SECURITY CAPITAL U S REAL ESTATE SHARES INC, 485APOS, 1999-03-01

SECURITY CAPITAL U S REAL ESTATE SHARES INC
485APOS, 1999-03-01

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<PAGE>

As filed with the Securities and Exchange Commission on March 1, 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. 10
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940

Amendment No. 12
(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.
[ ]on (date) pursuant to paragraph (b). [ ]75 days after filing pursuant
[X]60 days after filing pursuant to paragraph (a)(2).
to paragraph (a)(1). [ ]on date pursuant to paragraph
(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

April XX, 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.

. 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?

. Market risk. The prices of real estate securities will vary with market
conditions. As a result, an investor in the fund can lose money if the value
of the fund's investments declines.

. 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 below, along with its best and worst quarterly performance during
that time period.

In addition to the foregoing, the fund tracks its 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.

Security Capital U.S. Real Estate Shares
Comparative Returns vs. Industry Benchmarks
Total Return
Period from April 23, 1997/1/ to December 31, 1998

[BAR GRAPH APPEARS HERE]

<S> <C>
Wilshire Real Estate
Securities Index/2/ 0.52%
NAREIT Equity Index/1/ 0.78%
SC-US Real Estate Shares 7.32%
</TABLE>

This table compares the fund's results to changes in the Wilshire Real Estate
Index (WARESI)/2/ and the National Association of Real Estate Investment Trusts
(NAREIT) Equity Index./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 index also assume the
reinvestment of dividends. Because the index is not a managed investment, no
operating expenses are deducted from its total return.

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

/2/ 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. Prior to utilizing WARESI,
the fund used the Wilshire REIT Index as a benchmark, but changed because
it was limited solely to REITs.

/3/ 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.

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

[BAR GRAPH APPEARS HERE]

This chart shows the fund's quarterly total return for the year ended December
31, 1998. 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.

These expenses cover basic operating costs, such as fund management, account
administration, and other services. Other customary expenses include transfer
agent fees, custodial fees paid to the bank that holds the fund's securities,
audit fees, and legal expenses.

<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
. Maximum account 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*.............................................................. 0.29%
. Net fund operating expenses............................................................ 1.00%
</TABLE>
* Under the terms of an agreement dated December 16, 1997, 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 1.00% of the fund's Class I average
daily net assets until 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.

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
-----------------------------------------------------------
$12 $38 $66 $146

If you did not redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------
$12 $38 $66 $146

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

6
<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
$23.99 billion (as of December 31, 1998).

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
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 $5 billion in assets (as of December 31, 1998).

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 _____ 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 $5 billion as of December 31, 1998

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 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. These may 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.

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.

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 REITs has increased. As of September 30,
1998, the total market capitalization of U.S. equity REITs and REOCs was
approximately $295 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 (see chart at right). GCMG believes that this trend will continue over the
next decade.

Comparative Returns:
REITs vs. Direct Real Estate Investments
Average Annual Total Return

[BAR GRAPH APPEARS HERE]

<S> <C>
1 yr.............-13.54% (REITS)
17.26% (Direct Real Estate Investments)
5 yr.............. 8.77% (REITS)
9.92% (Direct Real Estate Investments)
15 yr.............12.42% (REITS)
7.05% (Direct Real Estate Investments)
20 yr.............14.46% (REITS)
9.12% (Direct Real Estate Investments)
</TABLE>

[_] REITs
[_]

Sources: NAREIT, National Council of Real Estate Investment Fiduciaries
(NCREIF). Data for the 1-, 5-, 15-, and 20-year periods ending September 30,
1998. NAREIT returns are leveraged and NCREIF returns are unleveraged.

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

13
<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.

GCMG's primary valuation tool, the Integrated Valuation Matrix, integrates and
quantifies this research information to determine an investment's relative
value. 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 transaction 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. For
capital gains distributions, the statement indicates which portion will be taxed
at a maximum rate of 20 percent and which portion will be taxed at a maximum
rate of 28 percent.

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............... $ -- $ 10.15
Income from investment operations:
Net investment income............................ -- 0.31
Net realized and unrealized gain on investments.... -- 2.49
Total from investment operations................. -- 2.80

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

Net asset value, end of period..................... -- $11.95
Total return/(3)/.................................. -- 29.92%
Supplemental data and ratios:
Net assets, end of period........................ -- $116,560,328.00
Ratio of expenses to average net
assets/(4)(5)/................................. -- 1.16%
Ratio of net investment income to average net
assets/(4)(5)/................................. -- 4.08%
Portfolio turnover rate/(6)/..................... -- 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
and January 1, 1998 through December 31, 1998.

(4) Annualized for the period April 23, 1997 through December 31, 1997 and
January 1, 1998 through December 31, 1998.

(5) 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 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
April XX, 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?

* Market risk. The prices of real estate securities will vary with market con-
ditions. As a result, an investor in the fund can lose money if the value
of the fund's investments declines.
* 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 below, along with its best and worst quarterly performance during
that time period.

Security Capital U.S. Real Estate Shares
Comparative Returns vs. Industry Benchmarks
Total Return
Period from April 23, 1997 to December 31, 1998

[BAR GRAPH APPEARS HERE]

SC-US Real Estate Shares....................7.29%
NAREIT Equity Index(2)......................0.73%
Wilshire Real Estate Securities Index(2)....0.52%

This table compares the fund's results to changes in the Wilshire Real Estate
Index (WARESI)(2) and the National Association of Real Estate Investment Trusts
(NAREIT) Equity Index(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. Because the index is not a managed
investment, no operating expenses are deducted from its total return.

1 The effective date of the fund's registration statement with the Securities
and Exchange Commission.
2 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. Prior to utilizing WARESI, the fund
used the Wilshire REIT Index as a benchmark, but changed because it was
limited solely to REITs.
3 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.

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

[BAR GRAPH APPEARS HERE]

0%
Q(1)......0.43%
Q(2).... -5.77%
Q(3)....-10.15%
Q(4)......3.53%

This chart shows the fund's quarterly total return for the year ended December
31, 1998. 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.

<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
. Maximum account 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*............................................................. 0.14%
. Net fund operating expenses........................................................... 1.15%
</TABLE>
* Under the terms of an agreement dated December 16, 1997, 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 1.15% of the fund's Class R average daily net
assets until 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.

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>
$14 $43 $74 $163

If you did not redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------
$14 $43 $74 $163
</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 _____ 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 $5 billion as of December 31, 1998

7
<PAGE>

Distribution and Servicing Plan

Types of Investments

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. These may 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)

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

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 (see chart at right). GCMG believes that this trend will continue over the
next decade.

Comparative Returns:
REITs vs. Direct Real Estate Investments
Average Annual Total Return

[BAR GRAPH APPEARS HERE]

1 yr. ...............13.54% (REITs)
17.26% (Direct Real Estate Investments)
5 yr. ................8.77% (REITs)
9.92% (Direct Real Estate Investments)
15 yr. ..............12.42% (REITs)
7.05% (Direct Real Estate Investments)
20 yr. ..............14.46% (REITs)
9.12% (Direct Real Estate Investments)

[_] REITs
[_]

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 transaction 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. For
capital gains distributions, the statement indicates which portion will be taxed
at a maximum rate of 20 percent and which portion will be taxed at a maximum
rate of 28 percent.

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............................... $ -- $ 10.15
Income from investment operations:
Net investment income......................................... -- 0.31
Net realized and unrealized gain on investments............... -- 2.49
Total from investment operations.............................. -- 2.80

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

Net asset value, end of period..................................... -- $ 11.95
Total return/(3)/.................................................. -- 29.91%
Supplemental data and ratios:
Net assets, end of period..................................... -- $671,856.00
Ratio of expenses to average net assets/(4)(5)/............... -- 1.16%
Ratio of net investment income to average net assets/(4)(5)/.. -- 4.06%
Portfolio turnover rate/(6)/.................................. -- 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 and
January 1, 1998 through December 31, 1998.

(4) Annualized for the period April 23, 1997 through December 31, 1997 and
January 1, 1998 through December 31, 1998.

(5) 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

April XX, 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?

. MARKET RISK. The prices of real estate securities will vary with market
conditions. As a result, an investor in the fund can lose money if the value
of the fund's investments declines.

. 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 total return achieved by the fund through the fiscal year ended December 31,
1998, is shown below, along with its best and worst quarterly performance during
that time period.

Security Capital European Real Estate Shares Comparative Returns vs. Industry
Benchmark

Total Return
Period from June 30, 19981 to December 31, 1998

[GRAPH APPEARS HERE]

This table compares the fund's results to changes in the Salomon Smith
Barney-European Property Index (SSB-European Property Index)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 index also assume the reinvestment of dividends. Because the index
is not a managed investment, no operating expenses are deducted from its total
return.

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

2 The Salomon Smith Barney-European Property Index is 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.

Security Capital European Real Estate Shares Quarterly Performance
Fiscal Year ended December 31, 1998

[GRAPH APPEARS HERE]

This chart shows the fund's quarterly total return from its inception date of
June 30, 1998 to December 31, 1998. The fund's best quarterly performance during
this time period was a gain of 2.10% for the quarter ended September 30, 1998.
Its worst quarterly performance was a 1.12% gain for the quarter ended December
31, 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.

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

. Maximum account 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........................................................ --%

. Total annual fund operating expenses.................................. --%

. Less reimbursed expenses*............................................. --%

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

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
- --------------------------------------------------------
$15 $46 $79 $174

If you did not redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------
$15 $46 $79 $174

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.

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 $5 billion in assets (as of December 31,
1998).

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 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 $5 BILLION AS OF DECEMBER 31, 1998

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. These securities may 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.

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 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.

GCMG's primary valuation tool, the Integrated Valuation Matrix, integrates and
quantifies this research information to determine an investment's relative
value.

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 transaction 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

Reports To Shareholders

24
<PAGE>

Financial
Highlights

June 30, 1998(1)
through
December 31, 1998
Per Share Data

Net asset value, beginning of period........................................ --
Income from investment operations:
Net investment income.................................................. --
Net realized and unrealized gain on investments........................ --
Total from investment operations....................................... --

Less distributions:
Dividends from net investment income................................... --
Dividends in excess of net investment income........................... --
Distributions from net realized gains.................................. --
Total distributions.................................................... --

Net asset value, end of period.............................................. --
Total return/(2)/........................................................... --
Supplemental data and ratios:
Net assets, end of period.............................................. --
Ratio of expenses to average net assets/(3)(4)/........................ --
Ratio of net investment income to average net assets/(3)(4)/........... --
Portfolio turnover rate/(5)/........................................... --

(1) Date the fund was effective with the SEC.
(2) Not annualized for the period June 30, 1998 through December 31, 1998.
(3) Annualized for the period June 30, 1998 through December 31, 1998.
(4) Without expense reimbursement of $___ for the period June 30, 1998 through
December 31, 1998, $___ of which represents the amortization of
organizational expenses, the ratio of expenses to average net assets would
have been ___% and the ratio of net investment income to average net assets
would have been ___%.
(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
April XX, 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?

. Market risk. The prices of real estate securities will vary with market
conditions. As a result, an investor in the fund can lose money if the value
of the fund's investments declines.

. 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 total return achieved by the fund through the fiscal year ended December 31,
1998, is shown below, along with its best and worst quarterly performance during
that time period. The charts below reflect 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.

Security Capital European Real Estate Shares
Comparative Returns vs. Industry Benchmark

Total Return
Period from June 30, 1998/1/ to December 31, 1998

[CHART APPEARS HERE]

This table compares the fund's results to changes in the Salomon Smith
Barney-European Property Index (SSB-European Property Index)/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 index also assume the reinvestment of dividends. Because the index
is not a managed investment, no operating expenses are deducted from its total
return.

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

Security Capital European Real Estate Shares Quarterly Performance
Fiscal Year ended December 31, 1998

[CHART APPEARS HERE]

This chart shows the fund's quarterly total return from its inception date of
June 30, 1998 to December 31,1998. The fund's best quarterly performance during
this time period was a gain of 2.10% for the quarter ended September 30, 1998.
Its worst quarterly performance was a 1.12% gain for the quarter ended December
31, 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.

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

. Maximum account 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......................................................... -- %
. Total annual fund operating expenses................................... -- %
. Less reimbursed expenses*.............................................. -- %
. 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
-----------------------------------------------------
$16 $51 $87 $191

If you did not redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------
$16 $51 $87 $191

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 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 $5 billion as of December 31, 1998

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. These securities may include:

. common stocks

. rights or warrants to purchase common stocks

. convertible securities

. preferred stocks

Depositary Receipts

Defensive Investments

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 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

GCMG's primary valuation tool, the Integrated Valuation Matrix, integrates and
quantifies this research information to determine an investment's relative
value.

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 transaction 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

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.

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

Per Share Data/(2)/

Net asset value, end of period.............................................. --

Total return/(3)/........................................................... --
Supplemental data and ratios:
Net assets, end of period.............................................. --
Ratio of expenses to average net assets/(4)(5)/........................ --
Ratio of net investment income to average net assets/(4)(5)/........... --
Portfolio turnover rate/(6)/........................................... --

(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 for the period June 30, 1998 through December 31, 1998.
(4) Annualized for the period June 30, 1998 through December 31, 1998.
(5) Without expense reimbursement of $___ for the period June 30, 1998 through
December 31, 1998, $___ of which represents the amortization of
organizational expenses, the ratio of expenses to average net assets would
have been ___% and the ratio of net investment income to average net assets
would have been ___%.
(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).

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
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>

DRAFT: 2/16/99

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

_________, 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 _______, 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............. 36
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).

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
Investment Company Act of 1940, as amended ("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

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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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<PAGE>

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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<PAGE>

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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<PAGE>

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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<PAGE>

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 Group Incorporated, Mr. Manno was
a Managing Director of LaSalle Partners Limited from March
1980 to March 1994. Mr. Manno received his M.B.A. from
the University of Chicago Graduate School of Business, an
M.A. and a B.A. from Northwestern University and is a
Certified Public Accountant.

</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.

John H. Gardner, Jr.* Director and 45 Managing Director of GCMG since July, 1997. Prior thereto,
11 South LaSalle Street Managing Director of the REIT Manager for Security Capital Pacific
Chicago, Illinois 60603 Director Trust ("PTR") from February 1995 to June 1997 and Senior
Vice President of Security Capital Group Incorporated Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997 where he had
overall responsibility for asset management and multifamily
dispositions. Prior to joining Security Capital Group
Incorporated, Mr. Gardner was with Copley Real Estate
Advisors as a Managing Director and Principal responsible for
portfolio management from January 1991 to September 1994
and as a Vice President and Principal of asset management
from December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate Manager with
the John Hancock Companies. Mr. Gardner received his M.S.
from Bentley College and his B.S. from Stonehill College.

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

Kevin W. Bedell Senior Vice 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

<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated
Aggregate Accrued as Annual Total
Compensation Part of Benefits Compensation
From SC-REALTY Upon From SC-REALTY
Name of Person, Position SC-REALTY Expenses Retirement Paid To Directors
- ------------------------ ----------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
George F. Keane
Director................... $24,333 N/A N/A $24,333
Stephen F. Kasbeer
Director................... $28,000 N/A N/A $28,000
Robert H. Abrams
Director................... $21,000 N/A N/A $21,000
**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.

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 Group Incorporated ("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 $_________ and $________, respectively, net of waivers 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 $_________, net of waivers of
$_________, 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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<PAGE>

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

35
<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
$__________ for providing sub-administration services to SC-US. From June 30,
1998 to December 31, 1998, the Sub-Administrator earned $____________ for
providing sub-administration services to SC-EUROPEAN, Security Capital
Asia/Pacific Real Estate Shares ("SC-ASIA"), Security Capital Real Estate
Arbitrage

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<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, 1998, GCMG earned $______ 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 $_______ for providing services under the SC-US Class I Plan and $____
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)
$_____ on advertising; (ii) $________ on the printing and mailing of
prospectuses to other than current shareholders; (iii) $_______ on compensation
to underwriters; (iv) $_________ on compensation to broker-dealers; (v)
$________ on compensation to sales personnel;

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<PAGE>

and (vi) $__________ 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) $_____ on advertising; (ii) $________ on the printing and
mailing of prospectuses to other than current shareholders; (iii) $_______ on
compensation to underwriters; (iv) $_________ on compensation to broker-dealers;
(v) $________ on compensation to sales personnel; and (vi) $__________ on
interest, carrying or other financing charges.

From June 30, 1998 (the effective date of SC-EUROPEAN) to December 31,1998,
the Distributor earned $_______ for providing services under the SC-EUROPEAN
Plan. During that period, total payments made by SC-EUROPEAN under the
SC-EUROPEAN Plan were spent as follows: (i) $_____ on advertising; (ii)
$________ on the printing and mailing of prospectuses to other than current
shareholders; (iii) $_______ on compensation to underwriters; (iv) $_________ on
compensation to broker-dealers; (v) $________ on compensation to sales
personnel; and (vi) $__________ on interest, carrying or other financing
charges.

From June 30, 1998 (the effective date of SC-ASIA) to December 31, 1998, the
Distributor earned $_______ for providing services under the SC-ASIA Plan.
During that period, total payments made by SC-ASIA under the SC-ASIA Plan were
spent as follows: (i) $_____ on advertising; (ii) $________ on the printing and
mailing of prospectuses to other than current shareholders; (iii) $_______ on
compensation to underwriters; (iv) $_________ on compensation to broker-dealers;
(v) $________ on compensation to sales personnel; and (vi) $__________ on
interest, carrying or other financing charges.

From June 30, 1998 (the effective date of SC-ARBITRAGE), the Distributor
earned $_______ for providing services under the SC-ARBITRAGE Plan. During that
period, total payments made by SC-ARBITRAGE under the SC-ARBITRAGE Plan were
spent as follows: (i) $_____ on advertising; (ii) $_______ on the printing and
mailing of prospectuses to other than current shareholders; (iii) $_______ on
compensation to underwriters; (iv) $_________ on compensation to broker-dealers;
(v) $________ on compensation to sales personnel; and (vi) $__________ on
interest, carrying or other financing charges.

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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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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<PAGE>

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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<PAGE>

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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<PAGE>

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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<PAGE>

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. It is uncertain at this time whether
the Funds will make the mark to market election permitted under these rules.

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

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, exchange or
redemption rights. 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' Articles of Incorporation and By-Laws which have been
filed with the SEC as exhibits to the registration statement of which this
Statement of Additional Information is a part.

SC-REMFs' 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 December 31, 1998, SC REALTY owned 89.98% of the issued and outstanding
shares of SC-US, and 99.91% 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 December 31, 1998, 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 8,679,603.586 94.20%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952

SC-EUROPEAN - SC REALTY Incorporated 590,196.078 99.91%
Class I 3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
</TABLE>

Because SC REALTY owns 99.91% of the issued and outstanding shares of SC-
EUROPEAN and 89.98% of the issued and outstanding shares of SC-US, 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.

Average Annual Total Return

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

50
<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 described in the Prospectus
represent the cumulative change in the value of an investment in a Fund for the
specified period and is computed by the following formula.

Aggregate Total Return = (ERV-P)
-------
P

Where: P = a hypothetical initial payment of $1,000.

ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of the 1-, 5- or 10-year period 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.

In reports or other communications to shareholders of a Fund or in
advertising materials, a Fund may compare its performance with that of (i) other
mutual funds listed in the rankings prepared by Lipper Analytical Services,
Inc., publications such as Barron's, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average and other relevant indices and industry
publications. A Fund may also compare the historical volatility of its portfolio
to the volatility of such indices during the same time periods. (Volatility is a
generally accepted barometer of the market risk associated with a portfolio of
securities and is generally measured in comparison to the stock market as a
whole--the beta--or in absolute terms--the standard deviation.)

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 [__________________________________].

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. [To be filed by amendment.]

52
<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 to be filed by amendment.]

(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, Secretary and Vice President, Treasurer and
Treasurer Assistant Secretary, SC-REMFs

Joshua D. Goldman Vice President Previously, Associate with
Sonnenschein, Nath & Rosenthal

Albert D. Adriani Vice President Previously, Vice President,
Security Capital (UK) Investment
Management

William Scott Hartman Vice President Previously, Vice President,
Security Capital Atlantic
Incorporated

Paul Froning Vice President Previously, Associate, Lazard
Freres Real Estate Investors

Kevin Bedell Senior Vice President Senior Vice President, SC-REMFs

David E. Rosenbaum 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

Gerios J.M. Rovers Vice President Previously, Vice President,
Security Capital (EU) Management
Group, S.A.

Todd Mansfield Director Managing Director, Security
Capital Global Realty; Previously,
Managing Director, Security
Capital Global Strategic Group
Incorporated

Jeremy J. Plummer Director Managing Director, Security
Capital Strategic Group
Incorporated, SPP Investment
Management

</TABLE>

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(a) 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 1st day of
March, 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 1st
day of March, 1999.

<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------------- --------------------------- -----------------
<S> <C> <C>
Chairman, Managing March 1, 1999
- ----------------------------- Director and President
/s/ Anthony R. Manno Jr.
- -----------------------------
Anthony R. Manno Jr.

/s/ Jeffrey C. Nellessen Principal Financial Officer March 1, 1999
- -----------------------------
Jeffrey C. Nellessen

/s/ Jeffrey C. Nellessen Comptroller March 1, 1999
- -----------------------------
Jeffrey C. Nellessen

/s/ Stephen F. Kasbeer Director March 1, 1999
- -----------------------------
Stephen F. Kasbeer

/s/ Anthony R. Manno Jr. Director March 1, 1999
- -----------------------------
Anthony R. Manno Jr.

/s/ George F. Keane Director March 1, 1999
- -----------------------------
George F. Keane

/s/ Robert H. Abrams Director March 1, 1999
- -----------------------------
Robert H. Abrams

/s/ John H. Gardner, Jr. Director March 1, 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.

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. (To be filed by amendment).

11(c) Consent of Independent Public Accountants. (To be filed by amendment).

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. (To be filed by amendment).

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.

