SECURITY CAPITAL U S REAL ESTATE SHARES INC, 485BPOS, 1999-04-30

SECURITY CAPITAL U S REAL ESTATE SHARES INC
485BPOS, 1999-04-30

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<PAGE>

As filed with the Securities and Exchange Commission on April 29, 1999

Registration Nos. 333-20649
811-8033
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 11
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940

Amendment No. 13
(Check Appropriate Box or Boxes)

----------------------
Security Capital Real Estate Mutual Funds Incorporated
(Exact Name of Registrant as Specified in Charter)
11 South LaSalle Street
Chicago, Illinois 60603
(312) 345-5800
(Address of Principal Executive Offices, Including Zip Code, and Telephone
Number, Including Area Code)

Anthony R. Manno Jr.
Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
(Name and Address of Agent for Service)

With Copies to:

David T. Novick Jeffrey A. Klopf
Security Capital Group Incorporated Security Capital Group Incorporated
11 South LaSalle Street 125 Lincoln Avenue
Chicago, Illinois 60603 Santa Fe, New Mexico 87501

Diane E. Ambler
Mayer, Brown & Platt
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

It is proposed that this filing will become effective (check appropriate
box):
[ ]immediately upon filing pursuant to [ ]on (date) pursuant to paragraph
paragraph (b). (a)(1) of Rule 485.
[X]on April 30, 1999 pursuant to [ ]75 days after filing pursuant
paragraph (b). to paragraph (a)(2).
[ ]60 days after filing pursuant [ ]on date pursuant to paragraph
to paragraph (a)(1). (a)(2) of Rule 485.

If appropriate, check the following box:

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

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

<PAGE>

SECURITY CAPITAL

U.S. REAL ESTATE SHARES

==============================================================================

Class I Shares

A mutual fund investing
primarily in real estate securities
in the United States

PROSPECTUS

May 1, 1999

As is the case with all mutual fund shares, the Securities and Exchange
Commission has not approved or disapproved these securities and has not passed
on the adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

[LOGO]

<PAGE>

SECURITY CAPITAL

U.S. REAL ESTATE SHARES

================================================================================

TABLE OF CONTENTS
<S> <C>
The Fund Blueprint.......................................2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio..............................7
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed.................................13
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder...............................16
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights....................................23
To Learn More About the Fund....................Back Cover
Contact Us for More Information.................Back Cover
</TABLE>

A WORD TO POTENTIAL INVESTORS

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

This prospectus is specific to Class I shares of the fund. The minimum initial
investment in Class I shares--which are sold at net asset value without a sales
charge--is $250,000.

The fund's Class R shares (which have a lower minimum investment and different
expenses) are described in a separate prospectus. For further information,
please call toll free: 1-888-SECURITY.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision.

Please read it carefully before you invest and then retain it for future
reference.
<PAGE>

The Fund

Blueprint
================================================================================

OVERVIEW

What are the fund's investment objectives?

. The fund 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, 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.

What kind of investments does the fund make?

. The fund invests primarily in real estate securities. It does not invest in
real estate directly.

. The fund's investments generally include equity securities -- primarily
common stocks of real estate investment trusts (REITs) and real estate
operating companies (REOCs), rights, warrants, convertible securities, and
preferred stocks. For a description of REITs and REOCs, please see "Types of
Investments" on page 8 of this prospectus.

. Typically, at least 80 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies operating in the United
States.

What type of investor might consider investing in the fund?

Based on the fund's investment goals and strategies, it might be suitable for
investors who:

. seek to diversify their investment holdings by adding a real estate component
to their portfolio

. have a long-term investment horizon

. expect real estate to provide above-average investment returns over time

<PAGE>

What are the chief risks of investing in the fund?

An investment in the Fund involves risks. An investor in the Fund can lose
money if the value of the Fund's investments decline.

. Market risk. The prices of real estate securities will vary with
conditions in the financial markets.

. Real estate exposure. The fund may be affected by the same factors that
influence the value of real estate in general.

. Interest rate risk. Higher mortgage rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can affect
the value of the real estate securities associated with those properties).

. Credit risk. A decline in the credit rating or perceived credit quality of a
real estate company's debt can have a negative impact on the value of its
stock.

. Non-diversified portfolio. The fund is non-diversified; therefore, the fund
may invest a greater percentage of its assets in the securities of one issuer
than a diversified fund. Accordingly, the results of any one investment can
have a significant impact on the fund's performance -- either good or bad.

. Concentration risk. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be
greater than that of a fund that invests in more than one market sector.

<PAGE>

PRIOR INVESTMENT RESULTS

The future performance of a mutual fund cannot be predicted by looking at its
performance in the past. However, a review of its prior results can help
illustrate the variability of fund returns that an investor in the fund would
have experienced over various time periods.

The total return achieved by the fund through the fiscal year ended December 31,
1998, is shown in the bar chart below.

Security Capital U.S. Real Estate Shares
Comparative Returns vs. Industry Benchmarks

[TABLE APPEARS HERE]

<TABLE>
<CAPTION>
Average Annual Average Annual
Total Return Total Return
January 1, 1998 April 23, 1987/1/
to December 31, 1998 to December 31, 1998
-------------------- --------------------
<S> <C> <C>
SC-US Real Estate Shares (Class I) -11.94% 7.32%
NAREIT Equity Index/2/ -17.50% 0.73%
Wilshire Real Estate
Securities Index/3/ -17.43% 0.52%
</TABLE>

This table compares the fund's results to changes in the National Association of
Real Estate Investment Trusts (NAREIT) Equity Index/2/ and the Wilshire Real
Estate Securities Index (WARESI)/2/. It provides an indication of the risks of
investing in the fund by comparing the fund's performance with a broad measure
of market performance. The calculation of total return assumes reinvestment of
all capital gains and income dividends. Results shown for the indices also
assume the reinvestment of dividends. Because the indices are not managed
investments, no operating expenses are deducted from their total returns.

/1/ The effective date of the fund's registration statement with the Securities
and Exchange Commission.

/2/ The NAREIT Equity Index is an unmanaged index of publicly traded U.S. tax-
qualified REITs which have 75% or more of their gross invested book assets
invested in the equity ownership of real estate.

/3/ The WARESI is an unmanaged, broad-based, market capitalization-weighted
index composed of publicly traded REITs and REOCs and partnerships, not
including special purpose or healthcare REITs. It is comprised of major
companies engaged in the equity ownership and operation of commercial real
estate. Prior to utilizing WARESI, the fund used the Wilshire REIT Index as
a benchmark, but changed because it was limited solely to REITs.

Security Capital U.S. Real Estate Shares
Performance
Fiscal Year ended December 31, 1998

[BAR GRAPH APPEARS HERE]

The fund's best quarterly performance during this time period was a
gain of 3.57% for the quarter ended December 31, 1998. Its worst quarterly
performance was a 10.14% loss for the quarter ended September 30, 1998.

4
<PAGE>

SHAREHOLDER COSTS

The table below shows the amount of fees and expenses you may pay if you buy and
hold Class I shares of the fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses (paid directly from your investment)
<S> <C>
. Maximum sales charge (load) imposed on purchases (as a percentage of offering price)... none
. Maximum deferred sales charge (load)................................................... none
. Maximum sales charge (load) imposed on reinvested dividends and other distributions.... none
. Redemption fee (as a percentage of amount redeemed, if applicable)..................... none
. Exchange fee........................................................................... none

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

. Management fees........................................................................ 0.60%
. Distribution and/or service (12b-1) fees............................................... 0.25%
. Other expenses......................................................................... 0.44%
. Total annual fund operating expenses................................................... 1.29%
. Less reimbursed expenses*.............................................................. 0.09%
. Net fund operating expenses............................................................ 1.20%
</TABLE>

* Under an agreement dated December 16, 1997, Security Capital
Global Capital Management Group Incorporated (GCMG) maintained the Fund's
net operating expenses at 1.00% and reimbursed expenses of 0.29% from
December 16, 1997 through December 31, 1998.

Under the terms of an agreement dated December 7, 1998, GCMG agreed that,
beginning January 1, 1999, it would waive fees and/or reimburse expenses to
maintain the net operating expenses of the fund's Class I shares, other than
brokerage fees and commissions, taxes, interest and other extraordinary
expenses, at no more than 1.20% of the fund's Class I average daily net
assets until December 31, 1999. Please note that the table reflects the
waiver in place for the 1999 calendar year.

5
<PAGE>

What are the costs to the typical investor?

To help you compare the costs of investing in this fund with those of other
funds, the following examples illustrate the typical expenses a shareholder
would pay on a $10,000 investment over various time periods.

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year.

If you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------
$122 $382 $661 $1460

An investor's actual costs may be higher or lower than those shown in the
example.

<PAGE>

BUILDING THE

FUND PORTFOLIO

================================================================================

Security Capital U.S. Real Estate Shares is a series of Security Capital Real
Estate Mutual Funds Incorporated (SC-REMFs). The following sections provide
basic information about the fund's management team and investment operations.

The Investment Adviser and Management Team

Security Capital Global Capital Management Group Incorporated (GCMG) is an
indirect, wholly owned subsidiary of Security Capital Group Incorporated
(Security Capital), a publicly traded company which, together with its
affiliated real estate operating companies, has a market capitalization of
$25.30 billion (as of March 31, 1999).

GCMG, under the supervision of the directors of SC-REMFs, provides investment
advice and conducts the investment management activities of the fund. A team of
full-time GCMG professionals, working together as the fund's Portfolio
Management Committee, is primarily responsible for overseeing the day-to-day
operations of the fund.

GCMG provides investment advice to the fund and to other Security Capital open-
end real estate mutual funds and separate accounts. In total, GCMG managed
approximately $1.144 billion in assets (as of March 31, 1999).

GCMG is uniquely positioned to capitalize on the real estate research and
investment expertise of Security Capital. The tools and resources which have
been developed and deployed since then reflect the organization's deep roots and
global reach in the real estate industry.

For services provided as investment adviser to the fund, GCMG is paid an annual
management fee equal to 0.60 percent of the average daily net asset value of the
fund's Class I shares. The aggregate management fee paid to GCMG after expense
waivers and reimbursement was 0.31 percent of the average daily net asset
value of the fund's Class I shares during the fiscal year ended December 31,
1998.

Security Capital and its affiliates
. A leader in the trend toward public company ownership in the real estate
industry
. Experience and market data from 17 affiliated companies
. Operations in 11 property types
. Market presence in 19 countries

Security Capital Global Capital Management Group (GCMG)
. Investment adviser to Security Capital's open-end real estate mutual funds
and separate accounts
. Assets under management of approximately $1.144 billion as of March 31,
1999

<PAGE>

Distribution and Servicing Plan

The fund has adopted a distribution and servicing plan under Rule 12b-1 of the
Investment Company Act of 1940 to help cover the cost of distributing Class I
shares and providing services to Class R shareholders.

The plan provides for the payment of a monthly fee (a "12b-1 fee") equal to 0.25
percent of the value of the average daily net assets invested in the fund's
Class R shares. This payment is made to the fund's distributor, Security Capital
Markets Group Incorporated, an affiliate of GCMG.

Because the 12b-1 fee is paid out of fund assets on an ongoing basis, it will
increase the cost of an investment in the fund over time. It is possible that
such an arrangement would ultimately result in higher costs than the payment of
other types of sales charges.

The fund's distributor may enter into agreements with various third-party
organizations to provide certain distribution or servicing functions. These
organizations might include 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. These agreements may
be governed by the plan.

Types of Investments

In seeking to achieve the fund's investment objectives, the fund's Portfolio
Management Committee uses the following types of investments and investment
policies, which may be changed by the fund's board of directors without
shareholder approval.

Real Estate Securities

The fund will invest, under normal market conditions, at least 80 percent of its
assets in equity securities of real estate companies operating in the United
States. The real estate securities in which the Fund may invest include:

. real estate investment trusts (REITs)
. real estate operating companies (REOCs)
. common stocks
. rights or warrants to purchase common stocks
. convertible securities
. preferred stocks

Real Estate Investment Trusts (REITs)

The fund may invest without limit in shares of REITs, which pool investors'
funds for investment primarily in income-producing real estate or in real estate
related loans (such as mortgages) or other interests. Therefore, a REIT normally
derives its income from rents or from interest payments, and may

8
<PAGE>

realize capital gains by selling properties that have appreciated in value.
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.

Real Estate Operating Companies (REOCs)

A REOC is a company that derives at least 50 percent of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate (or that has at least 50 percent of its
assets invested in such real estate).

Defensive Investments

If the fund's investment adviser (GCMG) determines that market conditions
justify a more defensive portfolio, the fund may make temporary investments in
high-grade bonds, U.S. government securities, and short-term money market
instruments. Such investments need not be issued by a real estate company.

If the fund makes defensive investments, such investments might not be
consistent with the fund's investment objectives. Therefore, during the period
of time when such investments are held, these objectives might not be met.

Investments in Companies Controlled by Security Capital

The real estate securities in which the fund invests may occasionally include
securities issued by real estate companies that are controlled by Security
Capital or its affiliates, subject to procedures approved by the directors
(including a majority of the independent directors) of SC-REMFs to assure that
these investments are made in the best interests of fund shareholders, prevent
conflicts of interest and comply with applicable law. Among other things, the
procedures will require investment decisions related to these controlled
companies to be made by GCMG independently of Security Capital and its other
affiliates. Because of certain federal securities laws limitations, the fund may
be restricted in its resale of these securities and will treat them as illiquid,
subject to the fund's 10 percent limitation on investment in illiquid
securities.

INVESTMENT RISKS

All investments involve some degree of risk. While all mutual funds, including
this one, employ techniques and practices to limit risk, there is always a
possibility that investors may earn a smaller return than expected or lose some
or all of their investment.

For this reason, an investment in the fund should be considered a long-term
investment. Before investing, investors should read this prospectus carefully
and come to understand the risks described below.

Please note that the most significant risks of investing in the fund are those
associated with investing in the real estate market. These risks could have a
direct impact on the fund's net asset value, yield, and total return.

Real Estate Exposure

The fund will not invest in real estate directly, but its investments will be
highly concentrated in real estate securities (see "Types of Investments").

9
<PAGE>

The value of real estate securities, of course, will be affected by many of the
factors that affect the value of real estate.

As a result, the fund is subject to investment risks that are similar to those
associated with direct ownership of real estate. For example, general or local
economic conditions could contribute to:
. a decline in the value of commercial or residential properties
. extended vacancies of properties
. increases in property taxes and operating expenses
. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:
. variations in supply and demand
. increased competition or overbuilding
. changes in existing laws
. environmental issues

Other important risk factors which could affect the value of a real estate
security might apply to individual properties or the issuers of particular
securities:
. casualty or condemnation losses
. legal liabilities for injury or damages
. operating losses

Investing in REITs and REOCs

The fund's investments in REITs and REOCs (together "real estate securities")
are subject to the same general investment risks as those described under "Real
Estate Exposure."

In general, the performance of real estate securities is dependent on the
management skills of their managers and of the operators of the real estate
properties in which they invest. Also, real estate securities may be affected by
changes in the value of the underlying property owned by such entities.

Under certain conditions, real estate securities could possibly fail to qualify
for tax-free pass-through of their income, resulting in a tax liability for
shareholders (such as the fund). Real estate securities also generate certain
expenses which would be paid indirectly by fund shareholders.

The fund may not be able to sell illiquid securities including securities issued
by real estate companies controlled by Security Capital or its affiliates, at a
time when GCMG otherwise believes it would be appropriate to do so and,
therefore, the fund may be disadvantaged.

Market Risk

The prices of the common stocks of REITs and REOCs, and other securities in
which the fund invests, will fluctuate from day to day and may -- in either the
near term or over the long run -- decline in value. The value of the fund may be
affected by a decline in financial markets in general.

<PAGE>

Interest Rate Risk

As interest rates fluctuate, mortgage rates and other lending rates will
increase or decrease, which could affect the value of the fund's portfolio.
Higher mortgage rates, for example, could make properties less profitable or
more difficult to sell (as credit becomes more costly). Such conditions could
depress the prices of the securities in which the fund invests over either
short- or long-term periods.

Credit Risk

The performance of the fund may be affected by the credit ratings or perceived
credit quality of the real estate companies in which it invests. For example, if
a real estate company's credit rating is downgraded, or if market conditions
suggest that its ability to service its debt may be impaired in the future, the
price of its stock may decline, thereby affecting the value of the fund
portfolio.

Performance Risk

There can be no assurance that the fund will meet its investment objectives. As
with any mutual fund, the performance of the fund will vary and may not match
that of similar funds or relevant benchmark indexes. The value of fund shares
will vary and, when sold, may be worth more or less than their original cost.

Concentration Risk

The fund is non-diversified. This means that the proportion of its assets that
can be invested in the securities of a single issuer is not limited by law. In
addition, the fund generally will invest in a smaller number of individual
issuers than a diversified investment company. As a result, the economic,
political, or regulatory conditions that affect these issuers may have a greater
impact on this fund than on a similar fund that is more diversified.

Similarly, because the fund concentrates its investments in the real estate
industry, it is susceptible to the same risks that direct ownership of real
estate would entail. Therefore, its performance will be more dependent on
conditions in the real estate industry than a fund which invests in a more
diverse range of industries or market sectors.

Year 2000 Risk

Most computer equipment in use today runs on software that follows basic
programming principles developed years or decades ago. While these programs were
designed to recognize dates, most were programmed to designate a specific year
using only the last two digits of that year (e.g., the year 1999 is coded as 99,
while the year 2000 will be coded as 00). As a result, certain computer systems
may be unable to distinguish the year 2000 from the year 1900, which could
impair their ability to function properly after 1999. This is commonly known as
the "Year 2000 Risk."

11
<PAGE>

As in most businesses today, computer systems play a key role in conducting the
day-to-day operations of the fund. If these computer systems cannot reliably
process and calculate date-related information and data after January 1, 2000,
the operations of the fund, including pricing, securities trading and
shareholder servicing, could be disrupted.

Therefore, SC-REMFs and GCMG are taking steps which they believe are reasonably
designed to address the Year 2000 issue. GCMG's and SC-REMFs' internal systems
are Year 2000 compliant. Because SC-REMFs' mission-critical systems are
undertaken by external suppliers, vendors and service providers, these firms
have been asked to provide satisfactory assurances that they have taken all
necessary precautions to assure that the systems with which SC-REMFs interacts
will remain operational at all times.

Though SC-REMFs and GCMG are taking every reasonable step to secure SC-REMFs'
internal systems and external relationships, as a contingency, SC-REMFs and GCMG
will adopt Security Capital's Year 2000 action plan to address any problems
specific to the operations of the fund that may occur on or after January 1,
2000. SC-REMFs and GCMG intend to monitor and improve the portions of this plan
relating to SC-REMFs throughout 1999 and 2000, and, at the same time, prepare to
implement alternative solutions, if necessary.

Despite SC-REMFs' and GCMG's efforts and the Year 2000 action plan, non-
compliant Year 2000 systems could have an adverse effect on the fund's business
operations or financial condition. Also, please note that non-compliant Year
2000 systems could negatively impact the issuers of securities in which the fund
invests and, consequently, the fund's performance.

How The Fund Manages Risk

As the fund seeks to reduce investment risk, it will -- under normal market
conditions -- adhere to the following guidelines; which may be changed by the
fund's board of directors without shareholder approval:

With respect to the fund's total assets:

. not more than 25 percent of the fund's market value will be invested in the
securities of a single issuer

With respect to 50 percent of the market value of its total assets:

. not more than 5 percent will be invested in the securities of a single issuer

. the fund will not own more than 10 percent of the outstanding voting
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

12
<PAGE>

HOW THE FUND

IS MANAGED

================================================================================

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

OPPORTUNITY IN THE
REAL ESTATE INDUSTRY

GCMG believes that the U.S. real estate industry has experienced a fundamental
transformation, creating significant investment opportunities. Within the last
decade, direct investment of equity capital in real estate has declined while
investment in publicly traded equity securities issued by REITs (equity REITs)
has increased. As of December 31, 1998, the total market capitalization of U.S.
equity REITs and REOCs was approximately $304 billion, up from $8.8 billion as
of December 31, 1990.

This shift from direct investment to increased "securitization" of real estate
offers significant benefits to shareholders, including:
. an efficient, practicable method of adding a real estate component to an
investment portfolio
. enhanced liquidity
. real-time pricing
. the potential for high dividend yields
. the potential for growth and sustainable rates of return

REITs have generally outperformed direct real estate investments over the long
term. GCMG believes that this trend will continue over the next decade.

INVESTMENT PROCESS

The organization and decision-making processes of GCMG are rooted in the belief
that superior investment results are achieved through a dedication to
proprietary research. GCMG has developed a sophisticated and fully integrated
set of analytical tools that focus on the following three research disciplines:
. Submarket Research
. Company Analysis
. Securities Pricing

<PAGE>

A separate team is dedicated to each research discipline to ensure balanced
representation in the investment process. The investment process integrates this
three-tiered research approach and is executed under the broad direction of the
Portfolio Management Committee, the decision-making body for investment
strategies. These different perspectives on value are critical to identifying
pricing inefficiencies and moving with conviction to capitalize on investment
opportunities.

Submarket Research

Real Estate Research Group

The analysis of real estate markets and submarkets is one of GCMG's most
important competitive advantages. The Real Estate Research Group draws upon
Security Capital's economic and demographic data and proprietary, purpose-built
models to assess supply and demand for all property types in various markets and
submarkets. The proprietary submarket and property analysis generated by this
team is used as a base by the Investment Analysis Team to build detailed cash
flow models.

Company Analysis

Investment Analysis Team

Building upon the information provided by the Real Estate Research Group, the
Investment Analysis Team analyzes the companies within GCMG's defined universe
of investments. To form a complete assessment of a company, the team performs a
thorough financial analysis, including an examination of key factors:

. internal and external growth potential

. capitalization

. strength and effectiveness of company management

The team develops detailed five-year cash flow forecasts in the course of
evaluating companies, as it is GCMG's belief that the strength and quality of a
company's net cash flow is a key determinant of above-average return
opportunities.

An understanding of a company's assets, management teams, and strategies is
achieved by analyzing the effectiveness of company management through one-on-one
meetings, careful scrutiny of SEC filings, and extensive field work.

Securities Pricing

Market Strategy Team

The Market Strategy Team integrates the research perspectives of the Real Estate
Research Group and the Investment Analysis Team in order to assign

14
<PAGE>

risk-adjusted valuation to the securities within the context of real estate
securities market and financial market return expectations. The target pricing
perspectives generated by the Market Strategy Team are used by the Portfolio
Management Committee to make stock selections for the fund.

An advanced, proprietary valuation model is used to select real estate
securities with significant potential for growth, integrating four pricing
methods to assess the relative valuation of real estate securities as market
prices change over time. This specialized and proprietary process results in a
high-conviction investment style and a concentrated portfolio of generally 20 to
25 securities.

Through research and analysis, the fund seeks to isolate markets which appear to
be reaching a "marginal turning point," with significant potential for growth.

Portfolio Construction

Portfolio Management Committee

The Portfolio Management Committee is the core of GCMG's domestic decision-
making process. Through quarterly strategy sessions and weekly tactical review
meetings, the Portfolio Management Committee analyzes price forecasts to create
a highly focused target portfolio for the fund. This target portfolio is the
final product integrating the critical real estate and capital market expertise
which helps to identify the most attractive investment opportunities. Under the
direction of the Portfolio Management Committee, a full-time trader executes
transactions to manage portfolio weightings in line with the fund's investment
policies.

15
<PAGE>

ON BECOMING A

SHAREHOLDER

================================================================================

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

HOW TO PURCHASE FUND SHARES

Investors may open an account to purchase fund shares through the fund's
transfer agent or through various authorized brokers and their intermediaries.
The fund has authorized one or more unaffiliated brokers to accept purchase and
redemption orders on its behalf. These brokers, in turn, may designate
intermediaries to accept such orders on the fund's behalf. In such cases, the
fund will be deemed to have received an order when an authorized broker (or its
authorized intermediary) accepts the order.

All purchases of Class I shares of the fund are made at the net asset value
determined after the receipt of your payment by the fund's transfer agent or an
authorized broker (or its authorized designee). All shares purchased, together
with any dividends and capital gains that are paid in additional shares, will be
credited to this account.

In some instances, when Class I shares of the fund are offered through an
authorized broker or intermediary agent, an investor may be charged a fee to
effect a transaction through such broker or agent.

Initial Investment

The minimum initial investment in Class I shares of the fund is $250,000. The
initial purchase of shares may be made only by mail or by wire; telephone
transactions may be used only for subsequent purchases of Class I fund shares.
To open an account, follow the procedures outlined below:

By Mail
1. Complete and sign the account application enclosed with this prospectus.
2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").
3. Send your application and payment to one of the following addresses:

. Via U.S. Mail
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02205-9719

<PAGE>

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184

By Wire
1. 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 your
investment. A completed application must be on file before funds are wired.
2. Use the following instructions to wire your investment to the fund's
transfer agent:

. 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

All Investments

. Customer orders will be priced at the fund's net asset value
(see "Determination of Net Asset Value") computed after they are accepted by
the fund's transfer agent, an authorized broker, or its authorized
intermediary.
. Payment must be in U.S. funds.
. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.
. Certificates for full shares can be obtained by writing to the transfer
agent; all fractional shares will be held in book entry form. Please note
that it is more difficult to redeem shares held in certificate form.

Additional Investments
If you wish to purchase additional Class I shares, the minimum for subsequent
investments is $20,000. These share purchases may be made by mail, by wire,
or by telephone as described below.

<PAGE>

By Mail

1. When making an additional investment by mail, the Additional Investment Form
provided on the lower portion of a shareholder's account statement must be
enclosed.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.

By Wire

1. To make an additional purchase by wire, a shareholder may call toll-free
1-800-409-4189 for complete wiring instructions.

By Telephone

1. Call toll-free 1-800-409-4189 to request a purchase of additional shares by
moving money from your bank account to your fund account. Your bank account
must be held at a domestic financial institution that is an Automated
Clearing House (ACH) member.

2. To purchase shares at the net asset value determined at the close of any
given trading day, the transfer agent must receive both a purchase order by
telephone and payment by electronic funds transfer through the ACH system
before the close of regular trading on that day. Most transfers are
completed within three business days.

