SECURITY CAPITAL U S REAL ESTATE SHARES INC, 497, 1998-07-06

SECURITY CAPITAL U S REAL ESTATE SHARES INC
497, 1998-07-06

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PROSPECTUS

[LOGO APPEARS HERE]

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 Global Capital Management Group Incorporated
("GCMG") 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.
Class I shares are offered directly through Security Capital Markets Group
Incorporated, SC-ARBITRAGE's distributor ("Distributor"), SC-REMFs and various
financial intermediaries. See "Purchase of Shares." This Prospectus provides
you with information specific to the Class I shares of SC-ARBITRAGE. It contains
information you should know before you invest in SC-ARBITRAGE.

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-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 June 30, 1998, containing additional and more detailed information about
SC-ARBITRAGE 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 toll free 1-888-
SECURITY.

The Board of Directors of SC-REMFs believes that the unrestrained growth of
SC-ARBITRAGE could impair investment flexibility and, therefore, would not be in
the best interests of SC-ARBITRAGE's shareholders. Accordingly, SC-ARBITRAGE
will cease offering shares to new investors for a period of at least six months
when total assets reach $100 million. The imposition of this limitation will
not affect existing shareholders of record, who will be permitted to continue to
invest in SC-ARBITRAGE and to reinvest dividends and capital gain distributions.
After SC-ARBITRAGE has been closed to new investors for a period of at least six
months, the Board of Directors will evaluate whether to re-open SC-ARBITRAGE to
new investors.

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.

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

June 30, 1998

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TABLE OF CONTENTS

Page
----

Expenses................................................................. 2

Description of SC-ARBITRAGE.............................................. 4

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

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

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

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

Directors, Officers and Other Personnel.................................. 11

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

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

Distribution and Servicing Plan.......................................... 15

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

Purchase of Shares....................................................... 16

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

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

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

Organization and Description of Capital Stock............................ 21

Custodian and Transfer Agent............................................. 22

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

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

Year 2000 Risks.......................................................... 23

Additional Information................................................... 23

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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-ARBITRAGE'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
GCMG. 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(3).................................................................. .25%
Other expenses(4).............................................................. .15%
-----
Total fund operating expenses.................................................. 2.40%
=====
</TABLE>

- ------------

(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.

(2) The management fee is a "fulcrum fee" that will be applied to SC-ARBITRAGE's
net assets in accordance with SEC regulations. After the first three full
months of operations, SC-ARBITRAGE will pay a monthly advisory fee to GCMG
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 investment performance
for the prior twelve-month period relative to the percentage change in
Wilshire Real Estate Index ("Index") 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 record
of the Index, will be measured from the date of inception. The advisory fee
is structured so that it will equal the 2.00% base fee if SC-ARBITRAGE's
investment performance for the preceding twelve months (net of fees and
expenses, including the advisory fee) equals the Index Return.

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(3) SC-REMFs has adopted a Distribution and Service Plan for SC-ARBITRAGE
Class I shares pursuant to Rule 12b-1 of the Investment Company Act of 1940,
as amended, pursuant to which SC-REMFs pays the Distributor 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 I
average daily net assets. As a result, long-term Class I 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 on estimated amounts for the current fiscal year.

Example

One Three
Year Years
---- -----
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............ $22 $67

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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DESCRIPTION OF SC-ARBITRAGE

SC-ARBITRAGE is a non-diversified investment portfolio of Security Capital
ReEstate Mutual Funds Incorporated ("SC-REMFs"), an open-end management
investment company organized under Maryland law. 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 one class of shares, Class I shares, which are offered to
investors whose minimum initial investment is $250,000. See "Purchase of Shares"
and "Organization and Description of Capital Stock."

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 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 65% 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 GCMG'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.

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

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Illiquid Securities

SC-ARBITRAGE will not invest more than 10% of its net assets in illiquid
securities, determined at the time of investment. 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. GCMG 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 stocks, 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 GCMG 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 GCMG expects that under normal circumstances SC-
ARBITRAGE is not likely to invest a substantial portion of its 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 SC-ARBITRAGE 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 GCMG will monitor
the investment to determine whether continued investment in the security will
assist in meeting SC-ARBITRAGE'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.

When, in the judgment of GCMG, 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.

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TRADING AND INVESTMENT STRATEGIES

Arbitrage Transactions

SC-ARBITRAGE seeks to achieve maximum returns by engaging in mergers and
acquisitions ("M&A"), liquidity and event arbitrage transactions. An arbitrage
transaction involves the simultaneous purchase and short sale of the same or
related securities in order to exploit a perceived pricing inefficiency. SC-
ARBITRAGE's arbitrage transactions will focus primarily on real estate
securities which are undergoing mergers, acquisitions, liquidity events and
structured events, including restructurings, spin-offs and liquidations
("Structured Events"). GCMG relies on a dynamic integration of quantitative
analysis in combination with GCMG's in-depth, proprietary research 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 generally involving the purchase of the
securities of a real estate company that is being acquired and short
sales of the securities of the acquiror. M&A arbitrage involves
purchasing the shares of an announced acquisition target at a discount
from the expected value of such shares upon completion of the
acquisition. In an M&A arbitrage transaction, SC-ARBITRAGE typically
will obtain a long position in the acquiree company and a short position
in the acquiror. SC-ARBITRAGE will purchase its position in the acquiree
company in anticipation of an increase in the value of the acquiree
company's securities upon the exchange of the acquiree company's
securities for those of the acquiror. The size of the discount, or
spread, and whether the potential reward justifies the potential risk,
are a function of a number of factors, including the status of
negotiations between the two companies, the complexity of the
transaction, the number of required regulatory approvals and the
possibility of competing offers for the target company.

. Liquidity Arbitrage. SC-ARBITRAGE will engage in liquidity arbitrage
transactions, involving the purchase and subsequent sale of blocks of
real estate securities. Liquidity arbitrage generally involves the
purchase and subsequent sale of real estate securities that are the
subject of institutional block trading. Specifically, SC-ARBITRAGE
intends to purchase securities that are subject to "selling pressure"
and will sell securities short, which are being subject to "buying
pressure." GCMG's valuation methodologies facilitate liquidity arbitrage
by SC-ARBITRAGE enabling SC-ARBITRAGE to respond quickly to block
opportunities as they arise.

. Event Arbitrage. SC-ARBITRAGE will engage in event arbitrage
transactions in the securities of real estate companies which are
undergoing a Structured Event. In event arbitrage transactions, SC-
ARBITRAGE purchases or sells short the securities of companies
undergoing a Structured Event at a discount, or premium in the case of a
short sale, from the value GCMG expects the security to realize upon the
consummation of the Structured Event. The spread in an event arbitrage
transaction, and whether the potential reward justifies the potential
risk, are a function of a number of factors, including the complexity of
the transaction, the number of required regulatory approvals and the
possibility a company will undergo a different type of Structured Event,
and most importantly the valuation conclusion of GCMG.

SC-ARBITRAGE will generally own more shares long than it will sell short.
Each particular arbitrage event will be evaluated to determine the net position
the fund wishes to establish in light of GCMG's valuation conclusions.

Short Sales

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,

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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 will not engage in short sales if immediately
following such transaction the aggregate market value of all securities sold
short would exceed 100% of SC-ARBITRAGE's net assets (taken at market value).
See the Statement of Additional Information for further discussion of short
sales.

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), determined at the time of investment.

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 times.

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

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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.

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

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.

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-ARBITRAGE and
therefore, shareholders will indirectly pay the fees charged by the REITs in
which SC-ARBITRAGE invests. In addition, equity and mortgage REITs could
possibly fail to qualify for tax free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), or to maintain their exemptions
from registration under 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.

Arbitrage Transactions

An arbitrage transaction generally involves the simultaneous purchase and
short sale of the same or related securities in order to exploit a perceived
pricing inefficiency. The arbitrage transactions in which SC-ARBITRAGE will
engage involve unique risks. In connection with M&A arbitrage, SC-ARBITRAGE is
subject to the risk that certain proposed mergers, acquisitions or
reorganizations may be delayed, renegotiated or terminated, in which case
anticipated price movements may not occur and losses may be realized.
Similarly, if event arbitrage transactions, including spin-offs, liquidations
and restructurings, do not materialize in a manner consistent with GCMG's
expectations, SC-ARBITRAGE is subject to the risk that the value of these
investments will decline. In addition, liquidity arbitrage

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transactions involve the risk that the price of securities purchased in block
trades will decrease or the price of securities sold short in block trades will
increase, in which case SC-ARBITRAGE would incur a loss.

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.

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

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 GCMG'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.

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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 SC-ARBITRAGE that are
the subject of a hedge. The successful use by SC-ARBITRAGE of the strategies
described above further depends on the ability of GCMG 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 GCMG 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 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 SC-ARBITRAGE. SC-ARBITRAGE will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of GCMG, 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 AND 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 GCMG 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 four times in a period of one year.
Arbitrage investments, especially M&A arbitrage, are typically characterized by
a high turnover rate because a short period of time (i.e., two to six months)
typically elapses between the announcement of a merger or acquisition and its
completion. Similarly, the institutional block trading that characterizes
liquidity arbitrage involves the acquisition of short-term positions. In
contrast, event arbitrage does not involve as high a turnover rate because
Structured Events generally require a longer period of time (i.e., more than six
months) to complete. 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

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<PAGE>

net short-term capital gains by SC-ARBITRAGE 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-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 GCMG, or with SC-
ARBITRAGE's administrator, its custodian and its 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, GCMG 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.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January 1995,
where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
also responsible for company and industry analysis,
market strategy and trading and reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. 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 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.

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. At
Loyola University, he also 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. Currently, Mr. Kasbeer serves as a
Director of Endowment Realty, Inc. and Endowment
Realty II and as a Member of the Investment
Committee of the University of San Diego. Mr.
Kasbeer also serves as Trustee, Treasurer and
Chairman of the Investment and Finance Committees
of Santa Fe Preparatory School and as Trustee and
Chairman of the Santa Fe Preparatory School
Combined Permanent Endowment

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<PAGE>

Fund Trust. 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 $95
billion New York State Common Retirement Fund since
1982. He has been a Director of the Northern Trust
of Connecticut 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, 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 also
holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") 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. from Bentley College and
his B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of
GCMG since November 1997 where he is responsible
for the development and implementation of portfolio
investment strategy. Prior thereto, Senior Vice
President of GCMG 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 and Senior REIT Analyst 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 GCMG since November 1997 and Vice
President since July 1996, where

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<PAGE>

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 GCMG, 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 $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 GCMG 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 Security Capital U.S. Realty
Incorporated; 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.
from the University of Chicago. Mr. Adriani is a
Chartered Financial Analyst.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-
REMFs. Vice President and Controller of GCMG 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.

GCMG

Security Capital Global Capital Management Group Incorporated ("GCMG"), 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.

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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.
GCMG is an indirect 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 GCMG analysts, is primarily responsible for the day-to-day
management of SC-ARBITRAGE's portfolio.

INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), GCMG
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. GCMG also
selects brokers and dealers to execute purchase and sale orders for the
portfolio transactions of SC-ARBITRAGE. GCMG provides persons satisfactory to
the Directors of SC-REMFs to serve as officers of SC-REMFs. Such officers,

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<PAGE>

as well as certain other employees and Directors of SC-ARBITRAGE, may be
directors, officers, or employees of GCMG.

Under the Advisory Agreement, SC-ARBITRAGE's Class I shares pay GCMG, monthly,
an annual management fee in an amount equal to 2.00% of SC-ARBITRAGE's Class I
average daily net asset value during the first three full months of operations.
Thereafter, SC-ARBITRAGE Class I shares will pay GCMG an annual investment
advisory fee which increases or decreases from a "fulcrum fee" or base fee of
2.00% of SC-ARBITRAGE's Class I average daily net assets ("Base Fee") 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 Base 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 SC-ARBITRAGE'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>

* The advisory fee increases or decreases from a Base Fee of 2.00%.

The Base 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, GCMG may receive the
maximum fee even if SC-ARBITRAGE's absolute performance is negative and may
receive the minimum fee in instances where SC-ARBITRAGE experiences significant
positive performance.

In addition to the payments to GCMG 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 GCMG, (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

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<PAGE>

GCMG 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.

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<PAGE>

ADMINISTRATOR AND SUB-ADMINISTRATOR

GCMG has also entered into a fund accounting and administration agreement with
SC-REMFs (the "Administration Agreement") under which GCMG 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 semi-
annual 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.

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 GCMG, or the Custodian or Transfer Agent, preparing
financial information for SC-ARBITRAGE's income tax returns, proxy statements,
semi-annual 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 .08% of the first $750 million, .06% of the next $250 million and .04% of SC-
REMFs's average daily net assets over $1 billion, subject to an annual minimum
fee of $75,000. The Sub-Administrator also serves as SC-ARBITRAGE's Custodian
and Transfer Agent. See "Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG receives a monthly fee from SC-REMFs at the
annual rate of .02% of the value of SC-ARBITRAGE's average daily net
assets.

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 I shares pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, SC-ARBITRAGE pays the Distributor a
monthly fee equal to, on an annual basis, .25% of the value of SC-ARBITRAGE'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-
ARBITRAGE understands that these third parties may also charge fees to their
clients who are beneficial owners of SC-ARBITRAGE 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.

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<PAGE>

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ARBITRAGE Class I shares. Such Agreements may be governed by the
Plan.

The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. 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

Net asset value per share of Class I shares of SC-ARBITRAGE, $.01 par value
per share, is determined on each day the New York Stock Exchange ("NYSE") 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 NYSE, 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 of 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 NYSE are valued, except as
indicated below, at the last sale price reflected on the consolidated tape at
the close of the NYSE 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 NYSE 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 GCMG 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-ARBITRAGE Class I shares may be purchased through
SC-ARBITRAGE's Transfer Agent and various financial intermediaries that have
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.

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<PAGE>

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:

Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184

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.

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: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

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<PAGE>

Credit: DDA Number (9905-378-7)

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

Please call toll free 1-800-409-4189 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

Additional investments must be at least $20,000 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital Real Estate Arbitrage 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 toll free 1-800-409-4189 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 I shares.

SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-ARBITRAGE, including purchases for accounts established on behalf
of the following types of retirement plans: (i) plans qualified under Section
401(k) of the Code; (ii) plans described in Section 403(b) of the Code; (iii)
deferred compensation plans described in Section 457 of the Code; (iv)
simplified employee pension (SEP) plans; and (v) salary reduction simplified
employee pension (SARSEP) plans.

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-US, SC-EURO, SC-ASIA or SC-ARBITRAGE
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-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 reasonably
satisfied that the check has cleared, which may take up to twelve days.

19
<PAGE>

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."

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 the
Transfer Agent 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 I shares (for a fixed dollar amount) at net asset
value to Security Capital Real Estate Arbitrage Shares:

Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.

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 toll
free 1-800-409-4189. 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.

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.

20
<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-ARBITRAGE or the 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-ARBITRAGE may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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 on 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.

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.

Dividends and distributions will automatically be reinvested into 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
dividends or distributions paid in cash. SC-ARBITRAGE will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-ARBITRAGE will send shareholders a statement showing
the amount and tax characterization of the distributions paid during the
previous year. In accordance with the Taxpayer Relief Act of 1997, SC-ARBITRAGE
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 28% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-ARBITRAGE's distribution
policies for SC-ARBITRAGE and its shareholders, see "Taxation."

21
<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-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. A recent legislative proposal
would reduce the holding period required to qualify for the 20% maximum capital
gains rate from 18 months to 12 months. It is impossible to determine at this
time whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.

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 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.

22
<PAGE>

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

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 June 30,
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. 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-
EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
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-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 I shareholders differ from the interests of SC-US'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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998,
SC REALTY Incorporated owned 95.44% of the issued and outstanding shares of SC-
US, which means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and
SC-ARBITRAGE for purposes of the 1940 Act. The effect of SC REALTY
Incorporated's ownership of a controlling interest in SC-US, SC-EURO, SC-ASIA,
SC-ARBITRAGE and, therefore, SC-REMFs, is to dilute the voting power of other
shareholders. SC REALTY Incorporated does not anticipate that its initial
control of SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE will adversely effect the
rights of future shareholders.

23
<PAGE>

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-ARBITRAGE's investments and as SC-ARBITRAGE's Transfer
Agent. State Street Bank and Trust Company has no 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 toll free 1-888-SECURITY 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).

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-
ARBITRAGE'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-EURO, SC-ASIA and SC-ARBITRAGE.

24
<PAGE>

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 of 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.

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 Global Capital Management Group Incorporated ("GCMG") serves as
both investment adviser and administrator to SC-EURO and Security Capital Global
Capital Management Group (Europe) S.A. ("GCMG-Europe") serves as SC-EURO's
investment sub-adviser.

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. Class I
shares are offered directly through SC-REMFs, Security Capital Markets Group
Incorporated, SC-EURO's distributor ("Distributor"), and various financial
intermediaries. 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 Class R shares should
call toll free 1-888-SECURITY or ask their sales representatives or the
Distributor. This Prospectus provides you with information specific to the
Class I shares of SC-EURO. It contains information you should know before you
invest in SC-EURO.

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 dated June 30, 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 toll
free 1-888-SECURITY.

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.

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

June 30, 1998
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

Page
----
<S> <C>
Expenses....................................... 2
Description of SC-EURO......................... 4
Investment Objectives and Policies............. 4
Investment Strategy............................ 5
Other Investment Strategies.................... 6
Risk Factors................................... 7
Non-Diversified Status & Portfolio Turnover.... 10
Directors, Officers and Other Personnel........ 10
Investment Advisory Agreement and
Investment Sub-Advisory Agreement.............. 14
Administrator and Sub-Administrator............ 14
Distribution and Servicing Plan................ 15
Determination of Net Asset Value............... 15
Purchase of Shares............................. 16
Redemption of Shares........................... 18
Dividends and Distributions.................... 20
Taxation....................................... 20
Organization and Description of Capital Stock.. 21
Custodian and Transfer Agent................... 22
Reports to Shareholders........................ 22
Performance Information........................ 22
Year 2000 Risks................................ 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-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 GCMG. 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

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................................................. .85%
12b-1 fees (2).................................................. .25%
Other expenses.................................................. .35%
----
Total SC-EURO operating expenses (3)............................ 1.45%

(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.

(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 the Distributor 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) GCMG has committed to waive fees and/or reimburse other 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 1.45% 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 waiver and/or reimbursement, other expenses would be .35%
and total fund operating expenses would be 1.45% of the value of SC-EURO's
Class I average daily net assets.

2
<PAGE>

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............................. $15 $46
</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-
EURO'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. SC-REMFs is comprised of four investment
portfolios, SC-EURO, Security Capital U.S. Real Estate Shares ("SC-US"),
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").

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 in the Statement of Additional Information,
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 65% of its assets in the
equity securities of publicly-traded real estate companies located primarily in
European nations, including Austria, Belgium, Denmark, Finland, France, Germany,
Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,
and the United Kingdom. SC-EURO also may invest in the equity securities of
real estate companies located in Eastern Europe and other European emerging
market countries.

The equity securities in which SC-EURO will invest 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 GCMG-
Europe'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 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 GCMG-Europe to be of
comparable quality and, in the aggregate, may have an average weighted maturity
of up to 30 years.

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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 and corporate commercial paper and other
short-term corporate obligations, in each case rated Baa by Moody's, or BBB or
better by S&P or, if unrated, of comparable quality as determined by GCMG; 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, determined at the time of investment. 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. GCMG and GCMG-Europe 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 Statement of Additional Information for further
discussion of SC-EURO's fundamental investment restrictions.

INVESTMENT STRATEGY

Real Estate Securities Industry Outlook

GCMG 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 $25
billion at December 31, 1992 to $65 billion at December 31, 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. GCMG 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. GCMG and GCMG-Europe are
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 GCMG
and GCMG-Europe by SC (EU) Management and other operating professionals within
the Security Capital Group Incorporated affiliate company network, assists GCMG-
Europe in identifying attractive growth in country markets and real estate
sectors. This research and analysis is instrumental to GCMG-Europe's ability to
make investment decisions for SC-EURO's portfolio and to identify country
markets reaching a "marginal turning point." This country market research
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 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 GCMG-Europe 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.

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Bottom Up Real Estate Operating Company Cash Flow Modeling. GCMG and GCMG-
Europe believe 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.
GCMG and GCMG-Europe believe 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 GCMG-Europe 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.

