland Ownership by US Realty of 99% of
voting securities
City Center Retail Trust/McCaffrey Delaware Sole general partnership interest owned by
Developments, L.P. City Center Retail Trust
CCRT I Incorporated Delaware Ownership by City Center Retail Trust of
100% of voting securities
CCRT II Incorporated Delaware Ownership by City Center Retail Trust of
100% of voting securities
CCRT McCaffrey Developments LLC Delaware Ownership by CCRT/McCaffrey Develop-
ments L.P. of 100% of voting securities
Parking Services International Incorporated Maryland Ownership by US Realty of 9.4% of
voting securities
NPC-1 Incorporated Maryland Ownership by Parking Services International
Incorporated of 100% of voting securities
CWS Communities Trust Maryland Ownership by US Realty of 100% of voting
securities
</TABLE>

4
<PAGE>

CWS Communities L.P. Delaware Sole general partnership interest owned by
CWS Communities Trust
CWS Communities Incorporated Delaware Ownership by US Realty of 100% of voting
securities
CWS Management Services Incorporated Delaware Ownership by US Realty of 100% of voting
shares
Security Capital Industrial Trust ("SCI") Maryland Ownership by SC Realty of 44.1% of
voting securities
International Industrial Investments Inc. Maryland Ownership by SCI of 100% of voting
securities
Security Capital Logistar International Delaware Ownership by SCI of 100% of voting
Incorporated securities
Security Capital Logistar Management Delaware Ownership by SCI of 100% of voting
Services Incorporated securities
Logistar - Netherlands I SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar France SARL I Luxembourg Ownership by SCI of 100% of voting
securities
Logistar SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar BV Luxembourg Ownership by SCI of 100% of voting
securities
Security Capital Logistar International Luxembourg Ownership by SCI of 100% of voting
Fund SCA securities
SCI Logistar Management SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar Germany SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar Italy SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar Belgium SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar Netherlands II SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar U.K. SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar Poland SARL Luxembourg Ownership by SCI of 100% of voting
securities
</TABLE>

5
<PAGE>

<TABLE>
<S> <C> <C>
Logistar Spain SARL Luxembourg Ownership by SCI of 100% of voting
securities
Logistar France SAS Netherlands Ownership by SCI of 100% of voting
securities
Logistar France SARL Netherlands Ownership by SCI of 100% of voting
securities
Logistar Netherlands SARL Netherlands Ownership by SCI of 100% of voting
securities
Logistar Czech Republic SARL Netherlands Ownership by SCI of 100% of voting
securities
Logistar France BV Netherlands Ownership by SCI of 100% of voting
securities
Logistar Spain BV Netherlands Ownership by SCI of 100% of voting
securities
CS Integrated LLC ("CSI") Delaware Ownership by SCI of 100% of voting
securities
Enterprise Refrigerated Services LLC Delaware Ownership by CSI of 100% of voting
securities
CS Integrated Retail Services LLC Delaware Ownership by CSI of 100% of voting
securities
CS Integrated-Texas Limited Partnership Delaware Ownership by CSI of 100% of voting
securities
CS Integrated Investment Management LLC Delaware Ownership by CSI of 100% of voting
securities
CS Integrated Investments Southwest LLC Delaware Ownership by CSI of 100% of voting
securities
SCI Logistics Services Incorporated Delaware Ownership by SCI of 95% of voting securities
SCI Logistics Holdings LLC Delaware Ownership by CSI of 100% of voting
securities
1440 Goodyear Partners Texas Sole general partnership interest owned
by SCI
Red Mountain Joint Venture Texas Sole general partnership interest owned
by SCI
SCI Limited Partnership-I Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-II Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-III Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-IV Delaware Sole general partnership interest owned
by SCI IV, Inc.
SCI IV, Inc. Delaware Ownership by SCI of 100% of voting
securities
Security Capital Industrial Management Delaware Ownership by SCI of 100% of voting
Incorporated securities
SCI--Alabama (1) Incorporated Maryland Ownership by SCI of 100% of voting
securities
</TABLE>