Exchange of Fund Shares

Your Class I shares may be exchanged for the Class I shares of any other mutual
fund offered by Security Capital Real Estate Mutual Funds Incorporated.
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.

You may not exchange your investment in any Class I shares more than four times
in any 12-month period (including the initial exchange of your investment during
that period). As with any mutual fund investment, obtain and carefully read the
prospectus of any fund before you obtain shares via an exchange.

18
<PAGE>

HOW TO REDEEM FUND SHARES

You may request redemption of some or all of your Class I shares at any time,
either by telephone or by mail, through the fund's transfer agent. You may also
request to redeem shares through an authorized broker or agent, though you may
be charged a fee to do so.

By Telephone

Call the transfer agent toll-free at 1-800-409-4189 to request a redemption of
your Class I shares. (Please note that you must have previously elected the
telephone redemption option in writing.)

By Mail and By Wire

1. For most redemption requests, you need only furnish a written, unconditional
request stating the number of your Class I shares (or the exact dollar
amount) that you wish to redeem. Your request must be signed exactly as the
shares are registered, and all joint owners must sign.

2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.

3. If you wish, you may have your redemption proceeds wired to a commercial
bank that you have authorized on your account application. Otherwise, a check
for the proceeds will be mailed to you at the address of record for your
account.

Once your request has been accepted, the fund normally will mail redemption
proceeds to you on the next business day, and no later than seven business days
after it receives and accepts your request. When a purchase has been made by
check, the fund may hold payment of redemption proceeds until reasonably
satisfied that the check has cleared. This may take up to 12 days.

To request redemption of any Class I shares held in certificate form, the
certificate must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to the transfer agent together with your
written redemption request.

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 fund's transfer agent. No telephone
redemptions will be allowed within 15 days of such a change.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

19
<PAGE>

For Your Protection

To help ensure the integrity of your account, the fund employs the following
reasonable measures to protect against unauthorized redemption of fund shares.
These include:

. The fund may require some form of personal identification prior to acting upon
telephone instructions, providing written confirmation of all such
transactions, and/or tape recording all telephone instructions.

. Once a telephone redemption request has been made, it may not be modified or
canceled.

. Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact before a
redemption request made by mail or by wire is granted.

. Any written redemption requests received within 15 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below).

. The fund reserves the right to refuse any telephone redemption in whole or in
part.

Assuming procedures such as the above have been followed, the fund will not be
liable for any loss, cost, or expense for acting upon a shareholder's telephone
instructions or for any unauthorized telephone redemption.

Signature Guarantees

Signature guarantees are required for any of the following transactions:

. redemption requests mailed to or wired to a person other than the registered
owner(s) of the shares

. redemption requests to be mailed to or wired to an address other than the
account's address of record

. any redemption request received within 15 days of a change of address

. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

OTHER REDEMPTION INFORMATION

The fund may suspend the right of redemption during any period when:

. trading on the New York Stock Exchange (NYSE) is restricted or the NYSE is
closed (other than customary weekend and holiday closings)

. an emergency (as defined by rules adopted by the SEC) makes disposal of
portfolio securities or determination of the value of net assets of the fund
not reasonably practicable

20
<PAGE>

A shareholder's account may be closed if, upon the redemption of shares, the
value of remaining shares is less than $250,000. The shareholder will be given
notice of at least 30 days and the opportunity to make additional investments
which will increase the account's value so that it satisfies the minimum amount
required.

A Class I shareholder who fails to meet the minimum account balance may elect to
convert Class I shares to Class R shares at no cost. Shares would be converted
at net asset value after the receipt of the appropriate written instructions.
The fund does not charge a fee to process conversions.

The fund may, under certain circumstances, redeem shares in kind.

Performance Reporting

Determination of Net Asset Value

Class I shares of the fund are sold, without a sales charge, at net asset value.
The net asset value per share of Class I shares is calculated on each day the
NYSE is open for trading. Net asset value will not be calculated on any national
holiday or any other day the NYSE is not open for trading.

Net asset value is determined by adding the market value of all securities in
the fund's portfolio and any other Class I assets, subtracting liabilities, and
dividing by the total number of Class I shares then outstanding. This is the
price at which purchase or redemption of the fund's Class I shares is effected.

Each trading day, portfolio securities are valued at their last sale price as of
the close of trading on the exchange representing the principal market for such
securities, or at the mean of the closing bid and asked price for that day. Any
securities for which market quotations are not readily available are valued in
good faith in a manner that best reflects their fair value.

Dividends and Distributions

The fund pays dividends from its investment income once each quarter and pays
any capital gains at least once each year. All dividends and distributions are
automatically reinvested in additional shares of the fund unless you choose to
have them paid in cash. As a shareholder, you will receive a statement
reflecting all payments made to your account.

21
<PAGE>

TAX CONSEQUENCES AND
YEAR-END REPORTING

Federal Income Taxes

To comply with tax law requirements, the fund intends to make annual
distributions of its investment income. It is likely that a portion of each
distribution (whether received in cash or reinvested in shares of the fund) will
be taxable to shareholders of the fund as ordinary income and the remainder of
such distribution will be taxable to shareholders as long-term capital gain.

Sales and other dispositions by a shareholder of his or her shares of the fund
(including an exchange of shares of one fund for shares of another fund)
generally will be treated as capital gain if the amount received by the
shareholder in the sale exceeds the shareholder's tax basis in the shares and
will be treated as a capital loss if the shareholder's tax basis in the fund
shares exceeds the amount received by the shareholder in the sale. If the
shareholder exchanges shares of one fund for shares of another fund, the amount
received in the sale will equal the value of the shares of the new fund received
in the exchange. A shareholder's tax basis in his or her shares generally will
equal the cost of the shares plus the amount of any distributions reinvested in
shares of the fund. Any capital gain or loss will be long-term capital gain or
loss if the shares sold have been owned by the shareholder for more than one
year from the date of sale.

State and Local Taxes

Fund 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 the fund.

Year-End Tax Statement

After the end of each calendar year, the fund will send shareholders a statement
showing the amount of all dividends and distributions paid during the year
and the portion of those distributions that will be treated as a capital gain
distribution.

Reports To Shareholders

The fund sends a report of portfolio investments and other information to its
shareholders on a semi-annual basis. An annual report, which includes financial
statements audited by an independent accounting firm, is sent to shareholders
each year. Please call toll-free 1-888-SECURITY for a copy of the fund's most
recent shareholder report.

22
<PAGE>

FINANCIAL

HIGHLIGHTS

================================================================================
<TABLE>
<CAPTION>
January 1, 1998 April 23, 1997/(1)/
through through
December 31, 1998 December 31, 1997
<S> <C> <C>
Per Share Data/(2)/
Net asset value, beginning of period............... $ 11.95 $ 10.15
Income from investment operations:
Net investment income............................ 0.42 0.31
Net realized and unrealized gain (loss) on
investments....................................... (1.80) 2.49
Total from investment operations................. (1.38) 2.80

Less distributions:
Dividends from net investment income............. (0.43) (0.31)
Distributions from net realized gains............ (0.29) (0.54)
Return of capital................................ (0.03) --
Total distributions.............................. (0.75) (1.00)

Net asset value, end of period..................... $ 9.82 $ 11.95
Total return/(3)/.................................. (11.94%) 29.92%
Supplemental data and ratios:
Net assets, end of period ($000)................. $90,540 $116,560
Ratio of expenses to average net
assets/(4)(5)/................................. 1.00% 1.16%
Ratio of net investment income to average net
assets/(4)(5)/................................. 4.75% 4.08%
Portfolio turnover rate/(6)/..................... 109.49% 82.10%
</TABLE>

(1) Date the fund was effective with the SEC.

(2) On December 16, 1997, the shares held by 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
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.

(3) Not annualized for the period April 23, 1997 through December 31, 1997.

(4) Annualized.

(5) Without expense reimbursements of $301,721 for the year ended December 31,
1998, the ratio of expenses to average net assets would have been 1.29% and
the ratio of net investment income to average net assets would have been
4.46%. Without expense reimbursement of $30,276 for the period April 23,
1997 through December 31, 1997, $22,063 of which represents the
amortization of organizational expenses, 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 rate is calculated on the basis of the fund as a
whole without distinguishing between the classes of shares issued.

The financial highlights table is intended to help you understand the fund's
financial performance since April 23, 1997, the effective date of the fund's
registration statement with the SEC.

Certain information in this table reflects financial results for a single Class
I fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the fund's Class I shares
(assuming reinvestment of all dividends and distributions).

This information has been audited by Arthur Andersen LLP, whose report--along
with the fund's financial statements--is included in the statement of additional
information, which is available upon request.

23
<PAGE>

NOTES

================================================================================

<PAGE>

NOTES

================================================================================

<PAGE>

TO LEARN MORE ABOUT THE FUND

. See the fund's current annual and semi-annual reports for an in-depth
discussion of the market conditions and investment strategies which
significantly affected the fund's performance during its last fiscal year.

. Review the fund's Statement of Additional Information (which is incorporated
by reference into this prospectus) for more details on the fund's portfolio,
investment policies, and operating procedures.

Contact Security Capital Real Estate Mutual Funds Incorporated if you have
questions or wish to obtain a free copy of these documents; simply call toll-
free 1-888-SECURITY.

You may also access recent fund reports via the Security Capital web site
(www.securitycapital.com).

The fund's Statement of Additional Information and current annual and semi-
annual reports are also available, along with other related materials, on the
SEC's web site (www.sec.gov). Materials may also be reviewed without charge, or
copied for a fee, at the SEC's Public Reference Room in Washington, DC. For
details, call the SEC at 1-800-SEC-0330.

Investment Company Act file number:
811-8033
<PAGE>

Security Capital

U.S. Real Estate Shares

================================================================================

Class R Shares

A mutual fund investing
primarily in real estate securities
in the United States

Prospectus

May 1, 1999

[LOGO]
Security Capital
<PAGE>

SECURITY CAPITAL

U.S. REAL ESTATE SHARES

===============================================================================
<TABLE>
<CAPTION>

TABLE OF CONTENTS
<S> <C>
The Fund Blueprint.......................................2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio..............................7
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed.................................13
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder...............................16
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights....................................24
To Learn More About the Fund....................Back Cover
Contact Us for More Information.................Back Cover
</TABLE>

A WORD TO POTENTIAL INVESTORS

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

This prospectus is specific to Class R shares of the fund. The minimum initial
investment in Class R shares--which are sold at net asset value without a sales
charge--is $2,500.

The fund's Class I shares (which have a higher minimum investment and different
expenses) are described in a separate prospectus. For further information,
please call toll free: 1-888-SECURITY.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision.

Please read it carefully before you invest and then retain it for future
reference.

<PAGE>

The Fund
Blueprint

================================================================================

OVERVIEW

What are the fund's investment objectives?
. The fund 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, 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.

What kind of investments does the fund make?
. The fund invests primarily in real estate securities. It does not invest in
real estate directly.

. Typically, at least 80 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies operating in the United
States.

What type of investor might consider investing in the fund?
Based on the fund's investment goals and strategies, it might be suitable for
investors who:
. seek to diversify their investment holdings by adding a real estate component
to their portfolio
. have a long-term investment horizon
. expect real estate to provide above-average investment returns over time

2
<PAGE>

What are the chief risks of investing in the fund?

An investment in the Fund involves risks. An investor in the Fund can lose
money if the value of the Fund's investments decline.
* Market risk. The prices of real estate securities will vary with conditions
in the financial markets.
* Real estate exposure. The fund may be affected by the same factors that
influence the value of real estate in general.
* Interest rate risk. Higher mortgage rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can affect
the value of the real estate securities associated with those properties).
* Credit risk. A decline in the credit rating or perceived credit quality of
real estate company's debt can have a negative impact on the value of its
stock.
* Non-diversified portfolio. The fund is non-diversified; therefore, the fund
may invest a greater percentage of its assets in the securities of one issuer
than a diversified fund. Accordingly, the results of any one investment can
have a significant impact on the fund's performance-either good or bad.
* Concentration risk. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be
greater than that of a fund that invests in more than one market sector.

<PAGE>

PRIOR INVESTMENT RESULTS

The total return achieved by the fund through the fiscal year ended December 31,
1998, is shown in the bar chart below.

Security Capital U.S. Real Estate Shares
Comparative Returns vs. Industry Benchmarks

[TABLE APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Average Annual Total
Returns Return
January 1, 1998 to April 23, 1997/1/ to
December 31, 1998 December 31, 1998
-------------------- --------------------
<S> <C> <C>
SC-US Real Estate Shares (Class R) ........... -11.97% 7.29%
NAREIT Equity Index/2/........................ -17.50% 0.73%
Wilshire Real Estate Securities Index/3/...... -17.43% 0.52%
</TABLE>

This table compares the fund's results to changes in the National Association of
Real Estate Investment Trusts (NAREIT) Equity Index(2) and the Wilshire Real
Estate Securities Index (WARESI)(3). It provides an indication of the risks of
investing in the fund by comparing the fund's performance with a broad measure
of market performance. The calculation of total return assumes reinvestment of
all capital gains and income dividends. Results shown for the indices also
assume the reinvestment of dividends. Because the indices are not managed
investments, no operating expenses are deducted from their total returns.

1 The effective date of the fund's registration statement with the Securities
and Exchange Commission.
2 The NAREIT Equity Index is an unmanaged index of publicly traded U.S. tax-
qualified REITs which have 75% or more of their gross invested book assets
invested in the equity ownership of real estate.
3 The WARESI is an unmanaged, broad-based, market capitalization-weighed index
composed at publicly traded REITs and REOCs and partnerships, not including
special purpose or healthcare REIT's. It is composed of major companies
engaged in the equity ownership and operation of commercial real estate.
Prior to utilizing WARESI, the fund used the Wilshire REIT Index as a
benchmark, but changed because it was limited solely to REITs.

Security Capital U.S. Real Estate Shares
Performance
Fiscal Year ended December 31, 1998

[BAR GRAPH APPEARS HERE]

- -11.97%

The fund's best quarterly performance during this time period was a gain of
3.53% for the quarter ended December 31, 1998. Its worst quarterly performance
was a 10.15% loss for the quarter ended September 30, 1998.

4
<PAGE>

SHAREHOLDER COSTS

The table below shows the amount of fees and expenses you may pay if you buy and
hold Class R shares of the fund.

<S> <C>
Shareholder Transaction Expenses (paid directly from your investment)
. Maximum sales charge (load) imposed on purchases (as a percentage of offering price).. none
. Maximum deferred sales charge (load).................................................. none
. Maximum sales charge (load) imposed on reinvested dividends and other distributions... none
. Redemption fee (as a percentage of amount redeemed, if applicable).................... none
. Exchange fee.......................................................................... none

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

. Management fees....................................................................... 0.60%
. Distribution and/or service (12b-1) fees.............................................. 0.25%
. Other expenses........................................................................ 0.44%
. Total annual fund operating expenses.................................................. 1.29%
. Less reimbursed expenses*............................................................. 0.00%
. Net fund operating expenses........................................................... 1.29%
</TABLE>

* Under an agreement dated December 16, 1997, Security Capital Global Capital
Management Group Incorporated (GCMG) maintained the Fund's net operating
expenses at 1.15% and reimbursed expenses of 0.14% from December 16, 1997
through December 31, 1998.

Under the terms of an agreement dated December 7, 1998, GCMG agreed that,
beginning January 1, 1999, it would waive fees and/or reimburse expenses to
maintain the net operating expenses of the fund's Class R shares, other than
brokerage fees and commissions, taxes, interest and other extraordinary
expenses, at no more than 1.35% of the fund's Class R average daily net assets
until December 31, 1999. Please note that the table reflects the waiver in
place for the 1999 calendar year.

5
<PAGE>

What are the costs to the typical investor?

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year.

If you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------
<S> <C> <C> <C>
$138 $429 $741 $1630
</TABLE>

An investor's actual costs may be higher or lower than those shown in the
example.

6
<PAGE>

BUILDING THE

FUND PORTFOLIO

==============================================================================

The Investment Adviser and Management Team

For services provided as investment adviser to the fund, GCMG is paid an annual
management fee equal to 0.60 percent of the average daily net asset value of the
fund's Class R shares. The aggregate management fee paid to GCMG after expense
waivers and reimbursement was 0.46 percent of the average daily net asset value
of the fund's Class R shares during the fiscal year ended December 31,
1998.

Security Capital and its affiliates

. A leader in the trend toward public company ownership in the real estate
industry

. Experience and market data from 17 affiliated companies

. Operations in 11 property types

. Market presence in 19 countries

Security Capital Global Capital Management Group (GCMG)

. Investment adviser to Security Capital's open-end real estate mutual funds
and separate accounts

. Assets under management of approximately $1.144 billion as of March 31,
1999

7
<PAGE>

Distribution and Servicing Plan

Types of Investments

Real Estate Securities

. real estate investment trusts (REITs)
. real estate operating companies (REOCs)
. common stocks
. rights or warrants to purchase common stocks
. convertible securities
. preferred stocks

Real Estate Investment Trusts (REITs)

8
<PAGE>

realize capital gains by selling properties that have appreciated in value. 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.

Real Estate Operating Companies (REOCs)

Defensive Investments

Investments in Companies Controlled by Security Capital

INVESTMENT RISKS

REAL ESTATE EXPOSURE

The fund will not invest in real estate directly, but its investments will be
highly concentrated in real estate securities (see "Types of Investments").

9
<PAGE>

The value of real estate securities, of course, will be affected by many of the
factors that affect the value of real estate.

As a result, the fund is subject to investment risks that are similar to those
associated with direct ownership of real estate. For example, general or local
economic conditions could contribute to:

. a decline in the value of commercial or residential properties
. extended vacancies of properties
. increases in property taxes and operating expenses
. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:

. variations in supply and demand
. increased competition or overbuilding
. changes in existing laws
. environmental issues

Other important risk factors which could affect the value of a real estate
security might apply to individual properties or the issuers of particular
securities:

. casualty or condemnation losses
. legal liabilities for injury or damages
. operating losses

Investing in REITs and REOCs

The fund's investments in REITs and REOCs (together "real estate securities")
are subject to the same general investment risks as those described under "Real
Estate Exposure."

Market Risk

10
<PAGE>

Interest Rate Risk

Credit Risk

Performance Risk

Concentration Risk

Year 2000 Risk

11
<PAGE>

HOW THE FUND MANAGES RISK

With respect to the fund's total assets:

. not more than 25 percent of the fund's market value will be invested in the
securities of a single issuer

With respect to 50 percent of the market value of its total assets:

. not more than 5 percent will be invested in the securities of a single issuer
. the fund will not own more than 10 percent of the outstanding voting
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

12
<PAGE>

HOW THE FUND

IS MANAGED

================================================================================

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

OPPORTUNITY IN THE REAL ESTATE INDUSTRY

This shift from direct investment to increased "securitization" of real estate
offers significant benefits to shareholders, including:

. an efficient, practicable method of adding a real estate component to an
investment portfolio
. enhanced liquidity
. real-time pricing
. the potential for high dividend yields
. the potential for growth and sustainable rates of return

REITs have generally outperformed direct real estate investments over the long
term. GCMG believes that this trend will continue over the next decade.

INVESTMENT PROCESS

. Submarket Research
. Company Analysis
. Securities Pricing

13
<PAGE>

Submarket Research
Real Estate Research Group

Company Analysis
Investment Analysis Team

Securities Pricing
Market Strategy Team

The Market Strategy Team integrates the research perspectives of the Real Estate
Research Group and the Investment Analysis Team in order to assign

14
<PAGE>

Through research and analysis, the fund seeks to isolate markets which appear to
be reaching a "marginal turning point," with significant potential for growth.

Portfolio Construction

Portfolio Management Committee

15
<PAGE>

On Becoming A Shareholder
===============================================================================

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

How To Purchase Fund Shares

All purchases of Class R shares of the fund are made at the net asset value
determined after the receipt of your payment by the fund's transfer agent or an
authorized broker (or its authorized designee). All shares purchased, together
with any dividends and capital gains that are paid in additional shares, will be
credited to this account.

In some instances, when Class R shares of the fund are offered through an
authorized broker or intermediary agent, an investor may be charged a fee to
effect a transaction through such broker or agent.

For individual retirement accounts and employee benefit plans qualified under
sections 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 investment is $250.

Initial Investment

The minimum initial investment in Class R shares of the fund is $2,500. The
initial purchase of shares may be made only by mail or by wire; telephone
transactions may be used only for subsequent purchases of Class R fund shares.
To open an account, follow the procedures outlined below:

By Mail
1. Complete and sign the account application enclosed with this prospectus.
2. Enclose a check or money order drawn on a U.S. bank, savings and
loan, or credit union (made payable to "Security Capital Real Estate Mutual
Funds").

16
<PAGE>

3. Send your application and payment to one of the following addresses:
. Via U.S. Mail
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02205-9719

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184

By Wire
1. 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 your
investment. A completed application must be on file before funds are wired.
2. Use the following instructions to wire your investment to the fund's transfer
agent:
. 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

All Investments

. Payment must be in U.S. funds. Neither cash nor third-party checks will be
accepted. If a shareholder's check does not clear, a service fee of $20 will
be charged and shareholder will be responsible for any losses suffered by the
fund as a result.

. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.

17
<PAGE>

. Certificates for full shares can be obtained by writing to the transfer
agent; all fractional shares will be held in book entry form. Please note
that it is more difficult to redeem shares held in certificate form.

Additional Investments

If you wish to purchase additional Class R shares, the minimum for subsequent
investments is $250. These share purchases may be made by mail, by wire, or by
telephone as described below.

By Mail
1. When making an additional investment by mail, the Additional Investment Form
provided on the lower portion of a shareholder's account statement must be
enclosed.
2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").
3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.
By Wire
1. To make an additional purchase by wire, a shareholder may call toll-free 1-
800-409-4189 for complete wiring instructions.
By Telephone
1. Call toll-free 1-800-409-4189 to request a purchase of additional shares
by moving money from your bank account to your fund account. Your bank
account must be held at a domestic financial institution that is an Automated
Clearing House (ACH) member.
2. To purchase shares at the net asset value determined at the close of any
given trading day, the transfer agent must receive both a purchase order by
telephone and payment by electronic funds transfer through the ACH system
before the close of regular trading on that day. Most transfers are completed
within three business days.

Automatic Investment Plan
The Automatic Investment Plan allows regular, systematic investments in
the fund's Class R shares from a bank checking or NOW account. The fund 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 the account application and
an existing shareholder should call 1-888-SECURITY (toll free) for an automatic
investment plan form.

The Automatic Investment Plan can be set up with any financial institution that
is a member of the ACH. Under certain circumstances (such as discon-

18
<PAGE>

tinuation 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), the fund reserves the right to close such
account. Prior to closing any account for failure to reach the minimum initial
investment, the fund 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 the fund 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
will be deducted from a shareholder's account for any Automatic Investment Plan
purchase that does not clear due to insufficient funds or, if prior to notifying
the fund 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.

Exchange of Fund Shares

Your Class R shares may be exchanged for the Class R shares of any other mutual
fund offered by Security Capital Real Estate Mutual Funds Incorporated.
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.

You may not exchange your investment in any Class R shares more than four times
in any 12-month period (including the initial exchange of your investment during
that period). As with any mutual fund investment, obtain and carefully read the
prospectus of any fund before you obtain shares via an exchange.

19
<PAGE>

HOW TO REDEEM FUND SHARES

You may request redemption of some or all of your Class R shares at any time,
either by telephone or by mail, through the fund's transfer agent. You may also
request to redeem shares through an authorized broker or agent, though you may
be charged a fee to do so.

By Telephone
Call the transfer agent toll-free at 1-800-409-4189 to request a redemption of
your Class R shares. (Please note that you must have previously elected the
telephone redemption option in writing.)

By Mail and By Wire
1. For most redemption requests, you need only furnish a written, unconditional
request stating the number of your Class R shares (or the exact dollar
amount) that you wish to redeem. Your request must be signed exactly as the
shares are registered, and all joint owners must sign.
2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.
3. If you wish, you may have your redemption proceeds wired to a commercial bank
that you have authorized on your account application (a service fee of $12
will be charged for wire redemptions). Otherwise, a check for the proceeds
will be mailed to you at the address of record for your account.

To request redemption of any Class R shares held in certificate form, the
certificate must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to the transfer agent together with your
written redemption request.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

20
<PAGE>

For Your Protection
To help ensure the integrity of your account, the fund employs the following
reasonable measures to protect against unauthorized redemption of fund shares.
These include:
. The fund may require some form of personal identification prior to acting
upon telephone instructions, providing written confirmation of all such
transactions, and/or tape recording all telephone instructions.
. Once a telephone redemption request has been made, it may not be modified or
canceled.
. Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact before a
redemption request made by mail or by wire is granted.
. Any written redemption requests received within 15 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below).

. The fund reserves the right to refuse any telephone redemption in whole or in
part.

Signature Guarantees
Signature guarantees are required for any of the following transactions:
. redemption requests mailed to or wired to a person other than the registered
owner(s) of the shares
. redemption requests to be mailed to or wired to an address other than the
account's address of record
. any redemption request received within 15 days of a change of address
. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

21
<PAGE>

OTHER REDEMPTION INFORMATION

The fund may suspend the right of redemption during any period when:
. trading on the New York Stock Exchange (NYSE) is restricted or the NYSE is
closed (other than customary weekend and holiday closings)
. an emergency (as defined by rules adopted by the SEC) makes disposal of
portfolio securities or determination of the value of net assets of the fund
not reasonably practicable

A shareholder's account may be closed if, upon the redemption of shares, the
value of remaining shares is less than $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). The shareholder will be given notice of at least
30 days and the opportunity to make additional investments which will increase
the account's value so that it satisfies the minimum amount required.

The fund may, under certain circumstances, redeem shares in kind.

PERFORMANCE REPORTING

Determination of Net Asset Value
Class R shares of the fund are sold, without a sales charge, at net asset value.
The net asset value per share of Class R shares is calculated on each day the
NYSE is open for trading. Net asset value will not be calculated on any national
holiday or any other day the NYSE is not open for trading.

Net asset value is determined by adding the market value of all securities in
the fund's portfolio and any other Class R assets, subtracting liabilities, and
dividing by the total number of Class R shares then outstanding. This is the
price at which purchase or redemption of the fund's Class R shares is effected.