OTHER INVESTMENT 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
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.

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 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, 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.

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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 GCMG 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 Statement of
Additional Information.

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
will not engage in short sales if immediately following such transaction the
aggregate market value of all securities sold short would exceed 10% of SC-
EURO's net assets (taken at market value). See SC-EURO's Statement of
Additional Information for further discussion of short sales.

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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 GCMG-Europe 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.

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 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.

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

There are special risks attendant to investment in the Western European
countries. The countries that are members of the European Economic Community
("Common Market") (Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
United Kingdom) have eliminated certain import tariffs and quotas and other
trade barriers with respect to one another over the past several years. GCMG
believes that these Common Market reforms are likely to improve the prospects
for economic growth in many Western European countries. Nevertheless, it is not
clear what the form or effect of such reforms will be on real estate companies
in Western Europe. Therefore it is impossible to predict their long-term impact
on SC-EURO's investments.

SC-EURO may also invest in the equity securities of real estate companies in
European emerging market countries. Investing in emerging markets entails the
risks associated with foreign investment described above. However, these risks
may be intensified in emerging markets. Emerging markets can include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, trade difficulties and unemployment. 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 and other protectionist
measures imposed or negotiated by the countries in which they trade. There are
also risks associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulations, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of SC-EURO's investments in
those countries.

The markets of Eastern Europe are among the emerging markets in which SC-EURO
may invest. Most Eastern European nations, including Hungary, Poland, the Czech
Republic, the Slovak Republic and Romania have had centrally planned, socialist
economies since shortly after World War II. A number of their governments,
including those of Hungary, the Czech Republic and Poland are currently
implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning and move toward free market economies. Any
change in the leadership or policies of Eastern European countries, or countries
that exercise a significant influence over those countries, may cause Eastern
European countries to revert from a market-oriented to a centrally planned
economy and adversely affect existing investment opportunities. Additionally,
former Communist regimes of a number of Eastern European countries expropriated
a large amount of property, the claims of which have not been entirely settled.
There can be no assurance that the SC-EURO's investment in Eastern Europe would
not also be expropriated, nationalized or otherwise confiscated.

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.

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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 GCMG-
Europe'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.

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 Statement of Additional Information.

NON-DIVERSIFIED STATUS AND 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 GCMG 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

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furnishing services to SC-EURO, including SC-REMFs's agreements with GCMG, and
with its custodian and its 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 GCMG, 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 their principal occupations are set forth below.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since January 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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 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.

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. At Loyola University, he also
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. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty, Inc. and Endowment Realty II and as a
Member of the Investment Committee of the University of
San Diego. Mr. Kasbeer also serves as Trustee, Treasurer
and Chairman of the Investment and Finance Committees of
Santa Fe Preparatory School and as Trustee and Chairman
of the Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S. from
Northwestern University.

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Pharmaceutical Corporation, United Water Resources and
United Properties Group, 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 also holds
honorary degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton, Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs. Managing
Director of GCMG since July, 1997. Prior thereto,
Director of the REIT Manager for Security Capital
Pacific Trust ("PTR") 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. from Bentley College and his
B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of GCMG
since November 1997 where he is responsible for the
development and implementation of portfolio investment
strategy. Prior thereto, Senior Vice President of GCMG
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 and Senior REIT
Analyst 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 GCMG 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 GCMG, 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
$800 million. Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from Kenyon College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

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Security Capital Global Capital Management Group Incorporated ("GCMG"), 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-EURO under the overall supervision and
control of the Directors of SC-EURO.

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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.
Messrs. Manno and Gardner are responsible for overseeing the portfolio
management activities of GCMG-Europe. GCMG is an indirect wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.

GCMG-Europe

Security Capital Global Capital Management Group (Europe) S.A. ("GCMG-
Europe"), with offices located at Boulevard de la Woluwe 34, Brussels, Belgium,
provides portfolio management services to SC-EURO pursuant to an investment sub-
advisory agreement with GCMG. GCMG-Europe, an indirect wholly-owned subsidiary
of Security Capital Group Incorporated, was formed on May 14, 1998 under Belgian
law and is registered as an investment adviser with the SEC. The principal
officer of GCMG-Europe, who serves on the SC-EURO Portfolio Management
Committee, and his principal occupations are set forth below.

Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998 where he
is responsible for trading and portfolio management
strategy. From April 1997 to May 1998, Mr. Rovers
served as Vice President of SC (EU) Management where he
was responsible for providing research and management
support services in the area of European investments.
Mr. Rovers was a Vice President and Senior Portfolio
Manager with GIM Management, Inc. (the Netherlands)
from January 1993 to March 1997. From July 1988 to
April 1997, Mr. Rovers was associated with GIM Algemeen
Vermogensbeheer and served as an Associate Director and
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.

The SC-EURO Portfolio Management Committee, which is comprised of certain SC-
REMFs and GCMG-Europe officers, is responsible for the day-to-day management of
SC-EURO's portfolio.

SC (EU) Management

Security Capital (EU) Management Group S.A., ("SC (EU) Management") provides
GCMG-Europe with proprietary economic and 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. The
principal officer of SC (EU) Management and his principal occupations are set
forth below.

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<PAGE>

to March 1985, as 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 U.S. 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.

INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), GCMG
furnishes a continuous investment program for SC-EURO's portfolio, subject to
the general supervision of SC-REMFs's Board of Directors. GCMG 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 GCMG.

Under the Advisory Agreement, SC-EURO Class I shares pay GCMG, monthly, an
annual management fee in an amount equal to 0.85% of SC-EURO's Class I average
daily net asset value. Under a separate agreement GCMG 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 1.45% of the value of SC-EURO's Class I
average daily net assets for the year ending December 31, 1998.

In addition to the payments to GCMG 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 GCMG, (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 GCMG 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.

GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides various
portfolio management and investment advisory services to SC-EURO. In connection
with the management of SC-EURO's portfolio, GCMG-Europe may select brokers and
dealers to execute purchase and sale orders for SC-EURO's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Europe monthly,
an annual management fee in an amount equal to 0.08% of SC-EURO's average daily
net value. The fee is the sole obligation of GCMG and not SC-EURO.

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

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<PAGE>

ADMINISTRATOR AND SUB-ADMINISTRATOR

GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG 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
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual 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 GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-EURO's income tax returns, proxy statements, semi-annual 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 .08% of
the first $750 million, .06% of the next $250 million and .04% of SC-REMFs's
average daily net assets over $1 billion, subject to an annual minimum fee of
$75,000. The Sub-Administrator also serves as SC-EURO's Custodian and Transfer
Agent. See "Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of SC-EURO.

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 1940 Act. Under the Plan, SC-
EURO pays 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 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.

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<PAGE>

brokerage firms or other industry recognized service providers of fund
supermarkets or similar programs to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients who are
beneficial owners of SC-EURO Class I shares. Such Agreements may be governed by
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 SC-EURO's Transfer
Agent and various financial intermediaries that have 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 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,

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<PAGE>

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:

Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston Massachusetts, 02260-8500 Braintree, Massachusetts 02184

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: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number 9905-378-7

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

Please call toll free 1-800-409-4189 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.

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<PAGE>

Subsequent Investments

Additional investments must be at least $20,000 and may be made by mail, wire
or by telephone. When making an additional purchase by mail, a check payable to
"Security Capital European 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 toll free 1-800-409-4189 for complete wiring
instructions.

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.

SC-REMFs reserves the right to waive or modify minimum initial and subsequent
investment requirements in connection with purchases of Class I shares of SC-
EURO, including purchases for accounts established on behalf of the following
types of retirement plans: (i) plans qualified under Section 401(k) of the Code;
(ii) plans described in Section 403(b) of the Code; (iii) deferred compensation
plans described in Section 457 of the Code; (iv) simplified employee pension
(SEP) plans; and (v) salary reduction simplified employee pension (SARSEP)
plans.

Exchange Feature

Class I shares of SC-EURO may be exchanged for Class I shares of SC-US, SC-
ASIA and SC-ARBITRAGE. 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-EURO, SC-ASIA or SC-ARBITRAGE
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 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."

Mail and Wire

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<PAGE>

Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston Massachusetts, 02260-8500 Braintree, Massachusetts 02184

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application.

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 1-800-409-
4189. 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 the 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-EURO may suspend the right of redemption during any period when (i) trading
on the NYSE is restricted or the NYSE is closed, other than customary weekend
and holiday closings,

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<PAGE>

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 on 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.

Dividends and distributions will automatically be reinvested into 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
dividends or distributions paid in cash. SC-EURO will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-EURO will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-EURO
will indicate 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%.
For information concerning the tax treatment of SC-EURO's distribution policies
for SC-EURO and its shareholders, see "Taxation."

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.

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<PAGE>

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. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.

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.

Further information relating to tax consequences is contained in the Statement
of Additional Information.

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 June 30, 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. 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-EURO, SC-ASIA and SC-ARBITRAGE three of which issue two classes of shares:
Class I shares and Class R shares.

21
<PAGE>

SC-ARBITRAGE issues Class I shares only. 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,
SC-ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA'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, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders.

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company, which has its principal business address
at 225 Franklin Street, Boston, Massachusetts 02101, has been retained to act as
Custodian of SC-EURO's investments and as SC-EURO's Transfer Agent. State Street
Bank and Trust Company has no 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
toll free 1-888-SECURITY 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

22
<PAGE>

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).

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-EURO, SC-ASIA and SC-ARBITRAGE.

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 of 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.

23
<PAGE>

PROSPECTUS

LOGO

11 South LaSalle Street
Chicago, Illinois 60603

By this Prospectus, SC-EURO is offering Class R shares. Class R shares are
sold at net asset value without a sales charge to investors whose minimum
initial investment is $2,500. Class R shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-EURO's distributor
("Distributor"), and various financial intermediaries. 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 Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the 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 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.

June 30, 1998
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Expenses........................................ 2
Description of SC-EURO.......................... 4
Investment Objectives and Policies.............. 4
Investment Strategy............................. 5
Other Investment Strategies..................... 6
Risk Factors.................................... 8
Non-Diversified Status & Portfolio Turnover..... 10
Directors, Officers and Other Personnel......... 11
Investment Advisory Agreement and
Investment Sub-Advisory Agreement............... 14
Administrator and Sub-Administrator............. 15
Distribution and Servicing Plan................. 16
Determination of Net Asset Value................ 16
Purchase of Shares.............................. 16
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
Year 2000 Risks................................. 24
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-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 GCMG. 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>
<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.................................................... .85%
12b-1 fees (2)..................................................... .25%
Other expenses..................................................... .50%
----
Total SC-EURO operating expenses (3)............................... 1.60%
</TABLE>

(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(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 the Distributor 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) GCMG has committed to waive fees and/or reimburse other 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 1.60% 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 reimbursement, other expenses would

2
<PAGE>

be .50% and total fund operating expenses would be 1.60% of the value of SC-
EURO's Class R average daily net assets.

3
<PAGE>

Examples
One Three
Year Years
---- -----
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 ........................... $16 $50

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-
EURO's assets.

4
<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

Under normal conditions, SC-EURO will invest at least 65% of its assets in the
equity securities of publicly-traded real estate companies located primarily in
European nations, including Austria, Belgium, Denmark, Finland, France, Germany,
Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland
and the United Kingdom. SC-EURO also may invest in the equity securities of
real estate companies located in Eastern Europe and other European emerging
market countries.

5
<PAGE>

When, in the judgment of GCMG or GCMG-Europe, 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 and corporate commercial paper and other short-term corporate
obligations, in each case rated Baa by Moody's, or BBB or better by S&P or, if
unrated, of comparable quality as determined by GCMG 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

GCMG 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 $25
billion at December 31, 1992 to $65 billion at December 31, 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

6
<PAGE>

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 GCMG-Europe 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.

OTHER INVESTMENT STRATEGIES

7
<PAGE>

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 GCMG 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.

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 Statement of
Additional Information.

8
<PAGE>

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 will not engage in short sales if immediately following
such transaction the aggregate market value of all securities sold short would
exceed 10% of SC-EURO's net assets (taken at market value). See SC-EURO's
Statement of Additional Information for further discussion of short sales.

RISK FACTORS

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

9
<PAGE>

foreign courts. Also, most foreign countries withhold portions of income and
dividends at the source requiring investors to reclaim taxes withheld.

SC-EURO may also invest in the equity securities of real estate companies in
European emerging market countries. Investing in emerging markets entails the
risks associated with foreign investment described above. However, these risks
may be intensified in emerging markets. Emerging markets can include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, trade difficulties and unemployment. 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 and other protectionist
measures imposed or negotiated by the countries in which they trade. There are
also risks associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of SC-EURO's investments in
those countries.

10
<PAGE>

from a market-oriented to a centrally planned economy and adversely affect
existing investment opportunities. Additionally, former Communist regimes of a
number of Eastern European countries expropriated a large amount of property,
the claims of which have not been entirely settled. There can be no assurance
that the SC-EURO's investment in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated.

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.

NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER

11
<PAGE>

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 GCMG, and with its
custodian and its 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 GCMG, 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 their
principal occupations are set forth below.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since January 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market
securities activities and is also responsible for
company and industry analysis, market strategy and
trading and reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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
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>

Endowment Realty Inc. and Endowment Realty II and as
a Member of the Investment Committee of the
University of San Diego. Mr. Kasbeer also serves as
Trustee, Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School and
as Trustee and Chairman of the Sante Fe Preparatory
School Combined Permanent Endowment Fund Trust. 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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 also holds
honorary degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton,
Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs. Managing
Director of GCMG since July, 1997. Prior thereto, the
Director of the REIT Manager for Security Capital
Pacific Trust ("PTR") 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. from
Bentley College and his B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of
GCMG since November 1997 where he is responsible for
the development and implementation of portfolio
investment strategy. Prior thereto, Senior Vice
President of GCMG 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 and Senior REIT Analyst 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.

13
<PAGE>

Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG 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
GCMG, 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 $800
million. Mr. Bedell received his M.B.A. from the
University of Chicago and his B.A. from Kenyon
College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

Security Capital Global Capital Management Group Incorporated ("GCMG"), 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-EURO under the overall supervision and
control of the Directors of SC-EURO.

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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. Messrs. Manno and Gardner are responsible for overseeing the
portfolio management activities of GCMG-Europe. GCMG is an indirect wholly-
owned subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.

GCMG-Europe

Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998 where he
is responsible for trading and portfolio management
strategy. From April 1997 to May 1998, Mr. Rovers was
Vice President of SC (EU) Management where he was
responsible for providing research and management
support services in the area of European investments.
Mr. Rovers was a Vice President and Senior Portfolio
Manager with GIM Management, Inc. (the Netherlands)
from January 1993 to March 1997. From July 1988 to
April 1997, Mr. Rovers was associated with GIM
Algemeen Vermogensbeheer and served as an Associate
Director and Portfolio

14
<PAGE>

Manager of global real estate securities on behalf of
domestic and foreign clients. Mr. Rovers graduated
from the University of Tilburg in The Netherlands.

The SC-EURO Portfolio Management Committee, which is comprised of certain SC-
REMFs and GCMG-Europe officers, is primarily responsible for the day-to-day
management of SC-EURO's portfolio.

SC (EU) Management

Security Capital (EU) Management Group S.A. ("SC (EU) Management") provides
GCMG-Europe with proprietary economic and 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. The
principal officer of SC (EU) Management and his principal occupations are set
forth below.

W. Joseph Houlihan Managing Director of SC (EU) Management since April
1997 where he is responsible for providing research
and management support services in the area of
European investments. Mr. Houlihan has over twenty
years of business experience in Europe. Prior to
joining Security Capital, Mr. Houlihan served as
Executive Vice President and Portfolio Manager of GIM
Capital Management, Inc. (The Netherlands) from
August 1987 to March 1997 and as Vice President of
GIM Algemeen Vermogensbeheer, a prominent Dutch
investment management company from April 1985 to
March 1997, 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 served as
Director of Melchior Holland Holding BV (The
Netherlands) from February 1983 to March 1985, as
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.

INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT

Under the Advisory Agreement, SC-EURO Class R shares pay GCMG, monthly, an
annual management fee in an amount equal to .85% of SC-EURO's Class R average
daily net asset value. Under a separate agreement GCMG 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 1.60% of the value of SC-EURO's Class R
average daily net assets for the year ending December 31, 1998.

In addition to the payments to GCMG 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 GCMG, (c) clerical, accounting and other office
costs, (d) costs

15
<PAGE>

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 GCMG 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.

GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides various
portfolio management and investment advisory services to SC-EURO. In connection
with the management of SC-EURO's portfolio, GCMG-Europe may select brokers and
dealers to execute purchase and sale orders for SC-EURO's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Europe monthly,
an annual management fee in an amount equal to 0.08% of SC-EURO's average daily
net asset value. The fee is the sole obligation of GCMG-Europe and not SC-
EURO.

ADMINISTRATOR AND SUB-ADMINISTRATOR

GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG 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
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual 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.

16
<PAGE>

statements, semi-annual 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 .08% of the first $750 million, .06% of the next $250 million
and .04% of SC-EURO's average daily net assets over $1 billion, subject to an
annual minimum fee of $75,000. The Sub-Administrator also serves as SC-REMFs's
Custodian and Transfer Agent. See "Custodian and Transfer 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 1940 Act. Under the Plan, SC-EURO pays 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.

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-
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 may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-EURO Class R shares. Such Agreements may be governed by the Plan.

The Distributor, with offices located at 11 South La Salle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. 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

17
<PAGE>

(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 SC-EURO's Transfer Agent and
various financial intermediaries that have entered into a sales agreement with
the Distributor.

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 give 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

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<PAGE>

Via U.S. Mail Via Overnight Courier
Boston Financial Data Services Boston Financial Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184

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: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number (9905-378-7)

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

Please call toll free 1-800-409-4189 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 toll free 1-888-SECURITY for an
automatic investment plan form. The Automatic Investment Plan can be set up
with any financial institution that is a member of the Automated Clearing House
("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

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<PAGE>

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 prevents 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.

20
<PAGE>

Subsequent Investments

Additional investments must be at least $500 and may be made by mail, wire or
by telephone. When making an additional purchase by mail, a check payable to
"Security Capital European 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 toll free 1-800-409-4189 for complete wiring
instructions.

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 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-EURO may be exchanged for Class R shares of SC-US or 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-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-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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:

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<PAGE>

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 European Real Estate Shares:

Via U.S. Mail Via Overnight Courier
Boston Financial Data Services Boston Financial Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
66 Brooks Drive P.O. Box 8500
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application.

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 toll free
1-800-409-4189. 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 the 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.

22
<PAGE>

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-EURO may suspend the right of redemption during any period when (i) trading
on the NYSE is restricted or the NYSE 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 on 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

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<PAGE>

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.

Further information relating to tax consequences is contained in the Statement
of Additional Information.

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

24
<PAGE>

December 16, 1997, its name was changed to Security Capital U.S. Real Estate
Shares. On June 30, 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. 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-EURO, SC-ASIA and SC-ARBITRAGE, three of
which issue two classes of shares: Class I shares and Class R shares. SC-
ARBITRAGE issues Class I shares only. 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,
SC-ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA'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, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders.

As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. The effect of SC REALTY Incorporated's
ownership of a controlling interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE
and, therefore, SC-REMFs, is to dilute the voting power of other shareholders.
SC REALTY Incorporated does not anticipate that its initial control of SC-US,
SC-EURO, SC-ASIA and SC-ARBITRAGE will adversely effect the rights of future
shareholders.

CUSTODIAN AND TRANSFER AGENT

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<PAGE>

REPORTS TO SHAREHOLDERS

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-EURO, SC-ASIA and SC-ARBITRAGE.

ADDITIONAL INFORMATION

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<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 Global Capital Management
Group Incorporated ("GCMG") 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. Class I shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-US's distributor
("Distributor"), and various financial intermediaries. 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 Class R shares should
call toll free 1-888-SECURITY or ask their sales representatives or the
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.

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 June 30, 1998, containing additional and more detailed
information about SC-US 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 toll
free 1-888-SECURITY.

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.