6
<PAGE>

<TABLE>
<S> <C> <C>
SCI--Alabama (2) Incorporated Maryland Ownership by SCI of 100% of voting
securities
Security Capital Alabama Industrial Trust Alabama Ownership of 100% of voting securities
by SCI--Alabama (1) Incorporated
and SCI--Alabama (2) Incorporated
SCI--North Carolina (1) Incorporated Maryland Ownership by SCI of 100% of voting
securities
SCI--North Carolina (2) Incorporated Maryland Ownership by SCI of 100% of voting
securities
SCI--North Carolina Limited Partnership Delaware Sole general partnership interest owned
by SCI--North Carolina (1)
Incorporated
SCI Houston Holdings Inc. Delaware Ownership by SCI of 100% of voting
securities
SCI Mexico Industrial Trust Maryland Ownership of SCI of 100% non-voting
preferred securities
SCI De Mexico SA DE CV Mexico Ownership by SCI-DS Mexico of 100% of
voting securities
SCI Development Services Incorporated Delaware Ownership by SCI of 100% of voting
securities
SCI-DS Mexico Incorporated Maryland Ownership by SCI Development Services
100% of voting securities
Security Capital Atlantic Incorporated Maryland Ownership by SC Realty of 49% of
("Atlantic") voting securities
SCG Realty Services Atlantic Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
SCA Florida Holdings (1) Incorporated Florida Ownership by Atlantic of 100% of
voting securities
Atlantic Development Services Delaware Ownership by SCA of 100% of preferred
stock
Atlantic-Tennessee Limited Partnership Delaware Ownership by SCA (3) and SCA (4) of 100%
of voting securities
SCA Tennessee (3) Incorporated Maryland Ownership by SCA of 100% of voting
securities
SCA Tennessee (4) Incorporated Maryland Ownership by SCA of 100% of voting
securities
Atlantic--Alabama (3) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Atlantic--Alabama (4) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Atlantic Alabama Multifamily Trust Alabama Ownership of 100% of voting securities
by Atlantic--Alabama (3)
Incorporated and Atlantic--Alabama
(4) Incorporated
Atlantic--Alabama (5) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
</TABLE>

7
<PAGE>

<TABLE>
<S> <C> <C>
Atlantic--Alabama (6) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
SCA Florida Holdings (2) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
SCA Alabama Multifamily Trust Alabama Ownership by Atlantic-Alabama (5)
Incorporated and Atlantic-Alabama (6)
Incorporated of 100% of voting securities
SCA--South Carolina (1) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA--North Carolina (1) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA North Carolina (2) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA North Carolina Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Indiana Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Tennessee Limited Partnership Delaware Sole general partnership interest owned
by SCA--Tennessee (1) Incorporated
SCA--Tennessee (1) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
SCA--Tennessee (2) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Security Capital Atlantic Multifamily Inc. Delaware Ownership by Atlantic of 100% of
voting securities
Security Capital Pacific Trust ("PTR") Maryland Ownership by SC Realty of 36.0% of
voting securities
SCG Realty Services Incorporated Delaware Ownership by PTR of 100% of voting
securities
SCP Nevada Holdings 1 Incorporated Nevada Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 1 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 2 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 4 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 5 Incorporated Utah Ownership by PTR of 100% of voting
securities
PTR Multifamily Holdings Incorporated Delaware Ownership by PTR of 100% of voting
securities
Spectrum Apartment Locators Inc. Delaware Ownership by PTR of 100% of voting
securities
Las Flores Development Company Texas Ownership by PTR of 100% of voting
securities
PTR Holdings (Texas) Incorporated Texas Ownership by PTR of 100% of voting
securities
</TABLE>