Dividends and Distributions
The fund pays dividends from its investment income once each quarter and pays
any capital gains at least once each year. All dividends and distributions are
automatically reinvested in additional shares of the fund (at net asset value)
unless you choose to have them paid in cash. As a shareholder, you will receive
a statement reflecting all payments made to your account.

22
<PAGE>

TAX CONSEQUENCES AND YEAR-END REPORTING

Federal Income Taxes
To comply with tax law requirements, the fund intends to make annual
distributions of its investment income. It is likely that a portion of each
distribution (whether received in cash or reinvested in shares of the fund) will
be taxable to shareholders of the fund as ordinary income and the remainder of
such distribution will be taxable to shareholders as long-term capital gain.

State and Local Taxes
Fund 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 the fund.

Year-End Tax Statement

After the end of each calendar year, the fund will send shareholders a statement
showing the amount of all dividends and distributions paid during the year and
the portion of those distributions that will be treated as a capital gain
distribution.

REPORTS TO SHAREHOLDERS

23
<PAGE>

FINANCIAL

HIGHLIGHTS

===============================================================================

The financial highlights table is intended to help you understand the fund's
financial performance since April 23, 1997, the effective date of the fund's
registration statement with the SEC.

Certain information in this table reflects financial results for a single Class
R fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the fund's Class R shares
(assuming reinvestment of all dividends and distributions).

This information has been audited by Arthur Andersen LLP, whose report -- along
with the fund's financial statements -- is included in the statement of
additional information, which is available upon request.

January 1, 1998 April 23, 1997/(1)/
through through
December 31, 1998 December 31, 1997
<S> <C> <C>
Per Share Data/(2)/
Net asset value, beginning of period............................... $ 11.95 $10.15
Income from investment operations:
Net investment income......................................... 0.38 0.31
Net realized and unrealized gain (loss) on investments........ (1.76) 2.49
Total from investment operations.............................. (1.38) 2.80

Less distributions:
Dividends from net investment income.......................... (0.43) (0.31)
Distributions from net realized gains......................... (0.29) (0.54)
Return of capital............................................. (0.03) --
Total distributions........................................... (0.75) (1.00)

Net asset value, end of period..................................... $ 9.82 $11.95
Total return/(3)/.................................................. (11.97)% 29.91%
Supplemental data and ratios:
Net assets, end of period ($000).............................. $ 4,271 $ 672
Ratio of expenses to average net assets/(4)(5)/............... 1.15% 1.16%
Ratio of net investment income to average net assets/(4)(5)/.. 4.60% 4.06%
Portfolio turnover rate/(6)/.................................. 109.49% 82.10%
</TABLE>

(1) Date the fund was effective with the SEC.

(2) On December 16, 1997, the shares held by 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
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.

(3) Not annualized for the period April 23, 1997.

(4) Annualized.

(5) Without expense reimbursements of $3,478 for the year ended December 31,
1998, the ratio of expenses to average net assets would have been 1.29% and
the ratio of net investment income to average net assets would have been
4.46%. Without expense reimbursement of $167 for the period April 23, 1997
through December 31, 1997, $122 of which represents the amortization of
organizational expenses, 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 4.02%.

(6) Portfolio turnover rate is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.

24
<PAGE>

NOTES

===============================================================================

<PAGE>

TO LEARN MORE ABOUT THE FUND

Contact Security Capital Real Estate Mutual Funds Incorporated if you have
questions or wish to obtain a free copy of these documents; simply call toll-
free 1-888-SECURITY.

You may also access recent fund reports via the Security Capital web site
(www.securitycapital.com).

Investment Company Act file number: 811-8033
<PAGE>

Security Capital
European Real Estate Shares

Class I Shares

A mutual fund investing
primarily in equity securities
of publicly traded real estate companies
organized principally in European countries

Prospectus

May 1, 1999

As is the case with all mutual fund shares, the Securities and Exchange
Commission has not approved or disapproved these securities and has
not passed on the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

[LOGO OF SECURITY CAPITAL]
<PAGE>

Security Capital
European Real Estate Shares

Table of contents
The Fund Blueprint................................................. 2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio........................................ 7
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed........................................... 15
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder......................................... 18
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights.............................................. 25
To Learn More About the Fund............................... Back Cover
Contact Us for More Information............................ Back Cover

A Word To Potential Investors

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

This prospectus is specific to Class I shares of the fund. The minimum initial
investment in Class I shares -- which are sold at net asset value without a
sales charge -- is $250,000.

The fund's Class R shares (which have a lower minimum investment and different
expenses) are described in a separate prospectus. For further information,
please call toll free: 1-888-SECURITY.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision.

Please read it carefully before you invest and then retain it for future
reference.
<PAGE>

The Fund
Blueprint

OVERVIEW

WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?

. The fund 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, the fund's objective is to achieve top-quartile total returns as
compared with other mutual funds that invest in publicly traded real estate
companies organized principally in European countries.

WHAT KIND OF INVESTMENTS DOES THE FUND MAKE?

. The fund invests primarily in real estate securities. It does not invest in
real estate directly.
. Typically, at least 65 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies located primarily in
European countries, including Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, and the United Kingdom.
. The fund's investments generally include equity securities--primarily common
stocks, rights or warrants to purchase common stocks, convertible securities
and preferred stocks.

WHAT TYPE OF INVESTOR MIGHT CONSIDER INVESTING IN THE FUND?

Based on the fund's investment goals and strategies, it might be suitable for
investors who:

. seek to diversify their investment holdings by adding a real estate component
to their portfolio
. wish to add a measure of international diversification to their portfolio
. have a long-term investment horizon
. expect real estate to provide above-average investment returns over time

2
<PAGE>

WHAT ARE THE CHIEF RISKS OF INVESTING IN THE FUND?

An investment in the Fund involves risks. An investor in the Fund can lose money
if the value of the Fund's investments decline.

. MARKET RISK. The prices of real estate securities will vary with conditions in
the financial markets.

. FOREIGN SECURITIES RISK. The fund's investments in securities issued by
companies and governments of foreign nations may present certain political,
economic, currency, regulatory, market and transaction risks which would not
normally be encountered when investing in securities of U.S. issuers.

. REAL ESTATE EXPOSURE. The fund may be affected by the same factors that
influence the value of real estate in general.

. INTEREST RATE RISK. Higher interest rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can affect
the value of the real estate securities associated with those properties).

. CREDIT RISK. A decline in the credit rating or perceived credit quality of a
real estate company's debt can have a negative impact on the value of its
stock.

. NON-DIVERSIFIED PORTFOLIO. The fund is non-diversified; therefore, the fund
may invest a greater percentage of its assets in the securities of one issuer
than a diversified fund. Accordingly, the results of any one investment can
have a significant impact on the fund's performance--either good or bad.

. CONCENTRATION RISK. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be greater
than that of a fund that invests in more than one market sector.

3
<PAGE>

PRIOR INVESTMENT RESULTS

The Fund commenced operations on June 30, 1998. Information about the Fund's
performance will be provided once the Fund has been operational for a full
calendar year.

4
<PAGE>

SHAREHOLDER COSTS

The table below shows the amount of fees and expenses you may pay if you buy and
hold Class I shares of the fund.

Shareholder Transaction Expenses (paid directly from your investment)

. Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).................................. none

. Maximum deferred sales charge (load).................................. none

. Maximum sales charge (load) imposed on reinvested
dividends and other distributions..................................... none

. Redemption fee (as a percentage of amount redeemed, if applicable).... none

. Exchange fee.......................................................... none

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

. Management fees....................................................... 0.85%

. Distribution and/or service (12b-1) fees.............................. 0.25%

. Other expenses........................................................ 8.56%

. Total annual fund operating expenses.................................. 9.66%

. Less reimbursed expenses*............................................. 8.21%

. Net fund operating expenses........................................... 1.45%

* Under the terms of an agreement dated June 30, 1998, Security Capital
Global Capital Management Group Incorporated (GCMG) agreed to waive fees
and/or reimburse expenses to maintain the net operating expenses of the
fund's Class I shares at no more than 1.45% of the fund's Class I average
daily net assets until December 31, 1998. By letter dated December 7,
1998, GCMG agreed to continue its undertaking to waive fees and/or
reimburse expenses under the agreement until December 31, 1999.

5
<PAGE>

WHAT ARE THE COSTS TO THE TYPICAL INVESTOR?

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year. If
you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------

$148 $460 $794 $1742

An investor's actual costs may be higher or lower than those shown in the
example.

6
<PAGE>

BUILDING THE
FUND PORTFOLIO

Security Capital European Real Estate Shares is a series of Security Capital
Real Estate Mutual Funds Incorporated (SC-REMFs). The following sections provide
basic information about the fund's management team and investment operations.

THE INVESTMENT ADVISER AND MANAGEMENT TEAM

GCMG, under the supervision of the directors of SC-REMFs, provides investment
advice and conducts the investment management activities of the fund. GCMG is
uniquely positioned to capitalize on the real estate research and investment
expertise of Security Capital. The tools and resources which have been developed
and deployed since then reflect the organization's deep roots and global reach
in the real estate industry.

For services provided as investment adviser to the fund, GCMG is paid an
annual management fee equal to 0.85% of the average daily net asset value of the
fund's Class I shares.

GCMG has entered into an investment sub-advisory agreement with Security Capital
Global Capital Management Group (Europe) S.A., known as GCMG-Europe. As sub-
adviser, GCMG-Europe provides various portfolio management and investment
advisory services to the fund. A team of full-time GCMG and GCMG-Europe
professionals, working together as the fund's Portfolio Management Committee, is
primarily responsible for overseeing the day-to-day operations of the fund.

GCMG-Europe receives an annual management fee, paid on a monthly basis, in an
amount equal to 0.08% of the fund's average daily asset value. This fee is paid
by, and is the sole obligation of, GCMG (not the fund).

SECURITY CAPITAL AND ITS AFFILIATES

. A LEADER IN THE TREND TOWARD PUBLIC COMPANY OWNERSHIP IN THE REAL ESTATE
INDUSTRY

. EXPERIENCE AND MARKET DATA FROM 17 AFFILIATED COMPANIES

. OPERATIONS IN 11 PROPERTY TYPES

. MARKET PRESENCE IN 19 COUNTRIES

SECURITY CAPITAL GLOBAL CAPITAL MANAGEMENT GROUP (GCMG)

. INVESTMENT ADVISER TO SECURITY CAPITALOS OPEN-END REAL ESTATE MUTUAL FUNDS AND
SEPARATE ACCOUNTS

. ASSETS UNDER MANAGEMENT OF APPROXIMATELY $1.144 BILLION AS OF MARCH 31, 1999

7
<PAGE>

GCMG, which is registered as an investment adviser with the Securities and
Exchange Commission (SEC), commenced operations in January 1995. Its offices are
located at 11 South LaSalle Street, Chicago, Illinois 60603. GCMG-Europe, formed
on May 14, 1998 under Belgian law, is an indirect wholly-owned subsidiary of
Security Capital and is registered as an investment adviser with the SEC. Its
offices are located at Boulevard de la Woluwe 34, Brussels, Belgium.

Distribution and Servicing Plan

The plan provides for the payment of a monthly fee (a "12b-1 fee") equal to 0.25
percent of the value of the average daily net assets invested in the fund's
Class I shares. This payment is made to the fund's distributor, Security Capital
Markets Group Incorporated, an affiliate of GCMG.

Types of Investments

Real Estate Securities

The fund will invest, under normal market conditions, at least 65 percent of its
assets in equity securities of publicly traded real estate companies operating
principally in European countries, including Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, and the United Kingdom. The fund may also
invest in the equity securities of real estate companies located in Eastern
Europe and other European emerging market

8
<PAGE>

countries. The real estate securities in which the Fund may invest include:

. common stocks

. rights or warrants to purchase common stocks

. convertible securities

. preferred stocks

The fund may, from time to time, invest in debt securities of issuers in the
real estate industry. Such securities will be rated as investment grade quality
(rated no lower than A by at least one major rating agency) or, if not rated,
believed by the fund's investment adviser to be of comparable quality.

Depositary Receipts

The fund 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 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.

Defensive Investments

If the fund's investment adviser or sub-adviser (GCMG or GCMG-Europe) determines
that market conditions justify a more defensive portfolio, the fund may make
temporary investments in high-grade, short-term corporate obligations, bank
obligations, or money market securities denominated in U.S. dollars or any
foreign currency. Such investments need not be issued by a real estate company.
Defensive investments may include 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 their instrumentalities.

Under normal circumstances, it is not likely that the fund will invest a
substantial portion of its assets in such securities. If such investments are
made, the fund will invest only in securities rated "investment grade" or
considered by GCMG to be of comparable quality. If the fund makes defensive
investments, such investments might not be consistent with the fund's investment
objectives. Therefore, during the period of time when such investments are held,
these objectives might not be met.

Investments in Companies Controlled by Security Capital

9
<PAGE>

Investment Risks

Real Estate Exposure

As a result, the fund is subject to investment risks that are similar to those
associated with direct ownership of real estate. For example, general or local
economic conditions could contribute to:

. a decline in the value of commercial or residential properties

. extended vacancies of properties

. increases in property taxes and operating expenses

. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:

. variations in supply and demand

. increased competition or overbuilding

. changes in existing laws

. environmental issues

Other important risk factors which could affect the value of a real estate
security might apply to individual properties or the issuers of particular
securities:

. casualty or condemnation losses

. legal liabilities for injury or damages

. operating losses

10
<PAGE>

Investing in Foreign Securities

Investments in foreign securities, including those of foreign governments, may
involve greater risks than investing in comparable domestic securities.
Securities of some foreign companies and governments may be traded in the United
States, but many foreign securities are traded primarily in foreign markets. The
risks of foreign investing include:

. Currency Risk. As long as the fund holds a foreign security, its value will be
affected by the value of the local currency relative to the U.S. dollar. When
the fund sells a foreign denominated security, its value may be worth less in
U.S. dollars even though the security increases in value in its home country.
U.S. dollar denominated securities of foreign issuers may also be affected by
currency risk.

. Political and Economic Risk. Foreign investments may be subject to heightened
political and economic risks, particularly in underdeveloped or developing
countries which may have relatively unstable governments and economies based
on only a few industries. In some countries, there is the risk that the
government may take over the assets or operations of a company or that the
government may impose taxes or limits on the removal of the fund's assets from
that country. The fund may invest in European emerging market countries,
including Hungary, Poland, the Czech Republic, the Slovak Republic and
Romania. Investments by the fund in issuers located in these countries involve
greater risks such as immature economic structures, national policies
restricting investments by foreigners and different legal systems.

. Regulatory Risk. There may be less government supervision of foreign markets.
Foreign issuers may not be subject to the uniform accounting, auditing and
financial reporting standards and practices applicable to domestic issuers.
Accordingly, there may be less publicly available information about foreign
issuers than domestic issuers.

. Market Risk. Foreign securities markets, particularly those of underdeveloped
or developing countries, may be less liquid and more volatile than domestic
markets. Certain markets may require payment for securities before delivery
and delays may be encountered in settling securities transactions. In some
foreign markets, there may be protection against failure by other parties to
complete transactions. Also, there may be limited legal recourse against an
issuer in the event of a default on a debt instrument.

. Transaction Costs. Transaction costs of buying and selling foreign securities,
including brokerage, tax and custody costs, are generally higher than those
involved in domestic transactions.

Foreign securities purchased indirectly (e.g., depositary receipts) are subject
to many of the above risks, including currency risk, because their values depend
on the performance of a foreign security denominated in its home currency.

11
<PAGE>

Euro Conversion Risk

The countries that currently comprise the European Economic and Monetary Union
("EMU") agreed to reduce trade barriers between themselves and eliminate
fluctuations in their currencies through the introduction of a single European
currency on January 1, 1999. This single European currency (the euro) is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. All European securities are generally now priced
in the euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including companies in which the fund invests, the fund could be
adversely affected:

. If the euro, or EMU as a whole, does not take effect as planned.

. If the value of the euro declines.

. If the computing, accounting and trading systems used by the fund's service
providers or other entities with which the fund or its service providers do
business are not capable of recognizing the euro as a distinct currency
beginning with the euro conversion.

Investing in Real Estate Companies

The fund will not invest in real estate directly, but only in securities issued
by real estate companies. However, the fund 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. These risks are described
under "Real Estate Exposure."

Under certain conditions, certain real estate securities could possibly fail to
qualify for tax-free pass-through of their income, resulting in a tax liability
for shareholders (such as the fund). Real estate securities also generate
certain expenses which would be paid indirectly by fund shareholders.

Market Risk

The prices of the common stocks of real estate companies and other securities in
which the fund invests will fluctuate from day to day and may--in either the
near term or over the long run--decline in value. The value of the fund may be
affected by a decline in financial markets in general.

Interest Rate Risk

12
<PAGE>

depress the prices of the securities in which the fund invests over either
short- or long-term periods.

Credit Risk

Performance Risk

Concentration Risk

Year 2000 Risk

13
<PAGE>

How The Fund Manages Risk

As the fund seeks to reduce investment risk, it will--under normal market
conditions--adhere to the following guidelines; which may be changed by the
fund's board of directors without shareholder approval:

With respect to the fund's total assets:

. not more than 25 percent of the fund's market value will be invested in the
securities of a single issuer

With respect to 50 percent of the market value of its total assets:

. not more than 5 percent will be invested in the securities of a single issuer

. the fund will not own more than 10 percent of the outstanding voting
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

14
<PAGE>

How The Fund
Is Managed

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

Opportunity in the
Real Estate Industry

GCMG and GCMG-Europe believe that the real estate industry throughout Europe
will experience the same fundamental transformation as experienced in the U.S.,
creating significant investment opportunities. Indeed, the European public
securities market has more than tripled since 1992, and now has a market
capitalization of $160.5 billion/1/.

The "securitization" of real estate in Europe offers significant benefits to
shareholders, including:

. an efficient, practicable method of adding an international real estate
component to an investment portfolio

. enhanced liquidity

. real-time pricing

. the potential for high dividend yields

. the potential for growth and sustainable rates of return

Public Real Estate Investment
Opportunities Exist Worldwide

Global Real Estate Equity Market
Capitalization

[PIECHART APPEARS HERE]

Chart Showing Real Estate Equity Market Capitalization in
Europe (36.7%)
U.S. (31.5%)
Asia (28.7%)
Others (3.1%)

Sources: Security Capital Global Capital Management Group Incorporated, Salomon
Smith Barney, Inc., SNL Securities L.P., National Association of Real Estate
Investment Trusts (NAREIT). Data as of June 30, 1998.

Investment Process

The organization and decision-making processes of GCMG and GCMG-Europe are
rooted in the belief that superior investment results are achieved through a
dedication to proprietary research. GCMG has developed a sophisticated and fully
integrated set of analytical tools that focus on the following three research
disciplines:

. Companies: Investment Analysis

. Submarkets: Real Estate and Economic Research

. Pricing: Market Strategy

A separate team is dedicated to each research discipline to ensure balanced
representation in the investment process. The investment process integrates this
three-tiered research approach and is executed under the broad direction of the
Portfolio Management Committee, a team of GCMG and GCMG-Europe professionals
which is primarily responsible for overseeing the

1 Source: Salomon Smith Barney, Inc., Security Capital Global Capital
Management Group Incorporated.

<PAGE>

day-to-day operations of the fund. These different perspectives on value are
critical to identifying pricing inefficiencies and moving with conviction to
capitalize on investment opportunities.

Companies
Investment Analysis

Building upon the information provided by Real Estate and Economic Research, the
Investment Analysis team analyzes the companies within the fund's defined
universe of investments. To form a complete assessment of a company, the team
performs a thorough financial analysis, including an examination of key factors:

. asset quality

. cash flow quality

. growth potential and revisions

. management and organization

. financial flexibility

The team develops detailed five-year cash flow forecasts in the course of
evaluating companies, as it is GCMG's and GCMG-Europe's belief that the strength
and quality of a company's cash flow is a key determinant of above-average
return opportunities.

Submarkets
Real Estate and Economic Research

The analysis of real estate markets and submarkets is one of GCMG's and GCMG-
Europe's most important competitive advantages. The Real Estate and Economic
Research group draws upon Security Capital's economic and demographic data and
proprietary, purpose-built models to assess supply and demand for all property
types in various markets and submarkets. The proprietary submarket and property
analysis generated by this team is used to build detailed cash flow and net
asset value models.

16
<PAGE>

Pricing
Market Strategy

The Market Strategy team integrates the research perspectives of the Real Estate
and Economic Research group and the Investment Analysis team in order to assign
risk-adjusted valuation to the securities within the context of real estate
securities market and financial market return expectations. The target pricing
perspectives generated by the Market Strategy team are used by the Portfolio
Management Committee to make stock selections for the fund.

An advanced, proprietary valuation model is used to select real estate companies
with significant potential for growth, integrating four pricing methods to
assess the relative valuation of real estate securities as market prices change
over time.

Through research and analysis, the fund seeks to isolate markets which appear to
be reaching a "marginal turning point," with significant potential for growth.

Portfolio Construction
Portfolio Management Committee

The Portfolio Management Committee is the core of GCMG's and GCMG-Europe's
decision-making process. Through quarterly strategy sessions and biweekly
tactical review meetings, the Portfolio Management Committee analyzes price
forecasts to create a target portfolio for the fund. This target portfolio is
the final product integrating the critical real estate and capital market
expertise which helps to identify the most attractive investment opportunities.
Under the direction of the Portfolio Management Committee, a dedicated trader
executes transactions to manage portfolio weightings in line with the fund's
investment policies.

17
<PAGE>

On Becoming A
Shareholder

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

How To Purchase Fund Shares

Initial Investment

By Mail

1. Complete and sign the account application enclosed with this prospectus.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

3. Send your application and payment to one of the following addresses:

. Via U.S. Mail
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02205-9719

18
<PAGE>

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184
By Wire

1. 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 your
investment. A completed application must be on file before funds are wired.

2. Use the following instructions to wire your investment to the fund's transfer
agent:

. 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

All Investments

. Payment must be in U.S. funds.

. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.

. Certificates for full shares can be obtained by writing to the transfer agent;
all fractional shares will be held in book entry form. Please note that it is
more difficult to redeem shares held in certificate form.

Additional Investments

If you wish to purchase additional Class I shares, the minimum for subsequent
investments is $20,000. These share purchases may be made by mail, by wire, or
by telephone as described below.

19
<PAGE>

By Mail

1. When making an additional investment by mail, the Additional Investment Form
provided on the lower portion of a shareholder's account statement must be
enclosed.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.

By Wire

1. To make an additional purchase by wire, a shareholder may call toll-free 1-
800-409-4189 for complete wiring instructions.

By Telephone

Exchange of Fund Shares

20
<PAGE>

How To Redeem Fund Shares

By Telephone

Call the transfer agent toll-free at 1-800-409-4189 to request a redemption of
your Class I shares. (Please note that you must have previously elected the
telephone redemption option in writing.)

By Mail and By Wire

2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.

3. If you wish, you may have your redemption proceeds wired to a commercial bank
that you have authorized on your account application. Otherwise, a check for
the proceeds will be mailed to you at the address of record for your account.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

21
<PAGE>

For Your Protection

To help ensure the integrity of your account, the fund employs the following
reasonable measures to protect against unauthorized redemption of fund shares.
These include:

. Once a telephone redemption request has been made, it may not be modified or
canceled.

. Any written redemption requests received within 15 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below).

. The fund reserves the right to refuse any telephone redemption in whole or in
part.

Signature Guarantees

Signature guarantees are required for any of the following transactions:

. redemption requests mailed to or wired to a person other than the registered
owner(s) of the shares

. redemption requests to be mailed to or wired to an address other than the
account's address of record

. any redemption request received within 15 days of a change of address

. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

Other Redemption Information

The fund may suspend the right of redemption during any period when:

. trading on the New York Stock Exchange (NYSE) is restricted or the NYSE is
closed (other than customary weekend and holiday closings)

. an emergency (as defined by rules adopted by the SEC) makes disposal of
portfolio securities or determination of the value of net assets of the fund
not reasonably practicable

22
<PAGE>

The fund may, under certain circumstances, redeem shares in kind.

Performance Reporting

Determination of Net Asset Value

Dividends and Distributions

23
<PAGE>

Tax Consequences and
Year-End Reporting

Federal Income Taxes

State and Local Taxes

Year-End Tax Statement

After the end of each calendar year, the fund will send shareholders a statement
showing the amount of all dividends and distributions paid during the year and
the portion of those distributions that will be treated as capital gain
distribution.

Reports To Shareholders

24
<PAGE>

Financial
Highlights

<TABLE>
<CAPTION>
June 30, 1998(1)
through
December 31, 1998
<S> <C>
Per Share Data

Net asset value, beginning of period............................. $10.00
Income from investment operations:
Net investment income....................................... 0.04
Net realized and unrealized gain on investments............. 0.28
Total from investment operations............................ 0.32

Less distributions:
Dividends from net investment income........................ (0.02)
Dividends in excess of net investment income................ (0.02)
Return of capital .......................................... 0
Total distributions......................................... (0.04)

Net asset value, end of period................................... $10.28
Total return/(2)/................................................ 3.25%
Supplemental data and ratios:
Net assets, end of period.................................... $6,071,315
Ratio of expenses to average net assets/(3)(4)/.............. 1.45%
Ratio of net investment income to average net assets/(3)(4)/. 1.32%
Portfolio turnover rate/(5)/................................. 0%
</TABLE>

(1) Date the fund was effective with the SEC.
(2) Not annualized.
(3) Annualized.

(4) Without expense reimbursement of $155,345 for the period June 30, 1998
through December 31, 1998, $600 of which represents the amortization of
organizational expenses, the ratio of expenses to average net assets would
have been 9.66% and the ratio of net investment income to average net assets
would have been (6.89%).
(5) Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.

The financial highlights table is intended to help you understand the fund's
financial performance since June 30, 1998, the effective date of the fund's
registration statement with the SEC.

25
<PAGE>

To learn more about the fund

Contact Security Capital Real Estate Mutual Funds Incorporated if you have
questions or wish to obtain a free copy of these documents; simply call
toll-free 1-888-SECURITY.

You may also access recent fund reports via the Security Capital web site
(www.securitycapital.com).