June 30, 1998
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Expenses........................................ 2
Financial Highlights............................ 4
Description of SC-US............................ 5
Investment Objective and Policies............... 5
Investment Strategy............................. 6
Risk Factors.................................... 8
Non-Diversified Status and Portfolio Turnover... 9
Directors, Officers and Other Personnel......... 9
Investment Advisory Agreement................... 12
Administrator and Sub-Administrator............. 13
Distribution and Servicing Plan................. 13
Determination of Net Asset Value................ 14
Purchase of Shares.............................. 14
Redemption of Shares............................ 17
Dividends and Distributions..................... 19
Taxation........................................ 20
Organization and Description of Capital Stock... 21
Custodian and Transfer Agent.................... 22
Reports to Shareholders......................... 22
Performance Information......................... 22
Year 2000 Risks................................. 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 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 GCMG. 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.

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 through August 15, 1998. Thereafter this fee will no longer be
charged. The purchase or redemption of shares through a securities dealer
that has not entered into a sales agreement with the 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 the Distributor 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.

(5) From April 23, 1997 through December 16, 1997, GCMG 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, GCMG has
committed to waive fees and/or reimburse other 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

2
<PAGE>

Class I average daily net assets. Without such waiver and/or reimbursement,
SC-US's other expenses would have been .34% of SC-US's Class I average daily
net assets from April 23, 1997 to December 16, 1997 and .32% of SC-US's
Class I average daily net assets from December 17, 1997 to December 31,
1997. Similarly, total fund operating expenses would have been 1.19% of SC-
US's Class I average daily net assets from April 23, 1997 to December 16,
1997 and 1.17% of SC-US's Class I average daily net assets from December 17,
1997 to December 31, 1997.

Expenses reflected in the Fee Table are expressed as a percentage of SC-US's
average daily net assets for the year ending December 31, 1997 and have been
restated to reflect current fees.

Example
<TABLE>
<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.......................................... $10 $32 $55 $122
</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)/
<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 (0.15)
income (0.54)
Distributions from net realized gains --------------
(1.00)
Total distributions --------------
Net asset value, end of period 11.95
==============
Total return/(3)/ 29.92%
Supplemental data and ratios:
Net assets, end of period $116,560,328
Ratio of expenses to average net 1.15%
assets/(4)(5)/
Ratio of net investment income to 4.08%
average net assets/(4)(5)/
Portfolio turnover rate/(6)/ 82.10%
Average commission rate paid per share/(6)/ $ 0.0595

(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 SC-US was effective with the SEC.
(3) Not annualized for the period April 23, 1997 through December 31, 1997.
(4) Annualized for the period April 23, 1997 through December 31, 1997.
(5) Without expense reimbursements of $30,276 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%.

(6) Portfolio turnover and average commissions rate paid are calculated on the
basis of SC-US as a whole without distinguishing between the classes of
shares issued.
</TABLE>

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. SC-REMFs is comprised of four investment
portfolios, SC-US, Security Capital European Real Estate Shares ("SC-EURO"),
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").

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 GCMG'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.

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,
determined at the time of investment. 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. GCMG
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 GCMG 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 GCMG expects that under normal circumstances SC-US is not likely to
invest a substantial portion of its assets in debt securities.

SC-US will invest only in securities rated "investment grade" or considered by
GCMG 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 GCMG, 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

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 will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short 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.

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. Through 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. Past performance is not necessarily indicative of future results.
For current return information related to SC-US, contact SC-US at toll free 1-
888-SECURITY.

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

6
<PAGE>

estate securities in the United States. USREALTY Special Opportunity is advised
by Security Capital (EU) Management S.A. GCMG, 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. real estate securities
relying on the same research and analytical tools and models that GCMG 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

GCMG 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 aggregate market capitalization
of equity REITs has increased from $8.8 billion at December 31, 1990 to $213.9
billion at December 31, 1997, in part, due to $117.1 billion of public offerings
conducted during that period. 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.

GCMG 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 GCMG 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)
Through December 31, 1997 SC-US SC-US ----------- --------- ---------
- ------------------------- ------- ------- Special Equity Index Index S&P 500 Bonds(4)
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."

(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).

7
<PAGE>

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 calculate
performance differently.

A Research-Driven Philosophy and Approach

SC-US seeks to achieve top-quartile returns by investing primarily in equity
real estate securities which have the potential to deliver above-average growth.
GCMG 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 GCMG
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. GCMG
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 GCMG 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.

8
<PAGE>

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 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 AND 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 GCMG 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 GCMG, or with SC-US's administrator,
its custodian and its 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, GCMG 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.

9
<PAGE>

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since January 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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 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.

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. At Loyola University, he also
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. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty, Inc. and Endowment Realty II and as a
Member of the Investment Committee of the University of
San Diego. Mr. Kasbeer also serves as Trustee, Treasurer
and Chairman of the Investment and Finance Committees of
Santa Fe Preparatory School and as Trustee and Chairman
of the Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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

10
<PAGE>

Director and Chairman of the Investment Committee of the
United Negro College Fund. Mr. Keane also holds honorary
degrees from Loyola University, Chicago, Illinois and
Lawrence University, Appleton, Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs. Managing
Director of GCMG Management since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") 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. from Bentley College and his
B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of GCMG
since November 1997 where he is responsible for the
development and implementation of portfolio investment
strategy. Prior thereto, Senior Vice President of GCMG
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 and Senior REIT
Analyst 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 GCMG 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 GCMG, 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 $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 GCMG 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 Security
Capital U.S. Realty Incorporated; 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. from
the University of Chicago. Mr. Adriani is a Chartered
Financial Analyst.

11
<PAGE>

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

Security Capital Global Capital Management Group Incorporated ("GCMG"), 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.

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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. GCMG is an indirect 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 GCMG analysts, is primarily responsible for the day-to-day
management of SC-US's portfolio.

INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), GCMG
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. GCMG also selects brokers and
dealers to execute purchase and sale orders for the portfolio transactions of
SC-US. GCMG 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 GCMG.

Under the Advisory Agreement, SC-US Class I shares pay GCMG, monthly, an
annual management fee equal to .60% of SC-US's Class I average daily net asset
value. 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 GCMG 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 GCMG, (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 GCMG 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.

12
<PAGE>

ADMINISTRATOR AND SUB-ADMINISTRATOR

GCMG has also entered into a fund accounting and administration agreement with
SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-US, 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-US; (iv)
supervising preparation of the periodic updating of SC-US's Prospectus and
Statement of Additional Information; (v) supervising preparation of semi-annual
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, GCMG 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")
to provide services to SC-US until August 15, 1998. With the approval of SC-
REMFs's Board of Directors, GCMG has caused SC-REMFs to retain State Street Bank
and Trust Company ("New Sub-Administrator") as sub-administrator under a sub-
administration agreement ("New Sub-Administration Agreement") to provide
services to SC-US thereafter.

Under the Sub-Administration Agreement and the New Sub-Administration
Agreement, the Sub-Administrator and the New Sub-Administrator, respectively,
have 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 GCMG, or the Custodian or Transfer Agent,
preparing financial information for SC-US's income tax returns, proxy
statements, semi-annual 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. Under the terms of the New
Sub-Administration Agreement, SC-REMFs will pay the New Sub-Administrator a
monthly administration fee at the annual rate of .08% of the first $750 million,
.06% of the next $250 million and .04% of SC-REMFs's average daily net assets
over $1 billion, subject to an annual minimum fee of $75,000. The Sub-
Administrator also serves as SC-US's Custodian and Transfer Agent. The New Sub-
Administrator will also serve as SC-US's Custodian and Transfer Agent. See
"Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG 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 1940 Act. Under the Plan, SC-US pays
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

13
<PAGE>

accounts. These fees would be in addition to any amounts which may be received
by them from the Distributor under the Plan.

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-US Class I shares. Such Agreements may be governed by the Plan.

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class I shares of SC-US, $.01 par value per
share, 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 of 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.

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 SC-US's
Transfer Agent and various financial intermediaries that have entered into a
sales agreement with the Distributor.

14
<PAGE>

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.

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 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:

Until August 15, 1998
<TABLE>
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estate Shares
c/o Firstar Trust Company c/o Firstar 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
<CAPTION>
After August 15,1998
<S> <C>
Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
</TABLE>

Please note that, until August 15, 1998, if your check does not clear, a
service fee of $20 will be charged. Thereafter, no service fee will be charged.
At all times, you will be responsible for any losses suffered by SC-US as a
result of any check that does not clear.

15
<PAGE>

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:

Until August 15, 1998

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)

After August 15, 1998

Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number 9905-378-7

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

Until August 15, 1998, please call toll free 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. Thereafter, please call toll free 1-800-409-4189.
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.

Subsequent Investments

Additional investments must be at least $20,000 and 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 toll free 1-800-699-4594 for complete wiring instructions
until August 15, 1998, and toll free 1-800-409-4189 thereafter.

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.

16
<PAGE>

SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-US, including purchases for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.

Exchange Feature

Class I shares of SC-US may be exchanged for Class I shares of SC-EURO, SC-
ASIA and SC-ARBITRAGE. 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-EURO, SC-ASIA or SC-ARBITRAGE
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 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 the
Transfer Agent 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

17
<PAGE>

After August 15, 1998
<TABLE>
<S> <C>
Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Fund Incorporated Mutual Fund Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184

</TABLE>

Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application. A
$12.00 service fee will be charged for wire redemptions until August 15, 1998
and no service fee will be charged thereafter.

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 toll
free 1-800-699-4594, until August 15, 1998 and toll free 1-800-409-4189,
thereafter. 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 the 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-US may suspend the right of redemption during any period when (i) trading
on the NYSE is restricted or NYSE is closed, other than customary weekend
and holiday closings, or (ii) an emergency, as defined by rules adopted

18
<PAGE>

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 on 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.

Dividends and distributions will automatically be reinvested into 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
dividends or distributions paid in cash. SC-US will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-US will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-US
will indicate 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%.
For information concerning the tax treatment of SC-US's distribution policies
for SC-US and its shareholders, see "Taxation."

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 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.

19
<PAGE>

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. A recent legislative
proposal would reduce the holding period required to qualify for the 20% maximum
capital gains rate from 18 months to 12 months. It is impossible to determine
at this time whether that legislation will be enacted or, if enacted, whether it
will be modified in any manner.

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.

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 June
30, 1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

20
<PAGE>

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-EURO, SC-ASIA and SC-
ARBITRAGE, three of which issue two classes of shares: Class I shares and Class
R shares. SC-ARBITRAGE issues Class I shares only. 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, SC-ARBITRAGE's Class I
shareholders and 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, SC-ARBITRAGE's Class I shareholders
and SC-EURO's and SC-ASIA's Class I and Class R shareholders.

As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US
(including 97.74% of the issued and outstanding Class I shares), which means
that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE
for purposes of the 1940 Act. The effect of SC REALTY Incorporated's ownership
of a controlling interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and,
therefore, SC-REMFs, is to dilute the voting power of other shareholders. SC
REALTY Incorporated does not anticipate that its initial control of SC-US, SC-
EURO, SC-ASIA and SC-ARBITRAGE will adversely effect the rights of future
shareholders.

CUSTODIAN AND TRANSFER 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 until August 15, 1998. Thereafter, State Street Bank and Trust
Company, which has its principal address at Boston, Massachusetts 02101, has
been retained to serve as SC-US's Custodian and Transfer Agent. Neither Firstar
Trust Company nor State Street Bank and Trust Company has any part in deciding
SC-US's investment policies or which securities are to be purchased or sold for
SC-US's portfolio.

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 toll free 1-888-SECURITY 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

21
<PAGE>

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).

YEAR 2000 RISKS

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 of 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 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 Global Capital Management
Group Incorporated ("GCMG") serves as both investment adviser and administrator
to SC-US.

By this Prospectus, Class R shares of SC-US are being offered. Class R shares
are sold at net asset value without a sales charge to investors whose minimum
initial investment is $2,500. Class R shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-US's distributor
("Distributor"), and various financial intermediaries. 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 Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the 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 June 30, 1998, containing additional and more
detailed information about SC-US 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 toll
free 1-888-SECURITY.

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.

June 30, 1998
<PAGE>

TABLE OF CONTENTS

Page
----
Expenses......................................... 2
Financial Highlights............................. 4
Description of SC-US............................. 5
Investment Objective and Policies................ 5
Investment Strategy.............................. 6
Risk Factors..................................... 8
Non-Diversified Status & Portfolio Turnover...... 9
Directors, Officers and Other Personnel.......... 9
Investment Advisory Agreement.................... 12
Administrator and Sub-Administrator.............. 12
Distribution and Servicing Plan.................. 13

Determination of Net Asset Value................. 13
Purchase of Shares............................... 14
Redemption of Shares............................. 17
Dividends and Distributions...................... 18
Taxation......................................... 19
Organization and Description of Capital Stock.... 20

Custodian and Transfer Agent...................... 21
Reports to Shareholders.......................... 21
Performance Information.......................... 21
Year 2000 Risks.................................. 21
Additional Information........................... 22
<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 GCMG. 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.

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.

Fee Table (1)

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).................................................. .30%
-----
Total fund operating expenses (5)................................... 1.15%

- ------------
(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 through August 15, 1998. Thereafter this fee will no longer be
charged. In addition, the purchase or redemption of shares through a
securities dealer that has not entered into a sales agreement with the
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 the Distributor 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 R average
daily net assets. As a result, long-term Class R 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.

(5) From April 23, 1997 through December 16, 1997, GCMG 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, GCMG has
committed to waive fees and/or reimburse other 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 other expenses

2
<PAGE>

would have been .34% of SC-US's Class R average daily net assets from April
23, 1997 to December 16, 1997 and .45% of SC-US's Class R average daily net
assets from December 17, 1997 to December 31, 1997. Similarly, total fund
operating expenses would have been 1.19% of SC-US's Class R average daily
net assets from April 23, 1997 to December 16, 1997 and 1.30% of SC-US's
Class R average daily net assets from December 17, 1997 to December 31,
1997.

Expenses reflected in the Fee Table are expressed as a percentage of SC-US's
average daily net assets for the year ending December 31, 1997 and have been
restated to reflect current fees.

Example
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
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......................................... $12 $37 $63 $140

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)/

Financial Highlights
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
-----------------
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 /(3)/ 29.91%
Supplemental data and ratios:
Net assets, end of period $671,856
Ratio of expenses to average net 1.16%
assets /(4) (5)/
Ratio of net investment income to
average net assets /(4)//(5)/ 4.06%
Portfolio turnover rate /(6)/ 82.10%
Average commission rate paid per share /(6)/ $ 0.0595

(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 SC-US was effective with the SEC.
(3) Not annualized for the period April 23, 1997 through December 16, 1997.
(4) Annualized for the period April 23, 1997 through December 16, 1997.
(5) Without expense reimbursements of $21,167 for the period April 23, 1997
through December 31, 1997, $122 of which represents the amortization of
organizational expenses attributable to Class R shares, 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%.

(6) Portfolio turnover and average commission rate paid are calculated on
the basis of SC-US as a whole without distinguishing between the classes of
shares issued.

4
<PAGE>

DESCRIPTION OF SC-US

SC-US issues two classes of shares, one of which, Class R shares is 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

Real Estate Securities

Real Estate Investment Trusts

5
<PAGE>

Illiquid Securities

Debt Securities and Money Market Instruments

Short Sales

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. Through 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 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. Past performance is not necessarily indicative of future results.
For current return information related to SC-US, contact SC-US at toll free 1-
888-SECURITY.

6
<PAGE>

S.A. GCMG, 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. real estate securities relying on the same research and
analytical tools and models that GCMG 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

REITs vs. Other Investments
(Average Annual Total Return)
<TABLE>
<CAPTION>
USREALTY(1) NAREIT(2) NCREIF(3)
----------- --------- ---------
Through December 31, 1997 SC-US SC-US Special Equity Index Index S&P 500 Bonds(4)
- --------------------------- -------- -------- ------- ------------ ----- ------- --------
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."

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

7
<PAGE>

A Research-Driven Philosophy and Approach

RISK FACTORS

Risks of Investment in Real Estate Securities

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 1940 Act. The above factors may also

8
<PAGE>

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 AND PORTFOLIO TURNOVER

DIRECTORS, OFFICERS AND OTHER PERSONNEL

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since January 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting. 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.

9
<PAGE>

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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 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.

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. At Loyola University, he also
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. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty, Inc. and Endowment Realty II and as a
Member of the Investment Committee of the University of
San Diego. Mr. Kasbeer also serves as Trustee, Treasurer
and Chairman of the Investment and Finance Committees of
Santa Fe Preparatory School and as Trustee and Chairman
of the Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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
also holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University, Appleton,
Wisconsin.

10
<PAGE>

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. from Bentley
College and his B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of GCMG
since November 1997 where he is responsible for the
development and implementation of portfolio investment
strategy. Prior thereto, Senior Vice President of GCMG
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 and Senior REIT
Analyst 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 GCMG 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 GCMG, 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 $800 million. Mr. Bedell received his
M.B.A. from the University of Chicago and his B.A. from
Kenyon College.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

11
<PAGE>

management and investment program of SC-US under the overall supervision and
control of the Directors of SC-REMFs.

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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. GCMG is an indirect 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 GCMG analysts, is primarily responsible for the day-to-day
management of SC-US's portfolio.

INVESTMENT ADVISORY AGREEMENT

Under the Advisory Agreement, SC-US Class I shares pay GCMG, monthly, an
annual management fee equal to .60% of SC-US's Class R average daily net asset
value. 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 GCMG 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 GCMG, (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 GCMG 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

GCMG has also entered into a fund accounting and administration agreement with
SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-US, 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-US; (iv)
supervising preparation of the periodic updating of SC-US's Prospectus and
Statement of Additional Information; (v) supervising preparation of semi-annual
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.

12
<PAGE>

In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs's Board of Directors, GCMG 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")
to provide services to SC-US until August 15, 1998. With the approval of SC-
REMFs's Board of Directors, GCMG has caused SC-REMFs to retain State Street Bank
and Trust Company ("New Sub-Administrator") as sub-administrator under a fund
sub-administration agreement ("New Sub-Administration Agreement") to provide
services to SC-US thereafter.

Under the Sub-Administration Agreement and the New Sub-Administration
Agreement, the Sub-Administrator and the New Sub-Administrator, respectively,
have 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 GCMG, or the Custodian or Transfer Agent,
preparing financial information for SC-REMFs's income tax returns, proxy
statements, semi-annual and annual shareholders reports, and SEC filings, and
responding to shareholder inquiries. Under the terms of the Sub-Administration
Agreement, SC-REMFs pay 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. Under the terms of the New
Sub-Administration Agreement, SC-REMFs will pay the New Sub-Administrator a
monthly administration fee at the annual rate of .08% of the first $750 million,
.06% of the next $250 million and .04% of SC-REMFs's average daily net assets
over $1 billion, subject to an annual minimum fee of $75,000. The Sub-
Administrator also serves as SC-US's Custodian and Transfer Agent. The New Sub-
Administrator will also serve as SC-US's Custodian and Transfer Agent. See
"Custodian and Transfer Agent."

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 1940 Act. Under the Plan, SC-US pays
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.

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-US Class R shares. Such Agreements may be governed by the
Plan.

13
<PAGE>

DETERMINATION OF NET ASSET VALUE

Net asset value per share of Class R shares of SC-US, $.01 par value per
share, is determined on each day the New York Stock Exchange ("NYSE") 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 NYSE, 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 of 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 NYSE are valued, except as
indicated below, at the last sale price reflected on the consolidated tape at
the close of the NYSE 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 NYSE 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 SC-US's Transfer Agent and
various financial intermediaries that have 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 R shares are being purchased.

14
<PAGE>

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 give 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:

Until August 15, 1998

<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estate Shares
c/o Firstar Trust Company c/o 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
After August 15, 1998

</TABLE>

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:

15
<PAGE>

Until August 15, 1998

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)

After August 15, 1998

Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number 9905-378-7

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund Account Number

Until August 15, 1998, please call toll free 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. Thereafter, please call toll free 1-800-409-4189.
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.
16
<PAGE>

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 Automated Clearing House ("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 prevents withdrawal
of funds from the designated bank checking or NOW account.

Subsequent Investments

Additional investments must be at least $250 and 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 toll
free 1-800-699-4594 for complete wiring instructions until August 15, 1998, and
toll free 1-800-409-4189 thereafter.

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 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-US may be exchanged for Class R shares of 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-EURO or SC-ASIA more than four times in any twelve-month
period (including the initial exchange of your investment during that
period).

17
<PAGE>

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 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 the
Transfer Agent 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

Until August 15, 1998
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estates Shares
c/o Firstar Trust Company c/o 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
After August 15, 1998

</TABLE>

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. A $12.00
service fee will be charged for wire redemptions until August 15, 1998 and no
service fee will be charged thereafter.