8
<PAGE>

<TABLE>
<S> <C> <C>
PTR-California Holdings (1) Incorporated Maryland Ownership by PTR of 100% of voting
securities
Archstone Financial Services, Inc. Delaware Ownership by PTR of 100% of voting
securities
PTR-California Holdings (2) Incorporated Maryland Ownership by PTR of 100% of voting
securities
PTR-California Holdings (3) Incorporated Delaware Ownership by PTR of 100% of voting
securities
PTR-New Mexico (1) Incorporated Delaware Ownership by PTR of 100% of voting
securities
PTR Development Services Delaware Ownership by PTR of 100% of preferred
stock
Homestead Village Incorporated Maryland Ownership by SC Realty (including its
subsidiaries) of 56.5% of voting
securities
KC Homestead Village Redevelopment Missouri Ownership by Homestead Village
Corporation Incorporated of 100% of voting
securities
Missouri Homestead Village Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village Limited Delaware Sole general partnership interest owned
Partnership by Atlantic Homestead Village (1)
Incorporated
Atlantic Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Homestead Alabama Incorporated Alabama Ownership by Homestead Village of 100% of
voting securities
BTW Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities
Homestead Village Management Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities
</TABLE>

9
<PAGE>

<TABLE>
<S> <C> <C>
PTR Homestead Village Limited Partnership Delaware Sole general partnership interest owned
by PTR Homestead Village (1)
Incorporated
BTW II Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities
HVI Trust Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
</TABLE>

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD
HOLDERS
Shares of Beneficial Interest at March 31, 1998
----------------------------- ------------------
<S> <C>
Security Capital U.S. Real Estate Shares

Class I Shares 9,788,870.369
Class R Shares 200,603.647

Security Capital Real Estate Arbitrage Shares

Class I Shares 0
Class R Shares 0

Security Capital European Real Estate Shares

Class I Shares 0
Class R Shares 0

Security Capital Asia/Pacific Real Estate Shares
Class I Shares 0
Class R Shares 0

</TABLE>

ITEM 27. INDEMNIFICATION.

Reference is made to Article Eighth of the Registrant's Articles of
Incorporation, incorporated by reference to SC-US's Registration Statement on
Form N-1A (File Nos. 333-20649 and 811-8033), filed with the Securities and
Exchange Commission on January 29, 1997.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to its Articles of Incorporation, its By-
Laws or otherwise, the Registrant is aware that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and, therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by directors, officers or controlling
persons of the Registrant in connection with the successful defense of any act,
suit or proceeding) is asserted by such directors, officers or controlling
persons in connection with shares being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court

10
<PAGE>

of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Security Capital (US) Management Group Incorporated ("SC (US) Management"), 11
South LaSalle Street, Chicago, Illinois 60603, provides investment advisory
services to institutional investors.

For information as to any other business, vocation or employment of a
substantial nature in which each Director or officer of the Registrant's
investment adviser has been engaged for his own account or in the capacity of
Director, officer, employee, partner or trustee, reference is made to Prospectus
and Statement of Additional Information contained in this registration
statement.

ITEM 29. PRINCIPAL UNDERWRITER.

(a) Security Capital Markets Group Incorporated ("SCMG"), the principal
distributor for the Funds' securities, does not currently act as principal
underwriter or distributor for any other investment company.

(b) The table below sets forth certain information as to SCMG's Directors,
Officers and Control Persons:

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
------------------ --------------------- ---------------------
<S> <C> <C>
Lucinda G. Marker*/ President None
-
K. Scott Canon**/ Director and Senior Vice President None
--
Jeffrey A. Klopf*/ Director, Secretary and Senior Vice President None
-
Gerard de Gunzburg***/ Senior Vice President None
---
Donald E. Suter**/ Managing Director None
--
Robert H. Fippinger*/ Vice President None
-
Alison C. Hefele**/ Senior Vice President None
--
Garett C. House**/ Vice President None
--
Gerald R. Morgan, Jr.*/ Assistant Controller None
-
Jayson C. Cyr****/ Assistant Controller None
----
</TABLE>
*/ Principal business address is 125 Lincoln Avenue, Santa Fe, New Mexico,
- 87501.

**/ Principal business address is 11 South LaSalle Street, Chicago, Illinois
- -- 60609.

***/ Principal business address is 399 Park Avenue, 23rd Floor, New York, NY
- --- 10022.

****/ Principal business address is 7777 Market Center Avenue, El Paso, Texas
- ---- 79912.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

Certain of the records described in Section 31(a) of the 1940 Act and the
Rules 17 CFR 270.31a-1 to 31a-3 promulgated thereunder, are maintained by SC-
US's Investment Adviser and Administrator, Security Capital (US) Management
Group Incorporated, 11 South LaSalle Street, Chicago, Illinois 60603.
The remainder

11
<PAGE>

of such records are maintained by Firstar Trust Company, SC-US's Sub-
Administrator, 615 East Michigan Street, Milwaukee, Wisconsin 53202.