Investment Company Act file number: 811-8033
<PAGE>

Security Capital
European Real Estate Shares

Class R Shares

A mutual fund investing
primarily in equity securities
of publicly traded real estate companies
organized principally in European countries

Prospectus

May 1, 1999

[LOGO OF SECURITY CAPITAL]
<PAGE>

Security Capital
European Real Estate Shares

Table of contents
The Fund Blueprint.................................... 2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio........................... 7
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed............................... 15
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder............................. 18
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights.................................. 26
To Learn More About the Fund.......................... Back Cover
Contact Us for More Information....................... Back Cover

A Word To Potential Investors

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

This prospectus is specific to Class R shares of the fund. The minimum initial
investment in Class R shares -- which are sold at net asset value without a
sales charge -- is $2,500. The fund's Class I shares (which have a higher
minimum investment and different expenses) are described in a separate
prospectus. For further information, please call toll free: 1-888-SECURITY.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision. Please read it carefully before you invest
and then retain it for future reference.
<PAGE>

The Fund
Blueprint

OVERVIEW

What are the fund's investment objectives?

. Long term, the fund's objective is to achieve top-quartile total returns as
compared with other mutual funds that invest in publicly traded real estate
companies organized principally in European countries.

What kind of investments does the fund make?

. The fund invests primarily in real estate securities. It does not invest in
real estate directly.

. Typically, at least 65 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies located primarily in
European countries, including Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, and the United Kingdom.

. The fund's investments generally include equity securities--primarily common
stocks, rights or warrants to purchase common stocks, convertible securities,
and preferred stocks.

What type of investor might consider investing in the fund?

Based on the fund's investment goals and strategies, it might be suitable for
investors who:

2
<PAGE>

What are the chief risks of investing in the fund?

An investment in the Fund involves risks. An investor in the Fund can lose money
if the value of the Fund's investments decline.

. Market risk. The prices of real estate securities will vary with conditions in
the financial markets.

. Foreign securities risk. The fund's investments in securities issued by
companies and governments of foreign nations may present certain political,
economic, currency, regulatory, market and transaction risks which would not
normally be encountered when investing in securities of U.S. issuers.

. Real estate exposure. The fund may be affected by the same factors that
influence the value of real estate in general.

. Interest rate risk. Higher interest rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can affect
the value of the real estate securities associated with those properties).

. Credit risk. A decline in the credit rating or perceived credit quality of a
real estate company's debt can have a negative impact on the value of its
stock.

. Concentration risk. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be greater
than that of a fund that invests in more than one market sector.

3
<PAGE>

Prior Investment Results

The fund commenced operations on June 30, 1998. Information about the fund's
performance will be provided once the fund has been operational for a full
calendar year.

4
<PAGE>

Shareholder Costs

The table below shows the amount of fees and expenses you may pay if you buy and
hold Class R shares of the fund.

Shareholder Transaction Expenses (paid directly from your investment)

. Maximum sales charge (load) imposed on purchases (as a percentage of offering
price)................................................................. none

. Maximum deferred sales charge (load)................................... none

. Maximum sales charge (load) imposed on reinvested dividends and other
distributions.......................................................... none

. Redemption fee (as a percentage of amount redeemed, if applicable)..... none

. Exchange fee........................................................... none

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

. Management fees........................................................ 0.85%
. Distribution and/or service (12b-1) fees............................... 0.25%

. Other expenses......................................................... 8.56%
. Total annual fund operating expenses................................... 9.66%
. Less reimbursed expenses*.............................................. 8.06%

. Net fund operating expenses............................................ 1.60%

* Under the terms of an agreement dated June 30, 1998, Security Capital
Global Capital Management Group Incorporated (GCMG) agreed to waive fees
and/or reimburse expenses to maintain the net operating expenses of the
fund's Class R shares at no more than 1.60% of the fund's Class R
average daily net assets until December 31, 1998. By letter dated
December 7, 1998, GCMG agreed to continue its undertaking to waive fees
and/or reimburse expenses under the agreement until December 31, 1999.

5
<PAGE>

What are the costs to the typical investor?

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year.

If you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------

$163 $506 $873 $1907

An investor's actual costs may be higher or lower than those shown in the
example.

6
<PAGE>

Building the
Fund portfolio

The Investment Adviser and Management Team

For services provided as investment adviser to the fund, GCMG is paid an annual
management fee equal to 0.85% of the average daily net asset value of the fund's
Class R shares.

GCMG has entered into an investment sub-advisory agreement with Security Capital
Global Capital Management Group (Europe) S.A., known as GCMG-Europe. As sub-
adviser to the fund, GCMG-Europe provides various portfolio management and
investment advisory services to the fund. A team of full-time GCMG and GCMG-
Europe professionals, working together as the fund's Portfolio Management
Committee, is primarily responsible for overseeing the day-to-day operations of
the fund.

Security Capital and its affiliates

. A leader in the trend toward public company ownership in the real estate
industry

. Experience and market data from 17 affiliated companies

. Operations in 11 property types

. Market presence in 19 countries

Security Capital Global Capital Management Group (GCMG)

. Investment adviser to Security Capital's open-end real estate mutual funds and
separate accounts

. Assets under management of approximately $1.144 billion as of March 31,
1999

7
<PAGE>

Distribution and Servicing Plan

The fund has adopted a distribution and servicing plan under Rule 12b-1 of the
Investment Company Act of 1940 to help cover the cost of distributing Class R
shares and providing services to Class R shareholders.

The fund's distributor may enter into agreements with various
third-party organizations to provide certain distribution or servicing
functions. These organizations might include 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.
These agreements may be governed by the plan.

Types of Investments

Real Estate Securities

The fund will invest, under normal market conditions, at least 65 percent of its
assets in equity securities of publicly traded real estate companies
operating principally in European countries, including Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.
The fund may also invest in the equity securities of real estate companies
located in Eastern Europe and other European emerging market

8
<PAGE>

countries. The real estate securities in which the fund may invest include:
. common stocks

. rights or warrants to purchase common stocks

. convertible securities

. preferred stocks

Depositary Receipts

Defensive Investments

Investments in Companies Controlled by Security Capital

9
<PAGE>

Investment Risks

All investments involve some degree of risk. While all mutual funds,
including this one, employ techniques and practices to limit risk, there is
always a possibility that investors may earn a smaller return than expected or
lose some or all of their investment.

Real Estate Exposure

The fund will not invest in real estate directly, but its investments will be
highly concentrated in real estate securities (see "Types of Investments"). The
value of real estate securities, of course, will be affected by many of the
factors that affect the value of real estate. As a result, the fund is subject
to investment risks that are similar to those associated with direct ownership
of real estate. For example, general or local economic conditions could
contribute to:

. a decline in the value of commercial or residential properties

. extended vacancies of properties

. increases in property taxes and operating expenses

. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:

. variations in supply and demand

. increased competition or overbuilding

. changes in existing laws

. environmental issues

Other important risk factors which could affect the value of a real estate
security might apply to individual properties or the issuers of particular
securities:

. casualty or condemnation losses

. legal liabilities for injury or damages

. operating losses

Investing in Foreign Securities

Investments in foreign securities, including those of foreign governments, may
involve greater risks than investing in comparable domestic securities.

10
<PAGE>

Securities of some foreign companies and governments may be traded in the United
States, but many foreign securities are traded primarily in foreign markets. The
risks of foreign investing include:

. Transaction Costs. Transaction costs of buying and selling foreign securities,
including brokerage, tax and custody costs, are generally higher than those
involved in domestic transactions.

Euro Conversion Risk

11
<PAGE>

European currency on January 1, 1999. This single European currency (the euro)
is expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. All European securities are generally now priced
in the euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including companies in which the fund invests, the fund could be
adversely affected:

. If the euro, or EMU as a whole, does not take effect as planned.

. If the value of the euro declines.
. If the computing, accounting and trading systems used by the fund's service
providers or other entities with which the fund or its service providers do
business are not capable of recognizing the euro as a distinct currency
beginning with the euro conversion.

Investing in Real Estate Companies

Market Risk

The prices of the common stocks of real estate companies and other securities in
which the fund invests will fluctuate from day to day and may -- in either the
near term or over the long run -- decline in value. The value of the fund may be
affected by a decline in financial markets in general.

Interest Rate Risk

12
<PAGE>

Credit Risk

The performance of the fund may be affected by the credit ratings or
perceived credit quality of the real estate companies in which it invests. For
example, if a real estate company's credit rating is downgraded, or if market
conditions suggest that its ability to service its debt may be impaired in the
future, the price of its stock may decline, thereby affecting the value of the
fund portfolio.

Performance Risk

Concentration Risk

Year 2000 Risk

13
<PAGE>

Despite SC-REMFs' and GCMG's efforts and the Year 2000 action plan,
non-compliant Year 2000 systems could have an adverse effect on the
fund's business operations or financial condition. Also, please note that
non-compliant Year 2000 systems could negatively impact the issuers of
securities in which the fund invests and, consequently, the fund's performance.

How The Fund Manages Risk

With respect to the fund's total assets:

. not more than 25 percent of the fund's market value will be invested in the
securities of a single issuer

With respect to 50 percent of the market value of its total assets:

. not more than 5 percent will be invested in the securities of a single issuer

. the fund will not own more than 10 percent of the outstanding voting
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

14
<PAGE>

How The Fund
Is Managed

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

Opportunity in the
Real Estate Industry

The "securitization" of real estate in Europe offers significant benefits to
shareholders, including:

. an efficient, practicable method of adding an international real estate
component to an investment portfolio

. enhanced liquidity

. real-time pricing

. the potential for high dividend yields

. the potential for growth and sustainable rates of return

Public Real Estate Investment Opportunities Exist Worldwide
Global Real Estate Equity Market Capitalization

[PIECHART APPEARS HERE]

Chart Showing Real Estate Equity Market Capitalization in
Europe (36.7%)
U.S. (31.5%)
Asia (28.7%)
Others (3.1%)

Investment Process

. Companies: Investment Analysis

. Submarkets: Real Estate and Economic Research

. Pricing: Market Strategy

A separate team is dedicated to each research discipline to ensure balanced
representation in the investment process. The investment process integrates this
three-tiered research approach and is executed under the broad direction of the
Portfolio Management Committee, a team of GCMG and GCMG-Europe professionals
which is primarily responsible for overseeing the

1 Source: Salomon Smith Barney, Inc., Security Capital Global Capital
Management Group Incorporated.

15
<PAGE>

day-to-day operations of the fund. These different perspectives on value are
critical to identifying pricing inefficiencies and moving with conviction to
capitalize on investment opportunities.

Companies
Investment Analysis

. asset quality

. cash flow quality

. growth potential and revisions

. management and organization

. financial flexibility

Submarkets
Real Estate and Economic Research

The analysis of real estate markets and submarkets is one of GCMG's and
GCMG-Europe's most important competitive advantages. The Real Estate and
Economic Research group draws upon Security Capital's economic and demographic
data and proprietary, purpose-built models to assess supply and demand for all
property types in various markets and submarkets. The proprietary submarket and
property analysis generated by this team is used to build detailed cash flow and
net asset value models.

16
<PAGE>

Pricing
Market Strategy

An advanced, proprietary valuation model is used to select real estate
companies with significant potential for growth, integrating four pricing
methods to assess the relative valuation of real estate securities as market
prices change over time.

Through research and analysis, the fund seeks to isolate markets which appear to
be reaching a "marginal turning point," with significant potential for growth.

Portfolio Construction
Portfolio Management Committee

17
<PAGE>

On Becoming A Shareholder

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

How To Purchase Fund Shares

Investors may open an account to purchase fund shares through the fund's
transfer agent or through various authorized brokers and their
intermediaries. The fund has authorized one or more unaffiliated brokers to
accept purchase and redemption orders on its behalf. These brokers, in turn, may
designate intermediaries to accept such orders on the fund's behalf. In such
cases, the fund will be deemed to have received an order when an authorized
broker (or its authorized intermediary) accepts the order.

Initial Investment

By Mail

1. Complete and sign the account application enclosed with this prospectus.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

18
<PAGE>

3. Send your application and payment to one of the following addresses:

. Via U.S. Mail
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02205-9719

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184

By Wire

2. Use the following instructions to wire your investment to the fund's transfer
agent:

. 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

All Investments

. Customer orders will be priced at the fund's net asset value (see
"Determination of Net Asset Value") computed after they are accepted by the
fund's transfer agent, an authorized broker, or its authorized intermediary.
. Payment must be in U.S. funds. Neither cash nor third-party checks will be
accepted. If a shareholder's check does not clear, a service fee of $20 will
be charged and shareholder will be responsible for any losses suffered by the
fund as a result.
. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.

19
<PAGE>

. Certificates for full shares can be obtained by writing to the transfer agent;
all fractional shares will be held in book entry form. Please note that it is
more difficult to redeem shares held in certificate form.

Additional Investments

If you wish to purchase additional Class R shares, the minimum for subsequent
investments is $250. These share purchases may be made by mail, by wire, or by
telephone as described below.

By Mail

1. When making an additional investment by mail, the Additional Investment Form
provided on the lower portion of a shareholder's account statement must be
enclosed.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.

By Wire

1. To make an additional purchase by wire, a shareholder may call toll-free
1-800-409-4189 for complete wiring instructions.

By Telephone

Automatic Investment Plan

The Automatic Investment Plan allows regular, systematic investments in the
fund's Class R shares from a bank checking or NOW account. The fund 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 the account application and
an existing shareholder should call 1-888-SECURITY (toll free) for an automatic
investment plan form.

20
<PAGE>

The Automatic Investment Plan can be set up with any financial institution that
is a member of the ACH. Under certain circumstances (such as discontinuation of
the Automatic Investment Plan before the minimum initial investment is reached,
or, after reaching the minimum initial investment, the account balance is
reduced to less than $500), the fund reserves the right to close such account.
Prior to closing any account for failure to reach the minimum initial
investment, the fund will give a shareholder written notice and 60 days in which
to reinstate the Automatic Investment Plan until the minimum initial investment
amount is met because the fund has the right to close such account for failure
to reach the minimum initial investment. Such closings 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 the amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20
will be deducted from a shareholder's account for any Automatic Investment Plan
purchase that does not clear due to insufficient funds or, if prior to notifying
the fund 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.

Exchange of Fund Shares

21
<PAGE>

How To Redeem Fund Shares

By Telephone

Call the transfer agent toll-free at
1-800-409-4189 to request a redemption of your Class R shares. (Please note that
you must have previously elected the telephone redemption option in writing.)

By Mail and By Wire

1. For most redemption requests, you need only furnish a written, unconditional
request stating the number of your Class R shares (or the exact dollar
amount) that you wish to redeem. Your request must be signed exactly as the
shares are registered, and all joint owners must sign.

2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.

3. If you wish, you may have your redemption proceeds wired to a commercial bank
that you have authorized on your account application (a service fee of $12
will be charged for wire redemptions). Otherwise, a check for the proceeds
will be mailed to you at the address of record for your account.

Once your request has been accepted, the fund normally will mail redemption
proceeds to you on the next business day, and no later than seven
business days after it receives and accepts your request. When a purchase has
been made by check, the fund may hold payment of redemption proceeds until
reasonably satisfied that the check has cleared. This may take up to 12 days.

To request redemption of any Class R shares held in certificate form, the
certificate must be endorsed for transfer (or accompanied by a duly
executed stock power) and must be submitted to the transfer agent together with
your written redemption request.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

22
<PAGE>

For Your Protection

To help ensure the integrity of your account, the fund employs the following
reasonable measures to protect against unauthorized redemption of fund shares.
These include:

. Once a telephone redemption request has been made, it may not be modified or
canceled.

. Any written redemption requests received within 15 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below).

. The fund reserves the right to refuse any telephone redemption in whole or in
part.

Signature Guarantees

Signature guarantees are required for any of the following transactions:

. redemption requests mailed to or wired to a person other than the registered
owner(s) of the shares

. redemption requests to be mailed to or wired to an address other than the
account's address of record

. any redemption request received within 15 days of a change of address

. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

Other Redemption Information

The fund may suspend the right of redemption during any period when:

. trading on the New York Stock Exchange (NYSE) is restricted or the NYSE is
closed (other than customary weekend and holiday closings)

. an emergency (as defined by rules adopted by the SEC) makes disposal of
portfolio securities or determination of the value of net assets of the fund
not reasonably practicable

23
<PAGE>

A shareholder's account may be closed if, upon the redemption of shares, value
of remaining shares is less than $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 tax code). The shareholder will be given notice of at
least 30 days and the opportunity to make additional investments which will
increase the account's value so that it satisfies the minimum amount required.

The fund may, under certain circumstances, redeem shares in kind.

Performance Reporting

Determination of Net Asset Value

Class R shares of the fund are sold, without a sales charge, at net asset value.
The net asset value per share of Class R shares is calculated on each day the
NYSE is open for trading. Net asset value will not be calculated on any national
holiday or any other day the NYSE is not open for trading.

Dividends and Distributions

Tax Consequences and
Year-End Reporting

Federal Income Taxes

24
<PAGE>

remainder of such distribution will be taxable to shareholders as long-term
capital gain.

State and Local Taxes

Year-End Tax Statement

After the end of each calendar year, the fund will send shareholders a statement
showing the amount of all dividends and distributions paid during the year and
the portion of those distributions that will be treated as a capital gain
distribution.

Reports To Shareholders

The fund sends a report of portfolio investments and other information to
its shareholders on a semi-annual basis. An annual report, which includes
financial statements audited by an independent accounting firm, is sent to
shareholders each year. Please call toll-free 1-888-SECURITY for a copy of the
fund's most recent shareholder report.

25
<PAGE>

Financial
Highlights

The financial highlights table is intended to help you understand the fund's
financial performance since June 30, 1998, the effective date of the fund's
registration statement with the SEC.

The information in this table reflects the performance of the Fund's Class I
shares because there were no outstanding Class R shares for the period
shown.

This information has been audited by Arthur Andersen LLP, whose report -- along
with the fund's financial statements -- is included in the statement of
additional information, which is available upon request.

June 30, 1998 (1)
through
December 31, 1998

<TABLE>
<CAPTION>
Per Share Data/2/
<S> <C>
Net asset value, beginning of period................................ $ 10.00
Income from investment operations:
Net investment income.......................................... 0.04
Net realized and unrealized gain on investments................ 0.28
Total from investment operations............................... 0.32

Less distributions:
Dividends from net investment income........................... (0.02)
Dividends in excess of net investment income................... (0.02)
Return of capital.............................................. 0
Total distributions............................................ (0.04)

Net asset value, end of period...................................... $ 10.28

Total return/(3)/................................................... 3.25%
Supplemental data and ratios:
Net assets, end of period...................................... $6,074,315
Ratio of expenses to average net assets/(4) (5)/............... 1.45%
Ratio of net investment income to average net assets/(4) (5)/.. 1.32%
Portfolio turnover rate/(5)/................................... 0%
</TABLE>

(1) Date the fund was effective with the SEC.
(2) The table reflects the performance of the fund's Class I shares. There were
no outstanding Class R shares for the period shown. The maximum expenses
chargeable against Class R shares is 1.60%, and the maximum expenses
chargeable against Class I shares is 1.45%, for the period ending December
31, 1999.

(3) Not annualized.
(4) Annualized.

(5) Without expense reimbursement of $155,345 for the period June 30, 1998
through December 31, 1998, $600 of which represents the amortization of
organizational expenses, the ratio of expenses to average net assets would
have been 9.66% and the ratio of net investment income to average net assets
would have been (6.89)%.
(6) Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.

26
<PAGE>

To learn more about the fund

Contact Security Capital Real Estate Mutual Funds Incorporated if you have
questions or wish to obtain a free copy of these documents; simply call
toll-free 1-888-SECURITY.

You may also access recent fund reports via the Security Capital web site
(www.securitycapital.com).

Investment Company Act file number: 811-8033
<PAGE>

LOGO

11 South LaSalle Street
Chicago, Illinois 60603

STATEMENT OF ADDITIONAL INFORMATION

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
Security Capital U.S. Real Estate Shares
Security Capital European Real Estate Shares

May 1, 1999

Security Capital Real Estate Mutual Funds Incorporated ("SC-REMFs") is an
open-end management investment company organized under Maryland law with two
investment portfolios ("Funds"): Security Capital U.S. Real Estate Shares ("SC-
US") and Security Capital European Real Estate Shares ("SC-EUROPEAN"). 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-EUROPEAN.

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 and/or SC-EUROPEAN dated May 1, 1999 (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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies............... 2
Investment Restrictions.......................... 22
Management of SC-REMFs........................... 24
Distribution and Servicing Plans................. 33
Other Distribution and/or Servicing Arrangements. 34
Determination of Net Asset Value................. 35
Redemption of Shares............................. 35
Portfolio Transactions and Brokerage............. 35
Taxation......................................... 36
Organization and Description of Capital Stock.... 44
Performance Information.......................... 45
Counsel and Independent Accountants.............. 47
</TABLE>
<PAGE>

Financial Statements............................. 47

2
<PAGE>

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 both Funds. Except as otherwise
provided below under "Investment Restrictions," the Funds' investment policies
are not fundamental and may be changed by SC-REMFs' 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.

3
<PAGE>

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).

Investments in Companies Controlled by Security Capital

The securities in which the Funds invest may occasionally include securities
issued by real estate companies that are controlled by Security Capital Group
Incorporated ("Security Capital") or its affiliates (a "Security Capital
controlled real estate company"). These investments could create possible
conflicts of interest and raise potential issues under the federal securities
laws including compliance with joint arrangement prohibitions under the
Investment Company Act of 1940, as amended ("1940 Act"). In addition, if a Fund
invests in securities issued by a Security Capital controlled real estate
company, the Fund may be considered an affiliate of the issuer of such
securities, thus limiting the Fund's ability to resell them pursuant to Rule 144
under the Securities Act. As a result, the Funds will treat such securities
issued by Security Capital controlled real estate companies as illiquid
securities.

In order to assure that these types investments are in the best interests of the
Funds' shareholders, the directors (including a majority of the independent
directors) of SC-REMFs will consider the potential for conflicts and whether
possible resale restrictions are in the best interests of the funds, before the
Funds engage in these types of investment activities, and will approve
procedures designed to prevent conflicts of interest and assure compliance with
applicable law. Pursuant to these procedures, investments by the Funds in
Security Capital controlled real estate companies will only be made through
unaffiliated third party broker-dealers, in arms-length transactions, at market
prices. Security Capital and GCMG will have instituted chinese wall procedures
designed to assure that investment decisions related to Security Capital
controlled real estate companies are made independently of Security Capital and
its other affiliates by preventing GCMG and GCMG-Europe from accessing non-
public information regarding securities of Security Capital controlled real
estate companies. If the compliance procedures are inadequate or breached, the
Funds and their affiliates may be found to have violated the 1940 Act or other
federal securities laws. Additionally, all of the Funds' transactions in
securities of Security Capital controlled real estate companies will be subject
to prior approval of the GCMG compliance officer responsible for compliance with
applicable federal securities law requirements.

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 extent 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.

4
<PAGE>

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"). 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.

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.

Foreign Securities

SC-EUROPEAN invests primarily in the securities of foreign issuers.

5
<PAGE>

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-EUROPEAN
could lose its entire investment in any such country.

Religious, Political, or Ethnic Instability

Certain countries in which SC-EUROPEAN 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 SC-
EUROPEAN'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-EUROPEAN
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-EUROPEAN. These restrictions or controls may at
times limit or preclude investment in certain securities and may increase the
cost and expenses of SC-EUROPEAN. 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-EUROPEAN 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

6
<PAGE>

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-EUROPEAN 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 SC-EUROPEAN than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately 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.

7
<PAGE>

Currency Fluctuations

SC-EUROPEAN under normal circumstances 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-EUROPEAN'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 SC-EUROPEAN'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 SC-EUROPEAN 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 SC-EUROPEAN values its assets daily in terms of U.S. dollars, SC-
EUROPEAN does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. SC-EUROPEAN 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 SC-
EUROPEAN at one rate, while offering a lesser rate of exchange should the 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-EUROPEAN are uninvested and no return is earned
thereon. The inability of SC-EUROPEAN to make intended security purchases due to
settlement problems could cause SC-EUROPEAN to miss attractive investment
opportunities. Inability to dispose of a security due to settlement problems
either could result in losses to SC-EUROPEAN due to subsequent declines in value
of that security or, if SC-EUROPEAN has entered into a contract to sell the
security, could result in possible liability to the purchaser. GCMG-Europe will
consider such difficulties when determining the allocation of SC-EUROPEAN's
assets, although GCMG-

8
<PAGE>

Europe does not believe that such difficulties will have a material adverse
effect on SC-EUROPEAN's trading activities.

SC-EUROPEAN 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
SC-EUROPEAN's investments; and possible difficulties in obtaining and enforcing
judgments against such custodians.

Withholding Taxes

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

Concentration

Because SC-EUROPEAN invests a significant portion of its assets in
securities of issuers located in a particular region of the world, SC-EUROPEAN
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-
EUROPEAN'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.

9
<PAGE>

EURO Conversion

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic Monetary
Union (the "European Union"). Effective January 1, 1999, the member countries of
the European Union introduced the "euro" as a common currency. During a three
year transitional period, the euro will coexist with each member country's
currency. Beginning July 1, 2002, the euro is expected to become the sole
currency of the member countries.

Conversion to the euro may impact the trading in securities of issuers
located in, or denominated in the currencies of, the member countries. It is
possible that foreign exchanges, settlement processes, the custody of assets and
accounting also may be affected. The transition of member states' currency into
the euro will eliminate the currency risk among the member countries and will
likely affect GCMG's and GCMG-Europe's investment considerations with respect to
SC-EUROPEAN. To the extent SC-EUROPEAN holds non-U.S. dollar-denominated
securities, including those denominated in the euro, SC-EUROPEAN will still be
subject to currency risk due to fluctuations in those currencies as compared to
the U.S. dollar.

The introduction of the euro is expected to affect derivative and other
financial contracts in which SC-EUROPEAN may invest insofar as price sources
based upon current currencies of the member countries will be replaced, and
market conventions, such as day-count fractions or settlement dates, applicable
to underlying instruments may be changed to conform to the conventions
applicable to the euro currency.