18
<PAGE>

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 toll free
1-800-699-4594, until August 15, 1998 and toll free 1-800-409-4189, thereafter.
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 the 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-US may suspend the right of redemption during any period when (i) trading
on the NYSE is restricted or that NYSE 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 on 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.

19
<PAGE>

DIVIDENDS AND DISTRIBUTIONS

TAXATION

Federal Income Taxes

20
<PAGE>

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 June 30, 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-REMF'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-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
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 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, SC-ARBITRAGE's
Class I shareholders and 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, SC-ARBITRAGE's Class
I shareholders and SC-EURO's and SC-ASIA's Class I and Class R
shareholders.

21
<PAGE>

As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US
(including 0% of the issued and outstanding Class R shares), which means that SC
REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE for
purposes of the 1940 Act. The effect of SC REALTY Incorporated's ownership of a
controlling interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore,
SC-REMFs, is to dilute the voting power of other shareholders. SC REALTY
Incorporated does not anticipate that its initial control of SC-US, SC-EURO, SC-
ASIA and SC-ARBITRAGE will adversely effect the rights of future
shareholders.

CUSTODIAN AND TRANSFER 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 until August
15, 1998. Thereafter, State Street Bank and Trust Company, which has its
principal address at 225 Franklin Street, Boston, Massachusetts 02101, has been
retained to serve as SC-US's Custodian and Transfer Agent. Neither Firstar Trust
Company nor State Street Bank and Trust Company has any part in deciding SC-US's
investment policies or which securities are to be purchased or sold for SC-US's
portfolio.

REPORTS TO SHAREHOLDERS

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 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).

22
<PAGE>

YEAR 2000 RISKS

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 of 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 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.

23
<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 Global Capital Management Group
Incorporated ("GCMG") serves as both investment adviser and administrator to SC-
ASIA and Security Capital Global Capital Management Group (Asia) Incorporated
("GCMG-Asia") serves as SC-ASIA's investment sub-adviser.

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. Class I
shares are offered directly through SC-REMFs, Security Capital Markets Group
Incorporated, SC-ASIA's distributor ("Distributor"), and various financial
intermediaries. 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 Class R shares should call toll
free 1-888-SECURITY or ask their sales representatives or the Distributor. This
Prospectus provides you with information specific to the Class I shares of SC-
ASIA. It contains information you should know before you invest in SC-ASIA.

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
dated June 30, 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 toll free 1-888-
SECURITY.

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.

June 30, 1998
<PAGE>

TABLE OF CONTENTS

Page
----
Expenses................................................................. 2
Description of SC-ASIA.................................................. 4
Investment Objectives and Policies....................................... 4
Investment Strategy...................................................... 5
Other Investment Strategies.............................................. 6
Risk Factors............................................................. 7
Non-Diversified Status & Portfolio Turnover.............................. 10
Directors, Officers and Other Personnel.................................. 10
Investment Advisory Agreement and
Investment Sub-Advisory Agreement........................................ 13
Administrator and Sub-Administrator...................................... 14
Distribution and Servicing Plan.......................................... 15
Determination of Net Asset Value......................................... 15
Purchase of Shares....................................................... 16
Redemption of Shares..................................................... 17
Dividends and Distributions.............................................. 19
Taxation................................................................. 20
Organization and Description of Capital Stock............................ 21
Custodian and Transfer Agent............................................. 21
Reports to Shareholders.................................................. 21
Performance Information.................................................. 22
Year 2000 Risks.......................................................... 22
Additional Information................................................... 22

<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 GCMG. 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

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..................................................... .95%
12b-1 fees (2)...................................................... .25%
Other expenses...................................................... .35%
----
Total SC-ASIA operating expenses (3)................................ 1.55%

(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(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 the Distributor 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) GCMG has committed to waive fees and/or reimburse other 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 1.55% 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 and/or reimbursement, other expenses would be .35%
and total fund operating expenses would be 1.55% of the value of SC-ASIA's
Class I average daily net assets.

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Example

One Three
Year Years
---- -----

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................................. $16 $49

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-
ASIA's assets.

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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. SC-REMFs is comprised of four investment
portfolios, SC-ASIA, Security Capital U.S. Real Estate Shares ("SC-US"),
Security Capital European Real Estate Shares ("SC-EURO") and Security Capital
Real Estate Arbitrage Shares ("SC-ARBITRAGE").

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. For
purposes of its investment objective, SC-ASIA considers the Asia/Pacific region
to be comprised of all the countries in the region, including Hong Kong,
Singapore, Japan, Australia, New Zealand, the Philippines, Malaysia, Indonesia,
and Thailand. 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 in
the Statement of Additional Information, 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 65% of its assets in the
equity securities of publicly-traded real estate companies located primarily in
the more established markets of the Asia/Pacific region, including Hong Kong,
Singapore, Japan, Australia and New Zealand. SC-ASIA may also invest in the
equity securities of real estate companies located in the emerging markets of
the Philippines, Thailand, and Malaysia and other markets that are open to
foreign investment.

The equity securities that SC-ASIA anticipates investing in 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 GCMG-Asia'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 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 Baa by Moody's Investors Service, Inc. ("Moody's") or BBB Standard &
Poors Corporation ("S&P") or, if not so rated, believed by GCMG-Asia to be of
comparable quality, and, in the aggregate, may have an average weighted maturity
of up to 30 years.

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<PAGE>

When, in the judgment of GCMG or GCMG-Asia, 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. 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 GCMG; 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, determined at the time of investment. 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. GCMG and GCMG-Asia 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 Statement of Additional Information for further
discussion of SC-ASIA's fundamental investment restrictions.

INVESTMENT STRATEGY

Real Estate Securities Industry Outlook

GCMG 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. GCMG 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. 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. GCMG 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. GCMG and GCMG-Asia are
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 GCMG
and GCMG-Asia by other operating professionals within the Security Capital Group
Incorporated affiliate company network, assists GCMG and GCMG-Asia in
identifying attractive growth in country markets and real estate sectors. This
research and analysis is instrumental to GCMG-Asia's ability to make investment
decisions for SC-Asia's portfolio and to identify country markets reaching a
"marginal turning point." This country market research 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 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

5
<PAGE>

does GCMG-Asia 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. GCMG and GCMG-Asia
believe 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.
GCMG and GCMG-Asia believe 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 GCMG-Asia 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.

OTHER INVESTMENT 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 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.

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.

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, 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

6
<PAGE>

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 GCMG 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 Statement of
Additional Information.

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 will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 10% of SC-ASIA's net assets (taken at market
value). See SC-ASIA's Statement of Additional Information for further discussion
of short sales.

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<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 GCMG-Asia 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 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 Asia/Pacific countries are generally more expensive than in the
U.S. Asia/Pacific 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.

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<PAGE>

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.

Certain risks associated with foreign securities are heightened for
investments in countries in the Asia/Pacific region. Specifically, the
currencies of certain of these countries have experienced steady devaluations
relative to the U.S. dollar and major adjustments have been made periodically in
certain of such currencies. Moreover, recent currency devaluations in Pacific
region countries have resulted in high interest rates and sharp reductions in
economic activity, which have diminished prospects for short-term growth in
corporate earnings.

The economies of most Asia/Pacific region countries are heavily dependent upon
international trade and, therefore, are affected by protective trade barriers
and the economic conditions of their trading partners, principally the U.S.,
Japan, China and the European Community. Thus, the enactment by the U.S. or
other principal trading partners of protectionist trade legislation or the
reduction of foreign investment in Asia/Pacific economies and general declines
in the international securities markets could have a significant adverse effect
upon the securities markets of the Asia/Pacific region countries and the value
of SC-ASIA's investments in theses markets. Also, few Asia/Pacific region
countries have Western-style or fully democratic governments. During the course
of the last 25 years, governments in the region have periodically been installed
or removed as a result of military coups, while others have periodically
demonstrated repressive police state characteristics. Such political upheaval
also would negatively impact the value of SC-ASIA's investment in Asia/Pacific
countries.

On July 1, 1997, Hong Kong reverted to Chinese administration. The long-term
effects of this reversion are not known at this time. However, SC-ASIA's
investment in Hong Kong may now be subject to the same or similar risks as any
investment in China. Investments in Hong Kong may become subject to
expropriation, nationalization or confiscation, in which case SC-ASIA could lose
its entire investment in Hong Kong. In addition, the reversion of Hong Kong also
presents a risk that the Hong Kong dollar will be devalued and a loss of
investor confidence in Hong Kong's currency stock market and economy will ensue.

SC-ASIA may invest in the equity securities of real estate companies in
emerging market countries in the Asia/Pacific region. The risks associated with
foreign investment described above also may be intensified in emerging markets.
Emerging markets can include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Certain emerging market countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, trade difficulties and
unemployment. 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 and
other protectionist measures imposed or negotiated by the countries in which
they trade. There are also risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
SC-ASIA's investments in those countries.

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.

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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 GCMG-Asia'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.

NON-DIVERSIFIED STATUS AND 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 GCMG 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 GCMG, and with its
custodian and its 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 GCMG, 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

10
<PAGE>

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 their principal occupations are set forth below.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since January 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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 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.

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. At Loyola University, he also
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. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty Inc. and Endowment Realty II and as a
Member of the Investment Committee of the University of
San Diego. Mr. Kasbeer also serves as Trustee, Treasurer
and Chairman of the Investment and Finance Committees of
Santa Fe Preparatory School and as Trustee and Chairman
of the Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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.

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<PAGE>

Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs. Managing
Director of GCMG since July, 1997. Prior thereto,
Director of the REIT Manager for Security Capital
Pacific Trust ("PTR") 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. from Bentley College and his
B.S. in Accounting from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of GCMG
since November 1997 where he is responsible for the
development and implementation of portfolio investment
strategy. Prior thereto, Senior Vice President of GCMG
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 and Senior REIT
Analyst 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.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

Security Capital Global Capital Management Group Incorporated ("GCMG"), 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.

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<PAGE>

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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.
Messrs. Manno and Gardner are responsible for overseeing the portfolio
management activities of GCMG-Asia. GCMG is an indirect wholly-owned subsidiary
of Security Capital Group Incorporated, a real estate research, investment and
management company.

GCMG-Asia

Security Capital Global Capital Management Group (Asia) Incorporated ("GCMG-
Asia"), with offices located at Level 9, AIG Building, 1-1-3 Marunouchi,
Chiyoda-ku, Tokyo 100, Japan, provides portfolio management services to SC-ASIA
pursuant to an investment sub-advisory agreement with GCMG. GCMG-Asia, a
wholly-owned subsidiary of GCMG, was formed on May 11, 1998 under Delaware law
and is registered as an investment adviser with the SEC. The principal officers
of GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.

Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously, Vice President of GCMG from November 1997
to April 1998, where she conducted real estate
securities analysis in the Asia/Pacific region for the
firm. Prior to that, Ms. Lord was with Security
Capital Industrial Trust from September 1996 to
October 1997, where she was responsible for research
on special investment opportunities and prior thereto,
working on special assignments under Security Capital
Group Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security Capital, Ms.
Lord was with Societe Generale Securities, (North
Pacific) in Tokyo from June 1994 to August 1994, where
she was a member of the Japanese Government Bond
futures and options brokerage desk and Merill Lynch,
Pierce, Fenner & Smith from September 1992 to
September 1993. 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 Vice President of GCMG-Asia since May 1998. Vice
President of GCMG from November 1997 to April 1998,
where he conducted real estate securities analysis in
the Asia/Pacific region for the firm. Prior to that,
Mr. Montelibano worked on special assignments under
Security Capital Group Incorporated Managing Directors
June 1995 to December 1996. Prior to joining Security
Capital, Mr. Montelibano was a consultant for Ayala
Land, Incorporated in the Philippines from July 1994
to August 1994 where he conducted financial analyses
of office and residential development projects, and
for Bank of America in Malaysia from June 1994 to July
1994 where he conducted market research studies on
retail banking. Previously, Mr. Montelibano was a
senior consultant with Andersen Consulting from
January 1990 to August 1993, 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.

The SC-ASIA Portfolio Management Committee, which is comprised of SC-REMFs and
GCMG-Asia officers, is responsible for the day-to-day management of SC-ASIA's
portfolio.

<PAGE>
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT

Pursuant to an investment advisory agreement (the "Advisory Agreement"), GCMG
furnishes a continuous investment program for SC-ASIA's portfolio, subject to
the general supervision of SC-REMFs's Board of

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<PAGE>

Directors. GCMG 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
GCMG.

Under the Advisory Agreement, SC-ASIA Class I shares pay GCMG, monthly, an
annual management fee in an amount equal to .95% of SC-ASIA's Class I average
daily net asset value. Under a separate agreement GCMG 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 1.55% of the value of SC-ASIA's Class I
average daily net assets for the year ending December 31, 1998.

In addition to the payments to GCMG 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 GCMG, (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 GCMG 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.

GCMG has entered into an investment sub-advisory agreement with GCMG-Asia
("Sub-Advisory Agreement") pursuant to which GCMG-Asia provides various
portfolio management and investment advisory services to SC-ASIA. In connection
with the management of SC-ASIA's portfolio, GCMG-Asia may select brokers and
dealers to execute purchase and sale orders for SC-ASIA's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Asia a monthly
management fee based on its costs (including payroll, rent and other directly
allocable costs and expenses) plus a mark-up of 10%. The fee is the sole
obligation of GCMG and not SC-ASIA.

ADMINISTRATOR AND SUB-ADMINISTRATOR

GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG 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
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual 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>

for publication, maintaining certain of SC-ASIA's books and records that are not
maintained by GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-ASIA's income tax returns, proxy statements, semi-annual and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs's pays
the Sub-Administrator a monthly administration fee at the annual rate of .08% of
the first $750 million, .06% of the next $250 million and .04% of SC-ASIA's
average daily net assets over $1 billion, subject to an annual minimum fee of
$75,000. The Sub-Administrator also serves as SC-ASIA's Custodian and Transfer
Agent. See "Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG receives a monthly fee from SC-REMFs at
the annual rate of 0.02% of the value of the average daily net assets of SC-
ASIA.

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 1940 Act. Under the Plan, SC-
ASIA pays 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.

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ASIA Class I shares. Such Agreements may be governed by 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 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

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<PAGE>

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.

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<PAGE>

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 SC-ASIA's Transfer
Agent and various financial intermediaries that have 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.

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:

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<PAGE>

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: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number 9905-378-7

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

Please call toll free 1-800-409-4189 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

Additional investments must be at least $20,000 and may be made by mail, wire
or by telephone. When making an additional purchase by mail, a check payable to
"Security Capital Asia/Pacific 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 toll free 1-800-409-4189 for complete wiring
instructions.

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 I shares.

SC-REMFs reserves the right to waive or modify minimum initial and subsequent
investment requirements in connection with purchases of Class I shares of SC-
ASIA, including purchases for accounts established on behalf of the following
types of retirement plans: (i) plans qualified under Section 401(k) of the Code;
(ii) plans described in Section 403(b) of the Code; (iii) deferred compensation
plans described in Section 457 of the Code; (iv) simplified employee pension
(SEP) plans; and (v) salary reduction simplified employee pension (SARSEP)
plans.

Exchange Feature

Class I shares of SC-ASIA may be exchanged for Class I shares of SC-US, SC-
EURO and SC-ARBITRAGE. 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-EURO, SC-ARBITRAGE or SC-ASIA
more than four times in any twelve-month period (including the initial exchange
of your investment during that period).

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<PAGE>

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 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

Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application.

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.

Telephone

You may redeem shares by telephone by calling the Transfer Agent at
toll free 1-800-409-4189. 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.

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<PAGE>

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 the 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 NYSE is restricted or the NYSE 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 on 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-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.

Dividends and distributions will automatically be reinvested into 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
dividends or distributions paid in cash. SC-ASIA will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-ASIA will send shareholders a statement showing the
amount and tax characterization of all dividends and distributors paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-ASIA
will indicate 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%.
For information concerning the tax treatment of SC-ASIA's distribution policies
for SC-ASIA and its shareholders, see "Taxation."

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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. A recent legislative proposal would reduce
the holding period required for the 20% maximum capital gains rate from 18
months to 12 months. It is impossible to determine at this time whether that
legislation will be enacted or, if enacted, whether it will be modified in any
manner.

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 Statement
of Additional Information.

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.

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<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. On June 30, 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. 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-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
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,
SC-ARBITRAGE's Class I shareholders and SC-US's and SC-EURO'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, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-EURO's Class I and Class R
shareholders.

As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. The effect of SC REALTY Incorporated's
ownership of a controlling interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE
and, therefore, SC-REMFs, is to dilute the voting power of other shareholders.
SC REALTY Incorporated does not anticipate that its initial control of
SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE will adversely effect the rights of
future shareholders.

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company, which has its principal business address
at 225 Franklin Street, Boston, Massachusetts 02101, has been retained to act as
Custodian of SC-ASIA's investments and as SC-ASIA's Transfer Agent. State Street
Bank and Trust Company has no part in deciding SC-ASIA's investment policies or
which securities are to be purchased or sold for SC-ASIA's portfolio.

22
<PAGE>

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 toll free 1-888-SECURITY 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 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-EURO, SC-ASIA and SC-ARBITRAGE.

ADDITIONAL INFORMATION

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PROSPECTUS

LOGO

11 South LaSalle Street
Chicago, Illinois 60603

By this Prospectus, SC-ASIA is offering Class R shares. Class R shares are
sold at net asset value without a sales charge to investors whose minimum
initial investment is $2,500. Class R shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-ASIA's distributor
("Distributor"), and various financial intermediaries. 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 Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the 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.

June 30, 1998
<PAGE>

TABLE OF CONTENTS

Page
----
Expenses............................................................... 2

Description of SC-ASIA................................................. 4

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

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

Other Investment Strategies............................................ 6

Risk Factors........................................................... 7

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

Directors, Officers and Other Personnel................................ 10

Investment Advisory Agreement and
Investment Sub-Advisory Agreement...................................... 13

Administrator and Sub-Administrator.................................... 14

Distribution and Servicing Plan........................................ 15

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 Agent........................................... 22

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

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

Year 2000 Risks........................................................ 22

Additional Information................................................. 23

<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 GCMG. 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.

Fee Table

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.................................................... .95%
12b-1 fees (2)..................................................... .25%
Other expenses..................................................... .50%
----
Total SC-ASIA operating expenses (3)............................... 1.70%

(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(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 the Distributor 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) GCMG has committed to waive fees and/or reimburse other expenses to maintain
SC-ASIA's Class R expenses, other than brokerage fees and commissions,
taxes, interest and other extraordinary expenses, at no more than 1.70% 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
reimbursement, other expenses would be .50% and total fund operating
expenses would be 1.70% of the value of SC-ASIA's Class R average daily net
assets.

2
<PAGE>

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-
ASIA's assets.

3
<PAGE>

DESCRIPTION OF SC-ASIA

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 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 Baa by Moody's Investors Service, Inc. ("Moody's") or BBB Standard &
Poors Corporation ("S&P") or, if not so rated, believed by GCMG-Asia to be of
comparable quality and, in the aggregate, may have an average weighted maturity
of up to 30 years.

4
<PAGE>

INVESTMENT STRATEGY

Real Estate Securities Industry Outlook

GCMG 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. GCMG 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. 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. GCMG and GCMG-Asia are
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 GCMG
and GCMG-Asia by other operating professionals within the Security Capital Group
Incorporated affiliate company network, assists GCMG and GCMG-Asia in
identifying attractive growth in country markets and real estate sectors. This
research and analysis is instrumental to GCMG-Asia's ability to make investment
decisions for SC-ASIA's portfolio and to identify country markets reaching a
"marginal turning point." This country market research 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 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

5
<PAGE>

market research does GCMG-Asia 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.

OTHER INVESTMENT STRATEGIES

6
<PAGE>

7
<PAGE>

RISK FACTORS

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.

8
<PAGE>

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.

Certain risks associated with foreign securities are heightened for
investments in countries in the Asia/Pacific region. Specifically, the
currencies of certain of these countries have experience steady devaluations
relative to the U.S. dollar and major adjustments have been made periodically in
certain of such currencies. Moreover, recent currency devaluations in Pacific
region countries have resulted in high interest rates and sharp reductions in
economic activity, which have diminished prospects for short-term growth in
corporate earnings.