ITEM 31. MANAGEMENT SERVICES.

There are no management-related service contracts not discussed in Part A or
Part B.

ITEM 32. UNDERTAKINGS.

(a) Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest Annual Report to
Shareholders upon request and without charge.

(b) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less than 10 percent of the Registrant's outstanding shares and to assist
its shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder communications.

12
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, and State of Illinois on the 16th day of
April, 1998.

SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

/s/ Anthony R. Manno Jr.
By:__________________________________________
Anthony R. Manno Jr.
Chairman, Managing Director and President

Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement of Security Capital Real Estate Fund has been signed
below by the following persons in the capacities and on the 16th day of April,
1998.

Signature Capacity Date
- ------------------------ ------------------------------- -------------------
/s/ Anthony R. Manno Jr.
_____________________ Chairman, Managing Director and April 16, 1998
Anthony R. Manno Jr. President

/s/ Jeffrey C. Nellessen
_____________________ Principal Financial Officer April 16, 1998
Jeffrey C. Nellessen

/s/ Jeffrey C. Nellessen
_____________________ Comptroller April 16, 1998
Jeffrey C. Nellessen

_____________________ Director [___________, 1998]
Stephen F. Kasbeer

13
<PAGE>

/s/ Anthony R. Manno Jr.
_____________________ Director April 16, 1998
Anthony R. Manno Jr.

_____________________ Director April 16, 1998
George F. Keane

/s/ Robert H. Abrams
_____________________ Director April 16, 1998
Robert H. Abrams

/s/ John H. Gardner, Jr.
_____________________ Director April 16, 1998
John H. Gardner, Jr.

14
<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- ------------ --------------------------------------------

1* Articles of Incorporation.

2(a)* By-Laws.

2(b)*** Amended By-Laws.

5(a) Investment Advisory Contract. (To be filed by amendment.)

5(b) Amended Investment Advisory Contract. (To be filed by amendment.)

5(c) Sponsorship Agreement (To be filed by amendment.)

6(a) General Distributor's Agreement (To be filed by amendment.)

6(b) Distribution and Servicing Agreement (To be filed by amendment.)

8 Custodian Agreement (To be filed by amendment.)

9(a) Transfer Agent Agreement (To be filed by amendment.)

9(b) Fund Accounting and Administration Agreement (To be filed by
amendment.)

9(b)(i) Amended Fund Accounting and Administration Agreement (To be filed
by amendment.)

9(c) Fund Accounting Servicing Agreement (To be filed by amendment.)

10(a)** Opinion and Consent of Mayer, Brown & Platt regarding the
legality of the securities being issued.

11(a) Consent of Mayer, Brown & Platt.

11(b) Report of Independent Public Accountants

15(a)*** Rule 12b-1 Distribution and Service Plan for Class I Shares.

15(b)*** Rule 12b-1 Distribution and Service Plan for Class R Shares.

17 Financial Data Schedule.

18*** Rule 18f-3 Multiple Class Plan.

_________

*Incorporated herein by reference to Registrant's registration statement on
Form N-1A (File Nos. 333-20649 and 811-8033) filed with the Securities and
Exchange Commission on January 29, 1997.

**Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's registration statement on Form N-1A (file Nos. 333-20649 and 811-
9033) filed with the Securities and Exchange Commission on April 21, 1997.

***Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's registration statement on Form N-1A (File Nos. (333-20649 and 811-
90-33) filed with Securities and Exchange Commission on December 17, 1997.

<PAGE>

EXHIBIT 11(A)

CONSENT OF
----------
MAYER, BROWN & PLATT
--------------------

We hereby consent to the reference to our firm under the caption "Counsel
and Independent Accountants" in the statement of additional information
comprising a part of Post-Effective Amendment No. 6 to the Form N-1A
Registration Statement of Security Capital U.S. Real Estate Shares Incorporated,
File Nos. 333-20649 and 811-8033.