The overall impact of the transition of member countries currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
ramifications can be expected, such as changes in the economic environment and
changes in the behavior of investors, all of which will impact SC-EUROPEAN's
investments.

GCMG and GCMG-Europe are taking steps they believer will reasonably address
euro-related changes to enable SC-EUROPEAN to process transactions accurately
and completely with minimal disruption to business activities.

Eastern European Countries

Investment by SC-EUROPEAN 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

10
<PAGE>

and limitations on repatriation of invested capital, profits and dividends, and
on SC-EUROPEAN'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.

Emerging Markets

SC-EUROPEAN 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. 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-EUROPEAN is
uninvested and no cash is earned thereon. The inability of SC-EUROPEAN to make
intended security purchases due to settlement problems could cause SC-EUROPEAN
to miss attractive investment opportunities. The inability to dispose of
portfolio securities due to settlement problems could result either in losses to
SC-EUROPEAN due to subsequent declines in value of the portfolio security or, if
SC-EUROPEAN 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-EUROPEAN. 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.

11
<PAGE>

Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales 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-EUROPEAN 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-
EUROPEAN 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 manages the
assets of SC-EUROPEAN, 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 SC-EUROPEAN to suffer a loss of value in respect of the
securities in its 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 SC-EUROPEAN's securities in such markets
may not be readily available. SC-REMFs may suspend redemption of SC-EUROPEAN's
shares for any period during which an emergency exists, as determined by the
SEC. Accordingly if SC-EUROPEAN 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 SC-EUROPEAN'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 SC-EUROPEAN 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 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.

12
<PAGE>

Sovereign Risk Ratings for Selected Emerging Market Countries as of 12/3l/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)

<TABLE>
<CAPTION>
Country Moody's Standard &
<S> <C> <C>
Chile Baal A-
Turkey B1 A-
Mexico Ba2 BB
Czech Republic Baal A-
Hungary Baa2 BBB
Colombia Baa3 BBB-
Venezuela B2 B+
Morocco Ba1 BB
Argentina Ba3 BB
Brazil B2 B+
Poland Baa3 BBB-
Ivory Coast NR NR
</TABLE>

SC-EUROPEAN 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 SC-EUROPEAN defaults, SC-EUROPEAN 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-EUROPEAN'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-EUROPEAN could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which SC-EUROPEAN makes its investments. SC-EUROPEAN's net asset
value may also be affected by changes in the rates or methods of taxation
applicable to SC-EUROPEAN or to entities in which SC-EUROPEAN has invested. GCMG
and GCMG-Europe 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 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

13
<PAGE>

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 SC-
EUROPEAN'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 SC-EUROPEAN'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 an emerging market receives 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-
EUROPEAN may invest in these investment funds subject to the provisions of the
1940 Act, as applicable and other applicable laws.

Foreign Currency Transactions

SC-EUROPEAN endeavors 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-EUROPEAN changes 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-EUROPEAN from transferring
cash out of the country or withhold portions of interest and dividends at the
source. There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation, withholding and other
foreign taxes on income or other amounts, foreign exchange controls (which may
include suspension of the ability to transfer currency from a given country),
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations.

SC-EUROPEAN 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-EUROPEAN 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-EUROPEAN's
portfolio
14
<PAGE>

securities are denominated may have a detrimental impact on SC-EUROPEAN. SC-
REMFs' management endeavors to avoid unfavorable consequences and to take
advantage of favorable developments in particular nations where from time to
time it places SC-EUROPEAN'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' 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-EUROPEAN'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-EUROPEAN'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-EUROPEAN's appraisal of the
risks will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.

15
<PAGE>

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 and GCMG-Europe believe that Privatizations
may offer opportunities for significant capital appreciation and intends to
invest assets of SC-EUROPEAN in Privatizations in appropriate circumstances. In
certain foreign countries, the ability of foreign entities such as SC-EUROPEAN
to participate in Privatizations may be limited by local law, or the terms on
which SC-EUROPEAN 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-EUROPEAN 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 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-EUROPEAN 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-EUROPEAN) 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.

16
<PAGE>

Depository Receipts

SC-EUROPEAN 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-EUROPEAN's investment
policies, investment in ADRs, ADSs, GDRs and EDRs will be deemed to be an
investment 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 shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. SC-
EUROPEAN may invest in both sponsored and unsponsored ADRs.

Eurodollars and Yankee Dollars

SC-EUROPEAN 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

SC-EUROPEAN 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 the 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-EUROPEAN 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

17
<PAGE>

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 SC-
EUROPEAN's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect SC-EUROPEAN's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in SC-EUROPEAN'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 SC-EUROPEAN to utilize these Strategic Transactions successfully will
depend on GCMG's and GCMG-Europe's ability to predict pertinent market
movements, which cannot be assured. SC-EUROPEAN 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 SC-EUROPEAN.

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 or GCMG-Europe'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 SC-EUROPEAN, 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 SC-EUROPEAN can realize on its
investments or cause SC-EUROPEAN to hold a security it might otherwise sell. The
use of currency transactions can result in SC-EUROPEAN 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
SC-EUROPEAN creates the possibility that losses on the hedging instrument may be
greater than gains in the value of SC-EUROPEAN'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, SC-
EUROPEAN 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 SC-EUROPEAN's 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, SC-EUROPEAN'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 SC-EUROPEAN 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. SC-EUROPEAN's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect SC-EUROPEAN 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

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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. SC-EUROPEAN 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.

SC-EUROPEAN'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.

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. SC-
EUROPEAN 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 SC-EUROPEAN at a formula price within seven days. SC-
EUROPEAN 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 SC-EUROPEAN or fails to make a cash settlement
payment due in accordance with the terms of that option, SC-EUROPEAN will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, GCMG and/or GCMG-Europe 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. SC-EUROPEAN 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 or GCMG-Europe. 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 SC-EUROPEAN's limitation on investments in illiquid
securities.

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If SC-EUROPEAN 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-EUROPEAN 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 SC-EUROPEAN must be "covered" (i.e., SC-EUROPEAN
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 SC-EUROPEAN will receive the option premium to help
protect it against loss, a call sold by SC-EUROPEAN exposes SC-EUROPEAN 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 SC-
EUROPEAN to hold a security or instrument which it might otherwise have sold.

SC-EUROPEAN 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. SC-EUROPEAN will not sell put options if, as a result, more than 50%
of SC-EUROPEAN'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 SC-
EUROPEAN may be required to buy the underlying security at a disadvantageous
price above the market price.

General Characteristics of Futures

SC-EUROPEAN 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 would create a firm obligation
by SC-EUROPEAN, 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-EUROPEAN'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.

SC-EUROPEAN will not 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 SC-EUROPEAN'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.

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Options on Securities Indices and Other Financial Indices

SC-EUROPEAN 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-EUROPEAN 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 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. SC-EUROPEAN 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 and/or GCMG-Europe.

SC-EUROPEAN'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 SC-EUROPEAN, 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.

SC-EUROPEAN will not 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-EUROPEAN 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 SC-EUROPEAN has or in which it expects to
have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, SC-EUROPEAN 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 SC-EUROPEAN'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 SC-EUROPEAN'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-EUROPEAN
holds securities denominated in schillings

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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 SC-EUROPEAN 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 the Fund is engaging in proxy hedging. If SC-EUROPEAN enters into a
currency hedging transaction, SC-EUROPEAN 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 SC-EUROPEAN
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.

Combined Transactions

SC-EUROPEAN may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) 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 or GCMG-Europe, it is in the best interests of SC-EUROPEAN 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 GCMG'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-EUROPEAN may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. SC-EUROPEAN 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 SC-EUROPEAN anticipates purchasing at a later date. SC-EUROPEAN
intends 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 SC-EUROPEAN 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.

SC-EUROPEAN 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 SC-EUROPEAN receiving or paying,

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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 or GCMG-Europe and SC-EUROPEAN 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. SC-EUROPEAN will not 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, SC-EUROPEAN
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-EUROPEAN 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. SC-EUROPEAN 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 SC-EUROPEAN'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-EUROPEAN 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 SC-EUROPEAN were not exercised by
the date of its expiration, SC-EUROPEAN 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 SC-
EUROPEAN will require SC-EUROPEAN 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 SC-
EUROPEAN on an index will require SC-EUROPEAN to own portfolio securities which
correlate with the index or to segregate cash or liquid assets

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<PAGE>

equal to the excess of the index value over the exercise price on a current
basis. A put option written by SC-EUROPEAN 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 SC-EUROPEAN, 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 SC-
EUROPEAN 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 SC-EUROPEAN, 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 SC-EUROPEAN sells a call option on an index at a time
when the in-the-money amount exceeds the exercise price, SC-EUROPEAN 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
SC-EUROPEAN other than those above generally settle with physical delivery, or
with an election of either physical delivery or cash settlement and SC-EUROPEAN
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 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, SC-EUROPEAN 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, SC-EUROPEAN 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 SC-EUROPEAN's net obligation, if
any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. SC-EUROPEAN 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, SC-EUROPEAN 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 SC-EUROPEAN. Moreover, instead of segregating cash or liquid assets if
SC-EUROPEAN 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

The Funds 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

24
<PAGE>

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 duration of 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 the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Fund's custodian. If the seller defaults, SC-EUROPEAN or SC-US 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 SC-EUROPEAN or
SC-US may be delayed or limited.

Leverage

SC-EUROPEAN may use leverage to increase its 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-EUROPEAN shares and in the yield
on SC-EUROPEAN's portfolio. Although the principal of such borrowings will be
fixed, SC-EUROPEAN's assets may change in value during the time the borrowing is
outstanding. Since any decline in value of SC-EUROPEAN's investments will be
borne entirely by SC-EUROPEAN's shareholders (and not by those persons providing
the leverage to SC-EUROPEAN), the effect of leverage in a declining market would
be a greater decrease in net asset value than if SC-EUROPEAN were not so
leveraged. Leveraging will create interest expenses for SC-EUROPEAN, 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-EUROPEAN will have to pay, SC-EUROPEAN'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 SC-EUROPEAN will be less than
if leveraging were not used.

Reverse Repurchase Agreements

In connection with its leveraging activities, SC-EUROPEAN may enter into
reverse repurchase agreements in which SC-EUROPEAN 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 SC-EUROPEAN, 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 SC-EUROPEAN's Counterparty, SC-EUROPEAN 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 SC-
EUROPEAN under the agreement prior to such insolvency or bankruptcy is less than
the value of the security subject to the agreement, or that SC-EUROPEAN 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-US and SC-EUROPEAN 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) SC-US and SC-EUROPEAN may
at any time call the loan and regain the securities loaned within 5 business
days; (3) SC-US and SC-EUROPEAN will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities of SC-US
and SC-EUROPEAN 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.

25
<PAGE>

Before SC-US or SC-EUROPEAN 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, SC-US and SC-EUROPEAN retain the right to call the loans at any time
on reasonable notice, and will do so in order that the securities may be voted
by SC-US or SC-EUROPEAN if the holders of such securities are asked to vote upon
or consent to matters materially affecting the investment.

When-Issued Securities

SC-EUROPEAN 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 SC-EUROPEAN. To the extent that assets of SC-EUROPEAN 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, SC-EUROPEAN intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time SC-EUROPEAN 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 settlement, the market value of the when-issued or forward
delivery securities may be more or less than the purchase price. SC-EUROPEAN
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued or forward delivery basis. SC-
EUROPEAN 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. SC-EUROPEAN
will not enter into such transactions for leverage purposes.

Short Sales

The Funds, to the extent permitted by other countries, may engage in short
sales. The Funds 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).

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

26
<PAGE>

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.

Temporary Defensive Position

Under normal market conditions, the Funds do not intend to have a
substantial portion of their assets invested in cash, money market instruments
or U.S. Government securities. However, when GCMG or, with respect to SC-
EUROPEAN, GCMG-Europe, determines that adverse market conditions exist, each
fund may adopt a temporary defensive posture and invest entirely in cash, high-
grade bonds, and short-term money market instruments, including domestic bank
obligations and repurchase agreement. When a Fund is invested in this manner, it
may not be able to achieve its investment objective.

INVESTMENT RESTRICTIONS

The Funds are series of SC-REMFs, which is an open-end investment company
organized under Maryland law. The Funds are "non-diversified", which means that
they are not limited by the 1940 Act in the proportion of assets they may invest
in the securities of a single issuer.

However, 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

27
<PAGE>

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-EUROPEAN may not:

1. Invest directly in real estate or interests in real estate (although
it may purchase securities secured by real estate or interests therein, or
issued by companies or investment trusts which invest in real estate or
interests therein); invest in interests (other than publicly issued debentures
or equity stock interests) in oil, gas or other mineral exploration or
development programs; or purchase or sell commodity contracts (except futures
contracts as described in the Prospectus);

2. Act as an underwriter or issue senior securities;

3. Issue senior securities or borrow money, except that SC-EUROPEAN may
borrow money from banks in an amount not exceeding 33-1/3% of the value of SC-
EUROPEAN's total assets (not including the amount borrowed), except for
temporary or emergency purposes and to secure borrowings. If at any time SC-
EUROPEAN's borrowings exceed this limitation due to a decline in SC-EUROPEAN'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 SC-
EUROPEAN 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 SC-
EUROPEAN 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, SC-EUROPEAN has adopted non-fundamental investment limitations
as stated below. Such limitations may be changed without shareholder approval.

SC-EUROPEAN may not:

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

28
<PAGE>

2. Purchase or retain securities of an issuer if the officers and
Directors of SC-REMFs, GCMG or GCMG-Europe 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;

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.

MANAGEMENT OF SC-REMFs

The overall management of the business and affairs of the Funds 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 the Funds, including SC-REMFs' agreements with GCMG or with the
Funds' administrator, custodian and transfer agent. The management of each of
the Fund'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 each of the Funds 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' Articles of
Incorporation.

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
Occupation During
Name and Address Office Age The Past Five Years
- ----------------------- ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Anthony R. Manno Jr.* Chairman of 47 Managing Director and President of GCMG since January
11 South LaSalle Street the Board of 1995, where he is responsible for overseeing all investment
Chicago, Illinois 60603 Directors, and capital allocation matters for GCMG's public market
Managing securities activities and is also responsible for company and
Director and industry analysis, market strategy and trading and reporting.
President Mr. Manno was a member of the Investment Committee of
Security Capital from March 1994 to June 1996. Prior to joining
Security Capital, Mr. Manno was a Managing Director of LaSalle Partners
Limited from March 1980 to March 1994. Mr. Manno received his M.B.A.
from the University of Chicago Graduate School of Business, an M.A. and
a B.A. from Northwestern University and is a Certified Public
Accountant.
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- -------------------------- -------- --- ------------------------------------------------------------
<S> <C> <C> <C>
Robert H. Abrams Director 66 Director of the Program in Real Estate at Cornell University.
114 West Sibley Hall Founder of Colliers ABR, Inc. (formerly Abrams Benisch
Cornell University Riker Inc.), a property management firm. Mr. Abrams was
Ithaca, New York 14853 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 74 Retired; Senior Vice President for Administration and
8 Bonanza Trail Treasurer of Loyola University, Chicago from 1981 to July
Santa Fe, New Mexico 87505 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.

</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- ---------------- ------ --- -------------------
<S> <C> <C> <C>
George F. Keane Director 69 Chairman of the Board of Trigen Energy Corporation since
7408 Eaton Court 1994. As founding chief executive of The Common Fund in
University Park, Florida 34201 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.

</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- ---------------- ------ --- -------------------
<S> <C> <C> <C>
Kenneth D. Statz Managing 40 Managing Director of GCMG since November 1997 where he
11 South LaSalle Street Director is responsible for the development and implementation of
Chicago, Illinois 60603 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 43 Senior Vice President of GCMG since November 1997 and
11 South LaSalle Street President Vice President since July 1996, where he is responsible for
Chicago, Illinois 60603 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 37 Vice President and Controller of GCMG since March 1997.
11 South LaSalle Street President, Prior thereto, from June 1988 to March 1997, he was
Chicago, Illinois 60603 Treasurer and Controller, Manager of Client Administration and Compliance
Assistant Officer at Strong Capital Management, Inc. Mr. Nellessen is
Secretary a Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He received his
B.B.A. from the University of Wisconsin, Madison.

David T. Novick Vice President 34 Vice President of Security Capital Group Incorporated since
11 South LaSalle Street and Secretary June 1998. Prior thereto, from September 1989 to June 1998,
Chicago, Illinois 60603 he was an attorney, and most recently a Partner, with the law
firm of Katten Muchin and Zavis. Mr. Novick received his
B.S.B.A. from Boston University and his J.D. from the
University of Illinois.
</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 $14,000 and a fee of $1,000
for each meeting

32
<PAGE>

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, 1998.

Compensation Table
Fiscal Year Ending December 31, 1998

Pension or
Retirement
Benefits Estimated
Aggregate Accrued as Annual Total
Compensation Part of Benefits Compensation
From SC-REMFs Upon From SC-REMFs
Name of Person, Position SC-REMFs Expenses Retirement Paid To Directors
- ------------------------ ----------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
George F. Keane
Director................... $31,666 N/A N/A $31,666
Stephen F. Kasbeer
Director................... $32,000 N/A N/A $32,000
Robert H. Abrams
Director................... $25,000 N/A N/A $25,000
**Anthony R. Manno Jr.
Chairman, Managing Director and
President................... 0 N/A N/A 0
**John H. Gardner, Jr. /(1)/
Director................... 0 N/A N/A 0
</TABLE>

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

(1) Elected to serve by the Board of Directors on March 11, 1998. Resigned
position as Director effective May 1, 1999.

GCMG

Security Capital Global Capital Management Group Incorporated, a Delaware
corporation, is a registered investment adviser, which commenced operations in
January 1995 under Delaware law and specializes in the management of real estate
securities portfolios. GCMG is a wholly-owned subsidiary of Security Capital
Investment Research Group Incorporated, which is wholly-owned by Security
Capital. Security Capital is a publicly-traded company which, through its
affiliates, has a market presence in 19 countries throughout the world.
SC-REALTY Incorporated ("SC-REALTY"), a wholly-owned subsidiary of Security
Capital, owns a controlling interest in SC-US and SC-EUROPEAN. GCMG is
affiliated with SC-REALTY and SC-REMFs because they are under the common control
of Security Capital.

GCMG-Europe

Security Capital Global Capital Management Group (Europe) S.A., with
offices located at Boulevord de la Woluwe 34, Brussels, Belgium, 1200, provides
portfolio management services to SC-EUROPEAN 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. GCMG-Europe is
affiliated with GCMG, SC-REALTY and SC-REMFs because they are under the common
control of Security Capital.

33
<PAGE>

SC (EU) Management

Security Capital (EU) Management Group S.A., with offices located at
Boulevord de La Woluwe 34, Brussels, Belgium, 1200, 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.

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. 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 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' 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 1.20% of the value of SC-US's Class I
average daily net assets and SC-US's Class R shares at 1.35% of the value of SC-
US's Class R average daily net assets, for the 1999 fiscal year. For the period
April 23, 1997 (the effective date of SC-US's initial registration statement)
through December 31, 1997, and January 1, 1998 through December 31, 1998, GCMG
earned $607,727 and $335,505, respectively, net of waivers of $30,443 and
$305,199 for providing investment management services to SC-US.

Under the Advisory Agreement for SC-EUROPEAN, dated June 30, 1998, each
class of SC-EUROPEAN'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-
EUROPEAN'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-EUROPEAN's Class I shares at 1.45% of the value of
SC-EUROPEAN's Class I average daily net assets and SC-EUROPEAN's Class R shares
at 1.60% of the value of SC-EUROPEAN's Class R average daily net assets, until
December 31, 1999. For the period June 30, 1998 (the effective date of SC-
EUROPEAN) through December 31, 1998, GCMG earned $0.00, net of waivers of
$155,345, for providing management services to SC-EUROPEAN.

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.

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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'
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' 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' 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' 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 Agreement for SC-EUROPEAN was
approved on June 24, 1998 by SC-REMFs' Directors including a majority of the
non-interested Directors. The Advisory Agreement for SC-EUROPEAN continues in
effect until June 30, 2000. The Advisory Agreements FOR SC-US and SC-EUROPEAN
will continue in effect, provided that their continuance is specifically
approved prior to their 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 such 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. Each 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 Agreement with GCMG-Europe

GCMG has retained GCMG-Europe as investment sub-adviser ("Sub-Adviser"), to
manage the day-to-day investment of SC-EUROPEAN's portfolio in accordance with
SC-EUROPEAN's investment policies, subject to the general supervision of GCMG
and the overall authority of SC-REMFs' Board of Directors.

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-EUROPEAN. In
connection with the management of SC-EUROPEAN's portfolio, GCMG-Europe may
select brokers and dealers to execute purchase and sale orders for portfolio
transactions. Under the Sub-Advisory Agreement for SC-EUROPEAN, GCMG pays GCMG-
Europe monthly, an annual management fee in an amount equal to .08% of SC-
EUROPEAN's average daily net asset value. These fees are the sole obligations of
GCMG and not SC-EUROPEAN.

The Sub-Advisory Agreement was approved by SC-REMFs' 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, effective as of June 30, 1998. The 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.

The 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

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<PAGE>

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 the Sub-Adviser may have investment objectives and
policies similar to those of SC-EUROPEAN. The 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 SC-EUROPEAN. 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 the 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 SC-EUROPEAN. When two or
more of the clients of the 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.

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-
EUROPEAN'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.

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' 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 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' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration agreement (the "Sub-Administration
Agreement").

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of the net asset value of
each class of the Funds' shares 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 certain 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' average
daily net assets over $1 billion, subject to an average annual minimum fee of
$75,000 per investment portfolio.

For the period April 23, 1997 (the effective date of SC-REMFs' initial
registration statement) through December 31 1997, Firstar Trust Company
("Firstar"), SC-REMFs' prior sub-administrator, earned $47,791 for providing
sub-administration services to SC-US. From January 1, 1998 to August 10, 1998,
the termination date of Firstar's contract with SC-REMFs, Firstar earned
$52,465 for providing sub-administration services to SC-US. From June 30, 1998
to December 31, 1998, the Sub-Administrator earned $160,625 for providing
sub-administration services to SC-EUROPEAN, Security Capital Asia/Pacific Real
Estate Shares ("SC-ASIA"), Security Capital Real Estate Arbitrage

36
<PAGE>

Shares ("SC-ARBITRAGE") and SC-US (as of August 10, 1998). SC-ASIA and
SC-ARBITRAGE were terminated on December 31, 1998.

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' 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' initial registration
statement) through December 31, 1997, GCMG earned $15,930 for providing services
to SC-US. For the period January 1, 1998 through December 31, 1998, GCMG earned
$23,292 for providing services to SC-US, SC-EUROPEAN, SC-ASIA AND SC-ARBITRAGE
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.

Custodian and Transfer Agent

State Street Bank and Trust Company ("Custodian"), which has its principal
business address at 225 Franklin Street, Boston, Massachusetts 02101, as been
retained to act as Custodian of the Funds' investments and as the Funds'
Transfer Agent.

The Custodian's responsibilities include safeguarding and controlling
SC-REMFs' cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Funds' investment. Specifically,
the Custodian is responsible for holding all securities and cash of each Fund,
receiving and paying for securities purchased, delivering against payment for
securities sold, receiving and collecting income from investments, making all
payments covering expenses of SC-REMFs and performing other accounting and
administrative duties, all as directed by persons authorized by SC-REMFs. The
Custodian does not exercise any supervisory function in such matters as the
purchase and sale of portfolio securities, the payment of dividends, or payment
of expenses of the Funds or SC-REMFs. Portfolio securities of the Funds
purchased domestically are maintained in the custody of the Custodian and may be
entered into the book entry systems of securities depositories approved by the
Board of Directors. Portfolio securities maintained outside the United States
will be maintained in the custody of foreign branches of the Custodian and such
other custodians, including foreign banks and foreign securities depositories,
as are approved by the Custodian in its capacity as Foreign Custody Manager or
by the Board of Directors, pursuant to applicable 1940 Act rules.

In consideration for services provided, SC-REMFs pays the Custodian an annual
fee based upon the countries in which the Funds' assets are maintained, plus
transaction costs and other out of pocket expenses. SC-REMFs also pays the
Custodian a monthly fee for the performance of certain currency accounting
services in the amount of $3,000 for SC-US and $4,000 for SC-EUROPEAN.

The Transfer Agent's responsibilities include, without limitation: (i)
receiving for acceptance, orders for the purchase of shares and delivering
payment and appropriate documentation thereof to the Custodian; (ii) pursuant to
purchase orders, issuing the appropriate number of shares and holding such
shares in the appropriate shareholder account; (iii) receiving for acceptance
redemption requests and redemption directions and delivering the appropriate
documentation thereof to the Custodian; (iv) upon the receipt of monies paid by
the Custodian, causing to be paid such monies as instructed by redeeming
shareholders; (v) effecting transfers of shares upon the receipt of appropriate
instructions; (vi) as dividend disbursing agent, preparing and transmitting
payments for dividends and distributions declared by the Funds, including the
crediting of shareholder accounts in the case of dividend reinvestment plans;
(vii) recording the issuance of shares of the Funds and maintaining the records
required by SEC Rule 17Ad-10(e); and (viii) providing any other customary
services of a transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with accumulation, open-
account or similar plans.

In consideration for services provided, SC-REMFs pays the Transfer Agent an
annual fee of $40,000 for the first class of shares, $30,000 for each of the
second and third classes of shares, $20,000 for each of the fourth and fifth
classes of shares and $15,000 for each class of shares thereafter, plus certain
additional account service fees.

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<PAGE>

Distributor

Security Capital Markets Group Incorporated ("Capital Markets" or
"Distributor"),which has its principal offices at 11 South LaSalle Street,
Chicago, Illinois 60603, serves as principal underwriter and distributor of the
Funds' Class R and Class I shares. Capital Markets is an affiliate of GCMG and
SC-REMFs because it is wholly-own by Security Capital Financial Services, which
is wholly-owned by Security Capital.

Under separate Distribution and Servicing Agreements with SC-REMFs with
respect to the Class R and Class I shares of each Fund, Capital Markets offers
the Funds' shares on an agency or "best efforts" basis under which a Fund is
required to issue only such shares as are actually sold. SC-US and SC-EUROPEAN
offer Class I shares and Class R shares for sale to the public on continuous
basis. Since April 23, 1997 (the effective date of SC-REMFs initial registration
statement), Capital Markets has received no commissions in connection with the
sale of the Funds' shares.