The economies of most Asia/Pacific region countries are heavily dependent upon
international trade and, therefore, are affected by protective trade barriers
and the economic conditions of their trading partners, principally the U.S.,
Japan, China and the European Community. Thus, the enactment by the U.S. or
other principal trading partners of protectionist trade legislation or the
reduction of foreign investment in Asia/Pacific economies and general declines
in the international securities markets could have a significant adverse effect
upon the securities markets of the Asia/Pacific region countries and the value
of SC-ASIA's investments in these markets. Also, few Asia/Pacific region
countries have Western-style or fully democratic governments. During the course
of the last 25 years, governments in the region have periodically been installed
or removed as a result of military coups, while others have periodically
demonstrated repressive police state characteristics. Such political upheaval
also would negatively impact the value of SC-ASIA's investment in Asia/Pacific
countries.

SC-ASIA may invest in the equity securities of real estate companies in
emerging market countries in the Asia/Pacific region. The risks associated with
foreign investment described above, also may be intensified in emerging markets.
Emerging markets can include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Certain emerging market countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, trade difficulties and
unemployment. 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 and
other protectionist measures imposed or negotiated by the countries in which
they trade. There are also risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
SC-EURO's investments in those countries.

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.

9
<PAGE>

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.

NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER

DIRECTORS, OFFICERS AND OTHER PERSONNEL

10
<PAGE>

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 their principal occupations are set forth below.

Anthony R. Manno Jr. Chairman of the Board of Directors, Managing Director
and President of SC-REMFs. Managing Director and
President of GCMG since Jaunary 1995, where he is
responsible for overseeing all investment and capital
allocation matters for GCMG's public market securities
activities and is also responsible for company and
industry analysis, market strategy and trading and
reporting. 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.

Robert H. Abrams Director of SC-REMFs. Director of the Program in Real
Estate at Cornell University. 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 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.

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. At Loyola University, he also
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. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty Inc. and Endowment Realty II and as a
Member of the Investment Committee University of San
Diego. Mr. Kasbeer also serves as Trustee, Treasurer and
Chairman of the Investment and Finance Committees of
Santa Fe Preparatory School and as Trustee and Chairman
of the Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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.

11
<PAGE>

Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.

John H. Gardner, Jr. Director and Managing Director of SC-REMFs. Managing
Director of GCMG since July, 1997. Prior thereto,
Director of the REIT Manager for Security Capital
Pacific Trust ("PTR") 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. from Bentley College and his
B.S. from Stonehill College.

Kenneth D. Statz Managing Director of SC-REMFs. Managing Director of GCMG
since November 1997 where he is responsible for the
development and implementation of portfolio investment
strategy. Prior thereto, Senior Vice President of GCMG
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 and Senior REIT
Analyst 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.

Jeffrey C. Nellessen Vice President, Secretary and Treasurer of SC-REMFs.
Vice President and Controller of GCMG 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.

GCMG

Security Capital Global Capital Management Group Incorporated ("GCMG"), 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.

12
<PAGE>

GCMG commenced operations in January 1995, and is registered as an investment
adviser with the SEC. GCMG'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. Messrs. Manno and Gardener are responsible for overseeing the
portfolio management activities of GCMG-Asia. GCMG is an indirect wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.

GCMG-Asia

Security Capital Global Capital Management Group (Asia) Incorporated, with
offices located at Level 9, AIG Building, 1-1-3 Marunouchi, Chiyoda-ku, Tokyo
100, Japan, provides portfolio management services to SC-ASIA pursuant to an
investment sub-advisory agreement with GCMG. GCMG-Asia, a wholly-owned
subsidiary of GCMG, was formed on May 11, 1998 under Delaware law and is
registered as an investment adviser with the SEC. The principal officers of
GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.

Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously, Vice President of GCMG from November 1997
to April 1998, where she conducted real estate
securities analysis in the Asia/Pacific region for the
firm. Prior to that, Ms. Lord was with Security
Capital Industrial Trust from September 1996 to
October 1997, where she was responsible for research
on special investment opportunities and prior thereto,
working on special assignments under Security Capital
Group Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security Capital, Ms.
Lord was with Societe Generale Securities, (North
Pacific) in Tokyo from June 1994 to August 1994, where
she was a member of the Japanese Government Bond
futures and options brokerage desk and Merrill Lynch,
Pierce, Fenner & Smith from September 1992 to
September 1993. 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 Vice President of GCMG-Asia since May 1998.
Vice President of GCMG from November 1997 to April
1998, where he conducted real estate securities
analysis in the Asia/Pacific region for the firm.
Prior to that, Mr. Montelibano worked on special
assignments under Security Capital Group Incorporated
Managing Directors from June 1995 to December 1996.
Prior to joining Security Capital, Mr. Montelibano was
a consultant for Ayala Land, Incorporated in the
Philippines from July 1994 to August 1994 where he
conducted financial analyses of office and residential
development projects, and for Bank of America in
Malaysia from June 1994 to July 1994 where he
conducted market research studies on retail banking.
Previously, Mr. Montelibano was a senior consultant
with Andersen Consulting from January 1990 to August
1993, 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.

The SC-ASIA Portfolio Management Committee, which is comprised of SC-REMFs and
GCMG-Asia officers, is responsible for the day-to-day management of SC-ASIA's
portfolio.

<PAGE>
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT

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Under the Advisory Agreement, SC-ASIA Class R shares pay GCMG, monthly, an
annual management fee in an amount equal to .95% of SC-ASIA's Class R average
daily net asset value. Under a separate agreement GCMG 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 1.70% of the value of SC-ASIA's Class R
average daily net assets for the year ending December 31, 1998.

In addition to the payments to GCMG 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 GCMG, (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 GCMG 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

GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG 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
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual 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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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 GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-ASIA's income tax returns, proxy statements, semi-annual 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 .08% of
the first $750 million, .06% of the next $250 million and .04% of the SC-REMFs's
assets over $1 billion, subject to an annual minimum fee of $ 75,000. The Sub-
Administrator also serves as SC-ASIA's Custodian and Transfer Agent. See
"Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of SC-ASIA.

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 1940 Act. Under the Plan, SC-ASIA pays 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.

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ASIA Class R shares. Such Agreements may be governed by 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 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

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<PAGE>

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 SC-ASIA's Transfer Agent and
various financial intermediaries that have 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.

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 give 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-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 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:

Via U.S. Mail Via Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184

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: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

Credit: DDA Number 9905-378-7

Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

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 shareholder should call toll free 1-888-SECURITY for an
automatic investment plan form. The Automatic Investment Plan can be set up
with any financial institution that is a member of the Automated Clearing House
("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.

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<PAGE>

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

Additional investments must be at least $500 and may be made by mail, wire or
by telephone. When making an additional purchase by mail, a check payable to
"Security Capital Asia/Pacific 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 toll free 1-800-409-4189 for complete wiring
instructions.

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 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 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-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-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 reasonably
satisfied that the check has cleared, which may take up to twelve days.

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<PAGE>

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."

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 the
Transfer Agent 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.

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.

Telephone

You may redeem shares by telephone by calling the Transfer Agent at toll free
1-800-409-4189. 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.

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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 the 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.

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 on 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

Dividends and distributions will automatically be reinvested into 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
dividends or distributions paid in cash. SC-ASIA will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-ASIA will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-ASIA
will indicate 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%.
For information concerning the tax treatment of SC-ASIA's distribution policies
for SC-ASIA and its shareholders, see "Taxation."

TAXATION

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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. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.

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.

Further information relating to tax consequences is contained in the Statement
of Additional Information.

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

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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 June 30, 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-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of
shares: Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares
only. 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,
SC-ARBITRAGE's Class I shareholders and SC-US'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 from the interests of SC-ASIA's Class I shareholders, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-EURO's Class I and Class R
shareholders.

As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. The effect of SC REALTY Incorporated's
ownership of a controlling interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE
and, therefore, SC-REMFs, is to dilute the voting power of other shareholders.
SC REALTY Incorporated does not anticipate that its initial control of SC-US,
SC-EURO, SC-ASIA and SC-ARBITRAGE will adversely effect the rights of future
shareholders.

CUSTODIAN AND TRANSFER AGENT

REPORTS TO SHAREHOLDERS

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annual report, containing financial statements audited by SC-ASIA's
independent accountants, will be sent to shareholders each year. Please call
toll free 1-888-SECURITY 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 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-EURO, SC-ASIA and SC-ARBITRAGE.

ADDITIONAL INFORMATION

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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 European Real Estate Shares
Security Capital Asia/Pacific Real Estate Shares
Security Capital Real Estate Arbitrage Shares

June 30, 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 European Real Estate Shares ("SC-EURO"), Security
Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security Capital Real
Estate Arbitrage Shares ("SC-ARBITRAGE"). Security Capital Global Capital
Management Group Incorporated ("GCMG ") serves as both investment adviser and
administrator to the Funds. Security Capital Global Capital Management Group
(Europe) S.A. ("GCMG-Europe") serves as investment sub-adviser to SC-EURO and
Security Capital Global Capital Management Group (Asia) Incorporated ("GCMG-
Asia") serves as investment sub-adviser to SC-ASIA.

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-EURO, SC-ASIA, and/or SC-ARBITRAGE dated June 30, 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 toll free 1-888-SECURITY.

Table of Contents

Page
----

Investment Objectives and Policies...................... 2
Investment Restrictions................................. 25
Management of SC-REMFs.................................. 29
Distribution and Servicing Plans........................ 38
Other Distribution and/or Servicing Arrangements........ 39
Determination of Net Asset Value........................ 39
Redemption of Shares.................................... 40
Portfolio Transactions and Brokerage.................... 40
Taxation................................................ 41
Organization and Description of Capital Stock........... 49
Distributor............................................. 50
Custodian and Transfer Agent............................ 50
Performance Information................................. 51
Counsel and Independent Accountants..................... 52
Financial Statements.................................... 52

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INVESTMENT OBJECTIVES 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 the Funds may use and the risks they
entail. Certain of these may not be available to all 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.

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.

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GCMG will monitor the liquidity of restricted securities in the Funds'
portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, GCMG 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).

Convertible Securities

Each Fund may invest in convertible securities, that is, bonds, notes
debentures, preferred stocks and other securities which are convertible into
common stock. Investments in convertible securities can provide an opportunity
for capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.

The convertible securities in which a Fund may invest are either fixed income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends, spin-offs, other corporate distributions
or scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extend
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer. As debt securities,
convertible securities are investments which provide for a stream of income (or
in the case of zero coupon securities, accretion of income) with generally
higher yields than common stocks. Of course, like all debt securities, there
can be no assurance of income or principal payments because the issuers of the
convertible securities may default on their obligations. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.

Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.

Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"(TM)). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.

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<PAGE>

Zero Coupon Bonds

Each Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payment of interest prior to
maturity or that specify a future date when the securities begin to pay current
interest. Zero coupon securities are issued and traded at a discount from their
face amount or par value. This discount varies depending on prevailing interest
rates, the time remaining until cash payments begin, the liquidity of the
security, and the perceived credit quality of the issuer.

The discount on zero coupon securities ("original issue discount") must be
taken into income ratably by a Fund prior to the receipt of any actual payments.
Because the Fund must distribute substantially all of its net income to its
shareholders each year for income and excise tax purposes, the Fund may have to
dispose of portfolio securities under disadvantageous circumstances to generate
cash, or may be required to borrow, to satisfy its corresponding Fund's
distribution requirements.

The market prices of zero coupon securities generally are more volatile than
the prices of securities that pay interest periodically. Zero coupon securities
are likely to respond to changes in interest rates to a greater degree than
other types of debt securities having a similar maturity and credit quality.

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
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 GCMG 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

4
<PAGE>

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 GCMG 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 SC-ARBITRAGE 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 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 receive 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 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

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<PAGE>

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 invest primarily in the securities of foreign issuers.

Political, Social and Economic Risks

Investing in securities of non-U.S. companies may entail additional risks due
to the potential political, social and economic instability of certain countries
and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment; convertibility of currencies into U.S.
dollars and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, SC-EURO or
SC-ASIA could lose its entire investment in any such country.

Religious, Political, or Ethnic Instability

Certain countries in which SC-EURO or SC-ASIA may invest may have groups that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for widespread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of a
Fund's investment in those countries. Instability may also result from, among
other things: (i) authoritarian governments or military involvement in political
and economic decision-making, including changes in government through extra-
constitutional means; (ii) popular unrest associated with demands for improved
political, economic and social conditions; and (iii) hostile relations with
neighboring or other countries. Such political, social and economic instability
could disrupt the principal financial markets in which SC-EURO or SC-ASIA
invests and adversely affect the value of the Fund's assets.

Foreign Investment Restrictions

Certain countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign entities
such as SC-EURO or SC-ASIA. These restrictions or controls may at times limit
or preclude investment in certain securities and may increase the cost and
expenses of SC-EURO or SC-ASIA. For example, certain countries require prior
governmental approval before investments by foreign persons may be made, or may
limit the amount of investment by foreign persons in a particular company or
limit the investment by foreign persons to only a specific class of securities
of a company that may have less advantageous terms than securities of the
company available for purchase by nationals. Moreover, the national policies of
certain countries may restrict investment opportunities in issuers or industries
deemed sensitive to national interests. In addition, some countries require
governmental approval for the repatriation of investment income, capital or the
proceeds of securities sales by foreign investors. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose restrictions on foreign capital remittances abroad. SC-EURO or SC-
ASIA could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments.

Non-Uniform Corporate Disclosure Standards and Governmental Regulation

Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by SC-EURO or SC-
ASIA will not be registered with the SEC or regulators of any foreign country,
nor will the issuers thereof be subject to the SEC's reporting requirements.
Thus, there will be less available information concerning foreign issuers of
securities held by the Fund than is available concerning U.S. issuers. In
instances where the financial statements of an issuer are not deemed to reflect
accurately

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the financial situation of the issuer, GCMG will take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists. There is substantially less publicly available
information about foreign companies than there are reports and ratings published
about U.S. companies and the U.S. government. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers. Issuers of securities in foreign jurisdictions are
generally not subject to the same degree of regulation as are U.S. issuers with
respect to such matters as restrictions on market manipulation, insider trading
rules, shareholder proxy requirements and timely disclosure of information.

Currency Fluctuations

Because SC-EURO and SC-ASIA under normal circumstances each will invest a
substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of SC-EURO's
or SC-ASIA's investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of a Fund's holdings of securities and cash denominated in such currency and,
therefore, will cause an overall decline in the Fund's net asset value and any
net investment income and capital gains derived from such securities to be
distributed in U.S. dollars to shareholders in the Fund. Moreover, if the value
of the foreign currencies in which a Fund receives its income falls relative to
the U.S. dollar between receipt of the income and the making of the Fund
distributions, the Fund may be required to liquidate securities in order to make
distributions if the Fund has insufficient cash in U.S. dollars to meet
distribution requirements.

The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the relative
movement of interest rates, the pace of business activity in the other
countries, and the United States, and other economic and financial conditions
affecting the world economy.

Although each Fund values its assets daily in terms of U.S. dollars, SC-EURO
and SC-ASIA do not intend to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. Each Fund will do so, from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference ("spread") between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should a Fund desire
to sell that currency to the dealer.

Adverse Market Characteristics

Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities markets and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
transactions usually are subject to fixed commissions, which generally are
higher than negotiated commissions on U.S. transactions. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of SC-EURO or SC-ASIA are uninvested and no return is earned
thereon. The inability of SC-EURO or SC-ASIA to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a security due to settlement
problems either could result in losses to SC-EURO or SC-ASIA due to subsequent
declines in value of that security or, if a Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. The
Manager will consider such difficulties when determining the allocation of each
Fund's assets, although the Manager does not believe that such difficulties will
have a material adverse effect on a Fund's trading activities.

SC-EURO and SC-ASIA may use foreign custodians, which may involve risks in
addition to those related to the use of U.S. custodians. Such risks include
uncertainties relating to determining and monitoring the foreign custodian's
financial strength, reputation and standing; maintaining appropriate safeguards
concerning the Fund's investments; and possible difficulties in obtaining and
enforcing judgments against such custodians.

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Withholding Taxes

SC-EURO's or SC-ASIA's net investment income from foreign issuers may be
subject to withholding taxes by the foreign issuer's country, thereby reducing
the Fund's net investment income or delaying the receipt of income when those
taxes may be recaptured. See "Taxes."

Concentration

Because SC-EURO and SC-ASIA each invest a significant portion of its assets in
securities of issuers located in a particular region of the world, the Fund may
be subject to greater risks and may experience greater volatility than a Fund
that is more broadly diversified geographically.

There are special risks attendant to investment in the Western European
countries. The countries that are members of the European Economic Community
("Common Market") (Belgium, Denmark, France, Germany, Greece, Ireland,
Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom) have
eliminated certain import tariffs and quotas and other trade barriers with
respect to one another over the past several years. GCMG and GCMG-Europe
believe that these Common Market reforms are likely to improve the prospects for
economic growth in many Western European countries. In addition, these reforms
could benefit real estate operating companies domiciled in Western European
countries by expanding their markets. Nevertheless, it is not clear what the
form or effect of such reforms will be on real estate companies in Western
Europe. Therefore it is impossible to predict their long-term impact on SC-
EURO's investments.

A great deal of interest currently surrounds opportunities created by the
reunification of East and West Germany. Following reunification, the Federal
Republic of Germany has remained a firm and reliable member of the EC and
numerous other international alliances and organizations. To reduce inflation
caused by the reunification of East and West Germany, Germany has adopted a
tight monetary policy which has led to weakened exports and a reduced domestic
demand for goods and services. However, in the long-term, reunification could
prove to be an engine for domestic and international growth.

Portugal is a genuinely emerging market which has experienced rapid growth
since the mid-1980's, except for a brief period of stagnation over 1990-91.
Portugal's government remains committed to privatization of the financial system
away from one dependent upon the banking system to a more balanced structure
appropriate for the requirements of a modern economy. Inflation continues to be
about three times the EC average.

Eastern European Countries

Investment by SC-EURO in Eastern European countries involves a high degree of
risk and special considerations not typically associated with investing in the
United States securities market, and should be considered highly speculative.
Such risks include: (1) delays in settling portfolio transactions and risk of
loss arising out of the system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
economic system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation) and high
unemployment; (6) controls on foreign investment and local practices disfavoring
foreign investors and limitations on repatriation of invested capital, profits
and dividends, and on a Fund's ability to exchange local currencies for U.S.
dollars; (7) political instability and social unrest and violence; (8) the risk
that the governments of Russian and Eastern European countries may decide not to
continue to support the economic reform programs implemented recently and could
follow radically different political and/or economic policies to the detriment
of investors, including non-market-oriented policies such as the support of
certain industries at the expense of other sectors or investors, or a return to
the centrally planned economy that existed when such countries had a communist
form of government; (9) the financial condition of companies in these countries,
including large amounts of inter-company debt which may create a payments crisis
on a national scale; (10) dependency on exports and the corresponding importance
of international trade; (11) the risk that the tax system in these countries
will not be reformed to prevent inconsistent, retroactive and/or exorbitant
taxation; and (12) the underdeveloped nature of the securities markets.

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Japan

SC-ASIA will invest in companies located in Japan. Japan's economic growth
has declined significantly since 1990. The general government position has
deteriorated as a result of weakening economic growth and stimulative measures
taken to support economic activity and to restore financial stability. Although
the decline in interest rates and fiscal stimulation packages have helped to
contain recessionary forces, uncertainties remain. Japan is also heavily
dependent upon international trade, so its economy is especially sensitive to
trade barriers and disputes. Japan has had difficult relations with its trading
partners, particularly the United States, where the trade imbalance is the
greatest. It is possible that trade sanctions and other protectionist measures
could impact Japan adversely in both the short and the long term.

The common stocks of many Japanese companies trade at high price-earnings
ratios. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially in the U.S. in general, however, reported net income in Japan is
understated relative to U.S. accounting standards and this is one reason why
price-earnings ratios of the stocks of Japanese companies have tended
historically to be higher than those for U.S. stocks. In addition, Japanese
companies have tended to have higher growth rates than U.S. companies and
Japanese interest rates have generally been lower than in the U.S., both of
which factors tend to result in lower discount rates and higher price-earnings
ratios in Japan than in the U.S.

The Japanese securities markets are less regulated than those in the United
States. Evidence has emerged from time to time of distortion of market prices
to serve political or other purposes. Shareholders' rights are not always
equally enforced. In addition, Japan's banking industry is undergoing problems
related to bad loans and declining values in real estate.