<PAGE>

Exhibit 1(d)

690317
STATE OF MARYLAND

STATEMENT DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201

DATE: JANUARY 04, 1999

THIS IS TO ADVISE YOU THAT THE ARTICLES SUPPLEMENTARY FOR SECURITY CAPITAL
REAL ESTATE MUTUAL FUNDS INCORPORATED WERE RECEIVED AND APPROVED FOR RECORD ON
DECEMBER 31, 1998 AT 12:46 PM.

FEE PAID: 78.00

[SEAL]
JOSEPH V. STEWART
CHARTER SPECIALIST
<PAGE>

STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION

ENTER FOR RECORD
12/31/98 AT 12:46 PM

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
------------------------------------------------------

ARTICLES SUPPLEMENTARY

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 (the "1940 Act"), hereby certifies to the State
Department of Assessments and Taxation of Maryland, pursuant to Section 2-208.1
of the Maryland General Corporation Law, that:

FIRST: The number of shares of the corporation's Security Capital Real
Estate Arbitrage Shares, $.01 par value per share, and the Security Capital
Asia/Pacific Real Estate Shares, $.01 par value per share, are hereby decreased
by the Board of Directors in accordance with Section 2-105(c) of the Maryland
General Corporation Law.

SECOND: The total number of shares of stock which the Corporation had
authority to issue immediately prior to these Articles Supplementary was
200,000,000, consisting of 50,000,000 common shares, $.01 par value per share,
50,000,000 Security Capital Real Estate Arbitrage Shares, $.01 par value per
share, 50,000,000 Security Capital European Real Estate Shares, $.01 par value
per share; and 50,000,000 Security Capital Asia/Pacific Real Estate Shares, $.01
per value per share, having an aggregate par value of $2,000,000.

THIRD: The total number of shares of stock which the Corporation has
authority to issue pursuant to these Articles Supplementary is 200,000,000,
consisting of 50,000,000 common shares, $.01 par value per share, 50,000,000
Security Capital European Real Estate Shares, $.01 par value per share, and
100,000,000 shares, $.01 par value per share, undesignated as to class or
series, having an aggregate par value of $2,000,000.

The undersigned Vice President of the Corporation acknowledges these
Articles Supplementary 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 INTENTIONAL LEFT BLANK]
<PAGE>

- --------------------------------------------------------------------------------
STATE OF MARYLAND
-----------------

I hereby certify that this is a true and complete copy of the 3 page document on
file in the office DATED: 1-4-99.
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION

BY: /s/ Wayne D.W. Henderson, Custodian
This stamp replaces our previous certification system. Effective 6/95
- --------------------------------------------------------------------------------
<PAGE>

IN WITNESS WHEREOF, the Corporation has caused these Articles
Supplementary to be signed in its name and on its behalf by its Vice President
and attested to by its Secretary on this 30th day of December, 1998.

ATTEST: SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

/s/ David T. Novick /s/ Jeffrey C. Nellessen
- ------------------------------- -------------------------------
David T. Novick Jeffrey C. Nellessen
Vice President Vice President and Treasurer
and Secretary

-2-

<PAGE>

EXHIBIT 5(a)

INVESTMENT ADVISORY AGREEMENT

Security Capital U.S. Real Estate Shares Incorporated

Amended and Restated December 16, 1997

Security Capital (US) Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603

Dear Sirs:

We, the undersigned Security Capital U.S. Real Estate Shares Incorporated,
herewith confirm our agreement with you as follows:

1. We are an open-end, non-diversified management investment company.
Our Directors are authorized to reclassify and issue any unissued shares to any
number of additional classes or series (portfolios), each having its own
investment objective, policies and restrictions, without shareholder approval,
all as more fully described in our prospectus and statement of additional
information.

We propose to engage in the business of investing and reinvesting our
assets in securities of the type and in accordance with the limitations
specified in our Articles of Incorporation, By-Laws and any representations made
in our prospectus and statement of additional information, all in such manner
and to such extent as may from time to time be authorized by our Board of
Directors. We enclose copies of the documents listed above and will from time
to time furnish you with any amendments thereof.
<PAGE>

2. (a) We hereby employ you to manage the investment and reinvestment of
our assets as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.

(b) You will make decisions with respect to all purchases and sales of
our portfolio securities. To carry out such decisions, you are hereby
authorized, as our agent and attorney-in-fact, for our account and at our risk
and in our name, to place orders for the investment and reinvestment of our
assets. In all purchases, sales and other transactions in our portfolio
securities you are authorized to exercise full discretion and act for us in the
same manner and with the same force and effect as we might or could do with
respect to such purchases, sales or other transactions, as well as with respect
to all other things necessary or incidental to the furtherance or conduct of
such purchases, sales or other transactions.

(c) You will report to our Board of Directors at each meeting thereof
all changes in our portfolio since the prior report, and will also keep us in
touch with important developments affecting our portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in our portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to our
portfolio securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of our portfolio securities, you
will bear in mind the policies set from time to time by our Board of Directors
as well as the limitations imposed by our Articles of Incorporation, the
Investment

-2-
<PAGE>

Company Act of 1940 (the "Act") and the Securities Act of 1933, and of the
Internal Revenue Code of 1986, as amended, in respect of regulated investment
companies.

(d) It is understood that you will from time to time employ or
associate with yourselves such persons as you believe to be particularly fitted
to assist you in the execution of your duties hereunder, the cost of performance
of such duties to be borne and paid by you. No obligation may be incurred on
our behalf in any such respect. During the continuance of this Agreement at our
request you will provide us persons satisfactory to our Board of Directors to
serve as our officers.

3. We propose to retain the services of an administrator, which shall be
a firm acceptable to you, to administer all aspects of our operations except
those which are your responsibility pursuant to this Agreement. We will bear
the cost of and pay the fee of the administrator. Our initial Administrator
will be Security Capital (US) Management Group Incorporated.

4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of our prospectus and statement of
additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject to the foregoing, we
shall be responsible and hereby assume the obligation for payment of all our
other expenses, including: (a) payment of the fee payable to you under
paragraph 6 hereof; (b) charges and expenses of our administrator, custodian,
transfer, and dividend disbursing agent; (c) fees of directors who are not your
affiliated persons; (d) legal and auditing expenses; (e) compensation of our
officers, Directors and employees who do not devote any part of their time to
your affairs or the affairs of your affiliates other than us; (f) costs of
printing our prospectuses

-3-
<PAGE>

and stockholder reports; (g) costs of proxy solicitation; (h) costs of
maintenance of corporate existence; (i) interest charges, taxes, brokerage fees
and commissions; (j) costs of stationery and supplies; (k) expenses and fees
related to registration and filing with the Securities and Exchange Commission
and with state regulatory authorities; and (l) upon the approval of the Board of
Directors, costs of your personnel or your affiliates rendering clerical,
accounting and other office services.

5. We shall expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you shall not be liable
hereunder for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing herein shall be deemed to protect, or
purport to protect, you against any liability to us or to our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties hereunder, or by
reason of your reckless disregard of your obligations and duties hereunder.

6. In consideration of the foregoing we will pay you a monthly fee at an
annualized rate of .60 of 1% of the average daily net assets of each class of
shares. Such fee shall be payable in arrears on the last day of each calendar
month for services performed hereunder during such month. If this Agreement
terminates prior to the end of a month, such fee shall be prorated according to
the proportion which such portion of the month bears to the full month.

7. This Agreement shall become effective on the date it is approved by
the vote of a majority of the Company's outstanding voting securities, as
defined in the Act, and shall continue in effect until the second anniversary of
the date hereof and may be continued for

-4-
<PAGE>

successive twelve-month periods (computed from each January 1) with respect to
each portfolio provided that such continuance is specifically approved at least
annually by the Board of Directors or by majority vote of the holders of the
outstanding voting securities of such portfolio (as defined in the Act), and, in
either case, by a majority of the Board of Directors who are not interested
persons, as defined in the Act, of any party to this Agreement (other than as
Directors of our corporation), provided further, however, that if the
continuation of this Agreement is not approved, you may continue to render the
services described herein in the manner and to the extent permitted by the Act
and the rules and regulations thereunder. Upon the effectiveness of this
Agreement, it shall supersede all previous agreements between us covering the
subject matter hereof. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of a majority of the outstanding voting
securities (as so defined) or by a vote of a majority of the Board of Directors
on 60 days' written notice to you, or by you on 60 days' written notice to us.

8. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and any interpretation
thereof contained in rules or regulations promulgated by the Securities and
Exchange Commission thereunder.

-5-
<PAGE>

affiliated with us (within the meaning of the Act) to engage in any other
business or to devote time and attention to the management or other aspects of
any other business, whether of a similar or dissimilar nature, or to render
services of any kind to any other trust, corporation, firm, individual or
association.

10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.

If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.

Very truly yours,

Security Capital U.S. Real Estate Shares
Incorporated

By:/s/ Anthony R. Manno Jr.
-------------------------------------
Anthony R. Manno Jr.
President

Agreed to and accepted as
of the date first set forth above

By:/s/ Jeffrey C. Nellessen
-------------------------------

-6-

<PAGE>

EXHIBIT 5(b)
INVESTMENT ADVISORY AGREEMENT

Security Capital Real Estate Mutual Funds Incorporated

Security Capital European Real Estate Shares

June 30, 1998

Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603

Dear Sirs:

We, the undersigned Security Capital Real Estate Mutual Funds Incorporated
("Fund"), herewith confirm our agreement with you as follows:

1. We are an open-end management investment company. Our Directors are
authorized to reclassify and issue any unissued shares to any number of
additional classes or series (portfolios), each having its own investment
objective, policies and restrictions, without shareholder approval, all as more
fully described in our prospectus and statement of additional information.

We engage in the business of investing and reinvesting our assets in
securities in accordance with the limitations specified in our Articles of
Incorporation, By-Laws and any representations made in our prospectus and
statement of additional information, all in such manner and to such extent as
may from time to time be authorized by our Board of Directors. We enclose copies
of the documents listed above and will from time to time furnish you with any
amendments thereof.
<PAGE>

2. (a) We hereby employ you to manage the investment and reinvestment of
Security Capital European Real Estate Shares, a portfolio of the Fund
("Portfolio") as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.

(b) You will make decisions with respect to all purchases and sales of
the portfolio securities of the Portfolio. To carry out such decisions, you are
hereby authorized, as our agent and attorney-in-fact, for our account and at our
risk and in our name, to place orders for the investment and reinvestment of the
Portfolio's assets. In all purchases, sales and other transactions in our
portfolio securities you are authorized to exercise full discretion and act for
us in the same manner and with the same force and effect as we might or could do
with respect to such purchases, sales or other transactions, as well as with
respect to all other things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions.

(c) You will report to our Board of Directors at each meeting thereof
all changes in the Portfolio since the prior report, and will also keep us in
touch with important developments affecting the Portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in the Portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to the
Portfolio's securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of portfolio securities, you will
bear in mind the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation, the Investment

-2-
<PAGE>

Company Act of 1940 (the "Act") and the Securities Act of 1933, and the Internal
Revenue Code of 1986, as amended, in respect of regulated investment companies.

(e) Subject to our ability to obtain the required initial and periodic
approvals under Section 15(c) the 1940 Act, you may retain an investment sub-
adviser, at your own cost and expense, for the purpose of executing your duties
hereunder. Your retention of an investment sub-adviser shall in no way reduce
your responsibilities under this Agreement and you shall be responsible to us
for all acts or omissions of such investment sub-adviser in connection with the
performance of your duties hereunder.

4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of the Fund's prospectus and statement
of additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject

-3-
<PAGE>

to the foregoing, we shall be responsible and hereby assume the obligation for
payment of all our other expenses, including: (a) payment of the fee payable to
you under paragraph 6 hereof; (b) charges and expenses of our administrator,
custodian, transfer, and dividend disbursing agent; (c) fees of directors who
are not your affiliated persons; (d) legal and auditing expenses; (e)
compensation of our officers, Directors and employees who do not devote any part
of their time to your affairs or the affairs of your affiliates other than us;
(f) costs of printing our prospectuses and stockholder reports; (g) costs of
proxy solicitation; (h) costs of maintenance of corporate existence; (i)
interest charges, taxes, brokerage fees and commissions; (j) costs of stationery
and supplies; (k) expenses and fees related to registration and filing with the
Securities and Exchange Commission and with state regulatory authorities; and
(l) upon the approval of the Board of Directors, costs of your personnel or your
affiliates rendering clerical, accounting and other office services.

6. In consideration of the foregoing we will pay you a monthly fee at an
annualized rate of .85 of 1% of the average daily net asset value of each class
of the Portfolio's shares. Such

-4-
<PAGE>

fee shall be payable in arrears on the last day of each calendar month for
services performed hereunder during such month. If this Agreement terminates
prior to the end of a month, such fee shall be prorated according to the
proportion which such portion of the month bears to the full month.

7. This Agreement shall become effective on the date hereof, shall
continue in effect until the second anniversary of the date hereof, and may be
continued for successive twelve-month periods with respect to the Portfolio
provided that such continuance is specifically approved at least annually by the
Board of Directors or by majority vote of the holders of the outstanding voting
securities of the Portfolio (as defined in the Act), and, in either case, by a
majority of the Board of Directors who are not interested persons, as defined in
the Act, of any party to this Agreement (other than as Directors of our
corporation); provided further, however, that if the continuation of this
Agreement is not approved, you may continue to render the services described
herein in the manner and to the extent permitted by the Act and the rules and
regulations thereunder. Upon the effectiveness of this Agreement, it shall
supersede all previous agreements between us covering the subject matter hereof.
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of a majority of the outstanding voting securities (as so
defined) or by a vote of a majority of the Board of Directors on 60 days'
written notice to you, or by you on 60 days' written notice to us.

-5-
<PAGE>

governing law and any interpretation thereof contained in rules or regulations
promulgated by the Securities and Exchange Commission thereunder.

9. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees, who may also be a Director,
officer or employee of ours, or persons otherwise affiliated with us (within the
meaning of the Act) to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
trust, corporation, firm, individual or association.

10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.

If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.

Very truly yours,

Security Capital Real Estate Mutual Funds Incorporated

By: /s/ Anthony R. Manno Jr.
----------------------------------------------------
Anthony R. Manno Jr., President

Agreed to and accepted as of the date first set forth above

Security Capital Global Capital Management Group Incorporated

By: /s/ Jeffrey C. Nellessen
----------------------------
Name:
Title:

-6-

<PAGE>

Exhibit 5(c)

SPONSORSHIP AGREEMENT
---------------------

SPONSORSHIP AGREEMENT (the "Agreement"), dated as of December 7, 1998 by
and between Security Capital Global Capital Management Group Incorporated, a
Delaware corporation ("GCMG") and Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund").

WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital U.S.
Real Estate Shares is an investment portfolio of the Fund ("Portfolio") that
issues Class I shares and Class R shares; and

WHEREAS, GCMG serves as investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement with the Fund dated December 16, 1997 ("Advisory
Agreement"), pursuant to which each class of the Portfolio's shares pays GCMG a
monthly management fee in an amount equal to .60% of the average daily net asset
value of that class of shares ("Advisory Fee"); and

WHEREAS, the Fund and the GCMG desire to enter into an agreement pursuant
to which the GCMG shall waive the Advisory Fee and/or reimburse the Fund for
operating expenses relating to each class of the Portfolio's shares on the terms
and conditions hereto set forth;

NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:

1. Duties of GCMG. GCMG hereby agrees that from the date hereof January 1,
1999 through December 31, 1999, GCMG shall waive the Advisory Fee and/or
reimburse the Fund to the extent necessary to maintain the total operating
expenses (excluding brokerage fees and commissions, interest, taxes and other
extraordinary expenses) of: (i) Class I shares of the Portfolio at 1.20% of the
average daily net asset value of the Class I shares; and (ii) Class R shares of
the Portfolio at 1.35% of the average daily net asset value of the Class R
shares.

2. Annual Review. GCMG will review its undertaking to waive the Advisory Fee
and/or reimburse the Fund with respect to the Portfolio as set forth in
Paragraph 1 on an annual basis. There is no assurance GCMG will continue to
waive the Advisory Fee and/or reimburse expenses beyond the specified period.
GCMG shall notify the Fund promptly of its annual determination with respect to
the undertaking hereunder.

3. Severability. If any provision of this Agreement shall be found to be
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.
<PAGE>

4. Notice. Any notices under this Agreement shall be in writing addressed and
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of GCMG and the Fund shall be 11 South
LaSalle Street, Second Floor, Chicago, Illinois 60603.

5. Miscellaneous. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.

SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED

By: /s/ David T. Novick
--------------------------------------
David T. Novick, Vice President

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED

By: /s/ Anthony R. Manno, Jr.
--------------------------------------
Anthony R. Manno, Jr., President

<PAGE>

EXHIBIT 5(d)

SPONSORSHIP AGREEMENT
---------------------

SPONSORSHIP AGREEMENT (the "Agreement"), dated as of June 30, 1998 by and
between Security Capital Global Capital Management Group Incorporated, a
Delaware corporation ("SCGCMG") and Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund").

WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital
European Real Estate Shares is an investment portfolio of the Fund ("Portfolio")
that issues Class I shares and Class R shares; and

WHEREAS, SCGCMG serves as investment adviser to the Portfolio pursuant to
an Investment Advisory Agreement with the Fund dated June 30, 1998 ("Advisory
Agreement"), pursuant to which each class of the Portfolio's shares pays SCGCMG
a monthly management fee in an amount equal to .85% of the average daily net
asset value of that class of shares ("Advisory Fee"); and

WHEREAS, the Fund and the SCGCMG desire to enter into an agreement pursuant
to which the SCGCMG shall waive the Advisory Fee and/or reimburse the Fund for
operating expenses relating to each class of the Portfolio's shares on the terms
and conditions hereto set forth;

NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:

1. Duties of SCGCMG. SCGCMG hereby agrees that from the date hereof through
----------------
December 31, 1998, SCGCMG shall waive the Advisory Fee and/or reimburse the Fund
to the extent necessary to maintain the total operating expenses (excluding
brokerage fees and commissions, interest, taxes and other extraordinary
expenses) of: (i) Class I shares of the Portfolio at 1.45% of the average daily
net asset value of the Class I shares; and (ii) Class R shares of the Portfolio
at 1.60% of the average daily net asset value of the Class R shares.

2. Annual Review. SCGCMG will review its undertaking to waive the Advisory Fee
-------------
and/or reimburse the Fund with respect to the Portfolio as set forth in
Paragraph 1 on an annual basis. There is no assurance SCGCMG will continue to
waive the Advisory Fee and/or reimburse expenses beyond the specified period.
SCGCMG shall notify the Fund promptly of its annual determination with respect
to the undertaking hereunder.

3. Severability. If any provision of this Agreement shall be found to be
------------
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.
<PAGE>

4. Notice. Any notices under this Agreement shall be in writing addressed and
------
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of SCGCMG and the Fund shall be 11 South
LaSalle Street, Second Floor, Chicago, Illinois 60603.

5. Miscellaneous. Each party agrees to perform such further actions and
-------------
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.

SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED

By: /s/ Michael J. Heller
-----------------------------------

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED

By: /s/ Jeffrey C. Nellessen
-----------------------------------

<PAGE>

Exhibit 5(e)

SECURITY CAPITAL
GLOBAL CAPITAL MANAGEMENT GROUP
Incorporated

December 9, 1998

Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603

Re: Sponsorship Agreement for Security Capital European
Real Estate Shares ("Fund")
---------------------------------------------------

Gentlemen:

Pursuant to Section 2 of the above-referenced Sponsorship Agreement dated
June 30, 1998, Security Capital Global Capital Management Group Incorporated has
determined to continue its undertaking to waive the advisory fees and or
reimburse expenses to the extent necessary to maintain the total operating
expenses (excluding brokerage fees and commissions, interest, taxes and other
extraordinary expenses) of: (i) Class I shares of the Fund at 1.45% of the
average daily net assets of the Class I shares; and (ii) Class R shares of the
Fund at 1.60% of the average daily net assets of the Class R shares until
December 31, 1999.

Sincerely,

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP, INCORPORATED

/s/ Anthony R. Manno Jr.
-------------------------------------
Anthony R. Manno, Jr., President

<PAGE>

Exhibit 5(f)

SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made as of the 30th day of June, 1998 by and among
SECURITY CAPITAL GLOBAL CAPITAL MANAGEMENT GROUP INCORPORATED, a Delaware
corporation (the "Adviser"), and SECURITY CAPITAL GLOBAL CAPITAL MANAGEMENT
GROUP (EUROPE) S.A., a Belgian corporation (the "Sub-Adviser").

WHEREAS, the Adviser is the investment adviser to Security Capital Real
Estate Mutual Funds Incorporated ("Fund"), which is an open-end, management
investment company with non-diversified investment portfolios, registered under
the Investment Company Act of 1940, as amended (the "1940 Act"); and

WHEREAS, the Adviser wishes to retain the Sub-Adviser for purposes of
rendering advisory services to Security Capital European Real Estate Shares
("SC-EURO") and the Adviser in connection with the Adviser's responsibilities to
the Fund on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt whereof is hereby
acknowledged, the parties hereto agree as follows:

1. APPOINTMENT OF SUB-ADVISER

The Fund hereby appoints the Sub-Adviser to act as SC-EURO's Sub-Adviser
under the supervision of the Adviser and the Fund's Board of Directors, and the
Sub-Adviser hereby accepts such appointment, subject to the terms and conditions
contained herein.

2. DUTIES OF SUB-ADVISER

In carrying out its obligations under Section 1 hereof and under the
supervision of the Adviser and the Fund's Board of Directors, the Sub-Adviser
shall:

(a) provide SC-EURO with such executive, administrative and clerical
services as are deemed advisable by the Adviser and the Fund's Board of
Directors;

(b) determine which issuers and securities shall be represented in
SC-EURO's portfolio in accordance with the SC-EURO's investment objectives
and policies and regularly report thereon to Adviser and the Fund's Board
of Directors;
<PAGE>

(c) formulate and implement continuing programs for the purchases and
sales of the securities of such issuers for SC-EURO's portfolio in
accordance with SC-EURO's investment objectives and policies and regularly
report thereon to the Adviser and the Fund's Board of Directors;

(d) take, on behalf of SC-EURO, all actions which appear to SC-EURO to
be necessary to carry into effect such purchase and sale programs as
aforesaid, including the placing of orders for the purchase and sale of
securities of SC-EURO;

(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or SC-EURO,
and whether concerning the individual issuers whose securities are included
in SC-EURO's portfolio or the activities in which they engage, or with
respect to securities which the Adviser considers desirable for inclusion
in the SC-EURO's portfolio; and

(f) provide recommendations, in accordance with procedures and methods
established by the Fund's Board of Directors, of the fair value of
securities held by SC-EURO for which market quotations are not readily
available for purposes of facilitating the calculation of SC-EURO's net
asset value.