DISTRIBUTION AND SERVICING PLANS

The Board of Directors has adopted Distribution and Servicing Plan ("Plans")
with respect to each of the Class I shares and the Class R shares of SC-US (the
"SC-US Class I Plan" and the "SC-US Class R Plan"), the Class I and Class R
shares of SC-EUROPEAN (the "SC-EUROPEAN Plan"), the Class I and Class R shares
of SC-ASIA (the "SC-ASIA Plan") and the Class I shares of SC-ARBITRAGE (the
"SC-ARBITRAGE Plan") (together, the "Plans"). 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-REMFs to the Distributor under each Plan is an amount equal to .25% (on an
annual basis) of the value of the average daily net assets of the class of
shares to which the Plan relates.

Under the Plans, the Funds are authorized to pay a distribution fee for
distribution activities in connection with the sale of shares and a service fee
for services provided which are necessary for the maintenance of shareholder
accounts. To the extent such fee exceeds the expenses of these distribution and
shareholder servicing activities, the Distributor may retain such excess as
compensation for its services and may realize a profit from these arrangements.

The Plans are compensation plans which provide for the payment of a specified
distribution and service fee without regard to the distribution and service
expenses actually incurred by the Distributor. If the Plans were to be
terminated by the Board of Directors and no successor Plans were to be adopted,
the Directors would cease to make distribution and service payments to the
Distributor and the Distributor would be unable to recover the amount of any of
its unreimbursed distribution expenditures. However, the Distributor does not
intend to incur distribution and service expenses at a rate that materially
exceeds the rate of compensation received under the Plans. The 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 January 1, 1998 through December 31, 1998, the Distributor
earned $260,719 for providing services under the SC-US Class I Plan and $6,241
for providing services under the SC-US Class R Plan. During that period, total
payments made by SC-US under the SC-US Class I Plan were spent as follows: (i)
$234,641 on advertising, including the printing and mailing of prospectuses to
other than current shareholders; (ii) $0.00 on compensation to underwriters;
(iii) $26,078 on compensation to broker-dealers; (iv) $0.00 on compensation to
sales personnel;

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<PAGE>

and (v) $0.00 on interest, carrying or other financing charges. During the same
period, total payments made by SC-US under the SC-US Class R Plan were spent as
follows: (i) $1,402 on advertising, including the printing and mailing of
prospectuses to other than current shareholders; (ii) $0.00 on compensation to
underwriters; (iii) $4,839 on compensation to broker-dealers; (iv) $0.00 on
compensation to sales personnel; and (v) $0.00 on interest, carrying or other
financing charges.

From June 30, 1998 (the effective date of SC-EUROPEAN) to December 31,1998,
the Distributor earned $4,729 for providing services under the SC-EUROPEAN
Plan. During that period, total payments made by SC-EUROPEAN under the
SC-EUROPEAN Plan were spent entirely on compensation to broker-dealers.

From June 30, 1998 (the effective date of SC-ASIA and SC-ARBITRAGE) no
payments were made to the Distributor under the SC-ASIA Plan or the
SC-ARBITRAGE 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 SC-US Class I Plan and the SC-US Class R Plan were approved by the Board
of Directors, including the Disinterested Directors, on November 25, 1997 and by
SC-US's Class I and Class R shareholders on December 12, 1997. The Plans for
SC-EUROPEAN'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 Disinterested
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 Disinterested Directors. The continuance
of the SC-US Class I Plan and the SC-US Class R Plan was approved by the Board
of Directors, including a majority of the Disinterested Directors, on December
7, 1998. 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 Disinterested
Directors or by a vote of a majority of the outstanding class of shares. So long
as a Plan is in effect, the selection and nomination of Disinterested Directors
shall be committed to the discretion of the Disinterested Directors. The Board
of Directors has determined that in their judgment there is a reasonable
likelihood that the Plans will benefit SC-US, SC-EUROPEAN 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

39
<PAGE>

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.

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 and
SC-EUROPEAN 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 and/or SC-EUROPEAN 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' 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' 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-REMFs has 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 and SC-EUROPEAN
reserve the right to make payments in whole or in part in securities or
other

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<PAGE>

assets in case of an emergency, or if the payment of redemption in cash would be
detrimental to the existing shareholders of a Fund as determined by the board of
directors. In such circumstances, the securities distributed would be valued as
set forth in the Prospectus. Should a Fund distribute securities, a shareholder
may incur brokerage fees or other transaction costs in converting the securities
to cash.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the supervision of the Directors, decisions to buy and sell
securities for SC-US and SC-EUROPEAN and negotiation of brokerage commission
rates are made by GCMG and GCMG-EUROPE, respectively. Transactions on 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 or
GCMG-EUROPE, as appropriate, 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 and GCMG-EUROPE 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 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 or
GCMG-EUROPE, as appropriate, 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 or GCMG-EUROPE's, as appropriate, ongoing responsibilities with respect
to a Fund. Research and investment information may be provided by these and
other brokers at no cost to GCMG and GCMG-EUROPE and is available for the
benefit of other accounts advised by GCMG and GCMG-EUROPE and their 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
and GCMG-EUROPE's expenses, it is not possible to estimate its value and in the
opinion of GCMG and GCMG-EUROPE it does not reduce GCMG's or GCMG-EUROPE's
expenses in a determinable amount. The extent to which GCMG and GCMG-EUROPE make
use of statistical, research and other services furnished by brokers is
considered by GCMG and GCMG-EUROPE in the allocation of brokerage business but
there is no formula by which such business is allocated. GCMG and GCMG-EUROPE do
so in accordance with their judgment of the best interests of the Funds and
their shareholders. GCMG and GCMG-EUROPE 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 and GCMG-EUROPE 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

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receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies); and (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 (i.e.,
through dividend reinvestment), 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.

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 20% for most assets held for more than one year at the
time of disposition. 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 one year is reduced to 10% and the 18% rate for
assets held for more than 5 years is reduced to 8%.

The portion of a Fund distribution classified as a return of capital generally
is not taxable to the Fund shareholders, but it will reduce their tax basis in
their shares, which in turn would effect the amount of gain or loss shareholders
would realize on the sale or redemption of their shares. If a return of capital
distribution exceeds a shareholder's tax basis in his shares, the excess is
generally taxed as capital gain to the shareholder assuming the shares are a
capital asset.

REITs do not provide complete information about the taxability of their
distributions (i.e., how much of their distributions represent a return of
capital) until after the calendar year ends. As a result, the Funds may not be
able to determine how much of their annual distributions for a particular year
are taxable to shareholders until after the traditional January 31 deadline for
issuing Form 1099-DIV ("Form 1099''). The Funds in such circumstance may send

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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 (including an
exchange of shares of one Fund for shares of the other Fund), a shareholder may
realize a capital gain or loss which will be long-term capital gain if such
shares have been held for more than 12 months on the date of disposition. 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 in final form, 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 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 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

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

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"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 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.

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
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

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<PAGE>

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.

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-EUROPEAN, 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 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").

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-EUROPEAN qualifies as a
regulated investment company. 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.

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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-EUROPEAN 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 accredited 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 treated 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 Code
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 accredited 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 Code 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.

Constructive Sales of Certain Appreciated Financial Positions

The Taxpayer Relief Act of 1997 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

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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 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-EUROPEAN 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-EUROPEAN held the PFIC stock. SC-EUROPEAN itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to SC-EUROPEAN'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-EUROPEAN distributes 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.

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SC-EUROPEAN may be able to elect alternative tax treatment with respect to
PFIC stock. Under one such election, SC-EUROPEAN generally would be required to
include in its gross income its 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-
EUROPEAN. SC-EUROPEAN'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-EUROPEAN
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.

Taxpayers may also 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. Under recently proposed regulations,
all shares of PFICs owned by regulated investment companies such as SC-EUROPEAN
shall be treated as marketable stock. It is uncertain at this time whether
the Funds will make the mark to market election permitted under these
rules.

Foreign Income Tax

Investment income received by SC-EUROPEAN 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-
EUROPEAN 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-EUROPEAN's assets to be invested in various countries is not known.

If more than 50% of the value of SC-EUROPEAN's total assets at the close of
each taxable year consists of the stock or securities of foreign corporations,
SC-EUROPEAN may elect to "pass through" to SC-EUROPEAN's shareholders the amount
of foreign income taxes paid by SC-EUROPEAN (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-EUROPEAN 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-EUROPEAN for this purpose, shareholders will be required to
allocate SC-EUROPEAN distributions according to the source of the income
realized by SC-EUROPEAN. SC-EUROPEAN's gains from the sale of stock and
securities and certain currency fluctuation

48
<PAGE>

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-EUROPEAN if they have not held their shares in SC-EUROPEAN for 16
days or more during the 30 day period beginning 15 days before shares in SC-
EUROPEAN 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-EUROPEAN.

For tax years beginning after 1997, a shareholder who is an individual can
elect to utilize a simplified method of computing foreign tax credits if such
individual's entire gross income for the taxable year from foreign sources
consists of qualified passive income and such individual's creditable foreign
taxes during the year do not exceed $300 ($600 if a joint return is filed).
Under the simplified method, an individual can claim a foreign tax credit
without regard to the amount of his or her foreign source income, but the
individual cannot carry foreign tax credits back or forward from such year or to
such year. The simplified method should be available to individual shareholders
with respect to their share of taxes of SC-EUROPEAN.

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.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' shares have no preemptive, conversion or exchange rights,
other than the right to exchange shares of a mutual fund offered by SC-REMFs for
shares of the same class of any other mutual fund offered by SC-REMFs. A
shareholder may, at anytime, require SC-REMFs to redeem all of any of the shares
owned by that shareholder at net asset value. Each share of each class of SC-US
and SC-EUROPEAN 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' Charter 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' Board of Directors may, without shareholder approval, increase or
decrease the number of authorized but unissued shares of SC-REMFs' 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 two investment portfolios,
each with two classes of shares: Class I shares and Class R shares; SC-US and
SC-EUROPEAN Class I shares are offered to investors whose initial minimum
investment is $250,000 and Class R shares are available for purchase by all

49
<PAGE>

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' expenses.

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 April 15, 1999, SC REALTY owned 83.31% of the issued and outstanding
shares of SC-US, and 99.95% of the issued and outstanding shares of SC-EUROPEAN.
In each case, SC REALTY owns Class I shares only. SC REALTY is a corporation
organized under Nevada law which is wholly-owned by Security Capital, a Maryland
corporation.

As of April 15, 1999, the officers and directors of SC-REMFs, as a group,
owned less than 1% of the issued and outstanding shares of either SC-US or SC-
EUROPEAN. As of that date, the following persons owned of record 5% of each
Fund'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>
SC-US - Class I SC REALTY Incorporated 5,838,674.940 86.66%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952

SC-US - Class R Dennis G. Lopez 21,106.29 7.79%
34 Onslaw Gardens
Flat 6
London, England SW7-3AQ
United Kingdom

SC-EUROPEAN - SC REALTY Incorporated 966,781.099 99.95%
Class I 3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
</TABLE>

Because SC REALTY owns 83.31% of the issued and outstanding shares of SC-US
and 99.95% of the issued and outstanding shares of SC-EUROPEAN, SC REALTY
controls the Funds for purposes of the 1940 Act. The effect of SC REALTY's
ownership of a controlling interest in the Funds and, therefore, SC-REMFs, is to
dilute the voting power of other shareholders. SC REALTY does not anticipate
that its initial control of the Funds will adversely effect the rights of future
shareholders.

PERFORMANCE INFORMATION

From time to time, a Fund may quote its total return in advertisements or in
reports and other communications to shareholders. A Fund's performance will
vary from time to time depending upon market conditions, the composition of its
portfolio and its operating expenses. Consequently, any given performance
quotation should not be considered representative of a Fund's performance for
any specified period in the future. In addition, because performance will
fluctuate, it may not provide a basis for comparing an investment in a Fund with
certain bank deposits or other investments that pay a fixed yield for a stated
period of time. Investors comparing a Fund's performance with that of other
mutual funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.

The Funds track their performance against the Morningstar Specialty-Real
Estate Ranking, a compilation of entities which invest at least 75% of their
holdings in real estate-based securities. 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
Dow Jones Industrial Average and other relevant indices and industry
publications. A Fund may also compare the historical volatility of its portfolio
to the volatility of such indices during the same time periods. (Volatility is a
generally accepted barometer of the market risk associated with a portfolio of
securities and is generally measured in comparison to the stock market as a
whole--the beta--or in absolute terms--the standard deviation.) Specifically,
the performance of the funds may be compared to:

The Standard & Poor's 500 Composite Stock Price Index: an unmanaged index
of stocks selected by Standard & Poor's Index Committee to include leading
companies in leading industries and to reflect the U.S. stock market.

The Russell 200 Index: an unmanaged index of the 2000 smallest companies in
the Russell 3000 Index.

The Wilshire Real Estate Securities Index ("WARESI"): an unmanaged, broad-
based market capitalization-weighted index composed of publicly-traded real
estate investment trusts ("REITs"), real estate operating companies
("REOCs") and partnerships, not including special purpose or healthcare
REITs.

The National Association of Real Estate Trusts ("NAREIT") Equity Index: an
unmanaged index of publicly traded U.S. tax-qualified REITs which have 75%
or more of their gross invested book assets invested in the equity
ownership of real estate.

The National Counsel of Real Estate Fiduciaries Property Index: an
unmanaged index measuring appreciation (or depreciation); realized capital
gain or loss and income of real estate properties. Total return is computed
by adding income and capital appreciation return on a quarterly basis.

The Salomon Smith Barney-European Property Index: a float-weighted index
that includes 15 countries in Europe and the listed shares of all real
estate companies with an available market capitalization (float) of at
least $100 million.

From time to time, a Fund may advertise the "average annual total return"
of its shares over various periods of time. This total return figure shows the
average percentage change in value of an investment in the Fund's 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 the Fund's shares and
assumes that any income, dividends and/or capital gains distributions made by
the Fund's shares during the period are reinvested in shares of the Fund.
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 the Fund'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 the Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. The Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund's shares for the specific period (again reflecting changes in the Fund's
share price and assuming reinvestment of 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 methods used
to determine performance are described below.

Average Annual Total Return

A Fund's "average annual total return" figures are computed according to a
formula. The formula can be expressed as follows:

<PAGE>

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 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 or 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.

51
<PAGE>

COUNSEL AND INDEPENDENT ACCOUNTANTS

Legal matters in connection with the issuance of the shares of SC-REMFs
offered hereby will be passed upon by Mayer, Brown & Platt, 2000 Pennsylvania
Ave., NW, Washington, DC, 20006, which will rely as to certain matters of
Maryland law on Ballard Spahr Andrews & Ingersoll, LLP.

Arthur Andersen LLP has been appointed as independent accountants for SC-
REMFs to audit SC-REMFs' annual financial statements.

FINANCIAL STATEMENTS

The audited Financial Statements of Security Capital U.S. Real Estate
Shares Incorporated for the period January 1, 1998 through December 31, 1998,
are included herein.

52
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the board of directors and shareholders of
Security Capital U.S. Real Estate Shares:

We have audited the accompanying statement of assets and liabilities of Security
Capital U.S. Real Estate Shares (a separate portfolio of Security Capital Real
Estate Mutual Funds Incorporated, a Maryland corporation), including the
schedule of investments, as of December 31, 1998, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the years ended December 31, 1998 and 1997 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, 1998, 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 as of December 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for the
years ended December 31, 1998 and 1997 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 15, 1999

<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
<C> <S> <C>
COMMON STOCKS - 96.1%
Office Properties - 27.3%
219,700 Boston Properties, Inc. $ 6,700,850
276,200 Equity Office Properties Trust 6,628,800
295,000 Cornerstone Properties Inc. 4,609,375
179,800 Arden Realty, Inc. 4,169,112
122,600 Mack-Cali Realty Corporation 3,785,275
-----------
25,893,412
Diversified - 25.2%
252,300 Vornado Realty Trust 8,515,125
215,000 TrizecHahn Corporation 4,407,500
167,200 Prentiss Properties Trust 3,730,650
144,300 Liberty Property Trust 3,553,388
74,300 Spieker Properties, Inc. 2,572,637
79,800 Catellus Development Corporation+ 1,142,138
-----------
23,921,438
Multifamily - 18.7%
155,000 Essex Property Trust, Inc. 4,611,250
134,073 Avalon Bay Communities, Inc. 4,592,000
116,200 Apartment Investment & Management Company 4,321,187
53,000 Equity Residential Properties Trust 2,143,188
62,700 Amli Residential Properties Trust 1,395,075
20,600 Irvine Apartment Communities, Inc. 656,625
-----------
17,719,325
Regional Malls - 8.0%
232,400 Urban Shopping Centers, Inc. 7,611,100
</TABLE>

See notes to the financial statements.

<PAGE>

SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Storage - 7.7%

268,000 Public Storage, Inc. $ 7,252,750

Hotels - 6.7%

330,000 Host Marriott Corporation 4,558,125

148,000 Innkeepers USATrust 1,748,250
-----------
6,306,375

Industrial - 2.5%

118,000 Cabot Industrial Trust 2,411,625

-----------
Total Common Stock - (Cost $90,217,237) 91,116,025

Principal Amount
SHORT-TERM INVESTMENTS - 3.2%

$2,990,103 Agreement with State Street Bank and Trust Company,
3.250%, dated 12/31/1998, to be repurchased at
$2,991,183 on 01/04/1999, collateralized by $2,495,000
U.S. Treasury Note, 7.250% maturing 05/15/2016
(market value $3,050,123) 2,990,103
-----------
Total Short-Term Investments
(Cost $2,990,103) 2,990,103
-----------
Total Investments - 99.3%
(Cost $93,207,340) 94,106,128

Other Assets in Excess of
Liabilities - 0.7% 704,192
-----------
NET ASSETS 100.0% $94,810,320
===========
</TABLE>

+ Non income producing security.

See notes to the financial statements.
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value
(cost $93,207,340) $ 94,106,128
Receivable for investment securities sold 3,299,641
Dividends receivable 1,529,269
Deferred organization costs 72,307
Receivable from investment adviser 68,688
Other assets 29,023
------------
Total Assets 99,105,056
------------
LIABILITIES:
Payable for investment securities purchased 3,943,397
Payable to distributor 279,423
Accrued expenses and other liabilities 71,916
------------
Total Liabilities 4,294,736
------------
NET ASSETS $ 94,810,320
============
NET ASSETS CONSIST OF:
Capital stock $101,380,135
Accumulated undistributed net realized loss on investments (7,468,603)
Net unrealized appreciation on investments 898,788
------------
Total Net Assets $ 94,810,320
============
CLASS I:
Net assets $ 90,539,801
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 9,220,734
Net asset value and redemption price per share $9.82
============
CLASS R:
Net assets $ 4,270,519
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 434,826
Net asset value and redemption price per share $9.82
============
</TABLE>

See notes to the financial statements. 9
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $5,909,086
Interest income 229,591
-----------
Total investment income 6,138,677
-----------
EXPENSES:
Investment advisory fee 640,704
Distribution expense 266,960
Administration fee 21,357
Sub-administration fee 93,090
Transfer agent, custody and accounting costs 137,660
Federal and state registration 22,829
Professional fees 53,676
Shareholder reports and notices 46,046
Directors' fees and expenses 29,357
Amortization of organizational expenses 23,607
Other 41,501
-----------
Total expenses before reimbursement 1,376,787
Less: Reimbursement from Adviser (305,199)
-----------
Net expenses 1,071,588
-----------
NET INVESTMENT INCOME 5,067,089
===========
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (6,891,855)
Change in unrealized appreciation on investments (12,286,350)
-----------
Net realized and unrealized loss on investments (19,178,205)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(14,111,116)
============
</TABLE>

See notes to the financial statements.
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year
ended ended
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,067,089 $ 3,969,789
Net realized gain (loss) on investments (6,891,855) 8,063,795
Change in unrealized appreciation
on investments (12,286,350) 12,889,384
-------------------------------------
Net increase (decrease) in net assets resulting
from operations (14,111,116) 24,922,968

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 9,750,054 92,737,305
Shares issued to holders in reinvestment
of dividends 720,546 2,632,946
Cost of shares redeemed (11,297,204) (3,558,444)
-------------------------------------
Net increase (decrease) in net assets from
capital share transactions (826,604) 91,811,807

DISTRIBUTIONS TO SHAREHOLDERS:/(1)/
From net investment income -- (3,626,176)

DISTRIBUTIONS TO CLASS I SHAREHOLDERS:/(1)/
From net investment income (4,936,792) (372,583)
From net realized gains (1,997,333) (5,717,116)
Return of capital (389,531) --
-------------------------------------
Total distributions Class I (7,323,656) (6,089,699)

DISTRIBUTIONS TO CLASS R SHAREHOLDERS:/(1)/
From net investment income (137,519) (2,006)
From net realized gains (12,118) (31,388)
Return of capital (10,851) --
-------------------------------------
Total distributions Class R (160,488) (33,394)
TOTAL INCREASE (DECREASE) IN
NET ASSETS (22,421,864) 106,985,506
NET ASSETS:
Beginning of period 117,232,184 10,246,678
-------------------------------------
End of period $ 94,810,320 $117,232,184
=====================================
</TABLE>

(1) On December 16, 1997, the Fund's existing shareholders were split into
Class I and Class R shareholders 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. 11
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended Year ended
Dec. 31, 1998 Dec. 31, 1997/(2)/ Dec. 20, 1996/(1)/
------------------------------------------ through
Class I Class R Class I Class R Dec. 31, 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a share outstanding for each period:
Net Asset Value, beginning of period $ 11.95 $ 11.95 $ 10.38 $ 10.38 $ 10.00
------------------------------------------------------------------
Income from investment operations:

Net investment income 0.42 0.38 0.46/(3)/ 0.46/(3)/ 0.02

Net realized and unrealized gain (loss)
on investments (1.80) (1.76) 2.11 2.11 0.36
------------------------------------------------------------------
Total from investment operations (1.38) (1.38) 2.57 2.57 0.38
------------------------------------------------------------------
Less distributions:

Dividends from net investment income (0.43) (0.43) (0.46) (0.46) --

Distributions from net realized gains (0.29) (0.29) (0.54) (0.54) --

Return of capital (0.03) (0.03) -- -- --
------------------------------------------------------------------
Total distributions (0.75) (0.75) (1.00) (1.00) --
------------------------------------------------------------------
Net Asset Value, end of period $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38
==================================================================
Total return/(4)/ (11.94)% (11.97)% 25.20% 25.19% 3.77%

Supplemental data and ratios:
Net assets, end of period ($000) $ 90,540 $ 4,271 $116,560 $ 672 $10,247
Ratio of expenses to average net assets/(5)(6)/ 1.00% 1.15% 0.94% 0.95% --%
Ratio of net investment income to
average net assets/(5)(6)/ 4.75% 4.60% 4.08% 4.07% 19.71%
Portfolio turnover rate/(7)/ 109.49% 109.49% 104.17% 104.17% --%
</TABLE>

(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were split into
Class I and Class R 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.
(6) Without voluntary expense reimbursements of $301,721 and $3,478 for Class I
and Class R, respectively, for the year ended December 31, 1998, the ratio
of expenses to average net assets would have been 1.29% for both Class I
and Class R, and the ratio of net investment income to average net assets
would have been 4.46% for Class I and Class R. Without voluntary expense
reimbursements of $30,276 and $167 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 rate is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.

12 See notes to the financial statements.
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Security Capital U.S. Real Estate Shares (the "Fund") is a non-diversified
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), which is an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), and is a Maryland corporation.
SC-REMFs is comprised of two investment portfolios, the Fund and Security
Capital European Real Estate Shares. The Fund consists of Class I and Class R
Shares, which differ in services provided to shareholders and expenses. The Fund
commenced operations on December 20, 1996.

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 Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, 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 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. As of December 31, 1998, the Fund has a
realized capital loss carry forward, for federal income tax purposes, of
$4,307,707 (expires December 31, 2006), available to be used to offset future
realized capital gains. As of December 31, 1998, the Fund has elected for
Federal income tax purposes to defer a $2,495,483 current year post October
capital loss as though the loss was incurred on the first day of the next fiscal
year. For the fiscal year ended December 31, 1998, ordinary distributions paid
to shareholders in the amount of $141,581 were reallocated to capital gain
distributions.

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 decide to retain realized capital gains and not distribute them to
shareholders.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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. Generally accepted accounting principles
require that permanent financial reporting and tax differences be reclassified
to capital stock.

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. Distributions received from the REITs that are determined to be
capital gains or losses are recorded by the Fund as a realized gain or loss on
the investment. The character of such distributions, for tax and financial
reporting purposes, is determined by the Fund based on estimates and information
received by the Fund from the REITs.

d) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

e) Other -- Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from 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.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:

<TABLE>
<CAPTION>
Year Ended 12/31/98:
- ------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Shares sold $ 5,322,503 509,433
Shares issued to holders in reinvestment of dividends 563,921 56,034
Shares redeemed (10,809,047) (1,100,613)
------------ ----------
Net decrease $ (4,922,623) (535,146)
============ ==========
Class R Shares:
Shares sold $ 4,427,551 411,251
Shares issued to holders in reinvestment of dividends 156,625 15,304
Shares redeemed (488,157) (47,963)
------------ ----------
Net increase $ 4,096,019 378,592
============ ==========
</TABLE>

On December 16, 1997, the Fund's existing shareholders were split into Class I
and Class R shareholders based on the amount then invested in the Fund.

<TABLE>
<CAPTION>
Period from 12/17/97 through 12/31/97:
- ------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Reclassification of previous class $121,005,617 9,836,172
Shares sold -- --
Shares issued to holders in reinvestment of dividends 65,206 5,443
Shares redeemed (1,069,973) (85,735)
------------ ---------
Net increase $120,000,850 9,755,880
============ =========

Class R Shares:
Reclassification of previous class $ 658,057 53,492
Shares sold 2,500 208
Shares issued to holders in reinvestment of dividends 30,360 2,534
Shares redeemed -- --
------------ ---------
Net increase $ 690,917 56,234
============ =========
</TABLE>

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------

Period from 01/01/97 through 12/16/97:
- ------------------------------------------------------------------------------------------------
Amount Shares
---------------------------
<S> <C> <C>
Previous Class Shares:
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)
============= ===========
</TABLE>

3. INVESTMENT TRANSACTIONS

The aggregate purchases and sales of long term investments by the Fund for the
year ended December 31, 1998, were $112,456,994 and $114,674,565, respectively.