Pacific Region Countries

Certain of the risks associated with foreign securities are heightened for
investments in Pacific region countries. For example, some of the currencies of
Pacific region countries have experienced steady devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries, such as India, face serious exchange
constraints. Many of the Asia/Pacific region countries may be subject to a
greater degree of social, political and economic instability than is the case in
the United States. Such instability may result from, among other things, the
following (i) authoritarian governments or military involvement in political and
economic decision making, and changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic, religious and racial
disaffection. Such social, political and economic instability could
significantly disrupt the principal financial markets in which a Fund invests
and adversely affect the value of SC-ASIA's assets. In addition, there may be
the possibility of asset expropriations or future confiscatory levels of
taxation affecting the Funds.

In China, India, Indonesia, Malaysia, the Philippines, South Korea and
Thailand, government regulation or a company's charter may limit the maximum
foreign aggregate ownership of equity in any one company. South Korea generally
prohibits foreign investment in non-denominated debt securities and Sri Lanka
prohibits foreign investment in government debt securities. In the Philippines,
SC-ASIA may generally invest in "B" shares of Philippine issuers engaged in
partly nationalized business activities, the market prices, liquidity and rights
of which may vary from shares owned by nationals. Similarly, in China, SC-ASIA
may only invest in "B" shares of securities traded on The Shanghai Securities
Exchange and The Shenzhen Stock Exchange, currently the two officially
recognized securities exchanges in China. "B" shares traded on The Shanghai
Securities Exchange are settled in U.S. dollars, and those traded on The
Shenzhen Stock Exchange are generally settled in Hong Kong dollars.

If, because of restrictions on repatriation or conversion, SC-ASIA were unable
to distribute substantially all of its net investment income and net capital
gains within applicable time periods, SC-ASIA could be subject to federal income
and excise taxes that would not otherwise be incurred and could cease to qualify
for the favorable tax treatment afforded to regulated investment companies
("RICs") under the Internal Revenue Code of 1986, as amended ("Code"). In such
case, it would become subject to federal income tax on all of its income and net
capital gains. See "Taxation".

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Several of the Asia/Pacific region countries have or in the past have had
hostile relationships with neighboring nations or have experienced internal
insurgency. Thailand has experienced border conflicts with Laos and Cambodia,
and India is engaged in border disputes with several of its neighbors, including
China and Pakistan. An uneasy truce exists between North Korea and South Korea,
and the recurrence of hostilities remains possible. Reunification of North
Korea and South Korea could have a detrimental effect on the economy of South
Korea. Also, China continues to claim sovereignty over Taiwan and recently has
conducted military maneuvers near Taiwan.

The economies of most of the Asia/Pacific region countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally the United States, Japan, China and the European Community. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the securities markets of the
Asia/Pacific region countries. In addition, the economies of some of the
Asia/Pacific region countries, Australia and Indonesia, for example, are
vulnerable to weakness in world prices for their commodity exports, including
crude oil.

Few of the Asia/Pacific region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military coups, while others have periodically demonstrated repressive
police state characteristics. In several Asia/Pacific region countries, the
leadership ability of the government has suffered as a result of recent
corruption scandals. Disparities of wealth, among other factors, have also led
to social unrest in some of the Asia/Pacific region countries; accompanied, in
certain cases, by violence and labor unrest. Ethnic, religious and/or racial
disaffection, as evidenced in Indonesia, for example, have created social,
economic and political problems. Such problems also have occurred in other
regions.

Starting in mid-1997, some Pacific region countries began to experience
currency devaluations that resulted in high interest rate levels and sharp
reductions in economic activity. While the currency crisis diminished prospects
for short-term corporate earnings growth, GCMG and GCMG-Asia believe that high
interest rate levels may force governments and corporations to restructure the
financial sector in a manner that may facilitate a return to high levels of
long-term economic activity.

China assumed sovereignty over Hong Kong in July 1997. Although China has
committed by treaty to preserve the economic and social freedoms enjoyed in Hong
Kong for fifty years after regaining control of Hong Kong, the continuation of
the current form of the economic system in Hong Kong after the reversion will
depend on the actions of the government of China. In addition, such reversion
has increased sensitivity in Hong Kong to political developments and statements
by public figures in China. Business confidence in Hong Kong, therefore, can be
significantly affected by such developments and statements, which in turn can
affect markets and business performance.

In addition, the Chinese sovereignty over Hong Kong also presents a risk that
the Hong Kong dollar will be devaluated and a risk of possible loss of investor
confidence in the Hong Kong markets and dollar. However, factors exist that are
likely to mitigate this risk. First, China has stated its intention to
implement a "one country, two systems" policy, which would preserve monetary
sovereignty and leave control in the hands of the Hong Kong Monetary Authority
("HKMA").

Second, fixed rate parity with the U.S. dollar is seen as critical to
maintaining investors confidence in the transition to Chinese rule and,
therefore, it is anticipated that, in the event international investors lose
confidence in Hong Kong dollar assets, the HKMA would intervene to support the
currency, though such intervention cannot be assured. Third, Hong Kong's and
China's sizable combined foreign exchange reserve may be used to support the
value of the Hong Kong dollar, provided that China does not appropriate such
reserves for other uses, which is not anticipated, but cannot be assured.
Finally, China would be likely to experience significant adverse political and
economic consequences if confidence in the Hong Kong dollar and the territory
assets were to be endangered.

Emerging Markets

SC-EURO and SC-ASIA may invest in securities of issuers in emerging markets.
Most emerging securities markets may have substantially less volume and are
subject to less government supervision than U.S. securities markets.

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Securities of many issuers in emerging markets may be less liquid and more
volatile than securities of comparable domestic issuers. In addition, there is
less regulation of securities exchanges, securities dealers, and listed and
unlisted companies in emerging markets than in the U.S.

Emerging 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. Delays in settlement
could result in temporary periods when a portion of the assets of SC-EURO or SC-
ASIA is uninvested and no cash is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.

Foreign investment in certain emerging market debt obligations is restricted
or controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses to SC-EURO or SC-ASIA. Certain
emerging markets require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.

Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sates of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. SC-EURO or SC-ASIA
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
of any restrictions on investments.

In the course of investment in emerging market debt obligations, SC-EURO and
SC-ASIA will be exposed to the direct or indirect consequences of political,
social and economic changes in one or more emerging markets. Political changes
in emerging market countries may affect the willingness of an emerging market
country governmental issuer to make or provide for timely payments of its
obligations.

The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While GCMG-Europe and GCMG-
Asia manage the assets of SC-EURO and SC-ASIA, respectively, in a manner that
will seek to minimize the exposure to such risks, and will further reduce risk
by owning the bonds of many issuers, there can be no assurance that adverse
political, social or economic changes will not cause a Fund to suffer a loss of
value in respect of the securities in a Fund's portfolio.

The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. SC-REMFs may suspend redemption of Fund shares for
any period during which an emergency exists, as determined by the SEC.
Accordingly if SC-EURO or SC-ASIA believes that appropriate circumstances exist,
SC-REMFs will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from a Fund's identification of such
condition until the date of the SEC action, the Fund's securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of SC-REMFs Board of Directors.

Volume and liquidity in most foreign bond markets are less than in the U.S.
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of business and industry practices, securities
exchanges, brokers, dealers and listed companies

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than in the U.S., mail service between the U.S. and foreign countries may be
slower or less reliable than within the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain emerging markets,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the Fund's
investments in those countries. Moreover, individual emerging market economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. The chart below sets
forth the risk ratings of selected emerging market countries, sovereign debt
securities.

Sovereign Risk Ratings for Selected Emerging Market Countries as of 2/l/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)

Country Moody's Standard & Poor's
Chile Baal A-
Turkey Ba3 B+
Mexico Ba2 BB
Czech Republic Baal A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B
Morocco NR NR
Argentina Bi BB-
Brazil Bl B+
Poland Baa3 BBB-
Ivory Coast NR NR

SC-EURO or SC-ASIA may have limited legal recourse in the event of a
default with respect to certain debt obligations it holds. If the issuer of a
fixed-income security owned by a Fund defaults, the Fund may incur additional
expenses to seek recovery. Debt obligations issued by emerging market country
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
SC-EURO or SC-ASIA's ability to enforce its rights against private issuers may
be limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements. With four exceptions, (Panama, Cuba,
Costa Rica and Yugoslavia), no sovereign emerging markets borrower has defaulted
on an external bond issue since World War II.

Income from securities held by SC-EURO or SC-ASIA could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. SC-EURO or SC-ASIA's net
asset value may also be affected by changes in the rates or methods of taxation
applicable to the Fund or to entities in which the Fund has invested. GCMG and
GCMG-Europe or GCMG-Asia, as appropriate, will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.

Many emerging markets 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 adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. In recent years, certain of these countries
have begun to control inflation through prudent economic policies.

Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market

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governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic performance
and political and social stability of those issuers.

Governments of many emerging market countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in a Fund's
portfolio. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could adversely
affect a Fund's assets should these conditions recur.

The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.

To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain, and a
withdrawal of external funding could adversely affect the capacity of emerging
market country governmental issuers to make payments on their obligations. In
addition, the cost of servicing emerging market debt obligations can be affected
by a change in international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically based upon
international rates.

Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.

Investment Funds

Some emerging market countries have laws and regulations that currently
preclude direct investment in the securities of their companies. However,
indirect investment in the securities of companies listed and traded on the
stock exchanges in these countries is permitted by certain emerging market
countries through investment funds that have been specifically authorized. SC-
EURO and SC-ASIA may invest in these Investment Funds subject to the provisions
of the 1940 Act, as applicable and other applicable laws.

Foreign Currency Transactions

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.

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<PAGE>

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
GCMG, 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.

Privatizations

The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("Privatizations"). GCMG, GCMG-Europe and GCMG-Asia believe that
privatizations may offer opportunities for significant capital appreciation and
intends to invest assets of SC-EURO and SC-ASIA in privatizations in appropriate
circumstances. In certain foreign countries, the ability of foreign entities
such as the Funds to participate in privatizations may be limited by local law,
or the terms on which the Funds may be permitted to participate may be less
advantageous that those for local investors. There can be no assurance that
foreign governments will continue to sell companies currently owned or
controlled by them or that privatization programs will be successful.

Brady Bonds

SC-EURO and SC-ASIA may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plans introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, the Philippines, Poland and Uruguay.

Brady Bonds have been issued only recently, and for that reason do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets.

Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on many Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal

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<PAGE>

at maturity (these uncollateralized amounts constitute the "residual risk"). In
light of the residual risk of Brady Bonds and the history of defaults of
countries issuing Brady Bonds, with respect to commercial bank loans by public
and private entities, investment in Brady Bonds may be viewed as speculative.

Sovereign Debt

SC-EURO and SC-ASIA also may invest in sovereign debt. Investment in
sovereign debt can involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including SC-EURO and SC-ASIA) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
There is no bankruptcy proceeding by which sovereign debt on which governmental
entities have defaulted may be collected in whole or in part.

Depository Receipts

SC-EURO and SC-ASIA may hold securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), American Depository Shares ("ADSs"),
Global Depository Receipts ("GDRs") and European Depository Receipts ("EDRs") or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs are typically issued
by an American bank or trust company that evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe,
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in U.S. securities markets and EDRs in bearer form are designed
for use in European securities markets. For purposes of SC-EURO's and SC-ASIA's
respective investment policies, their investments in ADRs, ADSs, GDRs and EDRs
will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.

ADR facilities may be established as either "unsponsored" or "sponsored".
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions, and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide

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shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. SC-EURO and SC-ASIA may
invest in both sponsored and unsponsored ADRs.

Samurai and Yankee Bonds

SC-ASIA may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds"), and SC-EURO and SC-ASIA both may invest in the U.S.
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of each Fund to invest in Samurai or Yankee bond
issues, as appropriate, only after taking into account considerations of quality
and liquidity, as well as yield.

Eurodollars and Yankee Dollars

SC-EURO and SC-ASIA may also invest in obligations of foreign branches of
U.S. banks (denominated in Eurodollars) and U.S. branches of foreign banks
("Yankee dollars") as well as foreign branches of foreign banks. These
investments involve risks that are different from investments in securities of
U.S. banks, including potential unfavorable political and economic developments,
different tax provisions, seizure of foreign deposits, currency controls,
interest limitations or other governmental restrictions which might affect
payment of principal or interest.

Strategic Transactions and Derivatives

Each Fund, other than SC-US, may, but is not required to, utilize various
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific equity or fixed-
income market movements), to manage the effective maturity or duration of fixed-
income securities in a Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, SC-EURO, SC-ASIA and
SC-ARBITRAGE may purchase and sell exchange-listed and over-the-counter put and
call options on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used without limit to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect a Fund's unrealized gains in the
value of its portfolio securities in each Fund's portfolio, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of fixed-income securities in a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and in any combination and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Fund to utilize these Strategic
Transactions successfully will depend on GCMG 's, GCMG-Europe's or GCMG-Asia's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in a Fund.

Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent GCMG 's, GCMG-Europe's or GCMG-
Asia's view as to certain market movements is incorrect, the risk that the use
of such Strategic Transactions could result in losses greater than if they had
not been used. Use of put and call options may result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation

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<PAGE>

a Fund can realize on its investments or cause a Fund to hold a security it
might otherwise sell. The use of currency transactions can result in a Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of a Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, a Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.

General Characteristics of Options

Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each
Fund is authorized to purchase and sell exchange listed options and over-the-
counter options ("OTC options"). Exchange listed options are issued by a
regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

A Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

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<PAGE>

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. Each
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, GCMG, GCMG-Europe and/or GCMG-Asia must assess the
creditworthiness of each such counterparty or any guarantor or credit
enhancement of the counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. Each Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by GCMG. The staff of the SEC currently takes the position that OTC
options purchased by a Fund, and portfolio securities "covering" the amount of a
Fund's obligation pursuant to an OTC option sold by it (the cost of the sell-
back plus the in-the-money amount, if any) are illiquid, and are subject to the
Funds' limitation on investing no more than 10% of its assets in illiquid
securities.

If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

SC-EURO, SC-ASIA, and SC-ARBITRAGE may purchase and sell call options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though a Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.

SC-EURO, SC-ASIA, and SC-ARBITRAGE may purchase and sell put options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts other than futures on individual corporate debt
and individual equity securities. Each Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.

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<PAGE>

General Characteristics of Futures

SC-EURO, SC-ASIA, and SC-ARBITRAGE may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by a Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.

SC-EURO, SC-ASIA, and SC-ARBITRAGE Fund's use of financial futures and
options thereon will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission and will be entered into only for bona fide hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or setting an option
thereon requires a Fund to deposit with a financial intermediary as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited thereafter on a daily basis as the mark
to market value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Fund. If a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled
by entering into an offsetting transaction but there can be no assurance that
the position can be offset prior to settlement at an advantageous price, nor
that delivery will occur.

No Fund will enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are described
below.

Options on Securities Indices and Other Financial Indices

SC-EURO, SC-ASIA, and SC-ARBITRAGE also may purchase and sell call and put
options on securities indices and other financial indices and in so doing can
achieve many of the same objectives it would achieve through the sale or
purchase of options on individual securities or other instruments. Options on
securities indices and other financial indices are similar to options on a
security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, they settle by cash settlement, i.e., an
option on an index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite on
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.

Currency Transactions

SC-EURO and SC-ASIA may engage in currency transactions with counterparties
in order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value. Currency transactions
include forward currency contracts, exchange listed currency futures, exchange
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date

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<PAGE>

of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. A Fund may enter into currency
transactions with counterparties which have received (or the guarantors of the
obligations of which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by GCMG , GCMG-Europe and/or GCMG-
Asia.

SC-EURO's and SC-ASIA's dealings in currency transactions such as futures,
options, options on futures and swaps will be limited to hedging involving
either specific transactions or portfolio positions except as described below.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.

No Fund will enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to forward currency contracts entered into for non-
hedging purposes, or to proxy hedging or cross hedging as described below.

SC-EURO and SC-ASIA may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, SC-EURO and SC-ASIA may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the Fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency. Changes in value are generally considered to be correlated to a
currency or currencies in which some or all of a Fund's portfolio securities are
or are expected to be denominated, in exchange for U.S. dollars. The amount of
the commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if GCMG-Europe considers
that the Austrian schilling is correlated to the German Deutsche mark (the "D-
mark"), SC-EURO holds securities denominated in schillings and GCMG-Europe
believes that the value of schillings will decline against the U.S. dollar,
GCMG-Europe may enter into a commitment or option to sell D-marks and buy
dollars. Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to a Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived correlation between various currencies may not be present or may not
be present during the particular time that a Fund is engaging in proxy hedging.
If a Fund enters into a currency hedging transaction, the Fund will comply with
the asset segregation requirements described below.

Risks of Currency Transactions

Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.

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Combined Transactions

SC-EURO, SC-ASIA, and SC-ARBITRAGE may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts in the case of SC-
EURO and SC-ASIA) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("combined"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of GCMG, GCMG-Europe or GCMG-Asia, it is
in the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.

Swaps, Caps, Floors and Collars

Among the Strategic Transactions into which SC-EURO, SC-ASIA, and SC-
ARBITRAGE may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. Each Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. SC-EURO, SC-ASIA, and SC-ARBITRAGE intend to use these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, GCMG ,
GCMG-Europe or GCMG-Asia and the Funds believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. No Fund will enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from an NRSRO or is determined to be of equivalent credit
quality by GCMG. If there is a default by the counterparty, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

Eurodollar Instruments

SC-EURO and SC-ASIA may invest in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings.

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<PAGE>

A Fund might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed income
instruments are linked.

Risks of Strategic Transactions Outside the U.S.

When conducted outside the U.S., Strategic Transactions may not be
regulated as rigorously as in the U.S., may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.

Warrants

SC-EURO, SC-ASIA, and SC-ARBITRAGE may invest in warrants. The holder of a
warrant has the right, until the warrant expires, to purchase a given number of
shares of a particular issuer at a specified price. Such investments can
provide a greater potential for profit or loss than an equivalent investment in
the underlying security. Prices of warrants do not necessarily move, however, in
tandem with the prices of the underlying securities and are, therefore,
considered speculative investments. Warrants pay no dividends and confer no
rights other than a purchase option. Thus, if a warrant held by a Fund were not
exercised by the date of its expiration, the Fund would lose the entire purchase
price of the warrant.

Use of Segregated and Other Special Accounts

Many Strategic Transactions, in addition to other requirements, require
that a Fund segregate cash or liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid assets at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a
Fund will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by a Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate cash or liquid assets equal to the excess of the
index value over the exercise price on a current basis. A put option written by
a Fund requires the Fund to segregate cash or liquid assets equal to the
exercise price.

Except when a Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's
obligation.

OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when
the Fund sells these instruments it will only segregate an amount of cash or
liquid assets equal to its accrued net obligations, as there is no requirement
for payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by the Fund, or the in the money
amount plus any sell-back formula amount in the case of a cash-settled put or
call. In addition, when a Fund sells a call option on an index at a time when
the in-the-money amount exceeds the exercise price, the Fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by the Fund
other than those above generally settle with physical delivery, or with an
election of either physical delivery or cash settlement and the Fund will
segregate an amount of cash or liquid assets equal to the full value of the
option. OTC options settling with physical delivery, or with

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an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, a Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.

With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if a
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. if the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.

Investment Company Securities

Securities of other investment companies may be acquired by the Funds to
the extent permitted under the 1940 Act. Investment companies incur certain
expenses such as management, custodian, and transfer agency fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.

Repurchase Agreements

SC-ARBITRAGE, SC-EURO and SC-ASIA may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the Board
of Directors. In a repurchase agreement, a Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by a Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will a Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of thirteen months from
the effective date of the repurchase agreement. A Fund will always receive
securities as collateral whose market value is, and during the entire term of
the agreement remains, at least equal to 100% of the dollar amount invested by
the Fund in each agreement plus accrued interest, and a Fund will make payment
for such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the Funds' custodian. If the seller defaults, a Fund
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by a Fund may be delayed or limited.

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

23
<PAGE>

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 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, GCMG 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.

When-Issued Securities

Each Fund may from time to time purchase securities on a "when-issued" or
"forward delivery" basis for payments and delivery at a later date. The price
of such securities, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when-issued
or forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest accrues to the Fund. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, the Fund would earn
no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above.