3. BROKER-DEALER RELATIONSHIPS

In circumstances when the Sub-Adviser is responsible for decisions to buy
and sell securities for SC-EURO, broker-dealer selection, and negotiation of its
brokerage commission rates, the Sub-Adviser's primary consideration in effecting
a security transaction will be execution of orders at the most favorable price
on an overall basis. In performing this function, the Sub-Adviser shall comply
with applicable policies established by the Board of Directors and shall provide
the Adviser and the Board of Directors with such reports as the Adviser and the
Board of Directors may require in order to monitor SC-EURO's portfolio
transaction activities. In selecting a broker-dealer to execute each particular
transaction, the Sub-Adviser will take the following into consideration: the
best net price available; the reliability, integrity and financial condition of
the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of SC-EURO on a continuing basis. Accordingly, the price to SC-EURO
in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine, the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused SC-EURO to pay a broker-dealer that
provides brokerage and research services to the Sub-Adviser an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker-dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission was reasonable in relation to

2
<PAGE>

the value of the brokerage and research services provided by such broker-
dealer, viewed in terms of either that particular transaction or the Sub-
Adviser's overall responsibilities with respect to SC-EURO. The Sub-Adviser is
further authorized to allocate the orders placed by it on behalf of SC-EURO to
such broker-dealers who also provide research or statistical material or other
services to SC-EURO or the Sub-Adviser. Such allocation shall be in such amounts
and proportions as the Sub-Adviser shall determine and the Sub-Adviser will
report on said allocation regularly to the Adviser and Board of Directors of the
Fund, indicating the brokers to whom such allocations have been made and the
basis therefor.

Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking the most favorable price and execution
available and such other policies as the Board of Directors may determine, the
Sub-Adviser may consider services in connection with the sale of shares of
SC-EURO as a factor in the selection of broker-dealers to execute portfolio
transactions for SC-EURO. Subject to the policies established by the Board of
Directors and the supervision of the Adviser, and in compliance with applicable
law, the Adviser may direct Security Capital Markets Group Incorporated ("SCMG")
to execute portfolio transactions for SC-EURO on an agency basis. The
commissions paid to SCMG must be, as required by Rule 17e-1 under the 1940 Act,
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
If the purchase or sale of securities consistent with the investment policies of
SC-EURO or one or more other accounts of the Sub-Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
accounts in a manner deemed equitable by the Sub-Adviser. SCMG and the Sub-
Adviser may combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable execution.

SC-EURO will not deal with the Sub-Adviser, the Adviser or SCMG in any
transaction in which the Sub-Adviser or SCMG acts as a principal with respect to
any part of SC-EURO's order. If SCMG is participating in an underwriting or
selling group, SC-EURO may not buy portfolio securities from the group except in
accordance with policies established by the Board of Directors in compliance
with rules of the Securities and Exchange Commission.

4. CONTROL BY FUND'S BOARD OF DIRECTORS

Any recommendations concerning SC-EURO's investment program proposed by the
Sub-Adviser to the Adviser and to the Fund pursuant to this Agreement, as well
as any other activities undertaken by the Sub-Adviser on behalf of SC-EURO
pursuant hereto, shall at all times be subject to any applicable directives of
the Board of Directors of the Fund.

5. COMPLIANCE WITH APPLICABLE REQUIREMENTS

In carrying out its obligations under this Agreement, the Sub-Adviser shall
at all times conform to:

3
<PAGE>

(a) all applicable provisions of the 1940 Act and any rules and
regulations adopted thereunder, as amended;

(b) the provisions of the Fund's Registration Statement on Form N-1A
under the Securities Act of 1933 and the 1940 Act;

(d) the provisions of the Fund's Bylaws, as amended from time to time;
and

(e) any other applicable provisions of U.S. federal and state law and
Belgian law.

6. COMPENSATION

As consideration for the services provided under this Agreement, the
Adviser will pay the Sub-Adviser monthly, a management fee in an amount equal to
.08% of SC-EURO's average daily net asset value on an annual basis.

7. EXPENSES

The Sub-Adviser, at its own expense, will furnish (i) all necessary
investment and management facilities, including salaries of personnel required
for it to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of SC-EURO under the supervision of
the Adviser and the Fund's Board of Directors.

8. BOOKS AND RECORDS

The Sub-Adviser will maintain, and at its own expense, make available to
U.S. and foreign regulatory authorities, all accounts, books and records with
respect to SC-EURO in connection with the Sub-Adviser's provision of services
under this Agreement as are required of an investment adviser of a registered
investment company pursuant to the 1940 Act and the Investment Advisers Act of
1940 ("the "Investment Advisers Act") and the rules thereunder.

9. SUPPLEMENTAL AND OTHER ARRANGEMENTS

The Sub-Adviser may enter into arrangements with other persons affiliated
with the Sub-Adviser to better enable it to fulfill its obligations under this
Agreement.

The services of the Sub-Adviser to SC-EURO are not to be deemed to be
exclusive, the Sub-

4
<PAGE>

Adviser and any person controlling, controlled by or under common control with
the Sub-Adviser being free to render investment advisory and other services to
any other person or entity.

10. CONFLICTS OF INTEREST

It is understood that directors, officers, agents and shareholders of the
Fund are or may be interested persons of the Adviser or the Sub-Adviser within
the meaning of Section 2(a)(19) of the 1940 Act; that directors, officers,
agents and shareholders of the Adviser or the Sub-Adviser are or may be
interested persons of the Fund; that the Adviser or the Sub-Adviser may be an
interested person of the Fund within the meaning of Section 2(a)(19) of the 1940
Act; and that the existence of any such common interests shall not affect the
validity hereof or of any transactions hereunder except as otherwise provided in
the Articles of Incorporation or Bylaws of the Fund, the Adviser and/or the Sub-
Adviser, respectively, or by specific provision of applicable law.

11. REGULATION

The Sub-Adviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.

12. PROVISION OF CERTAIN INFORMATION BY SUB-ADVISER

The Sub-Adviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:

(a) the Sub-Adviser fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any jurisdiction in
which the Sub-Adviser is required to be registered as an investment adviser
in order to perform its obligations under this Agreement;

(b) the Sub-Adviser is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or in equity,
before or by any court, public board or body, involving the affairs of the
trust; and

13. AMENDMENTS TO THE AGREEMENT

This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the Fund's Directors who are
not interested persons of the Adviser or the Sub-Adviser within the meaning of
Section 2(a)(19) of the 1940 Act, cast in person at a meeting called for the
purpose of voting on such approval. Any required shareholder approval

5
<PAGE>

shall be effective with respect to SC-EURO if a majority of the outstanding
voting securities of SC-EURO vote to approve the amendment.

14. TERM

This Agreement shall become effective at 12:01 a.m. on the date hereof and
shall remain in force and effect, subject to Section 16 hereof, for two years
from the date hereof.

15. RENEWAL

Following the expiration of its initial two-year term, this Agreement shall
continue in force and effect from year to year, provided that such continuance
is specifically approved at least annually: (a) either (i) by the Fund's Board
of Directors or (ii) by the vote of a majority of the outstanding voting
securities of SC-EURO within the meaning of Section 2(a)(42) of the 1940 Act;
and (b) by the affirmative vote of a majority of the Directors who are not
"interested persons" of the Adviser or the Sub-Adviser within the meaning of
Section 2(a)(19) of the 1940 Act, by votes cast in person at a meeting
specifically called for such purpose.

16. TERMINATION

This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Fund's Board of Directors or by vote of a majority of
the outstanding voting securities of the Fund within the meaning of Section
2(a)(42) of the 1940 Act, on sixty (60) days' written notice to the Adviser and
the Sub-Adviser. This Agreement may be terminated at any time, without the
payment of any penalty, by the Adviser or the Sub-Adviser on sixty (60) days'
written notice to the other party and to the Fund. The notice provided for
herein may be waived by any person to whom such notice is required. This
Agreement shall automatically terminate in the event of its assignment within
the meaning of Section 2 (a) (4) of the 1940 Act.

17. LIABILITY OF SUB-ADVISER

In the performance of its duties hereunder, the Sub-Adviser shall be
obligated to exercise care and diligence and to act in good faith and to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement, but the Sub-Adviser shall not be liable for any
act or omission which does not constitute willful misfeasance, bad faith or
gross negligence on the part of the Sub-Adviser or its officers, directors or
employees, or reckless disregard by the Sub-Adviser of its duties under this
Agreement.

18. NOTICES

Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other parties hereto, it is agreed that the address of the Sub-Adviser
shall be Boulevard de la Woluwe 34, Brussels, Belgium, and of the Adviser shall
be 11

6
<PAGE>

South LaSalle Street, Chicago, Illinois 60603.

19. QUESTIONS AND INTERPRETATION

Any question of interpretation of any term or provision of this Agreement
having a counterpart in or otherwise derived from a term or provision of the
1940 Act shall be resolved by reference to such term or provision of the 1940
Act and to interpretations thereof, if any, by the United States Courts or in
the absence of any controlling decision of any such court, by rules, regulations
or orders of the SEC issued pursuant to said Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Illinois.

7
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.

Attest: SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED
/s/ Anna R. Pina
- ---------------------------------- By: /s/ Jeffrey C. Nellessen
-------------------------------
Title: Vice President

Attest: SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP (EUROPE) S.A.

/s/ W. J. Houlihan
- ---------------------------------- By: /s/ Gerios Rovers
W. J. Houlihan -------------------------------
Title: Vice President

<PAGE>

Exhibit 6(a)

DISTRIBUTION AND SERVICING AGREEMENT

This Distribution and Servicing Agreement, made this 17th day of
December, 1997, by and between Security Capital U.S. Real Estate Shares
Incorporated, a Maryland corporation ("Fund") and Security Capital Markets Group
Incorporated, a Delaware corporation, (the "Distributor")

WHEREAS, the Fund is registered with the Securities and Exchange Commission
as an open-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and has registered shares of Class I, Class I and
Class R common stock for sale to the public under the Securities Act of 1933
(the "1933 Act") and various state securities laws; and

WHEREAS, the Fund wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of Class I and Class R
shares of the Fund ("Shares") and to furnish certain other services to the
Fund's Class I and Class R shareholders as specified in this Agreement; and

WHEREAS, this Agreement has been approved by separate votes of the Fund's
Board of Directors and of its disinterested directors in conformity with Section
15 of, and paragraph (b)(2) of Rule 12b-1 under, the 1940 Act; and

WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:

1. (a) The Fund hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Fund's Class I and
Class R shares. The Distributor, as exclusive agent for the Fund, and subject to
applicable federal and state law and the Articles of Incorporation and By-Laws
of the Fund, shall: (1) provide services to the Fund primarily intended to
result in the sale of the Shares; (2) solicit orders for the purchase of the
Shares subject to such terms and conditions as the Fund may specify; and (3)
accept orders for the purchase of the Shares on behalf of the Fund
(collectively, "Distribution Services"). The Distributor shall comply with all
applicable federal and state laws and offer the Shares of the Fund on an agency
or "best efforts" basis under which the Fund shall issue only such Shares as are
actually sold. The Distributor shall have the right to use any list of
shareholders of the Fund or the Fund or any other list of investors which it
obtains in connection with its provision of services under this Agreement;
provided, however, that the Distributor shall not sell or knowingly provide such
list or lists to any unaffiliated person without the consent of the Fund's Board
of Directors.
<PAGE>

(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing shareholders
with information on their investments, and any other services now or hereafter
deemed to be appropriate subjects for the payments of "service fees" under Rule
2830 of the Conduct Rules of the National Association of Securities Dealers,
Inc. (collectively, "Shareholder Services").

2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, and may enter into agreements with qualified dealers
and other qualified entities to perform record keeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Fund and the Distributor. In making such arrangements, the Distributor
shall act only as principal and not as agent for the Fund. No such dealer or
other entity is authorized to act as agent for the Fund in connection with the
offering or sale of Shares to the public or otherwise.

3. The public offering price of the Shares of the Fund shall be the net
asset value per share of the outstanding Shares of the Fund. The Fund or its
administrator shall furnish the Distributor with a statement of each computation
of public offering price and of the details entering into such computation.

4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall receive from the Fund a distribution fee and a
service fee at the rates and under the terms and conditions of the Distribution
and Service Plan for Class I Shares and the Distribution and Service Plan for
Class R Shares (each, a "Plan") adopted by the Fund, as such Plans are in effect
from time to time, and subject to any further limitations on such fees as the
Fund's Board of Directors may impose. The Distributor may reallow any or all of
the distribution fee and service fee that it has received under this Agreement
to such dealers or sub-accountants as it may from time to time determine.

5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Fund with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Fund filed by the Fund as part of the
Registration Statement, or as they may be amended from time to time.

6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or subaccountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Fund, and the Fund shall not be responsible

2
<PAGE>

in any way for any other information, statements or representations given or
made by the Distributor, any dealer or sub-accountant, or their representatives
or agents. Except as specifically provided in this Agreement, the Fund shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.

7. The Fund agrees at its own expense to register the Shares with the
Securities and Exchange Commission, state and other regulatory bodies, and to
prepare and file from time to time such Prospectuses, Statements of Additional
Information, amendments, reports and other documents as may be necessary to
maintain the Registration Statement. The Fund shall bear all expenses related to
preparing and typesetting such Prospectuses, Statements of Additional
Information, and other materials required by law and such other expenses,
including printing and mailing expenses, related to such Fund's communications
with persons who are shareholders of the Fund.

8. The Fund agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
required to be stated or necessary to make the Registration Statement not
misleading, provided that in no event shall anything contained in this Agreement
be construed so as to protect the Distributor against any liability to the Fund
or its shareholders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement, and further provided that the Fund shall not
indemnify the Distributor for conduct set forth in paragraph 9.

9. The Distributor agrees to indemnify, defend and hold the Fund, its
several officers and directors, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Fund, its officers or
directors, or any such controlling person may incur, under the 1933 Act or under
common law or otherwise, on account of any wrongful act of the Distributor or
any of its employees or arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Fund for use in the Registration Statement or arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement or
necessary to make such information not misleading. As used in this paragraph,
the term "employee" shall not include a corporate entity under contract to
provide services to the Fund or the Fund, or any employee of such a corporate
entity, unless such person is otherwise an employee of the Fund.

3
<PAGE>

10. The Fund reserves the right at any time to withdraw all offerings of
the Shares of the Fund by written notice to the Distributor at its principal
office.

11. The Fund shall not issue certificates representing Shares unless
requested by a shareholder. If such request is transmitted through the
Distributor, the Fund will cause certificates evidencing the Shares owned to be
issued in such names and denominations as the Distributor shall from time to
time direct, provided that no certificates shall be issued for fractional
Shares.

12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by facsimile or in writing,
the Fund and the Fund's transfer agent, of the orders for repurchase of Shares
received by the Distributor since the last such report, the amount to be paid
for such Shares, and the identity of the shareholders or dealers offering Shares
for repurchase. Upon such notice, the Fund shall pay the Distributor such
amounts as are required by the Distributor for the repurchase of such Shares in
cash or in the form of a credit against moneys due the Fund from the Distributor
as proceeds from the sale of Shares. The Fund reserves the right to suspend such
repurchase right upon written notice to the Distributor. The Distributor further
agrees to act as agent for the Fund to receive and transmit promptly to the
Fund's transfer agent shareholder and dealer requests for redemption of Shares.

13. The Distributor is an independent contractor and shall be agent for
the Fund only in respect to the sale and redemption of the Shares.

14. The services of the Distributor to the Fund under this Agreement are
not to be deemed exclusive, and the Distributor shall be free to render similar
services or other services to others so long as its services hereunder are not
impaired thereby.

15. The Distributor shall prepare reports for the Fund's Board of
Directors on a quarterly basis showing such information concerning expenditures
related to this Agreement as from time to time shall be reasonably requested by
the Board of Directors.

16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.

17. This Agreement will become effective with respect to the Fund on the
date first written above and, unless sooner terminated as provided herein, will
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Agreement shall continue in effect with respect to the Fund for
successive annual periods ending on the same date of each year, provided that
such continuance is specifically approved at least annually (i) by the Fund's
Board of Directors or (ii) by a vote of a majority of the outstanding Class I
and Class R voting securities of

4
<PAGE>

the Fund (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval.

18. This Agreement is terminable with respect to the Fund or in its
entirety without penalty, on not less than 60 days notice to the other party,
by: (i) the Fund's Board of Directors by a vote of the Directors who are not
interested persons of the Fund within the meaning of Section 2(a)(19) of the
1940 Act, and have no direct or indirect financial interest in the operation of
the Plans or in any agreement related to the Plans, including this Agreement;
(ii), by vote of a majority of the outstanding Class I and Class R voting
securities of the Fund (as defined in the 1940 Act); (iii) by the Distributor,
or (iv) upon the mutual written consent of the Distributor and the Fund. This
Agreement will also automatically and immediately terminate in the event of its
assignment.

19. No provision of this Agreement may be changed, waived, discharged or
terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.

IN WITNESS WHEREOF, the parties hereto caused this Agreement to be executed
by their officers thereunto duly authorized.

Attest: SECURITY CAPITAL U.S. REAL ESTATE
SHARES INCORPORATED

By: /s/ Michael J. Heller By: /s/ Jeffrey C. Nellessen
------------------------------- -----------------------------------

Attest: SECURITY CAPITAL MARKETS GROUP
INCORPORATED

By: /s/ Melissa Long By: /s/ Donald E. Suter
------------------------------- -----------------------------------

<PAGE>

EXHIBIT 6(b)
DISTRIBUTION AND SERVICING AGREEMENT

This Distribution and Servicing Agreement is made this 30th day of
June, 1998, by and between Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund") and Security Capital Markets Group
Incorporated, a Delaware corporation, (the "Distributor").

WHEREAS, the Fund is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and issues registered shares of the classes
of common stock ("Classes") of its investment portfolios ("Series"), as set
forth on Schedule A hereto, for sale to the public under the Securities Act of
1933 (the "1933 Act") and various state securities laws; and

WHEREAS, the Fund may suspend the sales of shares of any one or more Series
or Classes at any time and may resume the sales of any such Series or Class(es)
at a later date; and

WHEREAS, the Fund has retained the Distributor as the principal underwriter
in connection with the offering and sale of the Class I and Class R shares of
Security Capital U.S. Real Estate Shares; and

WHEREAS, the Fund wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of all Classes of the
Series' shares ("Shares"), as may now or hereinafter be established, and to
furnish certain other services to the Series' shareholders as specified in this
Agreement; and

WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:

1. (a) The Fund hereby appoints the Distributor as principal underwriter in
connection with the offering and sale of the Shares. The Distributor,
as exclusive agent for the Fund, and subject to applicable federal and
state law and the Articles of Incorporation and By-Laws of the Fund,
shall: (1) provide services to the Fund primarily intended to result
in the sale of the Shares; (2) solicit orders for the purchase of the
Shares subject to such terms and conditions as the Fund may specify;
and (3) accept orders for the purchase of the Shares on behalf of the
Fund (collectively, "Distribution
<PAGE>

Services"). The appointment of the Distributor hereunder shall not
preclude the Fund from selling the Shares directly to the public.

The Distributor shall comply with all applicable federal and state
laws and offer the Shares of the Fund on an agency or "best efforts"
basis under which the Fund shall issue only such Shares as are
actually sold. The Distributor shall have the right to use any list
of shareholders of the Fund or the Fund or any other list of investors
which it obtains in connection with its provision of services under
this Agreement; provided, however, that the Distributor shall not sell
or knowingly provide such list or lists to any unaffiliated person
without the consent of the Fund's Board of Directors.

(b) The Distributor shall provide to the Series' shareholders ongoing
shareholder liaison services, including responding to shareholder
inquiries, providing shareholders with information on their
investments, recordkeeping, sub-accounting services and any other
services now or hereafter deemed to be appropriate subjects for the
payments of "service fees" under Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").

2. The Distributor accepts such appointment. The Distributor shall offer the
Fund's shares only on the terms set forth in the Fund's Registration
Statement, Prospectus or Statement of Additional Information.

3. As used in this Agreement, the term "Registration Statement" shall mean the
registration statement most recently filed by the Fund with the Securities
and Exchange Commission and effective under the 1940 Act and 1933 Act, as
such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement
of additional information with respect to the Fund filed by the Fund as
part of the Registration Statement, or as they may be amended from time to
time.

4. The Distributor may enter into dealer agreements with registered and
qualified securities dealers and other financial intermediaries it may
select for the performance of Distribution Services and Shareholder
Services, the form of such agreements to be as mutually agreed upon and
approved by the Fund and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Fund. No
such dealer or other financial intermediary is authorized to act as agent
for the Fund in connection with the provision of Distribution Services,
Shareholder Services or otherwise.

5. As compensation for providing Distribution Services and Shareholder
Services under this Agreement, with respect to the Shares, the Distributor
shall receive from the Fund a distribution fee and a service fee at the
rates and under the terms and conditions of the Distribution Services and
Service Plans (each, a "Plan") adopted by the Fund with respect to each
Series, as such Plans

2
<PAGE>

are in effect from time to time, and subject to any further limitations on
such fees as the Fund's Board of Directors may impose. The Distributor may
reallow any or all of the distribution fee and service fee that it has
received under this Agreement to such dealers, financial intermediaries or
sub-accountants as it may from time to time determine.