At December 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:

Appreciation $ 3,175,604
(Depreciation) (2,942,229)
-----------
Net appreciation on investments $ 233,375
===========

At December 31, 1998, the cost of investments for federal income tax purposes
was $93,872,753.

4. INVESTMENT ADVISORY AND OTHER AGREEMENTS

GCMG voluntarily agreed 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 year ended December 31, 1998.

For fiscal year 1999, 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 1.20% and 1.35% of the net assets of the Class I and
Class R Shares, respectively, computed on a daily basis.

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.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.

Boston Financial Data Services, Inc. ("BFDS"), a privately held company and an
affiliate of State Street, serves as transfer agent for the Fund. Transfer agent
services will be charged by BFDS according to contractual fee schedules agreed
to by the Fund.

5. DISTRIBUTION AND SERVICING PLANS

The Fund has adopted plans with respect to Class I and Class R shares pursuant
to Rule 12b-1 under the 1940 Act ("Plans"). Under the Distribution 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
distribution 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, 1998.

6. FORMATION AND RE-ORGANIZATION

The Fund, formerly was the sole investment portfolio of Security Capital
Employee REIT Fund Incorporated ("SCREF"), a Maryland corporation. On January
23, 1997, all of the assets and liabilities of SCREF were transferred to the
Fund in a reorganization (the "Reorganization") accounted for as a pooling of
interests. The Fund was restructured as one of four investment portfolios of SC-
REMFs on June 30, 1998, and as one of two investment portfolios of SC-REMFs on
December 31, 1998.

The Reorganization was a taxable event to SCREF and a capital gain of $1,002,746
was realized for tax purposes. As a result, at December 31, 1998, the tax basis
of securities held was $24,444 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 Fund.
These costs are being amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations.

7. PRINCIPAL SHAREHOLDERS

As of December 31, 1998, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital Group Incorporated, GCMG's parent corporation, owned 89.9% of
the Fund's total outstanding shares.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the board of directors and shareholders of

Security Capital European Real Estate Shares:

We have audited the accompanying statement of assets and liabilities of Security
Capital European Real Estate Shares (a separate portfolio of Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation), including the
schedule of investments, as of December 31, 1998, and the related statements of
operations and changes in net assets and the financial highlights for the period
from June 30, 1998 (date of inception) to December 31, 1998. 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 audit.

We conducted our audit 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, 1998, 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 audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security Capital European Real Estate Shares as of December 31, 1998, the
results of its operations, the changes in its net assets, and the financial
highlights for the period from June 30, 1998 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1999
<PAGE>

Security Capital European Real Estate Shares
Schedule of Investments--December 31, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>

Shares Market Value
<C> <S> <C>
COMMON STOCKS--52.6%
United Kingdom--27.8%
216,163 Chelsfield, PLC $ 881,147
200,000 Development Securities, PLC 670,511
25,000 Capital Shopping Centre, PLC 140,175
----------
1,691,833

Sweden--11.6%
40,000 Castellum, AB 434,271
93,000 Hufvudstaden, AB 269,630
----------
703,901

France--7.2%
3,000 Unibail 437,701

Spain--6.0%
40,000 Prima Inmobiliaria, SA/(1)/ 362,760

Total Common Stocks/(2)/ ----------
(Cost $3,114,254) 3,196,195

Principal Amount
SHORT TERM INVESTMENTS--46.6%
$2,836,000 United States Treasury Bills, 4.150%, 01/28/1999 2,827,173
----------
Total Short Term Investments
(Cost $2,827,173) 2,827,173
----------
Total Investments--99.2%
(Cost $5,941,427) 6,023,368

Other Assets in Excess of
Liabilities--0.8% 47,947
----------
NET ASSETS 100.0% $6,071,315
==========
</TABLE>

/(1)/ Non income producing security.
/(2)/ Percentages of long term investments are presented in this schedule by
country. Percentages of long term investments by industry are as follows:
Diversified Real Estate 18.8% and Real Estate Development 33.8%.

See notes to the financial statements
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
ASSETS:
<S> <C>
Investments, at market value
(Cost $5,941,427) $6,023,368
Cash 24,386
Deferred organization costs 55,836
Receivable from investment adviser 11,280
Other assets 500
----------
Total Assets 6,115,370
==========
LIABILITIES:
Accrued expenses and other liabilities 44,055
----------
Total Liabilities 44,055
----------
NET ASSETS $6,071,315
==========
NET ASSETS CONSIST OF:
Capital stock $5,993,705
Undistributed net investment loss (2,239)
Accumulated undistributed net realized loss on investments (2,092)
Net unrealized appreciation on investments 81,941
----------
Total Net Assets $6,071,315
==========

CLASS I:
Net assets $6,071,315
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 590,698
Net asset value and redemption price per share $10.28
==========

</TABLE>

See notes to the financial statements.
<PAGE>

<TABLE>
<CAPTION>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF OPERATIONS--PERIOD ENDED DECEMBER 31, 1998/(1)/
- -----------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividend income $ 5,069
Interest income 47,331
----------
Total investment income 52,400
----------
EXPENSES:
Investment advisory fee 16,076
Distribution expense 4,729
Administration fee 378
Sub-administration fee 38,333
Transfer agent, custody and accounting costs 44,359
Federal and state registration 34,224
Professional fees 25,096
Shareholder reports and notices 604
Director's fees and expenses 12,075
Insurance expense 600
Amortization of organization costs 6,295
----------
Total expenses before reimbursement 182,769
Less: Reimbursement from Adviser (155,345)
----------
Net expenses 27,424
----------
NET INVESTMENT INCOME 24,976
==========

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,092)
Net realized loss on foreign currency transactions (12,273)
Change in unrealized appreciation on investments 81,941
----------
Net realized and unrealized gain on investments 67,576
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 92,552
==========

</TABLE>
/(1)/ Fund commenced operations on June 30, 1998.

See notes to the financial statements. 6
<PAGE>

Security Capital European Real Estate Shares
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Period ended
December 31, 1998/(1)/
----------------------
<S> <C>
OPERATIONS:
Net investment income $ 24,976
Net realized loss on investments (2,092)
Net realized loss on foreign currency transactions (12,273)
Change in unrealized appreciation on investments 81,941
----------
Net increase in net assets resulting from operations 92,552

CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 6,007,500
Shares issued to holders in reinvestment of dividends 22
Cost of shares redeemed (2,552)
----------
Net increase in net assets from capital share transactions 6,004,970

DISTRIBUTIONS TO CLASS I SHAREHOLDERS:
From net investment income (15,690)
In excess of net investment income (10,517)
----------
Total distributions Class I (26,207)

TOTAL INCREASE IN NET ASSETS 6,071,315

NET ASSETS:
Beginning of period --
----------
End of period (including undistributed net investment loss of $2,239) $6,071,315
==========
</TABLE>

/(1)/ Fund commenced operations on June 30, 1998.

<PAGE>

Security Capital European Real Estate Shares
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Period ended
December 31, 1998/(1)/
----------------------
Class I
----------------------
<S> <C>
For a share outstanding for the period:
Net Asset Value, beginning of period $ 10.00

Income from investment operations:
Net investment income 0.04
Net realized and unrealized gain on investments 0.28
----------
Total from investment operations 0.32
----------

Less distributions:
Dividends from net investment income (0.02)
Dividends in excess of net investment income (0.02)
----------
Total distributions (0.04)
----------
Net asset value, end of period $ 10.28
==========
Total return/(2)/ 3.25%
Supplemental data and ratios:
Net assets, end of period $6,071,315
Ratio of expenses to average net assets/(3)(4)/ 1.45%
Ratio of net investment income to
average net assets/(3)(4)/ 1.32%
Portfolio turnover rate --%
</TABLE>

/(1)/ Fund commenced operations June 30, 1998.
/(2)/ Not annualized.
/(3)/ Annualized.
/(4)/ Without voluntary expense reimbursements of $155,345 for the period ended
December 31, 1998, the ratio of expenses to average net assets would have
been 9.66% for Class I and the ratio of net investment income to average
net assets would have been (6.89)% for Class I.

<PAGE>

Security Capital European Real Estate Shares
Notes to the Financial Statements--December 31, 1998
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Security Capital European Real Estate Shares (the "Fund") is a non-diversified
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), which is an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), and is a Maryland corporation.
SC-REMFs was comprised of four investment portfolios on June 30, 1998, and is
comprised of two investment portfolios on December 31, 1998, the Fund and
Security Capital U.S. Real Estate Shares. The Fund consists of Class I and Class
R Shares, which differ in services provided to shareholders and expenses. The
Fund commenced operations on June 30, 1998. For the period ended December 31,
1998, there were no capital stock transactions for Class R Shares.

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 Director's Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.

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. As of December 31, 1998, the Fund has a
realized capital loss carry forward, for federal income tax purposes, of $2,092
(expires December 31, 2006), available to be used to offset future realized
capital gains. As of December 31, 1998, the Fund has elected for Federal income
tax purposes to defer a $2,239 current year post October 31 currency loss as
though the loss was incurred on the first day of the next fiscal year.

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 decide 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.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------

net realized gain on investment transactions, or from paid-in-capital, depending
on the type of book/tax differences that may exist. Generally accepted
accounting principles require that permanent financial reporting and tax
differences be reclassified to capital stock.

d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

e) Other - Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from 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.

2. CAPITAL SHARE TRANSACTIONS

On June 30, 1998, the Fund commenced investment operations. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
Period from 06/30/98 through 12/31/98:
- -------------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Shares sold $6,007,500 590,946
Shares issued to holders in reinvestment of dividends 22 2
Shares redeemed (2,552) (250)
-------------------------
Net increase $6,004,970 590,698
=========================
</TABLE>

3. INVESTMENT TRANSACTIONS

The aggregate purchases and sales of long term investments by the Fund for the
period ended December 31, 1998, were $3,114,254 and $0, respectively.

At December 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
<S> <C>
Appreciation $170,575
(Depreciation) (88,634)
--------
Net appreciation on investments $ 81,941
========
</TABLE>

At December 31, 1998, the cost of investments for federal income tax purposes
was $5,941,427.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------

4. INVESTMENT ADVISORY AND OTHER AGREEMENTS

SC-REMFs has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"). Pursuant to the Advisory
Agreement, GCMG is entitled to receive a management fee, calculated daily and
payable monthly, at the annual rate of 0.85% as applied to the Fund's average
daily net assets. GCMG has entered into an investment sub-advisory agreement
with Security Capital Global Capital Management Group (Europe) S.A. ("GCMG-
Europe") ("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides
various portfolio management and investment advisory services to the Fund. Under
the Sub-Advisory Agreement, GCMG-Europe receives a monthly management fee from
GCMG equal to the annual rate of 0.08% of the Fund's average daily net asset
value.

GCMG voluntarily agreed 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 1.45% and 1.60% of the average net assets of the Class I Shares and Class R
Shares respectively, computed on a daily basis, for the period ended December
31, 1998.

State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.

5. CONCENTRATION OF RISKS

The Fund will invest a substantial portion of its assets in publicly-traded real
estate companies organized principally in European nations. The Fund may be
subject to risks similar to those associated with the direct ownership of real
estate (in addition to securities market 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.

<PAGE>

NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------

The Fund will invest primarily in foreign securities. Substantial risks are
involved when 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 generally not subject to the same accounting
and auditing and financial reporting standards as those for U.S. Companies, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. The Fund 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.

The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets.

The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of Additional
Information.

6. DISTRIBUTION AND SERVICING PLANS

The Fund has adopted distribution plans with respect to 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
distribution 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 the respect of these
services such amounts as it may determine. The Fund has made no payments
pursuant to the Plans for the period ended December 31, 1998.

7. PRINCIPAL SHAREHOLDERS

As of December 31, 1998, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital Group Incorporated, GCMG's parent corporation, owned 99.9% of
the Fund's total outstanding shares.

<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.

CI: The rating 'CI' is reserved for income bonds on which interest is being
paid.

53
<PAGE>

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 many 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.

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 rated in the
'AAA'

54
<PAGE>

and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F1+.'

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.

CC: 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.

55
<PAGE>

Security Capital Real Estate Mutual Funds Incorporated

Form N-1A

Part C -- Other Information

Item 23. Financial Statements and Exhibits.

(a) Financial Statements.

All required financial statements are filed herewith in Part B hereto
and are incorporated herein by reference.

(b) Exhibits:

A list of exhibits filed herewith is contained on the Exhibit Index
which immediately precedes such exhibits and is incorporated herein by
reference.

Item 24. Persons Controlled by or Under Common Control with Registrant.

Following is a list of entities that for purposes of the Investment Company
Act of 1940 are controlled by or under common control with Security Capital Real
Estate Mutual Funds Incorporated:

<TABLE>
<CAPTION>
Jurisdiction of
Name Organization Basis of Control
- ---------------------------------------------- --------------- --------------------------------------------
<S> <C> <C>
Security Capital Group Incorporated ("Group") Maryland No entity controls Group
SC REALTY Incorporated ("SC REALTY") Nevada Ownership by Group of 100% of voting
securities
Security Capital Preferred Growth Incorporated Maryland Ownership by SC REALTY of 10.96% of
("SCPG") voting securities
Harbor Capital Incorporated Delaware Ownership by SCPG of 100% of voting
securities
Security Capital U.S. Realty Luxembourg Ownership by SC Realty of 35.0% of
("U.S. Realty") outstanding voting securities
East Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
West Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Midwest Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Security Capital Investment Research Delaware Ownership by Group of 100% of voting
Incorporated ("Investment Research") securities
Security Capital U.S. Real Estate Maryland Ownership by SC REALTY of 96.19% of
Shares Incorporated voting securities
Security Capital EuroPacific Real Estate Maryland Ownership by SC REALTY of 100% of voting
Shares Incorporated securities
Security Capital European Realty ("SICAF") Luxembourg Ownership by SC REALTY of 34.5% of voting
securities
City & West End Properties S.A. Luxembourg Ownership by SICAF of 99.29% of voting
securities
City & West End Property Investments SARL Luxembourg Ownership by City & West End Properties S.A.
of 100% of voting securities
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Jurisdiction of
Name Organization Basis of Control
- --------------------------------------------- --------------- ---------------------------------------------
<S> <C> <C>
City & West End Services Limited United Kingdom Ownership by City & West End Property
Investments SARL of 100% of voting securities
City & West End Developments Limited United Kingdom Ownership by City & West End Property
Investments SARL of 100% of voting securities
City & West End Management Limited United Kingdom Ownership by City & West End Property
Investments SARL of 100% of voting securities
Akeler S.A. Luxembourg Ownership by SICAF of 94.16% of voting
securities
Akeler Property Investments SARL Luxembourg Ownership by Akeler S.A. of 100% of voting
securities
Akeler Services Limited United Kingdom Ownership by Akeler Property Investments
SARL of 100% of voting securities
Akeler Developments Limited United Kingdom Ownership by Akeler Property Investments
SARL of 100% of voting securities
Akeler Management Limited United Kingdom Ownership by Akeler Property Investments
SARL of 100% of voting securities
BelmontCorp. ("Belmont") Maryland Ownership by Group 100% of voting securities
Belmont One Corporation ("Belmont One") Delaware Ownership by Belmont of 100% of voting
securities
Belmont Two Corporation ("Belmont Two") Delaware Ownership by Belmont of 100% of voting
securities
Belmont Village L.P. Delaware Ownership by Belmont One of 1% general
partnership interest and ownership by Belmont
Two of 99% limited partnership interest
Security Capital BVI Holdings Incorporated Maryland Ownership by Group of 100% of voting
securities
SCGPB Incorporated British Virgin Ownership by Security Capital BVI Holdings
Islands of 100% of voting securities
Security Capital Global Capital Management Delaware Ownership by Investment Research of 100% of
Group Incorporated voting securities
Security Capital Global Capital Management Delaware Ownership by Security Capital Global Capital
Group (Asia) Incorporated Management Group Incorporated of 100%
voting securities
Security Capital Global Strategic Group Maryland Ownership by Investment Research of 100% of
Incorporated voting securities
Security Capital Real Estate Research Group Maryland Ownership by Investment Research 100% of
Incorporated voting securities
Security Capital Financial Services Delaware Ownership by Group of 100% of voting
Group Incorporated ("Financial Services") securities
SC Group Incorporated Texas Ownership by Financial Services of 100% of
voting securities
Coast Services Incorporated Maryland Ownership by SC Group Incorporated of 100%
of voting securities
Security Capital Markets Group Incorporated Delaware Ownership by Financial Services of 100% of
voting securities
Strategic Hotel Capital Incorporated ("SHCI") Delaware Ownership by SC REALTY of 30.43% of
voting securities
</TABLE>

2
<PAGE>

Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- -------------------------------------------
<S> <C> <C>
Strategic Hotel Funding LLC ("SHF") Delaware Ownership by SHCI of 100% of voting
securities
ES Philadelphia Airport Joint Venture Pennsylvania Ownership by Strategic Hotel Funding LLC of
90% of voting securities
GH Inn LLC Illinois Ownership by Strategic Hotel Funding LLC of
50% of voting securities
Imobilaris National Mexicana, S.A. de C.V. Mexico Ownership by Propanmer South DC CU. of
99.99% of voting securities
Padres Place Hotel Ventura Louisiana Ownership by Strategic Hotel Funding LLC of
1% of voting securities
Propanmex S.A. de C.V. Mexico Ownership by SHC Mexico Holdings
Incorporated of 99.99% of voting securities
SHC Burbank LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Mortgage Incorporated Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 1 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 2 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 3 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 4 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHCI Santa Monica Beach Hotel, L.L.C. Delaware Ownership by Strategic Hotel Funding, LLC of
100% of voting securities
SHC Paris - 5 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Paris - 6 LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
SHC Phoenix I LLC Delaware Ownership by Strategic Hotel Funding LLC of
60.5% of voting securities
SHC Phoenix II LLC Delaware Ownership by Strategic Hotel Funding LLC of
39.5% of voting securities
SHC Rancho LLC Delaware Ownership by Strategic Hotel Funding LLC of
99% of voting securities
SHC Santa Clara LLC Delaware Ownership by Strategic Hotel Funding LLC of
99% of voting securities
SHC Westward Look LLC Delaware Ownership by Strategic Hotel Funding LLC of
100% of voting securities
Strategic Hotel Capital Limited Partnership Delaware Ownership by SHF of 72.86% of voting
securities
SHC Holdings LLC Delaware Ownership by SHF of 100% of voting
securities
SHC Philadelphia LLC Delaware Ownership by SHF of 100% of voting
securities
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
Jurisdiction of
Name Organization Basis of Control
- ------------------------ --------------- --------------------------
<S> <C> <C>
SHC Laguna Niguel LLC Delaware Ownership by SHF of 100% of voting
securities
SHC Capitol LLC Delaware Ownership by SHF of 100% of voting
securities
SHC Westport Inn LLC Delaware Ownership by SHF of 100% of voting
securities
SHC Westport Plaza LLC Delaware Ownership by SHF of 100% of voting
securities
SHC Mexico Holdings Incorporated Delaware Ownership by SHF of 100% of voting
securities
Security Capital (EU) Management Holdings Luxembourg Ownership by Group of 100% of voting
S.A. securities
Security Capital (EU) Management Group S.A. Belgium Ownership by Security Capital European
Services S.A. of 100% of voting securities
Security Capital European Realty Management Luxembourg Ownership by Security Capital (EU)
S.A. Management Holdings S.A. of 100% of voting
securities
Security Capital U.S. Realty Management S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital (UK) Management Limited United Kingdom Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital European Services S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital U.S. Realty Management United Kingdom Ownership by Security Capital (UK)
Limited Management Limited of 100% of voting
securities
Security Capital European Realty Management United Kingdom Ownership by Security Capital (UK)
Limited Management Limited of 100% of voting
securities
Security Capital Markets Group Limited United Kingdom Ownership by Security Capital (UK)
Management Limited of 100% of voting
securities
Security Capital Global Capital Management Belgium Ownership by Security Capital (EU)
Group (Europe) S.A. Management Holdings S.A. of 100% of voting
securities
CarrAmerica Realty Corporation Delaware Ownership by U.S. Realty of 42.9% of
voting securities
Storage USA, Inc. Tennessee Ownership by U.S. Realty of 42.3% of
voting securities
Regency Realty Corporation Florida Ownership by U.S. Realty of 46% of
voting securities
Pacific Retail Trust Maryland Ownership by U.S. Realty of 74.2% of
voting securities
UGPT - Skypark, Inc. Delaware Ownership by Urban Growth Property Trust of
100% of voting securities
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- -----------------------------------------------
<S> <C> <C>
Urban Growth Property Trust Maryland Ownership by US Realty of 98.4% of
voting securities
Urban Growth Property Limited Partnership Delaware Sole general partnership interest owned by
Urban Growth Property Trust
LWP Associates LLC Delaware Ownership by Urban Growth Property Limited
Partnership of 50% of voting securities
Van Wells Realty Company, LLC Delaware Ownership by Urban Growth Property Limited
Partnership 50% of voting securities
City Center Retail Trust Maryland Ownership by U.S. Realty of 99% of
voting securities
City Center Retail Trust/McCaffrey Delaware Sole general partnership interest owned by
Developments, L.P. City
Center Retail Trust
CCRT I Incorporated Delaware Ownership by City Center Retail Trust of 100%
of voting securities
CCRT II Incorporated Delaware Ownership by City Center Retail Trust of 100%
of voting securities
CCRT McCaffrey Developments LLC Delaware Ownership by CCRT/McCaffrey Develop-
ments L.P. of 100% of voting securities
Interparking Incorporated Maryland Ownership by US Realty of 9.4% of
voting securities
NPC-1 Incorporated Maryland Ownership by Interparking Incorporated of
100% of voting securities
CWS Communities Trust Maryland Ownership by US Realty of 96.4% of voting
securities
CWS Communities L.P. Delaware Sole general partnership interest owned by
CWS Communities Trust
CWS Communities Incorporated Delaware Ownership by Security Capital Holdings S.A.
of 100% of voting securities
CWS Management Services Incorporated Delaware Ownership by Security Capital Holdings S.A.
of 100% of voting shares
ProLogis Trust ("PLD") Maryland Ownership by SC REALTY of 40.55% of
voting securities
International Industrial Investments Inc. Maryland Ownership by PLD of 100% of voting
securities
PLD Logistar International Incorporated Delaware Ownership by PLD of 100% of voting
securities
ProLogis Management Services Incorporated Delaware Ownership by PLD of 100% of voting
securities
Logistar - Netherlands I SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar France SARL I Luxembourg Ownership by PLD of 100% of voting
securities
Logistar SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar BV Luxembourg Ownership by PLD of 100% of voting
securities
</TABLE>

5
<PAGE>

Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- ----------------------------------
<S> <C> <C>
Security Capital Logistar International Fund Luxembourg Ownership by PLD of 100% of voting
SCA securities
SCI Logistar Management SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Germany SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Italy SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Belgium SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Netherlands II SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar U.K. SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Poland SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar Spain SARL Luxembourg Ownership by PLD of 100% of voting
securities
Logistar France SAS Netherlands Ownership by PLD of 100% of voting
securities
Logistar France SARL Netherlands Ownership by PLD of 100% of voting
securities
Logistar Netherlands SARL Netherlands Ownership by PLD of 100% of voting
securities
Logistar Czech Republic SARL Netherlands Ownership by PLD of 100% of voting
securities
Logistar France BV Netherlands Ownership by PLD of 100% of voting
securities
Logistar Spain BV Netherlands Ownership by PLD of 100% of voting
securities
CS Integrated LLC ("CSI") Delaware Ownership by PLD of 100% of voting
securities
Enterprise Refrigerated Services LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated Retail Services LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated-Texas Limited Partnership Delaware Ownership by CSI of 100% of voting securities
CS Integrated Investment Management LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated Investments Southwest LLC Delaware Ownership by CSI of 100% of voting securities
ProLogis Logistics Services Incorporated Delaware Ownership by PLD of 100% of voting
securities
1440 Goodyear Partners Texas Sole general partnership interest owned by
ProLogis Limited Partnership-II
Red Mountain Joint Venture Texas General partnership interest owned
by PLD
ProLogis Limited Partnership-I Delaware Sole general partnership interest owned
by PLD
</TABLE>

6
<PAGE>

Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- -----------------------------------------------
<S> <C> <C>
ProLogis Limited Partnership-II Delaware Sole general partnership interest owned
by PLD
ProLogis Limited Partnership-III Delaware Sole general partnership interest owned
by PLD
ProLogis Limited Partnership-IV Delaware Sole general partnership interest owned
by ProLogis IV, Inc.
ProLogis IV, Inc. Delaware Ownership by PLD of 100% of voting
securities
ProLogis Management Incorporated Delaware Ownership by PLD of 100% of voting
securities
ProLogis--Alabama (1) Incorporated Maryland Ownership by PLD of 100% of voting
securities
ProLogis--Alabama (2) Incorporated Maryland Ownership by PLD of 100% of voting
securities
ProLogis Alabama Industrial Trust Alabama Ownership of 100% of voting securities
by ProLogis--Alabama (1) Incorporated
and ProLogis--Alabama (2) Incorporated
ProLogis--North Carolina (1) Incorporated Maryland Ownership by PLD of 100% of voting
securities
ProLogis--North Carolina (2) Incorporated Maryland Ownership by PLD of 100% of voting
securities
ProLogis--North Carolina Limited Partnership Delaware Sole general partnership interest owned
by ProLogis--North Carolina (1)
Incorporated
ProLogis Houston Holdings Inc. Delaware Ownership by PLD of 100% of voting
securities
Frigoscandia SA Luxembourg Ownership by PLD of 100% of preferred
securities
Frigo Sari Luxembourg Ownership by PLD of 100% of preferred
securities
ProLogis Mexico Industrial Trust Maryland Ownership of PLD of 100% of common
securities
SCI De Mexico SA DE CV Mexico Ownership by ProLogis-DS Mexico of 100% of
voting securities
ProLogis Development Services Incorporated Delaware Ownership by PLD of 100% of voting
securities
SCI-DS Mexico Incorporated Maryland Ownership by ProLogis Development Services
100% of voting securities
Archstone Communities Trust ("ASN") Maryland Ownership by SC REALTY of 38.17% of
voting securities
Archstone Communities Incorporated Delaware Ownership by ASN of 100% of
voting securities
SCA Florida Holdings (1) Incorporated Florida Ownership by ASN of 100% of
voting securities
Atlantic-Tennessee Limited Partnership Delaware Ownership by SCA (3) and SCA (4)of 100% of
voting securities
</TABLE>