While when-issued or forward delivery securities may be sold prior to the
settlement date, a Fund intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Fund makes the commitment to purchase a security on a when-issued
or forward delivery basis, it will record the transaction and reflect the value
of the security in determining its net asset value. At the time of

24
<PAGE>

settlement, the market value of the when-issued or forward delivery securities
may be more or less than the purchase price. A Fund does not believe that its
net asset value or income will be adversely affected by its purchase of
securities on a when-issues or forward delivery basis. A Fund will establish a
segregated account with the Funds' custodian in which it will maintain cash or
liquid assets equal in value of commitments for when-issued or forward delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. A Fund will not enter into such
transactions for leverage purposes.

Short Sales

SC-US, SC-ARBITRAGE, SC-EURO, and SC-ASIA, to the extent permitted by other
countries, may engage in short sales. SC-US, SC-EURO and SC-ASIA will not
engage in a short sale if immediately after such transaction the aggregate
market value of all securities sold short would exceed 10% of a Fund's net
assets (taken at market value). SC-ARBITRAGE will not engage in short sales if
immediately after such transaction, the aggregate market value of all securities
sold short would exceed 100% of SC-ARBITRAGE's net assets (taken at market
value).

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 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.

25
<PAGE>

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.

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 1/3% (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. If at any time SC-ARBITRAGE's
borrowings exceed this limitation due

26
<PAGE>

to a decline in SC-ARBITRAGE's assets, such borrowings will be reduced within
three days to the extent necessary to comply with this limitation;

2. Engage in short sales 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);

3. 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);

4. 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;

5. Make loans in excess of 33 1/3% of SC-ARBITRAGE's total assets;

6. 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;

7. Participate on a joint or joint and several basis in any securities
trading account;

8. 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;

9. 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;

10. 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

11. (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.

In addition, SC-ARBITRAGE has adopted non-fundamental investment limitations
as stated below. Such limitations may be changed without shareholder approval.

1. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder; or

2. Invest more than 10% of its net assets in illiquid securities.

SC-EURO and SC-ASIA may not:

27
<PAGE>

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 the Prospectus);

2. Act as an underwriter or issue senior securities;

3. Issue senior securities or borrow money, except that a Fund may borrow
money from banks in an amount not exceeding 33-1/3% of the value of a Fund's
total assets (not including the amount borrowed), except for temporary or
emergency purposes and to secure borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in a Fund's assets, such borrowings will
be reduced within three days to the extent necessary to comply with this
limitation. Arrangements with respect to margin for futures contracts are not
deemed to be a pledge of assets;

4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings;

5. Participate on a joint or a joint and several basis in any trading account
in securities;

6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent a
Fund from purchasing or selling options or futures contracts or from investing
in securities or other instruments backed by physical commodities);

7. Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;

8. Underwrite securities issued by others, except to the extent that a Fund
may be considered an underwriter within the meaning of the Securities Act in the
disposition of restricted securities;

9. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs; or

10. Invest for the purpose of exercising control over management of any
company.

In addition, the Funds have adopted non-fundamental investment limitations as
stated below. Such limitations may be changed without shareholder approval.

SC-EURO and SC-ASIA may not:

1. Purchase securities on margin except that the Funds may enter into option
transactions and futures contracts as described in their Prospectuses, and as
specified above in fundamental investment limitation number (1) above;

2. Purchase or retain securities of an issuer if the officers and Directors
of SC-REMFs, GCMG or the Fund's sub-adviser owning more than 1/2 of 1% of such
securities, together own more than 5% of such securities;

3. Invest more than 10% 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;

4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder; or

5. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the SEC thereunder;

28
<PAGE>

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 distributed to the Fund by the issuer, unless such purchase would result
in a violation of a fundamental investment restriction listed above.

29
<PAGE>

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 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>
Anthony R. Manno Jr.* Chairman of 46 Managing Director and President of GCMG since
11 South LaSalle Street the Board of January 1995, where he is responsible for overseeing
Chicago, Illinois 60603 Directors, all investment and capital allocation matters for
Managing GCMG's public market securities activities and is
Director and also responsible for company and industry analysis,
President market strategy and trading and reporting. Mr. Manno was
a member of the Investment Committee of Security
Capital from March 1994 to June 1996. Prior to joining
Security Capital Group Incorporated, 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.

Robert H. Abrams Director 65 Director of the Program in Real Estate at Cornell
106 West Sibley Hall University. Founder of Colliers ABR, Inc. (formerly
Ithaca, New York 14851 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 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>

30
<PAGE>

<TABLE>
<S> <C> <C> <C>
Stephen F. Kasbeer Director 73 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. At Loyola University, he also 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. Currently, Mr. Kasbeer serves as a Director
of Endowment Realty, Inc. and Endowment Realty II and
as a Member of the Investment Committee of the
University of San Diego. Mr. Kasbeer also serves as
Trustee, Treasurer and Chairman of the Investment
and Finance Committees of Santa Fe Preparatory School
and as Trustee and Chairman of the Santa Fe Preparatory
School Combined Permanent Endowment Fund Trust. 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 68 Chairman of the Board of Trigen Energy Corporation
7408 Eaton Court since 1994. As founding chief executive of The
University Park, Florida Common Fund in 1971 and Endowment Realty Investors
34201 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 $95 billion New York State Common
Retirement Fund since 1982. He has been a Director of
the Northern Trust of Connecticut 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, 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 also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.

</TABLE>

31
<PAGE>

<TABLE>
<S> <C> <C> <C>
John H. Gardner, Jr.* Director and 44 Managing Director of GCMG since July, 1997. Prior
11 South LaSalle Street Managing thereto, Director of the REIT Manager for Security
Chicago, Illinois 60603 Director Capital Pacific Trust ("PTR") from February 1995
to June 1997 and Senior Vice President of Security
Capital Group Incorporated 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
Group Incorporated, 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.
from Bentley College and his B.S. from Stonehill College.

Kenneth D. Statz Managing 39 Managing Director of GCMG since November 1997 where he
11 South LaSalle Street Director is responsible for the development and
Chicago, Illinois 60603 implementation of portfolio investment strategy. Prior
thereto, Senior Vice President of GCMG from July
1996 to October 1997 and Vice President from May 1995
to June 1996. Prior to joining Security Capital
Group Incorporated, Mr. Statz was a Vice President
and Senior REIT Analyst 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 42 Senior Vice President of GCMG since November 1997 and
11 South LaSalle Street President Vice President since July 1996, where he is
Chicago, Illinois 60603 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 GCMG, 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
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.

</TABLE>

32
<PAGE>

<TABLE>
<S> <C> <C> <C>
Jeffrey C. Nellessen Vice 36 Vice President and Controller of GCMG since
11 South LaSalle Street President, March 1997. Prior thereto, from June 1988 to March
Chicago, Illinois 60603 Secretary and 1997, he was Controller, Manager of Client
Treasurer 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.

</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 GCMG 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.

33
<PAGE>

Compensation Table
Fiscal Year Ending December 31, 1997

Pension or
----------
Retirement
----------
Benefits Estimated
---------- ---------- Total
Aggregate Accrued as Annual -------------
------------ ---------- ---------- Compensation
Compensation Part of Benefits -------------
------------ ---------- ---------- From SC-US
From SC-US Upon -------------
------------ ---------- ---------- Paid To
Name of Person, Position SC-US Expenses Retirement Directors
- --------------------------- ------------ ---------- ---------- -------------
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.
Director /(1)/............ 0 N/A N/A 0

- ---------------------------
** "Interested person," as defined in the 1940 Act, of SC-REMFs.

(1) Elected to serve by the Board of Directors on March 11, 1998.

GCMG

Security Capital Global Capital Management Group Incorporated, a Maryland
corporation is a registered investment adviser, which commenced operations in
January 1995 under law and specializes in the management of real estate
securities portfolios. GCMG is an indirect wholly-owned subsidiary of Security
Capital Group Incorporated.

The following GCMG analyst assists in the management of the SC-US's and SC-
ARBITRAGE's investment portfolios.

<TABLE>
<S> <C>
Albert D. Adriani Member, SC-US and SC-ARBITRAGE Portfolio
Management Committees; Vice President of GCMG
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
Security Capital U.S. Realty Incorporated; from
March 1994 to January 1995, he was with Security
Capital Markets Group Incorporated. 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. from the University of Chicago. Mr.
Adriani is a Chartered Financial Analyst.
</TABLE>

34
<PAGE>

GCMG-Asia

Security Capital Global Capital Management Group (Asia) Incorporated, with
offices located at Level 9, AIG Building, 1-1-3, Marunouchi, Chiyoda-ku, Tokyo
100, Japan, provides portfolio management services to SC-ASIA pursuant to an
investment sub-advisory agreement with GCMG. GCMG-Asia, a wholly-owned
subsidiary of GCMG was formed on May 11, 1998 under Delaware law and is
registered as an investment adviser with the SEC. The principal officers of
GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.

<TABLE>
<S> <C>
Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously Vice President of GCMG from November
1997 to April 1998, where she conducted of real
estate securities analysis in the Asia/Pacific
region for the firm. Prior to that, Ms. Lord was
with Security Capital Industrial Trust from
September 1996 to October 1997, where she was
responsible for research on special investment
opportunities and prior thereto, working on
special assignments under Security Capital Group
Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security Capital
Group Incorporated, Ms. Lord was with Societe
Generale Securities, (North Pacific) in Tokyo from
June 1994 to August 1994, where she was a member
of the Japanese Government Bond futures and
options brokerage desk and Merrill Lynch, Pierce,
Fenner & Smith from September 1992 to September
1993. 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 Vice President of GCMG-Asia since May 1998. Vice
President of GCMG from November 1997 to April 1998,
where he conducted real estate securities analysis
in the Asia/Pacific region for the firm. Prior to
that, Mr. Montelibano was working on special
assignments under Security Capital Group
Incorporated Managing Directors from June 1995 to
December 1996. Prior to joining Security Capital
Group Incorporated, Mr. Montelibano was a
consultant for Ayala Land, Incorporated in the
Philippines from July 1994 to August 1994, where
he conducted financial analyses of office and
residential development projects, and for Bank of
America in Malaysia from June 1994 to July 1994,
where he conducted market research studies on
retail banking. Previously, Mr. Montelibano was a
senior consultant with Andersen Consulting from
January 1990 to August 1993, 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>

GCMG-Europe

Security Capital Global Capital Management Group (Europe) S.A., with offices
located at Boulevord de la Woluwe 34, Brussels, Belgium, provides portfolio
management services to SC-EURO pursuant to an investment sub-advisory
agreement with GCMG. GCMG-Europe was formed on May 14, 1998 under Belgian
law and is registered as an investment adviser with the SEC. GCMG-Europe is
a wholly-owned subsidiary of Security Capital (EU) Management Group S.A., a
Belgian corporation, which is wholly-owned by Security Capital Group
Incorporated. The principal officer of GCMG-Europe, who serves on the
SC-EURO Portfolio Management Committee, and his principal occupations are
set forth below.

35
<PAGE>

<TABLE>
<S> <C>
Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998,
where he is responsible for trading and portfolio
management strategy. From April 1997 to May 1998,
Mr. Rovers was Vice President of SC (EU)
Management from April 1997 to May 1998, where he
was responsible for providing research and
management support services in the area of
European investments. Mr. Rovers was a Vice
President and Senior Portfolio Manager with GIM
Capital Management, Inc. (the Netherlands) from
January 1993 to March 1997. 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.
</TABLE>

SC (EU) Management

Security Capital (EU) Management Group S.A. provides GCMG-Europe with
proprietary economic and 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 on March 24, 1997, under Belgian law
and is a wholly-owned subsidiary of Security Capital (EU) Management Group S.A.,
a Belgian corporation, which is wholly-owned by Security Capital Group
Incorporated. The principal officer of SC (EU) Management and his principal
occupation are listed below.

<TABLE>
<S> <C>
W. Joseph Houlihan Managing Director of SC (EU) Management since
Boulevord de La Woluwe 34 April 1997 where he is responsible for providing
Brussels, Belgium research and management support services in the
area of European investments. Mr. Houlihan has
over twenty years of business experience in
Europe. Prior to joining Security Capital, Mr.
Houlihan served as Executive Vice President and
Portfolio Manager of GIM Capital Management, Inc.
(The Netherlands) from August 1987 to March 1997
and as Vice President of GIM Algemeen
Vermogensbeheer, a prominent Dutch investment
management company from April 1985 to March 1997,
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 served
as Director of Melchior Holland Holding BV (The
Netherlands) from February 1983 to March 1985, as
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 GCMG may have investment objectives and policies
similar to those of the Funds. GCMG 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 securities that differ from the positions taken by other clients of GCMG.
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 GCMG to allocate advisory
recommendations and the placing of orders in a manner which is deemed

36
<PAGE>

equitable by GCMG to the accounts involved, including the Funds. When two or
more of the clients of GCMG (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.

Pursuant to an investment advisory agreement with SC-REMFs with respect to
each Fund (the "Advisory Agreement"), GCMG 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 GCMG, monthly, an annual management fee in an amount
equal to .60% of the average daily net asset value of that class of SC-US's
shares. Under a separate agreement, GCMG 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 I 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, GCMG 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 June 30, 1998, SC-
ARBITRAGE's Class I shares pay GCMG, monthly, an annual management fee in an
amount equal to 2.00% of the average daily net asset value of SC-ARBITRAGE's
Class I shares. After the first three full months of SC-ARBITRAGE's operations,
SC-ARBITRAGE's Class I shares will pay GCMG a monthly "fulcrum fee" or base fee
("Base Fee") of 2.00% of SC-ARBITRAGE's Class I average daily net assets that
will increase or decrease based on the investment performance of SC-ARBITRAGE
for the prior twelve-month period relative to the investment record of 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.

The management fee will be paid at an annual rate which varies between 0.50%
and 3.50% of SC-ARBITRAGE's Class I average net assets. The management fee is
structured so that it will be 2.00% of SC-ARBITRAGE's Class I 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 Base 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%.

GCMG 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 of 100 as of December 29, 1989.

Under the Advisory Agreement for SC-EURO, dated June 30, 1998, each class of
SC-EURO's shares pays GCMG, monthly, an annual management fee in an amount equal
to .85% of the average daily net asset value of that class of SC-EURO's shares.
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 1.45% of the value of SC-EURO's Class I average
daily net assets and SC-EURO's Class R shares at 1.60% 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 June 30, 1998, each class of
SC-ASIA's shares pays GCMG, monthly, an annual management fee in an amount equal
to .95% of the average daily net asset value of that class of SC-ASIA's shares.
Under a separate agreement, GCMG has agreed to waive advisory fees

37
<PAGE>

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 1.55% of the value of SC-ASIA's Class I average
daily net assets and SC-ASIA's Class R shares at 1.70% of the value of SC-ASIA's
Class R average daily net assets, for the year ending December 31, 1998.

GCMG 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 GCMG 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 GCMG 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 GCMG or its affiliates of providing the services. SC-REMFs does not pay
for services performed by officers of GCMG 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 GCMG 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 GCMG , (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 approval of SC-REMFs's Board of Directors, costs of personnel
of GCMG 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 GCMG ("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 June 24,
1998 by SC-REMFs's Directors including a majority of the non-interested
Directors. The Advisory Agreements for SC-ARBITRAGE and SC-EURO continue in
effect until June 30, 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
GCMG 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 GCMG , or of
reckless disregard of its obligations thereunder, GCMG shall not be liable for
any action or failure to act in accordance with its duties thereunder.

Investment Sub-Advisory Agreements with GCMG-Europe and GCMG-Asia

GCMG has retained GCMG-Europe and GCMG-Asia as investment sub-advisers (each,
a "Sub-Adviser"), to manage the day-to-day investment of SC-EURO's and SC-ASIA's
portfolios in accordance with each Fund's investment policies, subject to the
general supervision of GCMG and the overall authority of SC-REMFs's Board of
Directors.

38
<PAGE>

GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
and CGMG-Asia ("Sub-Advisory Agreement") pursuant to which GCMG-Europe and GCMG-
Asia provide various portfolio management and investment advisory services to
SC-EURO and SC-ASIA, respectively. In connection with the management of SC-
EURO's and SC-ASIA's portfolios, GCMG-Europe and GCMG-Asia may select brokers
and dealers to execute purchase and sale orders for portfolio transactions.
Under the Sub-Advisory Agreement for SC-EURO, GCMG pays GCMG-Europe monthly, an
annual management fee in an amount equal to .08% of SC-EURO's average daily net
asset value. Under the Sub-Advisory Agreement for SC-ASIA, GCMB pays GCMG-Asia
monthly, an annual management fee based on its costs (including payroll, rent
and other directly allocable costs and expenses) plus a mark-up of 10%. These
fees are the sole obligations of GCMG and not SC-EURO or SC-ASIA.

Each Sub-Advisory Agreement was approved on June 24, 1998 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, GCMG or a Sub-Adviser. Each Sub-
Advisory Agreement continues in effect until June 30, 2000 and will continue in
effect from year to year thereafter, provided that its continuance is
specifically approved prior to the initial expiration of the Sub-Advisory
Agreement 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 Sub-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.

Each Sub-Advisory Agreement is terminable without penalty by GCMG or the Sub-
Adviser on sixty days' written notice, and will automatically terminate in the
event of its assignment. The Sub-Advisory Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of
GCMG or the Sub-Adviser, or of reckless disregard of its obligations thereunder,
the Sub-Adviser shall not be liable for any action or failure to act in
accordance with its duties thereunder.

Certain other clients of a Sub-Adviser may have investment objectives and
policies similar to those of SC-EURO and SC-ASIA. A Sub-Adviser 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. 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 each Sub-Adviser to allocate
advisory recommendations and the placing of orders in a manner which is deemed
equitable by the Sub-Adviser to the accounts involved, including a Fund. When
two or more of the clients of a Sub-Adviser are purchasing or selling the same
security on a given day through the same broker-dealer, such transactions may be
averaged as to price.

Administrator and Sub-Administrator

SC-REMFs has also entered into a fund administration and accounting agreement
with GCMG (the "Administration Agreement") under which GCMG 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 semi-annual 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

39
<PAGE>

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.

In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as sub-
administrator under a sub-administration agreement (the "Sub-Administration
Agreement"). Firstar Trust Company ("Firstar") will serve as sub-administrator
for SC-US until August 15, 1998 pursuant to a fund administration and servicing
agreement approved by the Board of Directors in April 1997 ("Firstar
Agreement"). Thereafter, State Street Bank and Trust Company will perform sub-
administration services for SC-US as well as for the other Funds.

Under the Sub-Administration Agreement and the Firstar Agreement, the Sub-
Administrator and Firstar have assumed responsibility for performing certain of
the foregoing administrative functions, including determining the net asset
value of each class of the Funds' shares and preparing such figures for
publication, maintaining certain of the Funds' books and records that are not
maintained by GCMG as investment adviser, or by the Custodian or Transfer Agent,
preparing financial information for the Funds' income tax returns, proxy
statements, semi-annual 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 .08% of the first $750 million, .06% of the next $250 million
and .04% of SC-REMFs's average daily net assets over $1 billion, subject to an
annual minimum fee of $75,000. Under the Firstar Agreement, SC-US pays Firstar
.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, Firstar earned $47,791 for providing sub-administration services to
SC-US. The Firstar also serves as the Custodian and Transfer Agent for SC-US.
The Sub-Administrator also serves as the Funds' Custodian and Transfer Agent.
See "Funds' Custodian and Transfer Agent."

Under the Administration Agreement, GCMG 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, GCMG 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, GCMG 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
GCMG , or of reckless disregard of its obligations thereunder, GCMG 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"),
pursuant to Rule 12b-1 under the 1940 Act. See "Distribution and Servicing
Plan" in each Prospectus. The Plans are implemented by a Distribution and
Servicing Agreement that SC-REMFs has entered into with the Distributor. The
Plans and the Agreement 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.

40
<PAGE>

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 Distributor also
may pay third parties in respect of these services such amount as it may
determine. The Funds understand that these third parties may also charge fees
to their clients who are beneficial owners of Fund 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 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, 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
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 Directors, on November 25, 1997 and by SC-US's
Class I and Class R shareholders on December 12, 1997. The Plans for SC-EURO's
and SC-ASIA's Class I and Class R shares and SC-ARBITRAGE's Class I shares were
approved by the Board of Directors, including the Directors, on June 24, 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 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
shares 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 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 Directors shall be committed to the discretion
of the 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.