6. Allocation of Expenses.

(a) The Fund will pay (or will enter into arrangements providing that
persons other than the Fund will pay) for all expenses of the offering
of its shares incurred in connection with:

(1) The registration of the Fund or the registration or qualification
of the Fund's shares for offer or sale under the federal
securities laws and the securities laws of any state or other
jurisdiction in which the Distributor may arrange for the sale of
the Fund's shares; and

(2) The printing and distribution of the Fund's prospectuses to
existing shareholders as may be required under the federal
securities laws and the applicable securities laws of any state or
other jurisdiction; and

(3) The preparation, printing and distribution of any proxy
statements, notices and reports, and the performance of any acts
required to be performed by the Fund by and under the federal
securities laws and the applicable securities laws of any state or
other jurisdiction; and

(4) The issuance of the Fund's shares, including any share issue and
transfer taxes.

(b) The Distributor will pay from its own resources (or will enter into
arrangements providing that persons other than the Distributor or the
Fund shall pay), or promptly reimburse the Fund, for all expenses in
connection with:

(1) The printing and distribution of the Fund's prospectuses utilized
in connection with the provision of Distribution Services;

(2) The preparation, printing and distribution of advertising and
sales literature for use in the offering of the Fund's shares and
printing and distribution of reports to shareholders used as sales
literature;

3
<PAGE>

(3) The qualification of the Distributor as a distributor or broker or
dealer under any applicable federal or state securities laws;

(4) Any investment program of the Fund, including the reinvestment of
dividends and capital gains distributions, to the extent such
expenses exceed the Fund's normal costs of issuing its shares; and

(5) All other expenses in connection with the provision of
Distribution Services and Shareholder Services which have not been
herein specifically allocated to the Fund.

7. Duties of the Distributor.

(a) The Distributor shall devote reasonable time and effort to effect sales
of the Fund's shares, but it shall not be obligated to sell any
specific number of shares.

(b) The Distributor shall use its best efforts in all respects duly to
conform with the requirements of all federal and state laws and
regulations and the regulations of the NASD, in providing Distribution
Services and Shareholder Services. Neither the Distributor nor any
other person is authorized by the Fund to give any information or to
make any representations, other than those contained in the Fund's then
current registration statement or related prospectus and any sales
literature authorized by responsible officers of the Distributor.

(c) The Distributor shall act as an independent contractor and nothing
herein contained shall constitute the Distributor, its agents or
representatives, or any employees thereof as employees of the Fund in
connection with the sale of the Fund's shares.

The Distributor is responsible for its own conduct and the employment,
control and conduct of its agents and employees and for injury to such
agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees
under applicable statutes and agrees to pay all employer taxes
thereunder.

8. Sale and Redemption of the Fund's Shares.

(a) Orders for the purchase and redemption of the Fund's shares (and
payment for the Fund's shares, in the case of a purchase) shall be
transmitted directly from the Purchaser to the Fund or its agent.

(b) The Fund shall have the right to suspend the redemption of the Fund's
shares pursuant to the conditions set forth in the Fund's then current
registration statement or related prospectus. The Fund shall also have
the right to suspend the sale of the Fund's shares at any time.

4
<PAGE>

(c) The Fund will give the Distributor prompt notice of any such suspension
and shall promptly furnish such other information in connection with
the sale and redemption of the Fund's shares as the Distributor
reasonably requests.

(d) The Fund (or its agent) will make appropriate book entries upon receipt
by the Fund (or its agent) of orders and payments for the Fund's shares
or requests for redemption thereof, and will issue and redeem the
Fund's shares and confirm such transactions in accordance with
applicable laws and regulations.

9. Indemnification.

The Fund agrees to indemnify, defend and hold the Distributor, its several
officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of
or based upon any alleged untrue statement of a material fact contained in
the Registration Statement or arising out of or based upon any alleged
omission to state a material fact required to be stated or necessary to
make the Registration Statement not misleading, provided that in no event
shall anything contained in this Agreement be construed so as to protect
the Distributor against any liability to the Fund or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement.

The Distributor agrees to indemnify, defend and hold the Fund, its several
officers and directors, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost
of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its officers
or directors, or any such controlling person may incur, under the 1933 Act
or under common law or otherwise, on account of any wrongful act of the
Distributor or any of its employees or arising out of or based upon any
alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Fund for use in the
Registration Statement or arising out of or based upon any alleged omission
to state a material fact in connection with such information required to be
stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the Fund
or the Fund, or any employee of such a corporate entity, unless such person
is otherwise an employee of the Fund.

10. The Fund shall not issue certificates representing Shares unless requested
by a shareholder. If such request is transmitted through the Distributor,
the Fund will cause certificates

5
<PAGE>

evidencing the Shares owned to be issued in such names and denominations as
the Distributor shall from time to time direct, provided that no
certificates shall be issued for fractional Shares.

11. The Distributor may at its sole discretion, directly or through dealers,
repurchase Shares offered for sale by shareholders, dealers or financial
intermediaries. Any repurchase of Shares by the Distributor shall be at
the net asset value next determined after a repurchase order has been
received. The Distributor will receive no commission or other remuneration
for repurchasing Shares. At the end of each business day, the Distributor
shall notify by facsimile or in writing, the Fund and the Fund's transfer
agent, of the orders for repurchase of Shares received by the Distributor
since the last such report, the amount to be paid for such Shares, and the
identity of the shareholders or dealers offering Shares for repurchase.
Upon such notice, the Fund shall pay the Distributor such amounts as are
required by the Distributor for the repurchase of such Shares in cash or in
the form of a credit against moneys due the Fund from the Distributor as
proceeds from the sale of Shares. The Fund reserves the right to suspend
such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Fund to receive and
transmit promptly to the Fund's transfer agent shareholder and dealer
requests for redemption of Shares.

12. The services of the Distributor to the Fund under this Agreement are not to
be deemed exclusive, and the Distributor shall be free to render similar
services or other services to others so long as its services hereunder are
not impaired thereby.

13. The Distributor shall prepare reports for the Fund's Board of Directors on
a quarterly basis showing such information concerning expenditures related
to this Agreement as from time to time shall be reasonably requested by the
Board of Directors.

14. As used in this Agreement, the terms "assignment," "interested person," and
"majority of the outstanding voting securities" shall have the meanings
given to them by Section 2(a) of the 1940 Act, subject to such exemptions
as may be granted by the Securities and Exchange Commission by any rule,
regulation or order.

15. This Agreement will become effective with respect to the Fund on the date
first written above and, unless sooner terminated as provided herein, will
continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue in effect with respect to
the Fund for successive annual periods ending on the same date of each
year, provided that such continuance is specifically approved at least
annually (i) by the Fund's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of each Series, or a Class thereof, provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are
not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.

6
<PAGE>

16. This Agreement is terminable with respect to a Series, or a Class thereof,
or in its entirety, without penalty, on not less than 60 days notice to the
other party, by: (i) the Fund's Board of Directors by a vote of the
Directors who are not interested persons of the Fund within the meaning of
Section 2(a)(19) of the 1940 Act, and have no direct or indirect financial
interest in the operation of the Plans or in any agreement related to the
Plans, including this Agreement; (ii) by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of a Series or a
Class thereof; (iii) by the Distributor; or (iv) upon the mutual written
consent of the Distributor and the Fund. This Agreement will also
automatically and immediately terminate in the event of its assignment.

17. No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against
which enforcement of the change, waiver, discharge or termination is
sought.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.

Attest: SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED

By: /s/ Anna R. Pena By: /s/ Jeffrey C. Nellessen
----------------------------- ------------------------------

Attest: SECURITY CAPITAL MARKETS GROUP
INCORPORATED

By: /s/ Anna R. Pena By: /s/ Donald E. Suter
----------------------------- ------------------------------

7
<PAGE>

SCHEDULE A

Series of Security Capital Real Estate Mutual Funds Incorporated
----------------------------------------------------------------

Security Capital U.S. Real Estate Shares/1/

Security Capital European Real Estate Shares ("SC-EURO")

Security Capital Asia/ Pacific Real Estate Shares ("SC-ARBITRAGE")

Security Capital Real Estate Arbitrage Shares ("SC-ASIA")

Security Capital Real Estate Mutual Funds Incorporated Classes of Shares
------------------------------------------------------------------------

Class I Shares: Class I shares of SC-EURO, SC-ARBITRAGE and SC-ASIA are sold
at net asset value to investors whose minimum initial
purchase of the shares of that Series is $250,000.

Class R Shares: Class R shares of SC-EURO and SC-ASIA are sold at net asset
value to investors whose minimum initial purchase of the
shares of that Series is $2,500.

- --------------------
/1/ Distribution Services and Shareholder Services are provided by the
Distributor pursuant to a Distribution and Servicing Agreement dated as of
December 17, 1997.

<PAGE>

Exhibit 8(a)

Custodian Agreement
-------------------

This Agreement between Security Capital Real Estate Mutual Funds
Incorporated, a corporation organized and existing under the laws of the State
of Maryland with its principal place of business at 11 South LaSalle Street,
Chicago, Illinois 60603 (the "FUND"), and State Street Bank and Trust Company,
a Massachusetts trust company with its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110 (the "CUSTODIAN"),

Witnesseth:

Whereas, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and

Whereas, the Fund intends that this Agreement be applicable to each of the
series and classes listed on Appendix A attached hereto (such series together
with all other series subsequently established by the Fund and made subject to
this Agreement in accordance with Section 18, be referred to herein as the
"PORTFOLIO(S)");

Now Therefore, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:

Section 1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------

The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("DOMESTIC SECURITIES") and securities it desires to be held outside the United
States ("FOREIGN SECURITIES"). The Fund on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolios, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund representing interests in the Portfolios
("SHARES") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the Portfolio
and not delivered to the Custodian.

Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in Section 6
hereof), the Custodian shall on behalf of the applicable Portfolio(s) from time
to time employ one or more sub-custodians located in the United States, but only
in accordance with an applicable vote by the Board of Directors of the Fund (the
"BOARD") on behalf of the applicable Portfolio(s), and provided that the
Custodian shall have no more or less responsibility or liability to the Fund on
account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian. The Custodian may employ as sub-
custodian for the Fund's foreign securities on behalf of the
<PAGE>

applicable Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedules A and B hereto but only in accordance with
the applicable provisions of Sections 3 and 4.

Section 2. Duties of the Custodian with Respect to Property of the Fund Held By
--------------------------------------------------------------------
the Custodian in the United States
----------------------------------

Section 2.1 Holding Securities. The Custodian shall hold and physically
------------------
segregate for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to Section
2.8 in a clearing agency which acts as a securities depository or in a book-
entry system authorized by the U.S. Department of the Treasury (each, a "U.S.
SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State Street
Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER") which
is deposited and/or maintained in the Direct Paper System of the Custodian (the
"DIRECT PAPER SYSTEM") pursuant to Section 2.9.

Section 2.2 Delivery of Securities. The Custodian shall release and
----------------------
deliver domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon
receipt of Proper Instructions on behalf of the applicable Portfolio, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:

1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;

2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;

3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.8 hereof;

4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;

5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;

6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.7 or into the name or nominee name of any sub-custodian
appointed pursuant to Section 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount
<PAGE>

or number of units; provided that, in any such case, the new
--------
securities are to be delivered to the Custodian;

7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;

8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;

9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;

10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--- ----
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash, obligations issued by the
United States government, its agencies or instrumentalities,
irrevocable letters of credit or other collateral acceptable to the
lending agent, except that in connection with any loans for which
collateral is to be credited to the Custodian's account in the book-
entry system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the delivery of
securities owned by the Portfolio prior to the receipt of such
collateral;

11) For delivery as security in connection with any borrowing by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
--------

12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "EXCHANGE
ACT") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
<PAGE>

Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;

13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;

14) Upon receipt of instructions from the transfer agent for the Fund (the
"TRANSFER AGENT") for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund related to the
Portfolio (the "PROSPECTUS"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and

15) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the applicable
Portfolio, a copy of a resolution of the Board or of the Executive
Committee thereof signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary thereof (a "CERTIFIED
RESOLUTION"), specifying the securities of the Portfolio to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities shall
be made.

Section 2.3 Registration of Securities. Domestic securities held by the
--------------------------
Custodian (other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Portfolio, unless the Fund has authorized in writing the appointment of a
------
nominee to be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or nominee name of
any agent appointed pursuant to Section 2.7 or in the name or nominee name of
any sub-custodian appointed pursuant to Section 1. All securities accepted by
the Custodian on behalf of the Portfolio under the terms of this Agreement shall
be in "street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls, maturities,
tender or exchange offers, class action settlements and proofs of claims.
<PAGE>

Section 2.4 Bank Accounts. The Custodian shall open and maintain a
-------------
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended (the "1940 ACT"). Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
--------
however, that every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the Board. Such
funds shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.

Section 2.5 Collection of Income. Subject to the provisions of Section
--------------------
2.3, the Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.

Section 2.6 Payment of Fund Monies. Upon receipt of Proper Instructions
----------------------
on behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:

1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
1940 Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the
<PAGE>

Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S.
Securities System, in accordance with the conditions set forth in
Section 2.8 hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in Section
2.9; (d) in the case of repurchase agreements entered into between the
Fund on behalf of the Portfolio and the Custodian, or another bank, or
a broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing purchase
by the Portfolio of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to repurchase such
securities from the Portfolio or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions from
the Fund as defined herein;

2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;

3) For the redemption or repurchase of Shares issued as set forth in
Section 5 hereof;

4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;

5) For the payment of any dividends on Shares declared pursuant to the
governing documents of the Fund;

6) For payment of the amount of dividends received in respect of
securities sold short;

7) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the Portfolio, a copy
of a Certified Resolution specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper corporate purpose, and naming
the person or persons to whom such payment is to be made.

Section 2.7 Appointment of Agents. The Custodian may at any time or times
---------------------
in its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the 1940 Act to act as a custodian, as
its agent to
<PAGE>

carry out such of the provisions of this Section 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any agent shall
--------
not relieve the Custodian of its responsibilities or liabilities hereunder.

Section 2.8 Deposit of Fund Assets in U.S. Securities Systems. The
-------------------------------------------------
Custodian may deposit and/or maintain securities owned by a Portfolio in a
clearing agency registered with the United States Securities and Exchange
Commission (the "SEC") under Section 17A of the Exchange Act , which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:

1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account of the Custodian in the U.S. Securities System (the "U.S.
SECURITIES SYSTEM ACCOUNT") which account shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;

2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;

3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the U.S.
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities has been
transferred to the U.S. Securities System Account, and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Portfolio. Copies of all advices
from the U.S. Securities System of transfers of securities for the
account of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on behalf
of the Portfolio confirmation of each transfer to or from the account
of the Portfolio in the form of a written advice or notice and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio;

4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
<PAGE>

accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;

5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Section 15 hereof;

6) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage.

Section 2.9 Fund Assets Held in the Custodian's Direct Paper System. The
-------------------------------------------------------
Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:

1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;

2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in the Direct Paper
System Account, which account shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;

3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;

4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;

5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the
<PAGE>

form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Direct Paper System for the account of
the Portfolio;

6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.

Section 2.10 Segregated Account. The Custodian shall upon receipt of
------------------
Proper Instructions on behalf of each applicable Portfolio establish and
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash, securities,
irrevocable letters of credit or other permissible collateral, including
securities maintained in an account by the Custodian pursuant to Section 2.8
hereof, (i) in accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Portfolio or commodity
futures contracts or options thereon purchased or sold by the Portfolio, (iii)
for the purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the SEC relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper trust purposes, but only, in the
--------
case of clause (iv), upon receipt of, in addition to Proper Instructions from
the Fund on behalf of the applicable Portfolio, a copy of a Certified Resolution
setting forth the purpose or purposes of such segregated account and declaring
such purpose(s) to be a proper corporate purpose.

Section 2.11 Ownership Certificates for Tax Purposes. The Custodian shall
---------------------------------------
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in connection
with transfers of securities.

Section 2.12 Proxies. The Custodian shall, with respect to the domestic
-------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
<PAGE>

Section 2.13 Communications Relating to Portfolio Securities. Subject to
-----------------------------------------------
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.

Section 3. The Custodian as Foreign Custody Manager of the Portfolios
----------------------------------------------------------

Section 3.1 Definitions. The following capitalized terms shall have the
-----------
indicated meanings:

"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.

"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.

"FOREIGN ASSETS" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.

"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.

"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund, on the Portfolios' behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because
<PAGE>

maintaining or effecting trades in securities outside the foreign securities
depository or clearing agency is not consistent with prevailing or developing
custodial or market practices.

Section 3.2 Delegation to the Custodian as Foreign Custody Manager. The
------------------------------------------------------
Fund, by resolution adopted by the Board, hereby delegates to the Custodian with
respect to the Portfolios, subject to Section (b) of Rule 17f-5, the
responsibilities set forth in this Section 3 with respect to Foreign Assets of
the Portfolios held outside the United States, and the Custodian hereby accepts
such delegation, as Foreign Custody Manager with respect to the Portfolios.

Section 3.3 Countries Covered. The Foreign Custody Manager shall be
-----------------
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this Agreement, which list of countries may be amended
from time to time by the Fund with the Agreement of the Foreign Custody Manager.
The Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of the
Portfolios, which list of Eligible Foreign Custodians may be amended from time
to time in the sole discretion of the Foreign Custody Manager. Mandatory
Securities Depositories are listed on Schedule B to this Contract, which
Schedule B may be amended from time to time by the Foreign Custody Manager. The
Foreign Custody Manager will provide amended versions of Schedules A and B in
accordance with Section 3.7 hereof.

Upon the receipt by the Foreign Custody Manager of Proper Instructions to
open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Following the receipt of Proper
Instructions directing the Foreign Custody Manager to close the account of a
Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board on behalf of the
Portfolios to the Custodian as Foreign Custody Manager for that country shall be
deemed to have been withdrawn and the Custodian shall immediately cease to be
the Foreign Custody Manager of the Portfolios with respect to that country.

The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
<PAGE>

Section 3.4 Scope of Delegated Responsibilities.
-----------------------------------

3.4.1. Selection of Eligible Foreign Custodians. Subject to the
----------------------------------------
provisions of this Section 3, the Portfolios' Foreign Custody Manager may place
and maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A, as
amended from time to time. In performing its delegated responsibilities as
Foreign Custody Manager to place or maintain Foreign Assets with an Eligible
Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign
Assets will be subject to reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will be held by that
Eligible Foreign Custodian, after considering all factors relevant to the
safekeeping of such assets, including, without limitation the factors specified
in Rule 17f-5(c)(1).

3.4.2. Contracts With Eligible Foreign Custodians. The Foreign Custody
------------------------------------------
Manager shall determine that the contract (or the rules or established practices
or procedures in the case of an Eligible Foreign Custodian that is a foreign
securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).

3.4.3. Monitoring. In each case in which the Foreign Custody Manager
----------
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system to
monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall notify
the Board in accordance with Section 3.7 hereunder.

Section 3.5 Guidelines for the Exercise of Delegated Authority. For
--------------------------------------------------
purposes of this Section 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund, on behalf of the Portfolios, and
the Board shall be deemed to be monitoring on a continuing basis such Country
Risk to the extent that the Board considers necessary or appropriate. The Fund
and the Custodian each expressly acknowledge that the Foreign Custody Manager
shall not be delegated any responsibilities under this Section 3 with respect to
Mandatory Securities Depositories.
<PAGE>

Section 3.6 Standard of Care as Foreign Custody Manager of the Portfolios.
-------------------------------------------------------------
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.

Section 3.7 Reporting Requirements. The Foreign Custody Manager shall
----------------------
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign Custodian
by providing to the Board amended Schedules A or B at the end of the calendar
quarter in which an amendment to either Schedule has occurred. The Foreign
Custody Manager shall make written reports notifying the Board of any other
material change in the foreign custody arrangements of the Portfolios described
in this Section 3 after the occurrence of the material change.

Section 3.8 Representations with Respect to Rule 17f-5. The Foreign
------------------------------------------
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the
Board has determined that it is reasonable for the Board to rely on the
Custodian to perform the responsibilities delegated pursuant to this Agreement
to the Custodian as the Foreign Custody Manager of the Portfolios.

Section 3.9 Effective Date and Termination of the Custodian as Foreign
----------------------------------------------------------
Custody Manager. The Board's delegation to the Custodian as Foreign Custody
- ---------------
Manager of the Portfolios shall be effective as of the date of execution of this
Agreement and shall remain in effect until terminated at any time, without
penalty, by written notice from the terminating party to the non-terminating
party. Termination will become effective thirty (30) days after receipt by the
non-terminating party of such notice. The provisions of Section 3.3 hereof
shall govern the delegation to and termination of the Custodian as Foreign
Custody Manager of the Portfolios with respect to designated countries.

Section 4. Duties of the Custodian with Respect to Property of the Portfolios
------------------------------------------------------------------
Held Outside of the United States
---------------------------------

Section 4.1 Definitions. Capitalized terms in this Section 4 shall have
-----------
the following meanings:

"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.

"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
<PAGE>

Section 4.2 Holding Securities. The Custodian shall identify on its books
------------------
as belonging to the Portfolios the foreign securities held by each Foreign Sub-
Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Portfolios, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, provided however, that (i) the records of the
----------------
Custodian with respect to foreign securities of the Portfolios which are
maintained in such account shall identify those securities as belonging to the
Portfolios and (ii), to the extent permitted and customary in the market in
which the account is maintained, the Custodian shall require that securities so
held by the Foreign Sub-Custodian be held separately from any assets of such
Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.

Section 4.3 Foreign Securities Systems. Foreign securities shall be
--------------------------
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.

Section 4.4 Transactions in Foreign Custody Account.
---------------------------------------

4.4.1. Delivery of Foreign Securities. The Custodian or a Foreign Sub-
------------------------------
Custodian shall release and deliver foreign securities of the Portfolios held by
such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon
receipt of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:

(i) upon the sale of such foreign securities for the Portfolios in
accordance with commercially reasonable market practice in the
country where such foreign securities are held or traded, including,
without limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System in accordance with the rules governing the
operation of the Foreign Securities System;

(ii) in connection with any repurchase agreement related to foreign
securities;

(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;

(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;

(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian) or
for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units;
<PAGE>

(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with market custom; provided that
--------
in any such case the Foreign Sub-Custodian shall have no
responsibility or liability for any loss arising from the delivery
of such securities prior to receiving payment for such securities
except as may arise from the Foreign Sub-Custodian's own negligence
or willful misconduct;

(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;

(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or temporary
securities for definitive securities;

(ix) for delivery as security in connection with any borrowing by the
Portfolios requiring a pledge of assets by the Portfolios;

(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;

(xi) in connection with the lending of foreign securities; and

(xii) for any other proper purpose, but only upon receipt of, in addition
--- ----
to Proper Instructions, a copy of a Certified Resolution specifying
the foreign securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be
a proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.