7
<PAGE>

Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- -----------------------------------------------
<S> <C> <C>
SCA Tennessee (3) Incorporated Maryland Ownership by ASN of 100% of voting
securities
SCA Tennessee (4) Incorporated Maryland Ownership by ASN of 100% of voting
securities
Atlantic--Alabama (3) Incorporated Delaware Ownership by ASN of 100% of
voting securities
Atlantic--Alabama (4) Incorporated Delaware Ownership by ASN of 100% of
voting securities
Atlantic Alabama Multifamily Trust Alabama Ownership of 99.0% of voting securities
by Atlantic--Alabama (3) and
Atlantic--Alabama (4) Incorporated
Atlantic--Alabama (5) Incorporated Maryland Ownership by ASN of 100% of voting
securities
Atlantic--Alabama (6) Incorporated Maryland Ownership by ASN of 100% of voting
securities
SCA Florida Holdings (2) Incorporated Delaware Ownership by ASN of 100% of voting
securities
SCA Alabama Multifamily Trust Alabama Ownership by Atlantic-Alabama (6)
Incorporated of 100% of voting securities
SCA--South Carolina (1) Incorporated Maryland Ownership by ASN of 100% of
voting securities
SCA--North Carolina (1) Incorporated Maryland Ownership by ASN of 100% of
voting securities
SCA North Carolina (2) Incorporated Maryland Ownership by ASN of 100% of
voting securities
SCA North Carolina Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Indiana Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Tennessee Limited Partnership Delaware Sole general partnership interest owned
by SCA--Tennessee (1) Incorporated
SCA--Tennessee (1) Incorporated Maryland Ownership by ASN of 100% of
voting securities
SCA--Tennessee (2) Incorporated Maryland Ownership by ASN of 100% of
voting securities
Security Capital Atlantic Multifamily Inc. Delaware Ownership by ASN of 100% of
voting securities
Archstone Communities Incorporated Delaware Ownership by ASN of 100% of voting
securities
SCP Nevada Holdings 1 Incorporated Nevada Ownership by ASN of 100% of voting
securities
SCP Utah Holdings 1 Incorporated Utah Ownership by ASN of 100% of voting
securities
SCP Utah Holdings 2 Incorporated Utah Ownership by ASN of 100% of voting
securities
SCP Utah Holdings 4 Incorporated Utah Ownership by ASN of 100% of voting
securities
</TABLE>

8
<PAGE>

Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- ----------------------------------
<S> <C> <C>
SCP Utah Holdings 5 Incorporated Utah Ownership by ASN of 100% of voting
securities
PTR Multifamily Holdings Incorporated Delaware Ownership by ASN of 100% of voting
securities
Spectrum Apartment Locators Inc. Texas Ownership by ASN of 100% of voting
securities
Las Flores Development Company Texas Ownership by ASN of 100% of voting
securities
PTR Holdings (Texas) Incorporated Texas Ownership by ASN of 100% of voting
securities
PTR-California Holdings (1) Incorporated Maryland Ownership by ASN of 100% of voting
securities
Archstone Financial Services, Inc. Delaware Ownership by ASN of 100% of voting
securities
PTR-California Holdings (2) Incorporated Maryland Ownership by ASN of 100% of voting
securities
PTR-California Holdings (3) Incorporated Delaware Ownership by ASN of 100% of voting
securities
PTR-New Mexico (1) Incorporated Delaware Ownership by ASN of 100% of voting
securities
Homestead Village Incorporated Maryland Ownership by SC REALTY (including its
subsidiaries) of 39.67% of voting
securities
KC Homestead Village Redevelopment Missouri Ownership by Homestead Village
Corporation Incorporated of 100% of voting
securities
Missouri Homestead Village Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village Limited Delaware Sole general partnership interest owned
Partnership by Atlantic Homestead Village (1)
Incorporated
Atlantic Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Homestead Alabama Incorporated Alabama Ownership by Homestead Village of 100% of
voting securities
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Jurisdiction of
Name Organization Basis of Control
- ------------------------------------------------ --------------- -----------------------------------------------

<S> <C> <C>
BTW Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities

Homestead Village Management Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities

PTR Homestead Village Limited Partnership Delaware Sole general partnership interest owned
by PTR Homestead Village (1)
Incorporated

BTW II Incorporated Ownership by Homestead Village
Incorporated of 100% of voting
securities

BTW III Incorporated Delaware Ownership by Homestead Village Incorporated
of 100% of voting securities

HVI Trust Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
</TABLE>

Item 25. Indemnification.

Reference is made to Article Eighth of the Registrant's Articles of
Incorporation, incorporated by reference to SC-REMFs' Registration Statement on
Form N-1A (File Nos. 333-20649 and 811-8033), filed with the Securities and
Exchange Commission on January 29, 1997.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to its Articles of Incorporation, its By-
Laws or otherwise, the Registrant is aware that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and, therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by directors, officers or controlling
persons of the Registrant in connection with the successful defense of any act,
suit or proceeding) is asserted by such directors, officers or controlling
persons in connection with shares being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.

Item 26. Business and Other Connections of Investment Adviser.

See "Management of SC-REMFs" in the Statement of Additional Information
regarding the business of Security Capital Global Capital Management Group
Incorporated ("GCMG") and Security Capital Global Capital Management Group
(Europe) S.A. ("GCMG-Europe").

Set forth below is a list of each director and officer of GCMG and GCMG-
Europe indicating each other business, profession, vocation, or employment of a
substantial nature in which such person has been, at any time during the past
two fiscal years, engaged for his or her own account or in the capacity of
directors, officer, partner, or trustee. Unless otherwise specified, the
principal business address of GCMG is 11 South LaSalle Street, Chicago, Illinois
60603 and the principal business address of GCMG-Europe is Boulevard de la
Woluwe 34, Brussels, Belgium.

10
<PAGE>

Security Capital Global Capital Management Group Incorporated

Name Title(s) Principal Occupations
<S> <C> <C>
Anthony R. Manno Jr. President and Managing Director Chairman of the Board, Managing
Director and President SC-REMFs

Kenneth D. Statz Managing Director Senior Vice President, GCMG,
Managing Director, SC-REMFs

Daniel F. Miranda Executive Vice President and
Managing Director

John H. Gardner, Jr.* Managing Director Director and Managing Director,
SC-REMFs; Previously, Senior
Vice President, Security Capital
Group Incorporated

Jeffrey C. Nellessen Vice President, Treasurer Vice President, Treasurer and
and Assistant Secretary Assistant Secretary, SC-REMFs

Joshua D. Goldman Vice President Previously, Associate with
Sonnenschein, Nath & Rosenthal

David E. Rosenbaum Senior Vice President Previously, Analyst, Associate and
Vice President, Lazard Freres &
Company

Security Capital Global Capital Management Group (Europe) S.A.

Name Title(s) Principal Occupations

W. Joseph Houlihan Managing Director Previously, Managing Director of
Security Capital (EU) Management

Gerios J.M. Rovers Vice President Previously, Vice President,
Security Capital (EU) Management
Group, S.A.

Todd Mansfield Director Managing Director, Security
Capital European Realty; Previously,
Managing Director, Security
Capital Global Strategic Group
Incorporated

</TABLE>

* Mr. Gardner has resigned his position as Managing Director of GCMG effective
May 1, 1999.

11
<PAGE>

Incorporated, SPP Investment
Management
Item 27. Principal Underwriter.

(a) Security Capital Markets Group Incorporated ("Capital Markets"), the
principal distributor for the Funds' securities, does not currently act as
principal underwriter or distributor for any other investment company.

(b) The table below sets forth certain information as to Capital Markets'
Directors, Officers and Control Persons:

<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ------------------------- --------------------------------------------- ---------------------
<S> <C> <C>
Lucinda G. Marker* President None
K. Scott Canon** Director and Senior Vice President None
Jeffrey A. Klopf* Director, Secretary and Senior Vice President None
Gerard de Gunzburg*** Senior Vice President None
Mary R. McCarthy*** Senior Vice President None
Garett C. House** Senior Vice President None
Donald E. Suter** Managing Director None
Robert H. Fippinger* Vice President None
Joanna L. Rupp** Vice President None
Mark P. Peppercorn**** Vice President None
George W. Ahl*** Vice President None
Nansie J. Bernard** Vice President None
Leanne L. Gallagher** Vice President None
</TABLE>

* Principal business address is 125 Lincoln Avenue, Santa Fe, New Mexico, 87501.

** Principal business address is 11 South LaSalle Street, Chicago, Illinois
60603.

*** Principal business address is 399 Park Avenue, 23rd Floor, New York, NY
10022.

**** Principal business address is 4410 Rosewood Drive, Pleasanton, California
94588

Item 28. Location of Accounts and Records.

Certain of the records described in Section 31(a) of the 1940 Act and the
Rules 17 CFR 270.31a-1 to 31a-3 promulgated thereunder, are maintained by SC-
REMFs' Investment Adviser and Administrator, Security Capital Global Capital
Management Group Incorporated, 11 South LaSalle Street, Chicago, Illinois
60603. The remainder of such records are maintained by State Street Bank &
Trust Company, the Funds' Sub-Administrator, 225 Franklin Street, Boston,
Massachusetts 02101.

Item 29. Management Services.

There are no management-related service contracts not discussed in Part A
or Part B.

12
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements of Securities Act Rule 485(b) for effectiveness of this amendment
to its Registration Statement and has duly caused this amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, and State of Illinois on the 29th day of
April, 1999.

SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

By: /s/ Anthony R. Manno Jr.
-----------------------------------------
Anthony R. Manno Jr.
Chairman, Managing Director and President

Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement of Security Capital Real Estate Mutual Funds Incorporated
has been signed below by the following persons in the capacities and on the
29th day of April, 1999.

<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------------- --------------------------- -----------------
<S> <C> <C>
/s/ Anthony R. Manno Jr. Chairman, Managing April 29, 1999
- ----------------------------- Director and President
Anthony R. Manno Jr.

/s/ Jeffrey C. Nellessen Principal Financial Officer April 29, 1999
- -----------------------------
Jeffrey C. Nellessen

/s/ Jeffrey C. Nellessen Comptroller April 29, 1999
- -----------------------------
Jeffrey C. Nellessen

/s/ Stephen F. Kasbeer Director April 29, 1999
- -----------------------------
Stephen F. Kasbeer

/s/ Anthony R. Manno Jr. Director April 29, 1999
- -----------------------------
Anthony R. Manno Jr.

/s/ George F. Keane Director April 29, 1999
- -----------------------------
George F. Keane

/s/ Robert H. Abrams Director April 29, 1999
- -----------------------------
Robert H. Abrams
Director April 29, 1999
- -----------------------------
John H. Gardner, Jr.
</TABLE>
<PAGE>

EXHIBIT INDEX

Exhibit No. Description
- ------------ ---------------------------------------------------------------
<S> <C>
1* Articles of Incorporation.

1(a)**** Articles of Amendment dated December 16, 1997.

1(b)**** Articles of Amendment dated June 30, 1998.

1(c)**** Articles Supplementary dated June 30, 1998.

1(d)***** Articles Supplementary dated December 31, 1998.

1(e) Articles Supplementary dated March 11, 1999.

2(a)* By-Laws.

2(b)*** Amended By-Laws.

5(a)***** Investment Advisory Agreement (SC-US).

5(b)***** Investment Advisory Agreement (SC-EUROPEAN).

5(c)***** Sponsorship Agreement (SC-US).

5(d)***** Sponsorship Agreement (SC-EUROPEAN).

5(e)***** Extension of Sponsorship Agreement (SC-EUROPEAN).

5(f)***** Sub-Advisory Agreement (SC-EUROPEAN).

6(a)***** Distribution and Servicing Agreement (SC-US).

6(b)***** Distribution and Servicing Agreement (SC-EUROPEAN).

8(a)***** Custodian Agreement.

9(a)***** Transfer Agency and Service Agreement.

9(b)***** Fund Accounting and Administration Agreement.

9(c)***** Sub-Administration Agreement.

10(a)** Opinion and Consent of Mayer, Brown & Platt regarding the
legality of the securities being issued.

11(a) Consent of Mayer, Brown & Platt.

11(b) Consent of Ballard Spahr Andrews & Ingersoll.

11(c) Consent of Independent Public Accountants.

15(a)*** Rule 12b-1 Distribution and Service Plan for Class I Shares (SC-US).

15(b)*** Rule 12b-1 Distribution and Service Plan for Class R Shares (SC-US).

15(c)**** Rule 12b-1 Distribution and Service Plan (SC-EUROPEAN).
</TABLE>
<PAGE>

17 Financial Data Schedule.

18 Rule 18f-3 Multiple Class Plan.

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

*Incorporated herein by reference to Registrant's registration statement on
Form N-1A (File Nos. 333-20649 and 811-8033) filed with the Securities and
Exchange Commission on January 29, 1997.

**Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's registration statement on Form N-1A (file Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on April 21, 1997.

***Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on December 17, 1997.

****Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with Securities and Exchange Commission on June 29, 1998.

*****Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and
811-8033) filed with the Securities and Exchange Commission on March 1, 1999.

<PAGE>

Exhibit 1(e)

713080
STATE OF MARYLAND

STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201

DATE: MARCH 11, 1999

THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR SECURITY CAPITAL
REAL ESTATE MUTUAL FUNDS INCORPORATED WERE RECEIVED AND APPROVED FOR RECORD ON
MARCH 11, 1999 AT 12:06 PM.

FEE PAID: 78.00

[SEAL]

JOYCE M. THOMPSON
LEGAL OFFICER

<PAGE>

State Department of Assessments
and Taxation
03-11-99 at 12:06 p.m.
-------- ----------

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
------------------------------------------------------

ARTICLES OF AMENDMENT

THIS IS TO CERTIFY THAT:

FIRST: Security Capital Real Estate Mutual Funds Incorporated, a
Maryland corporation (the "Corporation"), registered as an open-end company
under the Investment Company Act of 1940, desires to amend its charter pursuant
to Section 2-605(a)(4) of the Maryland General Corporation Law by changing the
name of a series of its stock, as follows:

All of the Corporation's 50,000,000 common shares, $.01 par value, are
hereby designated as Security Capital U.S. Real Estate Shares.

SECOND: The amendment to the charter of the Corporation as set forth
above has been approved by at least a majority of the entire Board of Directors
of the Corporation as required by law.

The undersigned Vice President of the Corporation acknowledges these
Articles of Amendment to be the corporate act of the Corporation and, as to all
matters or facts required to be verified under oath, the undersigned Vice
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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

State of Maryland
-----------------

I hereby certify that this is a true and complete copy of the 3 page
-----
document on file in this office. DATED: 3/11/99
-----------------
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
BY: Joyce M. Thompson , Custodian
--------------------------------
This stamp replaces our previous certification system. Effective: 6/95

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

<PAGE>

IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be signed in its name and on its behalf by its Vice President and
attested to by its Secretary on this 1st day of March, 1999.

ATTEST: SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

/s/ David T. Novick By: /s/ Jeffrey C. Nellessen
- ----------------------------- -------------------------------
David T. Novick Jeffrey C. Nellessen
Vice President and Secretary Vice President and Treasurer

<PAGE>

Exhibit 11(a)

CONSENT OF
----------
MAYER, BROWN & PLATT
--------------------

We hereby consent to the reference to our firm under the caption "Counsel
and Independent Accountants" in the statement of additional information
comprising a part of Post-Effective Amendment No. 11 to the Form N-1A
Registration Statement of Security Capital Real Estate Mutual Funds
Incorporated, File No. 333-20649.

/s/ Mayer, Brown & Platt

MAYER, BROWN & PLATT

Washington, D.C.
April 29, 1999

<PAGE>

Exhibit 11(b)

Ballard, Spahr, Andrews & Ingersoll, LLP
Suite 1900
300 East Lombard Street
Baltimore, Maryland 21202-3268
(410) 528-5600
Fax: (410) 528-5650
[email protected]

April 29, 1999

Security Capital Real Estate Mutual
Funds, Incorporated
11 South LaSalle Street
Chicago, Illinois 60603

Re: Security Capital Real Estate Mutual Funds, Incorporated
Registration Statement on Form N-1A
(Registration Nos. 33-20649 and 811-8033)
-------------------------------------------------------

Ladies and Gentlemen:

We hereby consent to the use of the name of our firm in the above-
referenced Registration Statement under the caption "Counsel and Independent
Accountants." In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended.

Very truly yours,

/s/ Ballard Spahr Andrews & Ingersoll, LLP

<PAGE>

Exhibit 11(c)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------

As independent public accountants, we hereby consent to the use of our reports
dated February 15, 1999, and to all references to our Firm included in or made a
part of this registration statement on Form N-1A of Security Capital Real Estate
Mutual Funds Incorporated (comprised of Security Capital U.S. Real Estate Shares
and Security Capital European Real Estate Shares).

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Chicago, Illinois
April 29, 1999

<PAGE>

Exhibit 18

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

AMENDED AND RESTATED
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3

Security Capital Real Estate Mutual Funds Incorporated ("Fund") hereby
adopts this Multiple Class Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940, as amended, on behalf of its operating series, Security
Capital U.S. Real Estate Shares ("SC-US") and Security Capital European Real
Estate Shares ("SC-EUROPEAN") (each, a "Series").

A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------

1. Class R Shares. Class R shares of each Series are sold to the general
public without an initial or a deferred sales charge.

Class R shares of each Series are subject to a distribution fee and service
fee equal, in the aggregate, to .25 of 1% on an annual basis of the average
daily net assets of the Class R shares of the respective Series paid pursuant to
a distribution and service plan adopted pursuant to Rule 12b-1 under the 1940
Act.

Class R shares of each Series are available for purchase only by investors
whose minimum initial investment is $2,500 in the Series. Subsequent investments
must be at least $250.

For individual retirement account and employee benefit plans qualified
under Section 401, 403(b)(7) or 47 of the Internal Revenue Code of 1986, as
amended, as well as UGMA or UTMA accounts, the minimum initial investment is
$1,000 and subsequent investments must be at least $250.

For investors using the Automatic Investment Plan (described in the
prospectus for the Class R shares of each Series), the minimum initial
investment is $250 and subsequent investments must be at least $250.

The investment minimums for a Series may be changed or waived by the Series
at any time. Existing shareholders will be given at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.

2. Class I Shares. Class I shares of each Series are sold to the general
public without an initial or a deferred sales charge.

Class I shares of each Series are subject to a distribution fee and service
fee equal, in the aggregate, to .25 of 1% on an annual basis of the average
daily net assets of the Class I shares of the Fund paid pursuant to a
distribution and service plan adopted pursuant to Rule 12b-1 under the 1940 Act.
<PAGE>

Class I shares of a Series are available for purchase only by investors
whose minimum initial investment in the Series is $250,000. Subsequent
investments must be at least $20,000.

The Fund reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of a Series, including 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.

B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------

Certain expenses may be attributable to a particular Class of shares.
Income, realized gains and losses, unrealized appreciation and depreciation and
certain expenses not allocated to a particular Class shall be allocated to each
Class based on the net assets of that Class in relation to the net assets of the
Fund.

Each Class may pay a different amount of the following expenses:

(1) administration and transfer agency fees;
(2) fees of directors who are not affiliated with the Fund's investment
adviser;
(3) legal and auditing expenses;
(4) printing and postage fees that are related to preparing and
distributing the Fund's prospectus, proxy statements and shareholder
reports;
(5) costs of maintaining the Fund's existence;
(6) interest charges and taxes;
(7) costs of stationery and supplies;
(8) expenses and fees related to registration and filing with federal and
sate regulatory authorities; and
(9) costs of personnel rendering clerical accounting and other services.

C. CONVERSION FEATURE:
-------------------

Class I shares of a Series may be converted to Class R shares of that
Series, at the election of a shareholder, in the event applicable minimum
account balance requirements are not satisfied, as disclosed in the Series' then
current prospectus for Class I shares. No other conversions are permissible.

This conversion feature may be modified or terminated by the Fund.
<PAGE>

D. EXCHANGE FEATURE:
----------------

Shares of each Class of a Series may be exchanged for shares of the
corresponding Class of any other Series of the Fund.

All exchanges hereunder shall be effected on the basis of the relative net
asset values of the Classes without the imposition of any sales load, fee or
other charge.

An investor may not exchange shares hereunder more than four times in any
twelve-month period, including the initial exchange.

This exchange feature may be modified or terminated by the Fund.

E. CLASS DESIGNATION:
------------------

Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its classes of shares.

F. ADDITIONAL INFORMATION:
-----------------------

This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for each Class; provided, however, that none of the
terms set forth in any such prospectus shall be inconsistent with the terms of
the Class contained in this Plan. The prospectus for each Class contains
additional information about the Classes and each Series' multiple class
structure.

G. DATE OF EFFECTIVENESS:
----------------------

This Multiple Class Plan shall become effective immediately upon the
approval of a majority of the Board of Directors and by vote of a majority of
those Directors of the Fund who are not interested persons of the Fund.

By Action of the Board of Directors
March 1, 1999

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SECURITY CAPITAL U.S. REAL ESTATE SHARES CLASS I

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 93,207,340
<INVESTMENTS-AT-VALUE> 94,106,128
<RECEIVABLES> 4,897,598
<ASSETS-OTHER> 72,307
<OTHER-ITEMS-ASSETS> 29,023
<TOTAL-ASSETS> 99,105,056
<PAYABLE-FOR-SECURITIES> 3,943,397
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 351,339
<TOTAL-LIABILITIES> 4,294,736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,380,135
<SHARES-COMMON-STOCK> 9,220,734
<SHARES-COMMON-PRIOR> 9,755,880
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,468,603)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 898,788
<NET-ASSETS> 94,810,320
<DIVIDEND-INCOME> 5,909,086
<INTEREST-INCOME> 229,591
<OTHER-INCOME> 0
<EXPENSES-NET> (1,071,588)
<NET-INVESTMENT-INCOME> 5,067,089
<REALIZED-GAINS-CURRENT> (6,891,855)
<APPREC-INCREASE-CURRENT> (12,286,350)
<NET-CHANGE-FROM-OPS> (14,111,116)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,936,792)
<DISTRIBUTIONS-OF-GAINS> (1,997,333)
<DISTRIBUTIONS-OTHER> (389,531)
<NUMBER-OF-SHARES-SOLD> 509,433
<NUMBER-OF-SHARES-REDEEMED> (1,100,613)
<SHARES-REINVESTED> 56,034
<NET-CHANGE-IN-ASSETS> (22,421,864)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,315,291
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 640,704
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,376,787
<AVERAGE-NET-ASSETS> 104,287,631
<PER-SHARE-NAV-BEGIN> 11.95
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (1.80)
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> (0.03)
<PER-SHARE-NAV-END> 9.82
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> SECURITY CAPITAL U.S. REAL ESTATE SHARES CLASS R

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 93,207,340
<INVESTMENTS-AT-VALUE> 94,106,128
<RECEIVABLES> 4,897,598
<ASSETS-OTHER> 72,307
<OTHER-ITEMS-ASSETS> 29,023
<TOTAL-ASSETS> 99,105,056
<PAYABLE-FOR-SECURITIES> 3,943,397
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 351,339
<TOTAL-LIABILITIES> 4,294,736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,380,135
<SHARES-COMMON-STOCK> 434,826
<SHARES-COMMON-PRIOR> 56,234
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,468,603)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 898,788
<NET-ASSETS> 94,810,320
<DIVIDEND-INCOME> 5,909,086
<INTEREST-INCOME> 229,591
<OTHER-INCOME> 0
<EXPENSES-NET> (1,071,588)
<NET-INVESTMENT-INCOME> 5,067,089
<REALIZED-GAINS-CURRENT> (6,891,855)
<APPREC-INCREASE-CURRENT> (12,286,350)
<NET-CHANGE-FROM-OPS> (14,111,116)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (137,519)
<DISTRIBUTIONS-OF-GAINS> (12,118)
<DISTRIBUTIONS-OTHER> (10,851)
<NUMBER-OF-SHARES-SOLD> 411,251
<NUMBER-OF-SHARES-REDEEMED> (47,963)
<SHARES-REINVESTED> 15,304
<NET-CHANGE-IN-ASSETS> (22,421,864)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,315,291
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 640,704
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,376,787
<AVERAGE-NET-ASSETS> 2,496,434
<PER-SHARE-NAV-BEGIN> 11.95
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (1.76)
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> (0.03)
<PER-SHARE-NAV-END> 9.82
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES CLASS I

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 5,941,427
<INVESTMENTS-AT-VALUE> 6,023,368
<RECEIVABLES> 11,280
<ASSETS-OTHER> 24,886
<OTHER-ITEMS-ASSETS> 55,836
<TOTAL-ASSETS> 6,115,370
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,055
<TOTAL-LIABILITIES> 44,055
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,993,705
<SHARES-COMMON-STOCK> 590,698
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (2,239)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,092)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,941
<NET-ASSETS> 6,071,315
<DIVIDEND-INCOME> 5,069
<INTEREST-INCOME> 47,331
<OTHER-INCOME> 0
<EXPENSES-NET> (27,424)
<NET-INVESTMENT-INCOME> 24,976
<REALIZED-GAINS-CURRENT> (14,365)
<APPREC-INCREASE-CURRENT> 81,941
<NET-CHANGE-FROM-OPS> 92,552
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,690)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (10,517)
<NUMBER-OF-SHARES-SOLD> 590,946
<NUMBER-OF-SHARES-REDEEMED> (250)
<SHARES-REINVESTED> 2
<NET-CHANGE-IN-ASSETS> 6,071,315
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16,076
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<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.02)
<PER-SHARE-NAV-END> 10.28
<EXPENSE-RATIO> 1.45
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</TABLE>