/s/ Mayer, Brown & Platt

MAYER, BROWN & PLATT

Washington, D.C.
April 16, 1998

<PAGE>

EXHIBIT 11(b)

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------

To the Board of Directors and Shareholders of
Security Capital U.S. Real Estate Shares Incorporated:

We have audited, in accordance with generally accepted auditing standards, the
statement of assets and liabilities of Security Capital U.S. Real Estate Shares
Incorporated (a Maryland corporation), including the schedule of investments, as
of December 31, 1997, and the related statement of operations for the year then
ended and the statement of changes in net assets and financial highlights for
the year then ended and the period from December 20, 1996 (date of inception) to
December 31, 1996 (which are presented separately herein) and expressed an
unqualified opinion on those statements. The information set forth in the
financial highlights for the period from April 23, 1997 (effective date of the
Fund's initial registration statement) through December 31, 1997, appearing on
page 4 of the Fund's prospectus (both Class I and Class R shares), is fairly
stated in all material respects in relation to the financial statements from
which it has been derived.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 2, 1998

<PAGE>

<ARTICLE> 6
<CIK> 0001031659
<NAME> SECURITY CAPITAL US REAL ESTATE INC - I CLASS
<SERIES>
<NUMBER> 011
<NAME> I CLASS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 100,493,571
<INVESTMENTS-AT-VALUE> 113,678,709
<RECEIVABLES> 4,089,540
<ASSETS-OTHER> 117,474
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 117,885,723
<PAYABLE-FOR-SECURITIES> 479,854
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 173,685
<TOTAL-LIABILITIES> 653,539
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,731,755
<SHARES-COMMON-STOCK> 9,755,880
<SHARES-COMMON-PRIOR> 987
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,315,291
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,185,138
<NET-ASSETS> 117,232,184
<DIVIDEND-INCOME> 4,729,653
<INTEREST-INCOME> 141,838
<OTHER-INCOME> 0
<EXPENSES-NET> 901,702
<NET-INVESTMENT-INCOME> 3,969,789
<REALIZED-GAINS-CURRENT> 8,063,795
<APPREC-INCREASE-CURRENT> 12,889,384
<NET-CHANGE-FROM-OPS> 24,922,968
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,978,815
<DISTRIBUTIONS-OF-GAINS> 5,717,116
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,776,671
<NUMBER-OF-SHARES-REDEEMED> 309,713
<SHARES-REINVESTED> 240,503
<NET-CHANGE-IN-ASSETS> 106,985,506
<ACCUMULATED-NII-PRIOR> 24
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 652,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 932,145
<AVERAGE-NET-ASSETS> 95,394,149
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<CIK> 0001031659
<NAME> SECURITY CAPITAL US REAL ESTATE INC - R CLASS
<SERIES>
<NUMBER> 012
<NAME> R CLASS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 100,493,571
<INVESTMENTS-AT-VALUE> 113,678,709
<RECEIVABLES> 4,089,540
<ASSETS-OTHER> 117,474
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 117,885,723
<PAYABLE-FOR-SECURITIES> 479,854
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 173,685
<TOTAL-LIABILITIES> 653,539
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,731,755
<SHARES-COMMON-STOCK> 56,234
<SHARES-COMMON-PRIOR> 987
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,315,291
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,185,138
<NET-ASSETS> 117,232,184
<DIVIDEND-INCOME> 4,729,653
<INTEREST-INCOME> 141,838
<OTHER-INCOME> 0
<EXPENSES-NET> 901,702
<NET-INVESTMENT-INCOME> 3,969,789
<REALIZED-GAINS-CURRENT> 8,063,795
<APPREC-INCREASE-CURRENT> 12,889,384
<NET-CHANGE-FROM-OPS> 24,922,968
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21,950
<DISTRIBUTIONS-OF-GAINS> 31,388
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 113,720
<NUMBER-OF-SHARES-REDEEMED> 6
<SHARES-REINVESTED> 3,516
<NET-CHANGE-IN-ASSETS> 106,985,506
<ACCUMULATED-NII-PRIOR> 24
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 652,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 932,145
<AVERAGE-NET-ASSETS> 526,000
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>