4.4.2. Payment of Portfolio Monies. Upon receipt of Proper Instructions,
---------------------------
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the
respective Foreign Securities System to pay out, monies of a Portfolio in the
following cases only:

(i) upon the purchase of foreign securities for the Portfolio, unless
otherwise directed by Proper Instructions, by (A) delivering money to
the seller thereof or to a dealer therefor (or an agent for such
seller or dealer) against expectation of receiving later delivery of
such foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the rules
governing the operation of such Foreign Securities System;
<PAGE>

(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Portfolio;

(iii) for the payment of any expense or liability of the Portfolio,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees under
this Agreement, legal fees, accounting fees, and other operating
expenses;

(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Portfolio, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;

(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;

(vii) in connection with the borrowing or lending of foreign securities;
and

(viii) for any other proper purpose, but only upon receipt of, in addition
--- ----
to Proper Instructions, a copy of a Certified Resolution specifying
the amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such
payment is to be made.

4.4.3. Market Conditions. Notwithstanding any provision of this Agreement
-----------------
to the contrary, settlement and payment for Foreign Assets received for the
account of the Portfolios and delivery of Foreign Assets maintained for the
account of the Portfolios may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.

The Custodian shall provide to the Board the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule C from time to
time, provided that no such revision shall result in the Board being provided
with substantively less information than had been previously provided hereunder.

Section 4.5 Registration of Foreign Securities. The foreign securities
----------------------------------
maintained in the custody of a Foreign Sub-Custodian (other than bearer
securities) shall be registered in the name of the applicable Portfolio or in
the name of the Custodian or in the name of any Foreign Sub-Custodian or in the
name of any nominee of the foregoing, and the Fund on behalf of such Portfolio
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities. The Custodian or a Foreign Sub-Custodian
shall not be obligated to accept securities on behalf of a Portfolio under
<PAGE>

the terms of this Agreement unless the form of such securities and the manner in
which they are delivered are in accordance with reasonable market practice.

Section 4.6 Bank Accounts. The Custodian shall identify on its books as
-------------
belonging to the Fund cash (including cash denominated in foreign currencies)
deposited with the Custodian. Where the Custodian is unable to maintain, or
market practice does not facilitate the maintenance of, cash on the books of the
Custodian, a bank account or bank accounts opened and maintained outside the
United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be
subject only to draft or order by the Custodian or such Foreign Sub-Custodian,
acting pursuant to the terms of this Agreement to hold cash received by or from
or for the account of the Portfolio.

Section 4.7 Collection of Income. The Custodian shall use reasonable
--------------------
commercial efforts to collect all income and other payments with respect to the
Foreign Assets held hereunder to which the Portfolios shall be entitled and
shall credit such income, as collected, to the applicable Portfolio. In the
event that extraordinary measures are required to collect such income, the Fund
and the Custodian shall consult as to such measures and as to the compensation
and expenses of the Custodian relating to such measures.

Section 4.8 Shareholder Rights. With respect to the foreign securities
------------------
held pursuant to this Agreement, the Custodian will use reasonable commercial
efforts to facilitate the exercise of voting and other shareholder rights,
subject always to the laws, regulations and practical constraints that may exist
in the country where such securities are issued. The Fund acknowledges that
local conditions, including lack of regulation, onerous procedural obligations,
lack of notice and other factors may have the effect of severely limiting the
ability of the Fund to exercise shareholder rights.

Section 4.9 Communications Relating to Foreign Securities. The Custodian
---------------------------------------------
shall transmit promptly to the Fund written information (including, without
limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via the
Foreign Sub-Custodians from issuers of the foreign securities being held for the
account of the Portfolios. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund written information so received by
the Custodian from issuers of the foreign securities whose tender or exchange is
sought or from the party (or its agents) making the tender or exchange offer.
The Custodian shall not be liable for any untimely exercise of any tender,
exchange or other right or power in connection with foreign securities or other
property of the Portfolios at any time held by it unless (i) the Custodian or
the respective Foreign Sub-Custodian is in actual possession of such foreign
securities or property and (ii) the Custodian receives Proper Instructions with
regard to the exercise of any such right or power, and both (i) and (ii) occur
at least three business days prior to the date on which the Custodian is to take
action to exercise such right or power
<PAGE>

Section 4.10 Liability of Foreign Sub-Custodians and Foreign Securities
----------------------------------------------------------
Systems. Each agreement pursuant to which the Custodian employs as a Foreign
- -------
Sub-Custodian shall, to the extent possible in a foreign market, require the
Foreign Sub-Custodian to exercise reasonable care in the performance of its
duties and, to the extent possible in a foreign market, to indemnify, and hold
harmless, the Custodian from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the Foreign Sub-
Custodian's performance of such obligations. The Portfolios shall be entitled
to be subrogated to the rights of the Custodian with respect to any claims
against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Portfolios have not
been made whole for any such loss, damage, cost, expense, liability or claim.

Section 4.11 Tax Law. The Custodian shall have no responsibility or
-------
liability for any obligations now or hereafter imposed on the Fund, the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of the
United States or of any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations imposed on
the Fund with respect to the Portfolios or the Custodian as custodian of the
Portfolios by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.

Section 4.12 Conflict. If the Custodian is delegated the responsibilities
--------
of Foreign Custody Manager pursuant to the terms of Section 3 hereof, in the
event of any conflict between the provisions of Sections 3 and 4 hereof, the
provisions of Section 3 shall prevail.

Section 5. Payments for Sales or Repurchases or Redemptions of Shares
----------------------------------------------------------

The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the appropriate Portfolio such
payments as are received for Shares thereof issued or sold from time to time by
the Fund. The Custodian will provide timely notification to the Fund on behalf
of each such Portfolio and the Transfer Agent of any receipt by it of payments
for Shares of such Portfolio.

From such funds as may be available for the purpose, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
<PAGE>

such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.

Section 6. Proper Instructions
-------------------

Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board accompanied by a
detailed description of procedures approved by the Board, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three - party agreement which requires
a segregated asset account in accordance with Section 2.10.

Section 7. Actions Permitted without Express Authority
-------------------------------------------

The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:

1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;

2) surrender securities in temporary form for securities in definitive
form;

3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and

4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board.
<PAGE>

Section 8. Evidence of Authority
---------------------

The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a copy of a Certified Resolution as conclusive
evidence (a) of the authority of any person to act in accordance with such
resolution or (b) of any determination or of any action by the Board as
described in such resolution, and such resolution may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.

Section 9. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------

The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board to keep the books of account of each
Portfolio and/or compute the net asset value per Share of the outstanding Shares
or, if directed in writing to do so by the Fund on behalf of the Portfolio,
shall itself keep such books of account and/or compute such net asset value per
Share. If so directed, the Custodian shall also calculate daily the net income
of the Portfolio as described in the Prospectus and shall advise the Fund and
the Transfer Agent daily of the total amounts of such net income and, if
instructed in writing by an officer of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its various
components. The calculations of the net asset value per Share and the daily
income of each Portfolio shall be made at the time or times described from time
to time in the Prospectus.

For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall for each valuation date obtain prices from
pricing sources approved by the Board and apply those prices to the Portfolios'
positions in a manner consistent with the Fund's prospectus and statement of
additional information as may be amended from time to time and as communicated
to the Custodian by the Fund or the investment advisor. For those securities
where market quotations are not readily available, the Board shall approve, in
good faith, the method for determining the fair value for such securities and
shall communicate such method to the Custodian.

For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall determine gains and losses on securities sales
and identify them as to short- or long-term status, account for periodic
distributions of gains or losses to shareholders and maintain undistributed gain
or loss balances as of each valuation date.

For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall maintain accounting records for each of the
Portfolios to support the tax report required for IRS-defined regulated
investment companies; maintain tax lot details for each of the Portfolios;
calculate taxable gain/loss on securities sales using the tax lot relief method
designated by the Fund on behalf of the Portfolios; and provide the necessary
financial information to support the taxable components of income and capital
gains distributions to the transfer agent to support tax reporting to the
shareholders.
<PAGE>

Section 10. Records
-------

The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Agreement in such
manner as will meet the obligations of the Fund under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the SEC. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each Portfolio and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.

Section 11. Opinion of Fund's Independent Accountant
----------------------------------------

The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the SEC and with respect to any
other requirements thereof.

Section 12. Reports to Fund by Independent Public Accountants
-------------------------------------------------

The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Federal Reserve
Bank, a U.S. Securities System or a Foreign Securities System, relating to the
services provided by the Custodian under this Agreement; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.

Section 13. Compensation of Custodian
-------------------------

The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
<PAGE>

Section 14. Responsibility of Custodian
---------------------------

So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel for the Fund on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice. The Custodian shall be without liability to the Fund and the
Portfolios for any loss, liability, claim or expense resulting from or caused by
anything which is (A) part of Country Risk (as defined in Section 3 hereof),
including without limitation nationalization, expropriation, currency
restrictions, or acts of war, revolution, riots or terrorism, or (B) part of the
"prevailing country risk" of the Portfolios, as such term is used in SEC Release
Nos. IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are
now or in the future interpreted by the SEC or by the staff of the Division of
Investment Management thereof.

Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions with respect to equipment properly maintained by the
Custodian, computer viruses or communications disruptions work stoppages,
natural disasters, or other similar events or acts; (ii) errors by the Fund or
the Investment Advisor in their instructions to the Custodian provided such
instructions have been in accordance with this Agreement; (iii) the insolvency
of or acts or omissions by a Securities System; (iv) any delay or failure of any
broker, agent or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge of registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
<PAGE>

The Custodian shall maintain a fully functional disaster recovery plan and
procedures including provisions for emergency use of electronic data processing
equipment, which is reasonable in light of the services provided. The Custodian
shall, at no additional expense to the Fund or any Portfolio thereof, take
reasonable steps to minimize service interruptions. The Custodian shall have no
liability with respect to the loss of data or service interruptions caused by
equipment failure with respect to equipment properly maintained by the
Custodian, provided it maintains such plans and procedures.

The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian (as defined in Section 4 hereof) to the same extent as set forth with
respect to sub-custodians generally in this Agreement.

If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.

If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Agreement, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.

In no event shall the Custodian be liable for indirect, special or
consequential damages.

Section 15. Effective Period, Termination and Amendment
-------------------------------------------

This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
--------
however that the Custodian shall not with respect to a Portfolio act
<PAGE>

under Section 2.8 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board has approved the initial
use of a particular Securities System by such Portfolio, as required by Rule
17f-4 under the 1940 Act and that the Custodian shall not with respect to a
Portfolio act under Section 2.9 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board has
approved the initial use of the Direct Paper System by such Portfolio; provided
--------
further, however, that the Fund shall not amend or terminate this Agreement in
- -------
contravention of any applicable federal or state regulations, or any provision
of the Fund's Articles of Incorporation, and further provided, that the Fund on
behalf of one or more of the Portfolios may at any time by action of its Board
(i) substitute another bank or trust company for the Custodian by giving notice
as described above to the Custodian, or (ii) immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.

Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.

Section 16. Successor Custodian
-------------------

If a successor custodian for one or more Portfolios shall be appointed by
the Board, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio then held by it hereunder
and shall transfer to an account of the successor custodian all of the
securities of each such Portfolio held in a Securities System.

If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.

In the event that no written order designating a successor custodian or
Certified Resolution shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Agreement on behalf of each
applicable Portfolio, and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
<PAGE>

In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.

Section 17. Interpretive and Additional Provisions
--------------------------------------

In connection with the operation of this Agreement, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Agreement as
may in their joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
--------
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Fund's Articles of
Incorporation. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.

Section 18. Additional Funds
----------------

In the event that the Fund establishes one or more series of Shares in
addition to each of the series and classes listed on Appendix A attached hereto
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.

Section 19. Massachusetts Law to Apply
--------------------------

This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.

Section 20. Prior Agreements
----------------

This Agreement supersedes and terminates, as of the date hereof, all prior
---------
Agreements between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
<PAGE>

Section 21. Notices.
-------

Any notice, instruction or other instrument required to be given hereunder
may be delivered in person to the offices of the parties as set forth herein
during normal business hours or delivered prepaid registered mail or by telex,
cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.

To the Fund: Security Capital Real Estate
Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Attention: John H. Gardner, Jr., Managing Director
Telephone: 312-345-5843
Telecopy: 312-345-0818

Copy to: David Novick, Esq., Chief
Compliance Officer

To the Custodian: State Street Bank and Trust Company
150 Newport Avenue
North Quincy, Massachusetts 02171
Attention: Nick Bonos, Unit Head
Telephone: 617-985-3413
Telecopy: 617-985-4867

Such notice, instruction or other instrument shall be deemed to have been
served in the case of a registered letter at the expiration of five business
days after posting, in the case of cable twenty-four hours after dispatch and,
in the case of telex, immediately on dispatch and if delivered outside normal
business hours it shall be deemed to have been received at the next time after
delivery when normal business hours commence and in the case of cable, telex or
telecopy on the business day after the receipt thereof. Evidence that the
notice was properly addressed, stamped and put into the post shall be conclusive
evidence of posting.

Section 22. Reproduction of Documents
-------------------------

This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
<PAGE>

Section 22A. Year 2000
---------

The Custodian will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000 compliant, including, but not
limited to, century recognition of dates, calculations that correctly compute
same century and multi- century formulas and date values, and interface values
that reflect the date issues arising between now and the next one hundred years.
If any changes are required, the Custodian will make the changes to its products
at no cost to the Fund and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.

Section 23. Shareholder Communications Election
-----------------------------------

SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Fund to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by checking one of
the alternatives below.

YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.

NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of June 30, 1998.

Security Capital Real Estate Signature attested to By:
Mutual Funds Incorporated

By: /s/ John H. Gardner By: /s/ Kimberly J. Holmes
----------------------------- -----------------------------

Name: John H. Gardner Name: Kimberly J. Holmes
--------------------------- ---------------------------

Title: Managing Director Title: Administrative Assistant
-------------------------- --------------------------

State Street Bank and Trust Company Signature attested to By:

By: /s/ Ronald E. Logue By: /s/ Marc L. Parsons
----------------------------- -----------------------------

Name: Ronald E. Logue Name: Marc L. Parsons
--------------------------- ---------------------------

Title: Executive Vice President Title: Associate Counsel
-------------------------- --------------------------
<PAGE>

APPENDIX A

Security Capital U.S. Real Estate Shares - Class I *
Security Capital U.S. Real Estate Shares - Class R *
Security Capital European Real Estate Shares - Class I
Security Capital European Real Estate Shares - Class R
Security Capital Asia/Pacific Real Estate Shares - Class I
Security Capital Asia/Pacific Real Estate Shares - Class R
Security Capital Real Estate Arbitrage Shares - Class I

* Services and fees relating thereto commencing August 10, 1998
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

Argentina Citibank, N.A. --

Australia Westpac Banking Corporation --

Austria Erste Bank der Oesterreichischen --
Sparkassen AG

Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Bangladesh Standard Chartered Bank --

Belgium Generale de Banque --

Bermuda The Bank of Bermuda Limited --

Bolivia Banco Boliviano Americano S.A. --

Botswana Barclays Bank of Botswana Limited --

Brazil Citibank, N.A. --

Bulgaria ING Bank N.V. --

Canada Canada Trustco Mortgage Company --

Chile Citibank, N.A. --

People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches

Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

Croatia Privredna Banka Zagreb d.d --

Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit

Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.

Denmark Den Danske Bank --

Ecuador Citibank, N.A. --

Egypt National Bank of Egypt --

Estonia Hansabank --

Finland Merita Bank Limited --

France Banque Paribas --

Germany Dresdner Bank AG --

Ghana Barclays Bank of Ghana Limited --

Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in
Book-Entry Form

Hong Kong Standard Chartered Bank --

Hungary Citibank Budapest Rt. --

Iceland Icebank Ltd. --
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

India Deutsche Bank AG --

The Hongkong and Shanghai
Banking Corporation Limited

Indonesia Standard Chartered Bank --

Ireland Bank of Ireland --

Israel Bank Hapoalim B.M. --

Italy Banque Paribas --

Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire

Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.

Japan The Daiwa Bank, Limited Japan Securities
Depository Center

The Fuji Bank, Limited

Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Kenya Barclays Bank of Kenya Limited --

Republic The Hongkong and Shanghai Banking --
of Korea Corporation Limited

Latvia JSC Hansabank-Latvija --

Lebanon British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

Lithuania Vilniaus Bankas AB --

Malaysia Standard Chartered Bank --
Malaysia Berhad

Mauritius The Hongkong and Shanghai --
Banking Corporation Limited

Mexico Citibank Mexico, S.A. --

Morocco Banque Commerciale du Maroc --

Namibia (via) Standard Bank of South Africa --

The MeesPierson N.V. --
Netherlands

New Zealand ANZ Banking Group --
(New Zealand) Limited

Norway Christiania Bank og --
Kreditkasse

Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)

Pakistan Deutsche Bank AG --

Peru Citibank, N.A. --

Philippines Standard Chartered Bank --

Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

Portugal Banco Comercial Portugues --

Romania ING Bank N.V. --

Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)

Singapore The Development Bank --
of Singapore Limited

Slovak Ceskoslovenska Obchodna --
Republic Banka, A.S.

Slovenia Banka Creditanstalt d.d. --

South Africa Standard Bank of South Africa Limited --

Spain Banco Santander, S.A. --

Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited

Swaziland Standard Bank Swaziland Limited --

Sweden Skandinaviska Enskilda Banken --

Switzerland UBS AG --

Taiwan Central Trust of China --
- - R.O.C.

Thailand Standard Chartered Bank --

Trinidad & Republic Bank Limited --
Tobago
<PAGE>

SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES

COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES

Tunisia Banque Internationale Arabe de Tunisie --

Turkey Citibank, N.A. --
Ottoman Bank

Ukraine ING Bank, Ukraine --

United Kingdom State Street Bank and Trust Company, --
London Branch

Uruguay Citibank, N.A. --

Venezuela Citibank, N.A. --

Zambia Barclays Bank of Zambia Limited --

Zimbabwe Barclays Bank of Zimbabwe Limited --

Euroclear (The Euroclear System)/State Street London Limited

Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited

INTERSETTLE (for EASDAQ Securities)
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Argentina Caja de Valores S.A.

Australia Austraclear Limited

Reserve Bank Information and
Transfer System

Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)

Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.

Banque Nationale de Belgique

Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)

Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC

Central de Custodia e de Liquidacao
Financeira
de Titulos

Banco Central do Brasil,
Sistema Especial de Liquidacao de
Custodia

Bulgaria Central Depository AD

Bulgarian National Bank

Canada The Canadian Depository
for Securities Limited

People's Republic Shanghai Securities Central Clearing and
of China Registration Corporation

Shenzhen Securities Central Clearing
Co., Ltd.

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Croatia Ministry of Finance

National Bank of Croatia

Czech Republic Stredisko cennych papiru

Czech National Bank

Denmark Vaerdipapircentralen (the Danish
Securities Center)

Egypt Misr Company for Clearing, Settlement,
and Central Depository

Estonia Eesti Vaartpaberite Keskdepositoorium

Finland The Finnish Central Securities
Depository

France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)

Germany Deutsche Borse Clearing AG

Greece The Central Securities Depository
(Apothetirion Titlon AE)

Hong Kong The Central Clearing and
Settlement System

Central Money Markets Unit

Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]

* Mandatory depositories include entitties for which use is mandatory of law or
effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

India The National Securities Depository Limited

Indonesia Bank Indonesia

Ireland Central Bank of Ireland
Securities Settlement Office

Israel The Tel Aviv Stock Exchange Clearing
House Ltd.

Bank of Israel

Italy Monte Titoli S.p.A.

Banca d'Italia

Jamaica The Jamaican Central Securities Depository

Japan Bank of Japan Net System

Kenya Central Bank of Kenya

Republic of Korea Korea Securities Depository Corporation

Latvia The Latvian Central Depository

Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.

The Central Bank of Lebanon

Lithuania The Central Securities Depository of
Lithuania

* Mandatory depositories include entitites for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Malaysia The Malaysian Central Depository Sdn. Bhd.

Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System

Mauritius The Central Depository & Settlement
Co. Ltd.

Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)

Morocco Maroclear
(pending publication of enabling legislation
in the Moroccan government Gazette)

The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)

De Nederlandsche Bank N.V.

New Zealand New Zealand Central Securities
Depository Limited

Norway Verdipapirsentralen (the Norwegian
Registry of Securities)

Oman Muscat Securities Market

Pakistan Central Depository Company of Pakistan
Limited

Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Philippines The Philippines Central Depository, Inc.

The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury

Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartos'ciowych)

Central Treasury Bills Registrar

Portugal Central de Valores Mobiliarios (Central)

Romania National Securities Clearing, Settlement and
Depository Co.

Bucharest Stock Exchange Registry Division

Singapore The Central Depository (Pte)
Limited

Monetary Authority of Singapore

Slovak Republic Stredisko Cennych Papierov

National Bank of Slovakia

Slovenia Klirinsko Depotna Druzba d.d.

South Africa The Central Depository Limited

Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.

Banco de Espana,
Central de Anotaciones en Cuenta

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Sri Lanka Central Depository System
(Pvt) Limited

Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)

Switzerland Schweizerische Effekten - Giro AG

INTERSETTLE

Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.

Thailand Thailand Securities Depository
Company Limited

Tunisia Societe Tunisienne Interprofessionelle de
Compensation et de Depot de
Valeurs Mobilieres

Central Bank of Tunisia

Tunisian Treasury

Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)

Central Bank of Turkey

Ukraine The National Bank of Ukraine

United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office

Uruguay Central Bank of Uruguay

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES

COUNTRY MANDATORY DEPOSITORIES

Venezuela Central Bank of Venezuela

Zambia Lusaka Central Depository Limited

Bank of Zambia

* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>

SCHEDULE C

MARKET INFORMATION

PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)

The Guide to Custody in World
- -----------------------------
Markets
- -------
(annually): An overview of safekeeping and settlement
practices and procedures in each market in
which State Street Bank and Trust Company
offers custodial services.