OTHER DISTRIBUTION AND/OR SERVICING ARRANGEMENTS

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry-recognized service providers of fund supermarkets or
similar programs ("Institutions"), to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients
("Customers") who are beneficial owners of Fund shares. Such Agreements with
respect to all classes of shares may be governed by a Plan.

41
<PAGE>

An Institution with which the Distributor has entered into an Agreement may
charge a Customer one or more of the following types of fees, as agreed upon by
the Institution and the Customer, with respect to the cash management or other
services provided by the institution: (i) account fees (a fixed amount per month
or per year); (ii) transaction fees (a fixed amount per transaction processed);
(iii) compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or of
the dividend paid on those assets). Services provided by an Institution to
Customers are in addition to, and not duplicative of, the services provided
under the Plan and SC-US's administration arrangements. A Customer of an
Institution should read the relevant Prospectus and this Statement of Additional
Information in conjunction with the Agreement and other literature describing
the services and related fees that would be provided by the Institution to its
Customer prior to any purchase of Fund shares. Prospectuses are available from
the Distributor upon request.

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 a 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 of shares of that class then
outstanding. Because of 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

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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 GCMG . 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, GCMG 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, GCMG 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 a broker that provides research services to GCMG 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 GCMG 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 GCMG 's ongoing
responsibilities with respect to a Fund. Research and investment information is
provided by these and other brokers at no cost to GCMG and is available for the
benefit of other accounts advised by GCMG 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 GCMG 's expenses, it is
not possible to estimate its value and in the opinion of GCMG it does not reduce
GCMG 's expenses in a determinable amount. The extent to which GCMG makes use
of statistical, research and other services furnished by brokers is considered
by GCMG in the allocation of brokerage business but there is no formula by which
such business is allocated. GCMG does so in accordance with its judgment of the
best interests of the Funds and their shareholders. GCMG 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, GCMG 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) 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

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(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 (c) 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.

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 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 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%. A recent legislative proposal would reduce the holding period required to
qualify for the 20% maximum capital gains rate from 18 months to 12 months. It
is impossible to determine at this time whether that legislation will be enacted
or, if enacted, whether it will be modified in any manner.

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

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<PAGE>

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 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. GCMG
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.

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

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<PAGE>

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. 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.

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<PAGE>

Special Tax Considerations

The following discussion relates to the particular Federal income tax
consequences of certain investment strategies of the Funds. A Fund that
utilizes options, short sale and futures investment strategies will be somewhat
limited by the requirements for its continued qualification as a regulated
investment company under the Code, in particular the Distribution Requirement,
the Short-Short Gain Test and the Asset Diversification Requirement.

Straddles

The options transactions that a Fund enters into may result in "straddles" for
Federal income tax purposes. The straddle rules of the Code may affect the
character of gains and losses realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the investment company taxable income and net capital gain of the Fund for the
taxable year in which such losses are realized. Losses realized prior to
October 31 of any year may be similarly deferred under the straddle rules in
determining the "required distribution" that the Fund must make in order to
avoid Federal excise tax. Furthermore, in determining its investment company
taxable income and ordinary income, the Fund may be required to capitalize,
rather than deduct currently, any interest expense on indebtedness incurred or
continued to purchase or carry any positions that are part of a straddle. The
tax consequences to Funds holding straddle positions may be further affected by
various elections provided under the Code and Treasury regulations, but at the
present time the Funds are uncertain as to which (if any) of these elections
they will make.

Because only a few regulations implementing the straddle rules have been
promulgated by the U.S. Treasury, the tax consequences to a Fund of engaging in
options transactions are not entirely clear. Nevertheless, it is evident that
application of the straddle rules may substantially increase or decrease the
amount which must be distributed to shareholders in satisfaction of the
Distribution Requirement (or to avoid Federal excise tax liability) for any
taxable year in comparison to a fund that did not engage in options
transactions. For purposes of the Short-Short Gain Test, current Treasury
regulations provide that (except to the extent that the short sale rules
discussed below would otherwise apply) the straddle rules will have no effect on
the holding period of any straddle position. However, the U.S. Treasury has
announced that it is continuing to study the application of the straddle rules
for this purpose.

Options and Section 1256 Contracts

The writer of a covered put or call option generally does not recognize income
upon receipt of the option premium. If the option expires unexercised or is
closed on an exchange, the writer generally recognizes short-term capital gain.
If the option is exercised, the premium is included in the consideration
received by the writer in determining the capital gain or loss recognized in the
resultant sale. However, options transactions that the Funds enter into, as
well as futures transactions and transactions in forward foreign currency
contracts that are traded in the interbank market entered into by SC-EURO or SC-
ASIA, will be subject to special tax treatment as "Section 1256 contracts."
Section 1256 contracts are treated as if they are sold for their fair market
value on the last business day of the taxable year (i.e., marked-to-market),
regardless of whether a taxpayer's obligations (or rights) under such contracts
have terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end marking-to-market of Section 1256 contracts is combined (after
application of the straddle rules that are described above) with any other gain
or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, except in the case of marked-to-market forward
foreign currency contracts for which such gain or loss may be treated as
ordinary income or loss. See "Foreign Currency Transactions" below. Such
short-term capital gain (and, in the case of marked-to-market forward foreign
currency contracts, such ordinary income) would be included in determining the
investment company taxable income of a Fund for purposes of the Distribution
Requirement, even if it were wholly attributable to the year-end marking-to-
market of Section 1256 contracts that

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<PAGE>

the Fund continued to hold. Investors should also note that Section 1256
contracts will be treated as having been sold on October 31 in calculating the
"required distribution" that a Fund must make to avoid Federal excise tax
liability.

A Fund may elect not to have the year-end marking-to-market rule apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Fund that are not Section 1256 contracts (the "Mixed Straddle
Election"). It is unclear under present law how certain gain that a Fund may
derive from trading in Section 1256 contracts for which a Mixed Straddle
Election is not made will be treated for purposes of the "Short-Short Gain
Test."

Foreign Currency Transactions

In general, gains from "foreign currencies" and from foreign currency options,
foreign currency futures and forward foreign exchange contracts relating to
investments in stock, securities or foreign currencies will be qualifying income
for purposes of determining whether SC-EURO and SC-ASIA qualify as regulated
investment companies. It is currently unclear, however, who will be treated as
the issuer of a foreign currency instrument or how foreign currency options,
futures or forward foreign currency contracts will be valued for purposes of the
Asset Diversification Requirement.

Under Code Section 988 special rules are provided for certain transactions in
a foreign currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not "regulated futures contracts", and from unlisted
options will be treated as ordinary income or loss. In certain circumstances
where the transaction is not undertaken as part of a straddle, SC-EURO or SC-
ASIA may elect capital gain or loss treatment for such transactions.
Alternatively, a Fund may elect ordinary income or loss treatment for
transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general, gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if losses
from a foreign currency transaction subject to Code Section 988 exceed other
investment company taxable income during a taxable year, the Fund will not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be accreted
as a return of capital to shareholders, thereby reducing each shareholder's
basis in his shares.

Conversion Transactions

All or a portion of the capital gain from the disposition or other termination
of any position that was part of a "conversion transaction" will generally be
accreted as ordinary income. A conversion transaction is a transaction,
generally consisting of two or more positions taken with regard to the same or
similar property, where substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. A transaction, however, is not a conversion transaction unless it
also satisfies one of the following four criteria: (1) the transaction consists
of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (2) the transaction is a straddle, within the meaning of Section
1092 (treating stock as personal property); (3) the transaction is one that was
marketed or sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (4) the transaction is described as a conversion transaction in
regulations to be promulgated on a prospective basis by the Secretary of the
Treasury.

Subject to regulations to be promulgated by the Secretary of the Treasury, the
amount of gain accreted as ordinary income generally shall not exceed the amount
of interest that would have accrued on a Fund's net investment in the conversion
transaction for the relevant period at a yield equal to 120% of the applicable
federal rate as defined in Section 1274(d). Thus, to the extent that a Fund
recognizes income from conversion transactions, shareholders will be taxed on
all or a part of this income at ordinary rates.

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<PAGE>

Constructive Sales of Certain Appreciated Financial Positions

The recently enacted Taxpayer Relief Act added new Code Section 1259 which
provides for constructive sale treatment for appreciated financial positions.
Code Section 1259 provides that if there is a "constructive sale" of an
"appreciated financial position," the taxpayer recognizes gain as if such
position were sold, assigned or otherwise terminated at its fair market value on
the date of such constructive sale. The holding period of such position is
deemed to begin on the date of such constructive sale and any gain or loss
subsequently realized with respect to such position is to be adjusted for any
gain taken into account by reason of the earlier constructive sale of such
position.

An appreciated financial position for this purpose means an interest,
including a futures or forward contract, short sale, or option with respect to
any stock, debt instrument or partnership interest if there would be gain if
such position were sold, assigned or otherwise terminated at its fair market
value. A forward contract for this purpose means a contract to deliver a
substantially fixed amount of property for a substantially fixed price. An
offsetting notional principal contract for this purpose means, with respect to
any property, an agreement which includes a requirement to pay or provide credit
for all or substantially all of the investment yield (including appreciation) on
such property for a specified period and a right to be reimbursed for or receive
credit for all or substantially all of any decline in the value of such
property. An appreciated financial position, however, does not include any
position which is marked to market for federal income tax purposes, nor does it
include any position with respect to debt if (1) the debt unconditionally
entitles the holder to receive a specified principal amount, (2) the interest
payments (or other similar amounts) with respect to such debt are based on a
fixed rate or certain variable rates or consist of a specified portion of
interest payments on a pool of mortgages, which portion does not vary during the
period the debt is outstanding, and (3) the debt is not convertible directly or
indirectly into stock of the issuer or of any related person.

A taxpayer is treated as having made a constructive sale of an appreciated
financial position if the taxpayer or a related person (1) enters into a short
sale of the same or substantially identical property, (2) enters into an
offsetting notional principal contract with respect to the same or substantially
identical property, (3) enters into a futures or forward contract to deliver the
same or substantially identical property, (4) in the case of an appreciated
financial position that is a short sale, a notional principal contract or a
futures or forward contract with respect to any property, acquires the same or
substantially identical property, or (5) to the extent provided in regulations,
enters into one or more transactions or acquires one or more positions that have
substantially the same effect as a transaction described in the preceding
clauses (1) through (4). A person is related to another person with respect to
a transaction if the relationship is described in Code Section 267(b) or Code
Section 707(b) and such transaction is entered into with a view toward avoiding
the purposes of Code Section 1259. A constructive sale, however, does not
include any contract for sale of any stock, debt instrument or partnership
interest for which there is not a market on an established securities market or
otherwise if the contract settles within one year after the date the contract
was entered into. Also, a transaction which would otherwise be treated as a
constructive sale in a taxable year is disregarded if (1) the transaction is
closed before the end of the 30th day after the close of such taxable year, (2)
the taxpayer holds the appreciated financial position throughout the 60 day
period beginning on the date such transaction is closed and (3) at no time
during such 60 day period is the taxpayer's risk of loss with respect to such
position reduced by reason of the taxpayer (x) having an option to sell, having
a contractual obligation to sell, or having made and not closed a short sale of,
substantially identical property, (y) being the grantor of an option to buy
substantially identical property or (z) under regulations, having diminished his
risk of loss by holding one or more positions with respect to substantially
similar or related property. This exception to constructive sale treatment
applies even if the transaction which is closed is reestablished by a
substantially similar transaction (which would also be a constructive sale of
the position) entered into during the 60 day period beginning on the date the
first transaction is closed, provided that the conditions in clauses (1) through
(3) in the preceding sentence are satisfied with respect to the substantially
similar transaction.

In general, Code Section 1259 applies to any constructive sale after June 8,
1997. However, if before June 9, 1997 the taxpayer entered into any transaction
which is a constructive sale of any appreciated financial position and before
the close of the 30 day period beginning on the date of the enactment of the
Taxpayer Relief Act or before such later date as may be specified by the
Secretary of the Treasury, such transaction and position are clearly

49
<PAGE>

identified in the taxpayer's records as offsetting, such transaction and
position shall not be taken into account in determining whether any other
constructive sale after June 8, 1997 has occurred. This transition rule ceases
to apply as of the date such transaction is closed or the taxpayer ceases to
hold such position.

It is possible that a Fund may enter into some transactions which could
constitute constructive sales of certain appreciated investments held by the
Fund, which could have the affect of accelerating gain recognition with respect
to such investments.

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.

The Taxpayer Relief Act enacted a rule which permits taxpayers to elect to
mark to market interests in a PFIC each year if stock in the PFIC is regularly
traded on a national securities exchange which is registered with the Securities
and Exchange Commission or the national market system established pursuant to
section 11A of the Securities and Exchange Act of 1934, as amended. The
Internal Revenue Service has the authority to write regulations to include other
exchanges and to apply the mark to market rules to options and interests in
foreign corporations that are comparable to regulated investment companies. Any
gain or loss recognized under these rules will be ordinary income rather than
capital gain. It is uncertain at this time whether the Funds will make the mark
to market election permitted under these rules.

The Internal Revenue Service previously had issued proposed regulations that
would permit SC-EURO and SC-ASIA to elect (in lieu of paying deferred tax or
making a QEF election) to mark-to-market annually any PFIC shares that they
owned and to include any gains (but not losses) that it was deemed to realize as
ordinary income. The Funds generally would not be subject to deferred Federal
income tax on any gains that they were deemed to realize as a consequence of
making a mark-to-market election, but such gains would be taken into account by
the Funds for purposes of satisfying the Distribution Requirement and the excise
tax distribution requirement. The proposed regulations indicate that they would
apply only prospectively, to taxable years ending after their promulgation as
final regulations. It is unclear how the proposed regulations will be modified
following the enactment of the rules in the Taxpayer Relief Act of 1997.

50
<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. Moreover, shareholders will not be
entitled to credit or deduct their allocable share of foreign taxes imposed on
SC-EURO or SC-Asia if they have not held their shares in SC-EURO or SC-Asia for
16 days or more during the 30 day period beginning 15 days before shares in SC-
EURO or SC-Asia become ex-dividend. The holding period will be extended if the
shareholder's risk of loss with respect to such shares is reduced by reason of
holding an offsetting position. 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.

THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE PORTFOLIO.

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 June
30, 1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

51
<PAGE>

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 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, three of which with two classes of
shares: Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares
only. 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-REMFs's expenses.

As of June 30, 1998, SC REALTY Incorporated owned 99.25% of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and 95.44% of the issued
and outstanding shares of SC-US (including 97.74% of the issued and outstanding
Class I shares and 0% of the issued and outstanding Class R shares).

As of May 31, 1998, the following persons owned of record 5% of SC-US's
outstanding shares:

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial
Title of Class Beneficial Owner Ownership Percent of Class
- --------------- ---------------- --------- ----------------
<S> <C> <C> <C>
Class I SC REALTY Incorporated 9,646,032.884 97.74%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952

Class R Charles Schwab & Co. Inc. 161,960.243 68.14%
101 Montgomery Street
San Francisco, California 94104-4122

Class R Dennis G. Lopez 20,116.795 8.46%
117 Beekman Street, 4E
New York, New York 10038-2001

Class R Directors, Nominees and 12,340.387 5.19%
Executive Officers as a
Group*/
</TABLE>

52
<PAGE>

- ---------------
(*) Anthony R. Manno Jr., Director, Chairman of the Board and President,
beneficially owns 4,863.813 Class R shares, John H. Gardner, Jr., Director
and Managing Director, beneficially owns 2,009.568 Class R shares, Jeffrey
C. Nellessen, Vice President, Secretary and Treasurer beneficially owns
208.411 Class R shares and Kevin W. Bedell, Senior Vice President
beneficially owns 4,258.595 Class R shares.

Because SC REALTY Incorporated owns 100% of the issued an outstanding shares
of SC-EURO, SC-ASIA and SC-ARBITRAGE and 95.44% of the issued and outstanding
shares of SC-US, SC REALTY Incorporated controls the Funds for purposes of the
1940 Act. The effect of SC REALTY Incorporated's ownership of a controlling
interest in the Funds and, therefore, SC-REMFs, is to dilute the voting power of
other shareholders. SC REALTY Incorporated does not anticipate that its initial
control of the Funds will adversely effect the rights of future shareholders.

DISTRIBUTOR

Security Capital Markets Group Incorporated ("SCMGI"), an affiliate of GCMG ,
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 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-
EURO's and SC-ASIA's Class I and Class R shares and SC-ARBITRAGE's Class I
shares pursuant to a Distribution and Servicing Agreement dated June 30, 1998.
See "Distribution and Servicing Plans." 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

State Street Bank and Trust Company, which has its principal business address
at 225 Franklin Street, Boston, Massachusetts 02101, has been retained to act as
Custodian of the Funds' investments and as the Fund's Transfer Agent. State
Street Bank and Trust Company has no part in deciding the Funds' investment
policies or which securities are to be purchased or sold for the Funds'
portfolio.

Until August 15, 1998, Firstar Trust Company which has its principal business
at 615 East Michigan Street, Milwaukee, Wisconsin 53202 will serve as Custodian
of SC-US's investments and SC-US's Transfer Agent. Thereafter, State Street Bank
and Trust Company will serve as SC-US's Custodian and Transfer Agent.

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

53
<PAGE>

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.
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 is 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

54
<PAGE>

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.)

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 Ballard Spahr Andrews & Ingersoll.

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.

55
<PAGE>

Security Capital U.S. Real Estate Shares Incorporated
Schedule of Investments -- December 31, 1997

- ----------------------------------------------------------------------------------------------------------------------

Shares Market Value
<S> <C> <C>
COMMON STOCK -- REAL ESTATE
INVESTMENT TRUSTS (REITs) -- 96.7%
Office Properties -- 26.9%
589,240 Equity office Properties Trust $ 18,597,878
140,000 Prentiss Properties Trust 3,911,250
67,900 Crescent Real Estate Equities Company 2,673,563
80,300 Boston Properties, Inc. 2,654,919
65,000 Cornerstone Properties, Inc. 1,247,187
52,500 Cadillac Fairview Corporation# 1,233,750
28,400 Mack-Cali Realty Corporation 1,164,400
------------
31,482,947
Multifamily -- 20.8%
187,700 Apartment Investment & Management Company 6,897,975
150,000 Essex Property Trust, Inc. 5,250,000
145,100 Charles E. Smith Residential Realty, Inc. 5,151,050
95,300 Equity Residential Properties Trust 4,818,606
57,000 Bay Apartment Communities, Inc. 2,223,000
------------
24,340,631
Hotel -- 14.9%
312,500 Innkeepers USA Trust 4,843,750
115,000 FelCor Suite Hotels, Inc. 4,082,500
40,000 ITT Corporation# 3,315,000
125,000 WHG Resorts & Casinos Inc.# 2,781,250
61,000 Capstar Hotel Company# 2,093,062
22,200 Homestead Village, Inc.#+ 334,388
------------
17,449,950
</TABLE>

56
<PAGE>

See notes to the financial statements.

Schedule of Investments (continued)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares Market Value
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>

57
<PAGE>

See notes to the financial statements.

58
<PAGE>

Schedule of Investments (continued)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Principal Amount
<S> <C> <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.

59
<PAGE>

Security Capital U.S. Real Estate Shares Incorporated
Statement of Assets and Liabilities -- December 31, 1997

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
ASSETS:
<S> <C>
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.

60
<PAGE>

Security Capital U.S. Real Estate Shares Incorporated
Statement of Operations -- December 31, 1997

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------

INVESTMENT INCOME:
<S> <C>
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.

61
<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
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C>
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.

62
<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
------------------------------------------------------------
Per Share Data:
<S> <C> <C> <C>
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/(6)/ 0.94% 0.95% 0.00%
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 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.

63
<PAGE>

Security Capital U.S. Real Estate Shares Incorporated
Notes to the 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 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.

64
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Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

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.

65
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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:
- ------------------------------------------------------------------------------
Amount Shares
---------------------------
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
============== ===========

Period from 01/01/97 through 12/16/97:
- -------------------------------------------------------------------------------
Amount Shares
---------------------------
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
============== ===========

66
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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
Global Capital Management Group Incorporated ("GCMG"), 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.

GCMG 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. GCMG 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.

GCMG also serves as the Fund's administrator. GCMG 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 GCMG, 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 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.

67
<PAGE>

Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

68
<PAGE>

Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

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.

69
<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

70
<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.

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<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.

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.

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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.