The Depository Review (annually): Information relating to the operating history
- --------------------- and structure of depositories located in the
markets in which State Street Bank and Trust
Company offers custodial services, including
transnational depositories.

legal opinions (annually): With respect to each market in which State
Street Bank and Trust Company offers
custodial services, opinions relating to
whether local law restricts (i) access of a
fund's independent public accountants to
books and records of a Foreign Sub-Custodian
or Foreign Securities System, (ii) the Fund's
ability to recover in the event of bankruptcy
or insolvency of a Foreign Sub-Custodian or
Foreign Securities System, (iii) the Fund's
ability to recover in the event of a loss by
a Foreign Sub-Custodian or Foreign Securities
System, and (iv) the ability of a foreign
investor to convert cash and cash equivalents
to U.S. dollars.

Network Bulletins (weekly): Developments of interest to investors in the
markets in which State Street Bank and Trust
Company offers custodial services.

Foreign Custody Advisories (as
necessary): With respect to markets in which State Street
Bank and Trust Company offers custodial
services which exhibit special custody risks,
developments which may impact State Street's
ability to deliver expected levels of
service.
<PAGE>

STATE STREET BANK AND TRUST COMPANY

GLOBAL CUSTODY AND ACCOUNTING FEE SCHEDULE
FOR
SECURITY CAPITAL

I. GLOBAL CUSTODY

Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions in local and base currency.
Withhold foreign taxes. File foreign tax reclaims. Monitor corporate
actions. Report portfolio positions.

A. COUNTRY GROUPING
----------------

<TABLE>
<CAPTION>
Group A Group B Group C Group D Group E Group F
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
USA Austria Australia Denmark Indonesia Argentina
- ---------------------------------------------------------------------------------------
Canada Belgium Finland Malaysia Bangladesh
- ---------------------------------------------------------------------------------------
Euroclear Hong Kong France Philippines Brazil
- ---------------------------------------------------------------------------------------
Germany Netherlands Ireland Portugal Chile
- ---------------------------------------------------------------------------------------
Japan New Zealand Italy South Korea China
- ---------------------------------------------------------------------------------------
Singapore Luxembourg Spain Columbia
- ---------------------------------------------------------------------------------------
Switzerland Mexico Sri Lanka Cypress
- ---------------------------------------------------------------------------------------
Norway Sweden Greece
- ---------------------------------------------------------------------------------------
Thailand Taiwan Hungary
- ---------------------------------------------------------------------------------------
U.K. India
- ---------------------------------------------------------------------------------------
Israel
- ---------------------------------------------------------------------------------------
Pakistan
- ---------------------------------------------------------------------------------------
Peru
- ---------------------------------------------------------------------------------------
Turkey
- ---------------------------------------------------------------------------------------
Uruguay
- ---------------------------------------------------------------------------------------
Venezuela
- ---------------------------------------------------------------------------------------
</TABLE>

B. TRANSACTION CHARGES
-------------------

<TABLE>
<CAPTION>
Group A Group B Group C Group D Group E Group F
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State Street Bank $25 $50 $60 $70 $150
Repos or Euros - $ 7.00
- ----------------------------------------------------------------------------------------------
DTC or Fed Book
Entry - $12.00
- ----------------------------------------------------------------------------------------------
All other - $25.00
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

C. HOLDING CHARGES IN BASIS POINTS (ANNUAL FEE)
--------------------------------------------

II. MULTICURRENCY ACCOUNTING

Maintain investment ledgers in local and base currency, provide selected
portfolio transactions, position and income reports. Maintain general
ledger and capital stock accounts in compliance with GAAP (FAS 52).
Prepare daily trial balance. Calculate net asset value daily. Provide
selected general ledger reports in multicurrency detail. Securities yield
or market value quotations will be provided to State Street via State
Street's Automated Pricing System (See Section III) or by the fund.

Portfolios with U.S. Holdings Only $3,000 per month/portfolio
Global Portfolios $4,000 per $4,000 per month/portfolio
month/portfolio

III. NAVIGATOR AUTOMATED PRICING
<TABLE>
<CAPTION>

<S> <C>
Monthly Base Charge $375.00
Monthly Quote Charge:
Municipal Bonds via Kenny/S&P or Muller Data $ 16.00
Corporate, Municipal, Convertible, Government Bonds
and Adjustable Rate Preferred Stocks Via IDSI $ 13.00
Government, Corporate Bonds via Kenny/S&P or Muller $ 11.00
Government, Corporate and Convertible
Bonds via Merrill Lynch $ 11.00
Foreign Bonds via Extel $ 10.00
Options, Futures and Private Placements $ 6.00
Listed Equities (including International) and OTC Equities $ 6.00
</TABLE>
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio at month end.
<PAGE>

IV. SPECIAL SERVICES

Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiation. Fees for SEC yield
calculation, fund administration activities, self directed securities
lending transactions, SaFiRe financial reporting, multiple class and
core/feeder accounting, and other special items will be negotiated
separately.

V. OUT-OF-POCKET EXPENSES

A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:

- - Telephone -Transfer Fees
- - Wire Charges ($5.25 in and $5 out) - Price Waterhouse Audit Letter
- - Postage and Insurance - Federal Reserve Fee for Return
- - Courier Service Check items over $2,500
- - Duplicating ($4.25 each)
- - Legal Fees - GNMA Transfer ($15 each)
- - Supplies Related to Fund Records - PTC Deposit/Withdrawal for same
- - Rush Transfer ($8 each) day turnaround ($50 each)
- - Items held in Street name over record - Subcustodian charges
date at request of trader ($50 each)

VI. PAYMENT

The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices.

FUND NAME STATE STREET BANK & TRUST COMPANY

By By
--------------- ---------------
Title Title
--------------- ---------------
Date Date
--------------- ---------------
<PAGE>

CONFIDENTIAL COMMUNICATION

as of June 30, 1998

Pamela Silberman
Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603

Re: SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED (the "Fund");
delegation to State Street Bank and Trust Company pursuant to revised
rule 17f-5 promulgated under the Investment Company Act of 1940, as
amended ("Rule 17f-5")

Dear Ms. Silberman:

Pursuant to the terms set forth the custodian contract (the "Agreement")
between State Street Bank and Trust Company (the "Custodian") and the Fund, the
Custodian has agreed to accept delegation as Foreign Custody Manager (as such
term is described in Rule 17f-5) of the Fund. The Custodian is in the process
of reconsidering certain of the terms upon which it has agreed to accept such
delegation. If at any time prior to termination of the Agreement the Custodian,
as a matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms materially different than set
forth in the Agreement, the Custodian hereby agrees to negotiate with the Fund
in good faith with respect thereto.

Very truly yours,

/s/ Ronald E. Logue

Ronald E. Logue
Executive Vice President

<PAGE>

Exhibit 9(a)

TRANSFER AGENCY AND SERVICE AGREEMENT

between

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCOPORPORATED

and

STATE STREET BANK AND TRUST COMPANY
<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

1. Terms of Appointment; Duties of the Bank............................. 1

2. Third Party Administrators for Defined Contribution Plans............ 4

3. Fees and Expenses.................................................... 5

4. Representations and Warranties of the Bank........................... 5

5. Representations and Warranties of the Fund........................... 6

6. Wire Transfer Operating Guidelines................................... 6

7. Data Access and Proprietary Information.............................. 8

8. Indemnification...................................................... 9

9. Standard of Care..................................................... 10

10. Year 2000............................................................ 11

11. Confidentiality...................................................... 11

12. Covenants of the Fund and the Bank................................... 12

13. Termination of Agreement............................................. 12

14. Assignment and Third Party Beneficiaries............................. 12

15. Subcontractors....................................................... 13

16. Miscellaneous........................................................ 13

17. Additional Funds..................................................... 15
<PAGE>

TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------

AGREEMENT made as of the 30th day of June, 1998, by and between Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation, having its
principal office and place of business at 11 South LaSalle Street, Chicago,
Illinois 60603 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").

WHEREAS, the Fund is authorized to issue shares in separate series and classes,
with each such series representing interests in a separate portfolio of
securities and other assets; and

WHEREAS, the Fund intends to initially offer shares in several series and
classes named in the attached Schedule A, which may be amended by the parties
from time to time (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Article 13, being herein referred to as a "Portfolio", and collectively as the
"Portfolios");

WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities, and the Bank desires to
accept such appointment;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:

l. Terms of Appointment; Duties of the Bank
----------------------------------------

1.1 Transfer Agency Services. Subject to the terms and conditions set forth
in this Agreement, the Fund, on behalf of the Portfolios, hereby employs
and appoints the Bank to act as, and the Bank agrees to act as its
transfer agent for the Fund's authorized and issued shares of its common
stock, $.01 par value, ("Shares"), dividend disbursing agent, custodian of
certain retirement plans and agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of each of the
respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio,
including without limitation any periodic investment plan or periodic
withdrawal program. The Bank agrees that it will perform the following
services:

(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:

(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof
to the Custodian of the Fund authorized pursuant to the
Articles of Incorporation of the Fund (the "Custodian");

(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
<PAGE>

(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof
to the Custodian;

(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund;

(v) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies
as instructed by the redeeming Shareholders;

(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;

(vii) As dividend disbursing agent only, prepare and transmit
payments for dividends and distributions declared by the Fund
on behalf of the applicable Portfolio including the crediting
of shareholder accounts in the case of dividend reinvestment
plans;

(viii) Issue replacement certificates for those certificates alleged
to have been lost, stolen or destroyed upon receipt by the
Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at its option,
may issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such
indemnity;

(ix) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing and

(x) Record the issuance of shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number
of shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. The
Bank shall also provide the Fund on a regular basis with the
total number of shares which are authorized and issued and
outstanding and shall have no obligation, when recording the
issuance of shares, to monitor the issuance of such shares or
to take cognizance of any laws relating to the issue or sale
of such shares, which functions shall be the sole
responsibility of the Fund.

1.2 Additional Services. In addition to, and neither in lieu nor in
contravention of, the services set forth in the above paragraph, the Bank
shall perform the following services:

2
<PAGE>

(a) Other Customary Services. (i) Perform the 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 (including without
limitation any periodic investment plan or periodic withdrawal
program), including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing Shareholder
proxies, Shareholder reports and prospectuses to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts,
preparing, mailing and filing U.S. Treasury Department Forms 1099,
average cost statements and other appropriate forms required with
respect to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts, preparing
and mailing activity statements for Shareholders, and providing
Shareholder account information. Such U.S. Treasury Department Forms
1099 and other appropriate forms hereunder will provide annual notices
to shareholders of dividends and distributions.

(b) Control Book (also known as "Super Sheet"). Maintain a daily record
and produce a daily report for each Fund of all transactions and
receipts and disbursements of money and securities and deliver a copy
of such report for each Portfolio for each business day to the Fund no
later than 9:00 AM, or such earlier time as the Fund may reasonably
require, on the next business day;

(c) "Blue Sky" Reporting. The Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from
blue sky reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of the Bank for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and providing a system
which will enable the Fund to monitor the total number of Shares sold
in each State;

(d) National Securities Clearing Corporation (the "NSCC"). The Bank shall
(i) accept and effectuate the registration and maintenance of accounts
through Networking and the purchase, redemption, transfer and exchange
of shares in such accounts through Fund/SERV (networking and Fund/SERV
being programs operated by the NSCC on behalf of NSCC's participants,
including the Fund), in accordance with, instructions transmitted to
and received by the Bank by transmission from NSCC on behalf of
broker-dealers and banks which have been established by, or in
accordance with the instructions of authorized persons, as hereinafter
defined on the dealer file maintained by the Bank; (ii) issue
instructions to Fund's banks for the settlement of transactions
between the Fund and NSCC (acting on behalf of its broker-dealer and
bank participants); (iii) provide account and transaction information
from affected Fund's records on DST Systems, Inc. computer system
TA2000 ("TA2000 System") in accordance with

3
<PAGE>

NSCC's Networking and Fund/SERV rules for those broker-dealers; and
(iv) maintain Shareholder accounts on TA2000 System through
Networking.

(e) New Procedures. New procedures as to who shall provide certain of
these services in Section 1 may be established in writing from time
to time by agreement between the Fund and the Bank. The Bank may at
times perform only a portion of these services and the Fund or its
agent may perform these services on the Fund's behalf.

(f) Other Service Providers. The Bank acknowledges that the Fund may
contract with other service providers to furnish services to the Fund
and its shareholders and shall cooperate with such other service
providers in connection with the performance of its duties hereunder.

2. Third Party Administrators for Defined Contribution Plans
---------------------------------------------------------

2.1 The Fund may decide to make available to certain of its customers, a
qualified plan program (the "Program") pursuant to which the customers
("Employers") may adopt certain plans of deferred compensation ("Plan or
Plans") for the benefit of the individual Plan participant (the "Plan
Participant"), such Plan(s) being qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended ("Code") and administered by
third party administrators which may be plan administrators as defined in
the Employee Retirement Income Security Act of 1974, as amended (the
"TPA(s)").

2.2 In accordance with the procedures established in the initial Schedule 2.1
entitled "Third Party Administrator Procedures", as may be amended by the
Bank and the Fund from time to time ("Schedule 2.1"), the Bank shall:

(a) Treat Shareholder accounts established by the Plans in the name of
the Trustees, Plans or TPAs as the case may be as omnibus accounts;

(b) Maintain omnibus accounts on its records in the name of the TPA or
its designee as the Trustee for the benefit of the Plan; and

(c) Perform all services under Section 1 as transfer agent of the Funds
---------
and not as a record-keeper for the Plans.

2.3 Transactions identified under Section 2 of this Agreement shall be deemed
---------
exception services ("Exception Services") when such transactions:

(a) Require the Bank to use methods and procedures other than those
usually employed by the Bank to perform services under Section 1 of
---------
this Agreement;

(b) Involve the provision of information to the Bank after the
commencement of the nightly processing cycle of the TA2000 System; or

4
<PAGE>

(c) Require more manual intervention by the Bank, either in the entry of
data or in the modification or amendment of reports generated by the
TA2000 System than is usually required by non-retirement plan and
pre-nightly transactions.

3. Fees and Expenses
-----------------

3.1 Fee Schedule. For the performance by the Bank pursuant to this Agreement,
the Fund agrees to pay the Bank an annual maintenance fee for each
Shareholder account as set forth in the attached fee schedule ("Schedule
3.1"). Such fees and out-of-pocket expenses and advances identified under
Section 3.2 below may be changed from time to time subject to mutual
-----------
written agreement between the Fund and the Bank.

3.2 Out-of-Pocket Expenses. In addition to the fee paid under Section 3.1
above, the Fund agrees to reimburse the Bank for out-of-pocket expenses,
including but not limited to confirmation production, postage, forms,
telephone, microfilm, microfiche, mailing and tabulating proxies, records
storage, or advances incurred by the Bank for the items set out in
Schedule 3.1 attached hereto. In addition, any other expenses incurred by
the Bank at the request or with the consent of the Fund, will be
reimbursed by the Fund.

3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all shareholder accounts shall be advanced to the Bank by the
Fund at least seven (7) days prior to the mailing date of such materials.

3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses within
thirty (30) days following the receipt of the respective billing notice,
except for any fees or expenses which are subject to good faith dispute.
In the event of such a dispute, the Fund may only withhold that portion of
the fee or expense subject to the good faith dispute. The Fund shall
notify the Bank in writing within twenty-one (21) calendar days following
the receipt of each billing notice if the Fund is disputing any amounts in
good faith. If the Fund does not provide such notice of dispute within the
required time, the billing notice will be deemed accepted by the Fund.

4. Representations and Warranties of the Bank
------------------------------------------

The Bank represents and warrants to the Fund that:

4.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.

4.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.

4.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.

4.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.

5
<PAGE>

4.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.

4.6 It is registered as a transfer agent under Section 17A(c)(2) of the
Securities Exchange Act of 1934, as amended ("Exchange Act").

5. Representations and Warranties of the Fund
------------------------------------------

The Fund represents and warrants to the Bank that:

5.1 It is a corporation duly organized and existing and in good standing under
the laws of Maryland.

5.2 It is empowered under applicable laws and by its Articles of Incorporation
and By-Laws to enter into and perform this Agreement.

5.3 All corporate proceedings required by said Articles of Incorporation and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.

5.4 It is an open-end and diversified management investment company registered
under the Investment Company Act of 1940, as amended.

5.5 A registration statement under the Securities Act of 1933, as amended is
currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.

6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform Commercial
------------------------------------------------------------------------
Code
------

6.1 The Bank is authorized to promptly debit the appropriate Fund account(s)
upon the receipt of a payment order in compliance with the selected
security procedure (the "Security Procedure") chosen for funds transfer
and in the amount of money that the Bank has been instructed to transfer.
The Bank shall execute payment orders in compliance with the Security
Procedure and with the Fund instructions on the execution date provided
that such payment order is received by the customary deadline (currently
3:00 p.m. Eastern time) for processing such a request, unless the payment
order specifies a later time. All payment orders and communications
received after this the customary deadline will be deemed to have been
received the next business day.

6.2 The Fund acknowledges that the Security Procedure it has designated on the
Fund Selection Form was selected by the Fund from security procedures
offered by the Bank. The Fund shall restrict access to confidential
information relating to the Security Procedure to authorized persons as
communicated to the Bank in writing. The Fund must notify the Bank
immediately if it has reason to believe unauthorized persons may have
obtained access to such information or of any change in the Fund's
authorized

6
<PAGE>

personnel. The Bank shall verify the authenticity of all Fund instructions
according to the Security Procedure.

6.3 The Bank shall process all payment orders on the basis of the account
number contained in the payment order. In the event of a discrepancy
between any name indicated on the payment order and the account number,
the account number shall take precedence and govern.

6.4 The Bank reserves the right to decline to process or delay the processing
of a payment order which (a) is in excess of the collected balance in the
account to be charged at the time of the Bank's receipt of such payment
order; (b) if initiating such payment order would cause the Bank, in the
Bank's sole judgement, to exceed any volume, aggregate dollar, network,
time, credit or similar limits which are applicable to the Bank; or (c) if
the Bank, in good faith, is unable to satisfy itself that the transaction
has been properly authorized.

6.5 The Bank shall use reasonable efforts to act on all authorized requests to
cancel or amend payment orders received in compliance with the Security
Procedure provided that such requests are received in a timely manner
affording the Bank reasonable opportunity to act. However, the Bank
assumes no liability if the request for amendment or cancellation cannot
be satisfied.

6.6 The Bank shall assume no responsibility for failure to detect any
erroneous payment order provided that the Bank complies with the payment
order instructions as received and the Bank complies with the Security
Procedure. The Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of errors in
payment orders.

6.7 The Bank shall assume no responsibility for lost interest with respect to
the refundable amount of any unauthorized payment order, unless the Bank
is notified of the unauthorized payment order within thirty (30) days of
confirmation by the Bank of the acceptance of such payment order. In no
event (including failure to execute a payment order) shall the Bank be
liable for special, indirect or consequential damages, even if advised of
the possibility of such damages.

6.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the National
Automated Clearing House Association and the New England Clearing House
Association, the Bank will act as an Originating Depository Financial
Institution and/or receiving depository Financial Institution, as the case
may be, with respect to such entries. Credits given by the Bank with
respect to an ACH credit entry are provisional until the Bank receives
final settlement for such entry from the Federal Reserve Bank. If the
Bank does not receive such final settlement, the Fund agrees that the Bank
shall receive a refund of the amount credited to the Fund in connection
with such entry, and the party making payment to the Fund via such entry
shall not be deemed to have paid the amount of the entry.

7
<PAGE>

6.9 Confirmation of Bank's execution of payment orders shall ordinarily be
provided within twenty four (24) hours, notice of which may be delivered
through the Bank's proprietary information systems, or by facsimile or
call-back. Fund must report any objections to the execution of an order
within thirty (30) days.

7. Data Access and Proprietary Information
---------------------------------------

7.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank
on data bases under the control and ownership of the Bank or other third
party ("Data Access Services") constitute copyrighted, trade secret, or
other proprietary information (collectively, "Proprietary Information") of
substantial value to the Bank or other third party. In no event shall
Proprietary Information be deemed Customer Data. The Fund agrees to
treat all Proprietary Information as proprietary to the Bank and further
agrees that it shall not divulge any Proprietary Information to any person
or organization except as may be provided hereunder. Without limiting the
foregoing, the Fund agrees for itself and its employees and agents to:

(a) Access Customer Data solely from locations as may be designated in
writing by the Bank and solely in accordance with the Bank's
applicable user documentation;

(b) Refrain from copying or duplicating in any way the Proprietary
Information;

(c) Refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose of
such information in accordance with the Bank's instructions;

(d) Refrain from causing or allowing information transmitted from the
Bank's computer to the Fund's or its affiliates' terminal to be
retransmitted to any other computer terminal or other device except
as expressly permitted by the Bank (such permission not to be
unreasonably withheld);

(e) Allow the Fund to have access only to those authorized transactions
agreed upon by the parties;

(f) Honor all reasonable written requests made by the Bank to protect at
the Bank's expense the rights of the Bank in Proprietary Information
at common law, under federal copyright law and under other federal or
state law.

7.2 Neither Proprietary Information or Customer Data shall include all or any
portion of any of the foregoing items that: (i) are or become publicly
available without breach of this Agreement; (ii) are released for general
disclosure by a written release by the Bank; or (iii) are already in the
possession of the receiving party at the time or receipt without
obligation of confidentiality or breach of this Agreement.

8
<PAGE>

7.3 The parties acknowledge that their obligation to protect the other's
Proprietary Information or Customer Data is essential to the business
interest of the Bank and the other party and that the disclosure of such
Proprietary Information or Customer Data in breach of this Agreement would
cause the other party immediate, substantial and irreparable harm, the
value of which would be extremely difficult to determine. Accordingly, the
parties agree that, in addition to any other remedies that may be
available in law, equity, or otherwise for the disclosure or use of the
Proprietary Information or Customer Data in breach of this Agreement, the
party whose Proprietary Information or Customer Data is disclosed shall be
entitled to seek and obtain a temporary restraining order, injunctive
relief, or other equitable relief against the continuance of such breach.

7.4 If the Fund notifies the Bank that any of the Data Access Services do not
operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may
obtain certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund agrees to make no
claim against the Bank arising out of the contents of such third-party
data, including, but not limited to, the accuracy thereof. DATA ACCESS
SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN
CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE
BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED
HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

7.5 If the transactions available to the Fund include the ability to originate
electronic instructions to the Bank in order to (i) effect the transfer or
movement of cash or Shares or (ii) transmit Shareholder information or
other information, then in such event the Bank shall be entitled to rely
on the validity and authenticity of such instruction without undertaking
any further inquiry as long as such instruction is undertaken in
conformity with security procedures established by the Bank from time to
time.

7.6 Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 7. The obligations of this Section
---------
shall survive any earlier termination of this Agreement.

8. Indemnification
---------------

8.1 The Bank shall not be responsible for, and the Fund shall indemnify and
hold the Bank harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out
of or attributable to:

(a) All actions of the Bank or its agent or affiliated subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct;

9
<PAGE>

(b) The Fund's lack of good faith, negligence or willful misconduct which
arise out of the breach of any representation or warranty of the Fund
hereunder;

(c) The reliance upon, and any subsequent use of or action taken or
omitted, by the Bank, or its agents or affiliated subcontractors on:
(i) any information, records, documents, data, stock certificates or
services, which are received by the Bank or its agents or affiliated
subcontractors by machine readable input, facsimile, CRT data entry,
electronic instructions or other similar means authorized by the
Fund, and which have been prepared, maintained or performed by the
Fund or any other person or firm on behalf of the Fund including but
not limited to any previous transfer agent or registrar; (ii) any
instructions or requests of the Fund or any of its officers; (iii)
any instructions or opinions of legal counsel with respect to any
matter arising in connection with the services to be performed by the
Bank under this Agreement which are provided to the Bank after
consultation with such legal counsel; or (iv) any paper or document,
reasonably believed to be genuine, authentic, or signed by the proper
person or persons;

(d) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be
registered or in violation of any stop order or other determination
or ruling by any federal or any state agency with respect to the
offer or sale of such Shares;

(e) The negotiation and processing of any checks including without
limitation for deposit into the Fund's demand deposit account
maintained by the Bank;

(f) Upon the Fund's request entering into any agreements required by the
National Securities Clearing Corporation (the "NSCC") required by the
NSCC for the transmission of Fund or Shareholder data through the
NSCC clearing systems;

8.2 In order that the indemnification provisions contained in this Section 8
---------
shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund of
such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend
against said claim in its own name or in the name of the Bank. The Bank
shall in no case confess any claim or make any compromise in any case in
which the Fund may be required to indemnify the Bank except with the
Fund's prior written consent.

9. Standard of Care
----------------

9.1 The Bank shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall
not be liable for loss or damage due to errors unless said errors are
caused by its negligence, bad faith, or willful misconduct or that of its
employees, except as provided in Section 9.2 below.
-----------

<PAGE>

9.2 In the case of Exception Services as defined in Section 2.3 herein, the
-----------
Bank shall be held to a standard of gross negligence and encoding and
payment processing errors shall not be deemed negligence.

10. Year 2000
---------

The Bank will take reasonable steps to ensure that its products (and those
of its third-party suppliers) reflect the available technology to offer
products that are Year 2000 ready, including, but not limited to, century
recognition of dates, calculations that correctly compute same century and
multi century formulas and date values, and interface values that reflect
the date issues arising between now and the next one-hundred years, and if
any changes are required, the Bank will make the changes to its products
at a price to be agreed upon by the parties and in a commercially
reasonable time frame and will require third-party suppliers to do
likewise.

11. Confidentiality
---------------

11.1 The Bank and the Fund agree that they will not, at any time during the
term of this Agreement or after its termination, reveal, divulge, or make
known to any person, firm, corporations or other business organization,
any customers' lists, trade secrets, cost figures and projections, profit
figures and projections, or any other secret or confidential information
whatsoever, whether of the Bank or of the Fund, used or gained by the Bank
or the Fund during performance under this Agreement. The Fund and the
Bank further covenant and agree to retain all such knowledge and
information acquired during and after the term of this Agreement
respecting such lists, trade secrets, or any secret or confidential
information whatsoever in trust for the sole benefit of the Bank or the
Fund and their successors and assigns. In the event of breach of the
foregoing by either party, the remedies provided by Section 7.3 shall be
-----------
available to the party whose confidential information is disclosed. The
above prohibition of disclosure shall not apply to the extent that the
Bank must disclose such data to its sub-contractor or Fund agent for
purposes of providing services under this Agreement.

11.2 In the event of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund
and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel
that it may be held liable for the failure to exhibit the Shareholder
records to such person.

11.3 In the event that any requests or demands are made for the inspection of
the Shareholder records of the Fund, other than requests for records of
----------------------------------
Shareholders pursuant to standard subpoenas from state or federal
-----------------------------------------------------------------
government authorities (i.e., divorce and criminal actions), the Bank will
-----------------------------------------------------------
endeavor to notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. The Bank expressly reserves
the right, however, to exhibit the Shareholder records to any person
whenever it is advised by

11
<PAGE>

counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person.

12. Covenants of the Fund and the Bank
----------------------------------

12.1 The Fund shall promptly furnish to the Bank the following:

(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of the Bank and the execution and
delivery of this Agreement; and

(b) A copy of the Articles of Incorporation and By-Laws of the Fund and
all amendments thereto.

12.2 The Bank hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of stock certificates,
check forms and facsimile signature imprinting devices, if any; and for
the preparation or use, and for keeping account of, such certificates,
forms and devices.

12.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared
or maintained by the Bank relating to the services to be performed by the
Bank hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such Section and Rules,
and will be surrendered promptly to the Fund on and in accordance with its
request.

13. Termination of Agreement
------------------------

13.1 This Agreement may be terminated by either party upon ninety (90) days
written notice to the other.

13.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination and a
charge equivalent to the average of one (1) month's fees.

13.3 Upon termination of this Agreement, each party shall return to the other
party all copies of confidential or proprietary materials or information
received from such other party hereunder, other than materials or
information required to be retained by such party under applicable laws or
regulations.

14. Assignment and Third Party Beneficiaries
----------------------------------------

14.1 Except as provided in Section 15.1 below, neither this Agreement nor any
------------
rights or obligations hereunder may be assigned by either party without
the written consent of the

12
<PAGE>

other party. Any attempt to do so in violation of this Section shall be
void. Unless specifically stated to the contrary in any written consent
to an assignment, no assignment will release or discharge the assignor
from any duty or responsibility under this Agreement.

14.2 Except as explicitly stated elsewhere in this Agreement, nothing under
this Agreement shall be construed to give any rights or benefits in this
Agreement to anyone other than the Bank and the Fund, and the duties and
responsibilities undertaken pursuant to this Agreement shall be for the
sole and exclusive benefit of the Bank and the Fund. This Agreement shall
inure to the benefit of and be binding upon the parties and their
respective permitted successors and assigns.

14.3 This Agreement does not constitute an agreement for a partnership or joint
venture between the Bank and the Fund. Other than as provided in Section
-------
15.1, neither party shall make any commitments with third parties that are
---
binding on the other party without the other party's prior written
consent.

15. Subcontractors
--------------

15.1 The Bank may, without further consent on the part of the Fund, subcontract
for the performance hereof with (i) Boston Financial Data Services, Inc.,
a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(2) of the Exchange Act, (ii) a
BFDS subsidiary duly registered as a transfer agent or (iii) a BFDS
affiliate duly registered as a transfer agent; provided, however, that the
Bank shall be fully responsible to the Fund for the acts and omissions of
BFDS or its subsidiary or affiliate as it is for its own acts and
omissions.

15.2 Nothing herein shall impose any duty upon the Bank in connection with or
make the Bank liable for the actions or omissions to act of unaffiliated
third parties such as by way of example and not limitation, Airborne
Services, Federal Express, United Parcel Service, the U.S. mails, the NSCC
and telecommunication companies, provided, if the Bank selected such
company, the Bank shall have exercised due care in selecting the same.

16. Miscellaneous
-------------

16.1 Amendment. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a
resolution of the Board of Directors of the Fund.

16.2 Massachusetts Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of
The Commonwealth of Massachusetts.

16.3 Force Majeure. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment properly maintained by the Bank or transmission failure
or damage reasonably beyond its control, or other

13
<PAGE>

causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to
perform or otherwise from such causes.

16.4 Consequential Damages. Neither party to this Agreement shall be liable to
the other party for consequential damages under any provision of this
Agreement or for any consequential damages arising out of any act or
failure to act hereunder.

16.5 Survival. All provisions regarding indemnification, warranty, liability,
and limits thereon, and confidentiality and/or protection of proprietary
rights and trade secrets shall survive the termination of this Agreement.

16.6 Severability. If any provision or provisions of this Agreement shall be
held invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired.

16.7 Priorities Clause. In the event of any conflict, discrepancy or ambiguity
between the terms and conditions contained in this Agreement and any
Schedules or attachments hereto, the terms and conditions contained in
this Agreement shall take precedence.

16.8 Waiver. No waiver by either party or any breach or default of any of the
covenants or conditions herein contained and performed by the other party
shall be construed as a waiver of any succeeding breach of the same or of
any other covenant or condition.

16.9 Merger of Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect
to the subject matter hereof whether oral or written.

16.10 Counterparts. This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.

16.11 Reproduction of Documents. This Agreement and all schedules, exhibits,
attachments and amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other
similar process. The parties hereto each agree that any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence and
whether or not such reproduction was made by a party in the regular course
of business, and that any enlargement, facsimile or further reproduction
shall likewise be admissible in evidence.

16.12 Notices. All notices and other communications as required or permitted
hereunder shall be in writing and sent by facsimile or first class mail,
postage prepaid, addressed as follows or to such other address or
addresses of which the respective party shall have notified the other.

14
<PAGE>

(a) If to the Bank, to:

State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Attention: Legal Department

Facsimile: (617) 774-2287

(b) If to the Fund, to:

Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603

Attention: John H. Gardner, Jr.
Managing Director

Telephone: (312) 345-5843
Facsimile: (312) 345-0818

Copies to: David Novick, Esq.
Chief Compliance Officer

17. Additional Funds. In the event that the Fund establishes one or more series
of Shares in addition to the attached Schedule A with respect to which it
desires to have the Bank render services as transfer agent under the terms
hereof, it shall so notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a
Portfolio hereunder.

15
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.

SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCOPORPORATED

BY: /s/ John H. Gardner, Jr.
----------------------------------------------
John H. Gardner, Jr.
Managing Director

ATTEST:

/s/ Kimberly J. Holmes
- -----------------------------

STATE STREET BANK AND TRUST
COMPANY

BY: /s/ Ronald E. Logue
----------------------------------------------
Executive Vice President

ATTEST:

/s/ S. Lesso
- -----------------------------

16
<PAGE>

SCHEDULE A
Dated June 30, 1998

Security Capital U.S. Real Estate Shares - Class I Shares*
Security Capital U.S. Real Estate Shares - Class R Shares*

Security Capital European Real Estate Shares - Class I Shares
Security Capital European Real Estate Shares - Class R Shares

Security Capital Asia/Pacific Real Estate Shares - Class I Shares
Security Capital Asia/Pacific Real Estate Shares - Class R Shares

Security Capital Real Estate Arbitrage Shares - Class I Shares

*services and fees relating thereto commencing August 10, 1998

SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY

BY: /s/ John H. Gardner, Jr. BY: /s/ Ronald E. Logue
------------------------------ ------------------------------
<PAGE>

SCHEDULE 2.1

THIRD PARTY ADMINISTRATOR(S) PROCEDURES

Dated June 30, 1998

1. On each Business Day, the TPA(s) shall receive, on behalf of and as agent
of the Fund(s), Instructions (as hereinafter defined) from the Plan.
Instructions shall mean as to each Fund (i) orders by the Plan for the
purchases of Shares, and (ii) requests by the Plan for the redemption of
Shares; in each case based on the Plan's receipt of purchase orders and
redemption requests by Participants in proper form by the time required by
the term of the Plan, but not later than the time of day at which the net
asset value of a Fund is calculated, as described from time to time in that
Fund's prospectus. Each Business Day on which the TPA receives
Instructions shall be a "Trade Date".

2. The TPA(s) shall communicate the TPA(s)'s acceptance of such Instructions,
to the applicable Plan.

3. On the next succeeding Business Day following the Trade Date on which it
accepted Instructions for the purchase and redemption of Shares, (TD+1),
the TPA(s) shall notify the Bank of the net amount of such purchases or
redemptions, as the case may be, for each of the Plans. In the case of net
purchases by any Plan, the TPA(s) shall instruct the Trustees of such Plan
to transmit the aggregate purchase price for Shares by wire transfer to the
Bank on (TD+1). In the case of net redemptions by any Plan, the TPA(s)
shall instruct the Fund's custodian to transmit the aggregate redemption
proceeds for Shares by wire transfer to the Trustees of such Plan on
(TD+1). The times at which such notification and transmission shall occur
on (TD+1) shall be as mutually agreed upon by each Fund, the TPA(s), and
the Bank.

4. The TPA(s) shall maintain separate records for each Plan, which record
shall reflect Shares purchased and redeemed, including the date and price
for all transactions, and Share balances. The TPA(s) shall maintain on
behalf of each of the Plans a single master account with the Bank and such
account shall be in the name of that Plan, the TPA(s), or the nominee of
either thereof as the record owner of Shares owned by such Plan.

5. The TPA(s) shall maintain records of all proceeds of redemptions of Shares
and all other distributions not reinvested in Shares.

6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic
account statements showing the total number of Shares owned by that Plan as
of the statement closing date, purchases and redemptions of Shares by the
Plan during the period covered by the statement, and the dividends and
other distributions paid to the Plan on Shares during the statement period
(whether paid in cash or reinvested in Shares).

7. The TPA(s) shall, at the request and expense of each Fund, transmit to the
Plans prospectuses, proxy materials, reports, and other information
provided by each Fund for delivery to its shareholders.
<PAGE>

8. The TPA(s) shall, at the request of each Fund, prepare and transmit to each
Fund or any agent designated by it such periodic reports covering Shares of
each Plan as each Fund shall reasonably conclude are necessary to enable
the Fund to comply with state Blue Sky requirements.

9. The TPA(s) shall transmit to the Plans confirmation of purchase orders and
redemption requests placed by the Plans; and

10. The TPA(s) shall, with respect to Shares, maintain account balance
information for the Plan(s) and daily and monthly purchase summaries
expressed in Shares and dollar amounts.

11. Plan sponsors may request, or the law may require, that prospectuses, proxy
materials, periodic reports and other materials relating to each Fund be
furnished to Participants in which event the Bank or each Fund shall mail
or cause to be mailed such materials to Participants. With respect to any
such mailing, the TPA(s) shall, at the request of the Bank or each Fund,
provide at the TPA(s)'s expense complete and accurate set of mailing labels
with the name and address of each Participant having an interest through
the Plans in Shares.

SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY

BY: /s/ John H. Gardner, Jr. BY: /s/ Ronald E. Logue
----------------------------- -------------------------------

2
<PAGE>

SCHEDULE 3.1

Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent

SECURITY CAPITAL
Dated June 30, 1998

- --------------------------------------------------------------------------------
ANNUAL ACCOUNT SERVICE FEES
- --------------------------------------------------------------------------------

Daily Dividend Fund $ 14.00
Non-Daily Dividend Fund $ 12.00

Closed Account Fee $ 1.80

Minimum (per Fund/Class)

1st Fund $40,000

2nd & 3rd Fund $30,000

4th & 5th Fund $20,000
5th Fund+ $15,000

Each class is considered a fund and will be billed accordingly.

Fees are billable on a monthly basis at the rate of 1/12 of the annual fee. A
charge is made for an account in the month that an account opens or closes.
Account service fees are the higher of: open account charges plus closed
account charges or the fund minimum.

- --------------------------------------------------------------------------------
ACTIVITY BASED FEES
- --------------------------------------------------------------------------------

New Account Set-up $ 5.00/each
Manual Transactions $ 1.50/each
Telephone Calls $ 2.50/each
Correspondence $ 1.50/each
Research Requests $ 1.50/each

- --------------------------------------------------------------------------------
BANKING SERVICES
- --------------------------------------------------------------------------------

Checkwriting Setup $ 5.00
Checkwriting (per draft) $ 1.00
ACH $ .35

- --------------------------------------------------------------------------------
OTHER FEES
- --------------------------------------------------------------------------------

Investor Processing $ 1.80/Investor
12b-1 Commissions $ 1.20/account

- --------------------------------------------------------------------------------
CONVERSION FEES
- --------------------------------------------------------------------------------

Per Account Fee $ 1.00
Minimum (per complex) $25,000

- --------------------------------------------------------------------------------
IRA CUSTODIAL FEES
- --------------------------------------------------------------------------------

Annual Maintenance $ 10.00/account
<PAGE>

- --------------------------------------------------------------------------------
OUT-OF-POCKET EXPENSES BILLED AS INCURRED
- --------------------------------------------------------------------------------

Out-of-Pocket expenses include but are not limited to: confirmation statements,
average cost statements, investor statements, postage, forms, audio response,
telephone, records retention, customized programming / enhancements, federal
wire, transcripts, microfilm, microfiche, and expenses incurred at the specific
direction of the fund.

THESE FEES WILL BE SUBJECT TO AN ANNUAL COST OF LIVING ADJUSTMENT BASED ON
REGIONAL CONSUMER PRICE INDEX.

SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY

BY:/s/ John H Gardner Jr. BY:/s/ Ronald E Logue
---------------------- -------------------

<PAGE>

Exhibit 9(b)

FUND ACCOUNTING AND ADMINISTRATION AGREEMENT

Amended and Restated as of June 30, 1998

THIS AGREEMENT made as of June 30, 1998 by and between Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation (the "Fund"), and
Security Capital Global Capital Management Group Incorporated, a Delaware
corporation (the "Administrator").

W I T N E S S E T H:

WHEREAS, the Fund is an open-end, management investment company that issues
shares in several series and classes (collectively "Series") as set forth on
Schedule 1 thereto; and

WHEREAS, the Fund wishes to retain the Administrator to provide certain
fund accounting and administration services with respect to the Series and the
Administrator is willing to furnish such services;

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:

1. Appointment. The Fund hereby appoints the Administrator to provide
-----------
fund accounting and administration services to the Series, subject to the
supervision of the Board of Directors of the Fund (the "Board of Directors"),
for the period and on the terms set forth in this Agreement. The Administrator
accepts such appointment and agrees to furnish the services herein set forth in
return for the compensation as provided in Paragraph 4 of this Agreement. In
the event that the Fund establishes one or more additional series or classes
with respect to which it decides to retain the Administrator to act as
administrator hereunder, the Fund shall notify the Administrator in writing. If
the Administrator is willing to render such services to a new series or class,

<PAGE>

the Administrator shall so notify the Fund in writing whereupon such series
or class shall added to Schedule 1 thereto shall be subject to the provisions of
this Agreement to the same extent as the Fund and the Series, except to the
extent that said provisions (including those relating to the compensation
payable by the Fund) may be modified with respect to such series or class in
writing by the Fund and the Administrator at the time of the addition of such
new series or class.

2. Delivery of Documents. The Fund has furnished the Administrator with
---------------------
copies, properly certified or authenticated, of each of the following:

(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of the Administrator to provide certain fund accounting and
administration services to the Fund and approving this Agreement;

(b) The Fund's Articles of Incorporation ("Charter");

(d) The most recent draft of the Fund's Registration Statement on Form
N-1A and when completed, the Fund will provide its most recent Prospectus and
Statement of Additional Information and all amendments and supplements thereto
(such Prospectus and Statement of Additional Information and supplements
thereto, as presently in effect and as from time to time hereafter amended and
supplemented, herein called the "Prospectus").

The Fund will timely furnish the Administrator from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.

2. Services and Duties. Subject to the supervision and control of
-------------------
the Fund's Board of Directors, the Administrator agrees to assist in supervising
aspects of the Fund's administrative operations, including but not limited to
the performance of the following specific services for the Fund:

(a) Provide office facilities (which may be in the offices of the
Administrator or a corporate affiliate of them, but shall be in such location as
the Fund shall reasonably approve) and the services of a principal financial
officer to be appointed by the Fund;

(b) Furnish statistical and research data, clerical services, and
stationery and office supplies;

(c) Keep and maintain all financial accounts and records (other than
those required to be maintained by the Fund's Custodian and Transfer Agent)
including without

-2-
<PAGE>

limit those required under Section 31 (a) and Rule 31a-1 under the Investment
Company Act of 1940 (the "1940 Act");

(d) Compute, and transmit to the NASD service for the publication of
fund prices, the Fund's net asset value, net income and net capital gain (loss)
in accordance with the Fund's Prospectus and resolutions of its Board of
Directors;

(e) Compile data for, and prepare required reports and notices to
shareholders of record including, without limitation, proxy statements,
Semiannual and Annual Reports to shareholders;

(f) Compile data for, prepare for execution and file all reports or
other documents, including tax returns, required by Federal, state and other
applicable laws and regulations, including those required by applicable Federal
and state tax laws (other than those required to be filed by the Fund's
Custodian or Transfer Agent);

(g) Assist in developing and monitoring compliance procedures for the
Fund and any Series thereof, including, without limitation, procedures to
monitor compliance with applicable law and regulations, the Fund's investment
objectives, policies and restrictions, its continued qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code");

(h) Determine, together with the Fund's Board of Directors, the
jurisdictions in which the Fund's shares shall be registered or qualified for
sale and, in connection therewith, the Administrator shall be responsible for
the registration for sale and maintenance of the registrations of shares for
sale under the securities laws of any state. Payment of share registration fees
for qualifying or continuing the qualification of Fund shares or the Fund as a
dealer or broker, if applicable, shall be made by the Fund;

(i) Provide financial data requested by the Fund and its outside
counsel;

(j) Perform such other duties related to the administration of the
Fund's operations as reasonably requested by the Board of Directors, from time
to time;

(k) Assist in the monitoring of regulatory and legislative
developments which may affect the Fund and, in response to such developments,
counsel and assist the Fund in

-3-
<PAGE>

routine regulatory examinations or investigations of the Fund, and work with
outside counsel to the Fund in connection with regulatory matters or litigation.

In performing its duties as administrator of the Fund, the
Administrator (a) will act in accordance with the Fund's Charter, By-Laws,
Prospectus, Statement of Additional Information and the instructions and
directions of the Fund's Board of Directors and will conform to, and comply
with, the requirements of the 1940 Act and all other applicable Federal or state
laws and regulations, and (b) will consult with outside legal counsel to the
Fund, as necessary or appropriate.

The Administrator will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under said Act in connection with the services required to be performed
hereunder. The Administrator further agrees that all such records which it
maintains for the Fund are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records upon the Fund's request.

3. Fees; Expenses; Expense Reimbursement. For the services rendered
-------------------------------------
pursuant to this Agreement for the Fund, the Administrator shall be entitled to
a fee based on the average net assets of each class of shares issued by the Fund
determined at the annual rate set forth in Exhibit A hereto and applied to the
average daily net assets of each class of the Fund's shares. Such fees are to
be computed daily and paid monthly on the first business day of the following
month. Upon any termination of this Agreement before the end of any month, the
fee for such part of the month shall be prorated according to the proportion
which such period bears to the full monthly period and shall be payable upon the
date of termination of this Agreement.

For the purpose of determining fees payable to the Administrator, the value
of the Fund's net assets shall be computed as required by its Prospectus,
generally accepted accounting principles and resolutions of the Fund's Board of
Directors.

The Administrator will from time to time employ or associate with
themselves such sub-administrator or such person or persons as they may believe
to be fitted to assist them in the performance of this Agreement. Such person
or persons may be officers and employees who are employed by both the
Administrator and the Fund. The compensation of such person or persons for such
employment shall be paid by the Administrator, if such person is retained solely
by the Administrator, and no obligation may be incurred on behalf of the Fund in
such respect.

-4-
<PAGE>

The Administrator or the Fund may retain a sub-administrator to assist the
Administrator in the execution of its duties hereunder. The retention of a sub-
administrator by the Administrator or the Fund shall in no way affect the
responsibilities of the Administrator hereunder. The compensation of a sub-
administrator retained by the Administrator or the Fund may be paid either by
the Adminstrator or by the Fund.

The Administrator will bear all expenses in connection with the performance
of its services under this Agreement except as otherwise expressly provided
herein. Other expenses to be incurred in the operation of the Fund, including
taxes, interest, brokerage fees and commissions, if any, salaries and fees of
officers and directors who are not officers, directors shareholders or employees
of the Administrator, or the Fund's investment advisor or distributor for the
Fund, Securities and Exchange Commission fees and state Blue Sky qualification
fees, advisory and administration fees, charges of custodians, transfer and
divided disbursing agents' fees, certain insurance premiums including fidelity
bond premiums, outside auditing and legal expenses, costs of maintenance of
corporate existence, typesetting and printing of prospectuses for regulatory
purposes and for distribution to current shareholders of the Fund, costs of
shareholders' reports and corporate meetings and any extraordinary expenses,
will be borne by the Fund, provided, however, that, except as provided in any
distribution plan adopted by the Fund, the Fund will not bear, directly or
indirectly, the cost of any activity which is primarily intended to result in
the distribution of shares of the Fund, and further provided that the
Administrator may utilize one or more independent pricing services, approved
from time to time by the Board of Directors of the Fund, to obtain securities
prices in connection with determining the net asset value of each class of the
Fund's shares and the Fund will reimburse the Administrator for its share of the
cost of such services based upon its actual use of the services.

If in any fiscal year the Fund's aggregate expenses (as defined under the
securities regulations of any state having jurisdiction over the Fund) exceed
the expense limitations of any such state, the Administrator agrees to reimburse
the Fund for a portion of any such excess expense in an amount equal to the
proportion that the fee otherwise payable to the Administrator bear to the total
amount of investment advisory and administration fees otherwise payable by the
Fund. The expense reimbursement obligation of the Administrator is limited to
the amount of its fees hereunder for such fiscal year, provided, however, that
notwithstanding the foregoing, the

-5-
<PAGE>

Administrator shall reimburse the Fund for a portion of any such excess expenses
in an amount equal to the proportion that the fees otherwise payable to the
Administrator bear to the total amount of investment advisory and administration
fees otherwise payable by the Fund regardless of the amount of fees paid to the
Administrator during such fiscal year to the extent that the securities
regulations of any state having jurisdiction over the Fund so require. Such
expense reimbursement, if any, will be estimated on a daily basis, reconciled
and paid on a monthly basis.

5. Proprietary and Confidential Information. The Administrator agrees on
----------------------------------------
behalf of itself and its employees to treat confidentially and as proprietary
information of the Fund all records and other information relative to the Fund's
prior, present or potential shareholders, and not to use such records and
information for any purpose other than performance of their responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Fund, which approval shall not be unreasonably withheld and may not be
withheld where the Administrator may be exposed to Civil or Criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Fund.

6. Limitation of Liability. The Administrator shall not be liable for any
-----------------------
error of judgement or mistake of law or for any loss or expense suffered by the
Fund, in connection with the matters to which this Agreement relates, except for
a loss or expense resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, director, partner, employee or agent of the
Administrator, who may be or become an officer, director, employee or agent of
the Fund, shall be deemed when rendering services to the Fund or acting on any
business of the Fund (other than services or business in connection with the
Administrator's duties hereunder) to be rendering such services to or acting
solely for the Fund and not as an officer, director, partner, employee or agent
or one under the control or direction of the Administrator even though paid by
them.

7. Terms. This Agreement shall become effective on the date first
-----
hereinabove written and, unless sooner terminated as provided herein, shall
continue in effect from year to year thereafter, provided such continuance is
specifically approved at least annually (i) by the Fund's Board of Directors or
(ii) by a vote of a majority (as defined in the 1940 Act) of the

-6-
<PAGE>

outstanding voting securities of the Fund, provided that in either event the
continuance is also approved by the majority of the Fund's Board of Directors
who are not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable, without penalty, by the Fund's
Board of Directors, by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of such Fund, or by the Administrator, on not less
than sixty days' notice. This agreement shall automatically terminate upon its
assignment by the Administrator without the prior written consent of the Fund,
provided, however, that no such assignment shall release the Administrator from
its obligations under this Agreement.

8. Governing Law. This Agreement shall be governed by Illinois law.
-------------

9. Amendments. No provision of this Agreement may be changed,
----------
discharged, or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, discharge or termination is
sought.

10. Miscellaneous. The parties to this Agreement acknowledge and agree
-------------
that all liabilities arising, directly or indirectly, under this Agreement, of
any and every nature whatsoever, including without limitation, liabilities
arising in connection with any agreement of the Fund set forth herein to
indemnify any party to this Agreement or any other person, shall be satisfied
out of the assets of the Fund and that no director, officer or shareholder of
the Fund shall be personally liable for any of the foregoing liabilities.

If a change or discharge is sought against the Fund, the instrument must be
signed by the Administrator.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date indicated below.

-7-
<PAGE>

SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

ATTEST: /s/ Anna R. Pena By: /s/ Michael J. Heller
--------------------------- -----------------------------------
(Title) Assistant Secretary

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED

ATTEST: /s/ Anna R. Pena By: /s/ Jeffrey C. Nellessen
--------------------------- -----------------------------------
(Title) Vice President

EFFECTIVE AS OF:

-8-
<PAGE>

EXHIBIT A

FUND ACCOUNTING AND FUND ADMINISTRATION

FEE SCHEDULE

FOR

SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED

Annual Rate: .02% (2 basis points) of the average daily net assets of the Fund
billed monthly.

SCHEDULE 1

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

The following Series of Security Capital Real Estate Mutual Funds Incorporated
are subject to this Agreement:

Security Capital U.S. Real Estate Shares-Class I shares

Security Capital U.S. Real Estate Shares-Class R shares

Security Capital European Real Estate Shares-Class I shares

Security Capital European Real Estate Shares-Class R shares

Security Capital Asia/Pacific Real Estate Shares-Class I shares

Security Capital Asia/Pacific Real Estate Shares-Class R shares

Security Capital Real Estate Arbitrage Shares-Class I shares

-9-

<PAGE>

Exhibit 9(c)

SUB-ADMINISTRATION AGREEMENT

Agreement dated as of June 30, 1998, by and between State Street Bank
and Trust Company, a Massachusetts trust company (the "Administrator"), and
Security Capital Real Estate Mutual Funds Incorporated (the "Company").

WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act");

WHEREAS, the Company intends initially to offer several series and
classes of shares (each an "Investment Fund") as identified on Schedule A to
this Agreement as may be amended from time to time; and

WHEREAS, the Company desires to retain the Administrator to furnish
certain administrative services to the Company, and the Administrator is willing
to furnish such services, on the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:

1. APPOINTMENT OF ADMINISTRATOR

The Company hereby appoints the Administrator to act as administrator
with respect to the Company for purposes of providing certain administrative
services for the period and on the terms set forth in this Agreement. The
Administrator accepts such appointment and agrees to render the services stated
herein.

The Company will initially consist of the portfolio(s) and/or
class(es) of shares listed in Schedule A to this Agreement. In the event that
the Company establishes one or more additional Investment Funds with respect to
which it wishes to retain the Administrator to act as administrator hereunder,
the Company shall notify the Administrator in writing. Upon written acceptance
by the Administrator, such Investment Fund shall become subject to the
provisions of this Agreement to the same extent as the existing Investment
Funds, except to the extent that such provisions (including those relating to
the compensation and expenses payable by the Company and its Investment Funds)
may be modified with respect to each additional Investment Fund in writing by
the Company and the Administrator at the time of the addition of the Investment
Fund.

2. DELIVERY OF DOCUMENTS

The Company will promptly deliver to the Administrator copies of each
of the following documents and all future amendments and supplements, if any:

a. The Company's Articles of Incorporation and by-laws;
<PAGE>

b. The Company's currently effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act and the Company's Prospectus(es) and Statement(s) of
Additional Information relating to all Investment Funds and all
amendments and supplements thereto as in effect from time to
time;

c. Certified copies of the resolutions of the Board of Directors of
the Company (the "Board") authorizing (1) the Company to enter
into this Agreement and (2) certain officers on behalf of the
Company to (a) give instructions to the Administrator pursuant to
this Agreement and (b) sign checks and pay expenses;

d. A copy of the investment advisory agreement between the Company
and its investment adviser; and

e. Such other certificates, documents or opinions which the
Administrator may, in its reasonable discretion, deem necessary
or appropriate in the proper performance of its duties.

3. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR

The Administrator represents and warrants to the Company that:

a. It is a Massachusetts trust company, duly organized and existing
under the laws of The Commonwealth of Massachusetts;

b. It has the corporate power and authority to carry on its business
in The Commonwealth of Massachusetts;

c. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement;

d. No legal or administrative proceedings have been instituted or
threatened which would impair the Administrator's ability to
perform its duties and obligations under this Agreement; and

e. Its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or
obligation of the Administrator or any law or regulation
applicable to it.

4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Administrator that:

a. It is a corporation, duly organized, existing and in good
standing under the laws of the State of Maryland;

2
<PAGE>

b. It has the corporate power and authority under applicable laws
and by its charter and by-laws to enter into and perform this
Agreement;

c. All requisite proceedings have been taken to authorize it to
enter into and perform this Agreement;

d. It is an investment company properly registered under the 1940
Act;

e. A registration statement under the 1933 Act and the 1940 Act has
been filed and will be effective and remain effective during the
term of this Agreement. The Company also warrants to the
Administrator that as of the effective date of this Agreement,
all necessary filings under the securities laws of the states in
which the Company offers or sells its shares have been made;

f. No legal or administrative proceedings have been instituted or
threatened which would impair the Company's ability to perform
its duties and obligations under this Agreement;

g. Its entrance into this Agreement will not cause a material breach
or be in material conflict with any other agreement or obligation
of the Company or any law or regulation applicable to it; and

h. As of the close of business on the date of this Agreement, the
Company is authorized to issue shares of capital stock, and it
will initially offer shares, in the authorized amounts as set
forth in Schedule A to this Agreement.

5. ADMINISTRATION SERVICES

The Administrator shall provide the following services, in each case, subject
to the control, supervision and direction of the Company and the review and
comment by the Company's auditors and legal counsel and in accordance with
procedures which may be established from time to time between the Company and
the Administrator:

a. Oversee the determination and publication of the Company's net
asset value in accordance with the Company's policy as adopted
from time to time by the Board;

b. Oversee the maintenance by the Company's custodian of certain
books and records of the Company as required under Rule 31a-1(b)
of the 1940 Act;

c. Prepare the Company's federal, state and local income tax returns
for review by the Company's independent accountants and filing by
the Company's treasurer;

d. Review the calculation, submit for approval by officers of the
Company and arrange for payment of the Company's expenses;

3
<PAGE>

e. Prepare for review and approval by officers of the Company
financial information for the Company's semi-annual and annual
reports and other communications required or otherwise to be sent
to Company shareholders, and arrange for the printing and
dissemination of such reports and communications to shareholders;

f. Prepare for review by an officer of and legal counsel for the
Company the Company's periodic financial reports required to be
filed with the Securities and Exchange Commission ("SEC") on Form
N-SAR and financial information required by Form N-1A and such
other reports, forms or filings as may be mutually agreed upon;

g. Prepare reports relating to the business and affairs of the
Company as may be mutually agreed upon and not otherwise prepared
by the Company's investment adviser, custodian, legal counsel or
independent accountants;

h. Make such reports and recommendations to the Board concerning the
performance of the independent accountants as the Board may
reasonably request;

i. Make such reports and recommendations to the Board concerning the
performance and fees of the Company's custodian and transfer and
dividend disbursing agent ("Transfer Agent") as the Board may
reasonably request or deems appropriate;

j. Oversee and review calculations of fees paid to the Company's
investment adviser, custodian, Administrator and Transfer Agent;

k. Consult with the Company's officers, independent accountants,
legal counsel, custodian and Transfer Agent in establishing the
accounting policies of the Company;

l. Respond to, or refer to the Company's officers or Transfer Agent,
shareholder inquiries relating to the Company;

m. Provide periodic testing of portfolios to assist the Company's
investment adviser in complying with mandatory qualification
requirements of Subchapter M of the Internal Revenue Code, the
requirements of the 1940 Act and the Company's prospectus
limitations as may be mutually agreed upon;

n. Review and provide assistance on shareholder communications;

o. Maintain copies of the Company's charter and by-laws;

p. File annual and semi-annual shareholder reports with the
appropriate regulatory agencies; review text of "President's
letters" to shareholders and "Management's

4
<PAGE>

Discussion of Company Performance" (which shall also be subject
to review by the Company's legal counsel);

q. Prepare and file Rule 24f-2 notices.

r. Perform Blue Sky services pursuant to the specific instructions
of the Company and as detailed in Schedule B to this Agreement.

The Administrator shall provide the office facilities and the personnel required
by it to perform the services contemplated herein.

6. FEES; EXPENSES; EXPENSE REIMBURSEMENT

The Administrator shall receive from the Company such compensation for
the Administrator's services provided pursuant to this Agreement as may be
agreed to from time to time in a written fee schedule approved by the parties
and initially set forth in the Fee Schedule to this Agreement. The fees are
accrued daily and billed monthly and shall be due and payable upon receipt of
the invoice. Upon the termination of this Agreement before the end of any month,
the fee for the part of the month before such termination shall be prorated
according to the proportion which such part bears to the full monthly period and
shall be payable upon the date of termination of this Agreement. In addition,
the Company shall reimburse the Administrator for its reasonable out-of-pocket
costs incurred in connection with this Agreement.

The Company agrees promptly to reimburse the Administrator for any
equipment and supplies specially ordered by or for the Company through the
Administrator and for any other expenses not contemplated by this Agreement that
the Administrator may incur on the Company's behalf at the Company's request or
with the Company's consent.

The Company will bear all expenses that are incurred in its operation
and not specifically assumed by the Administrator. Expenses to be borne by the
Company, include, but are not limited to: organizational expenses; cost of
services of independent accountants and outside legal and tax counsel retained
by the Company (including such counsel's review of the Company's registration
statement, proxy materials, federal and state tax qualification as a regulated
investment company and other reports and materials prepared by the Administrator
under this Agreement); cost of any services contracted for by the Company
directly from parties other than the Administrator; cost of trading operations
and brokerage fees, commissions and transfer taxes in connection with the
purchase and sale of securities for the Company; investment advisory fees;
taxes, insurance premiums and other fees and expenses applicable to its
operation; costs incidental to any meetings of shareholders including, but not
limited to, legal and accounting fees, proxy filing fees and the costs of
preparation, printing and mailing of any proxy materials; costs incidental to
Board meetings, including fees and expenses of Board members; the salary and
expenses of any officer, director\trustee or employee of the Company; costs
incidental to the preparation, printing and distribution of the Company's
registration statements and any amendments thereto and shareholder reports; cost
of typesetting and printing of prospectuses; cost of preparation and filing of
the Company's tax returns, Form N-1A or N-2 and Form N-SAR, and all notices,
registrations and amendments associated with applicable federal and state tax
and securities laws; all applicable registration fees and filing fees required
under federal and state securities laws; fidelity bond and

5
<PAGE>

directors' and officers' liability insurance; and cost of independent pricing
services used in computing the Company's net asset value.

The Administrator is authorized to and may employ or associate with
such person or persons as the Administrator may deem desirable to assist it in
performing its duties under this Agreement; provided, however, that the
compensation of such person or persons shall be paid by the Administrator and
that the Administrator shall be as fully responsible to the Company for the acts
and omissions of any such person or persons as it is for its own acts and
omissions.

7. INSTRUCTIONS AND ADVICE

At any time, the Administrator may apply to any officer of the Company
for instructions and may consult with outside counsel for the Company or the
independent accountants for the Company at the expense of the Company, with
respect to any matter arising in connection with the services to be performed by
the Administrator under this Agreement. The Administrator shall not be liable,
and shall be indemnified by the Company, for any action taken or omitted by it
in good faith in reliance upon any such instructions or advice or upon any paper
or document believed by it to be genuine and to have been signed by the proper
person or persons. The Administrator shall not be held to have notice of any
change of authority of any person until receipt of written notice thereof from
the Company. Nothing in this paragraph shall be construed as imposing upon the
Administrator any obligation to seek such instructions or advice, or to act in
accordance with such advice when received.

8. LIMITATION OF LIABILITY AND INDEMNIFICATION

The Administrator shall be responsible for the performance of only
such duties as are set forth in this Agreement and, except as otherwise provided
under Section 6, shall have no responsibility for the actions or activities of
any other party, including other service providers. The Administrator shall have
no liability for any error of judgment or mistake of law or for any loss or
damage resulting from the performance or nonperformance of its duties hereunder
unless solely caused by or resulting from the negligence of the Administrator
its officers or employees or the breach of any representation or warranty of the
Administrator hereunder. The Administrator shall not be liable for any special,
indirect, incidental, or consequential damages of any kind whatsoever
(including, without limitation, attorneys' fees) under any provision of this
Agreement or for any such damages arising out of any act or failure to act
hereunder. In any event, the Administrator's liability under this Agreement
shall be limited to the greater of two times its total annual compensation
earned and fees paid hereunder during the preceding twelve months or one hundred
thousand dollars ($100,000) for any liability or loss suffered by the Company
including, but not limited to, any liability relating to qualification of the
Company as a regulated investment company or any liability relating to the
Company's compliance with any federal or state tax or securities statute,
regulation or ruling.

The Administrator shall not be responsible or liable for any failure
or delay in performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its control,
including without limitation, work stoppage, power or other mechanical failure,
computer virus, natural disaster, governmental action or communication
disruption.

The Administrator shall maintain a fully functional disaster recovery
plan and procedures including provisions for emergency use of electronic data
processing equipment, which is commercially

6
<PAGE>

reasonable in light of the services provided. The Administrator shall, at no
additional expense to the Company, take commercially reasonable steps to
minimize service interruptions. The Administrator shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided it maintains such plan and procedures.

The Company shall indemnify and hold the Administrator harmless from
all loss, cost, damage and expense, including reasonable fees and expenses for
counsel, incurred by the Administrator resulting from any claim, demand, action
or suit in connection with the Administrator's acceptance of this Agreement, any
action or omission by it in the performance of its duties hereunder, or as a
result of acting upon any instructions reasonably believed by it to have been
duly authorized by the Company, provided that this indemnification shall not
apply to actions or omissions of the Administrator, its officers or employees in
cases of its or their own gross negligence or willful misconduct.

The indemnification contained herein shall survive the termination of this
Agreement.

9. CONFIDENTIALITY

The Administrator agrees that, except as otherwise required by law or
in connection with any required disclosure to a banking or other regulatory
authority, it will keep confidential all records and information in its
possession relating to the Company or its shareholders or shareholder accounts
and will not disclose the same to any person except at the request or with the
written consent of the Company.

10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS

The Company assumes full responsibility for complying with all
securities, tax, commodities and other laws, rules and regulations applicable to
it.

In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Administrator agrees that all records which it maintains for the Company
shall at all times remain the property of the Company, shall be readily
accessible during normal business hours, and shall be promptly surrendered upon
the termination of the Agreement or otherwise on written request. The
Administrator further agrees that all records which it maintains for the Company
pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods
prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier
surrendered as provided above. Records shall be surrendered in usable machine-
readable form.

11. SERVICES NOT EXCLUSIVE

The services of the Administrator to the Company are not to be deemed
exclusive, and the Administrator shall be free to render similar services to
others. The Administrator shall be deemed to be an independent contractor and
shall, unless otherwise expressly provided herein or authorized by the Company
from time to time, have no authority to act or represent the Company in any way
or otherwise be deemed an agent of the Company.

12. TERM, TERMINATION AND AMENDMENT

This Agreement shall become effective on the date of its execution and
shall remain in full force and effect and effect for an initial term of two
years from the effective date and shall

7
<PAGE>

automatically continue in full force and effect after such initial term unless
either party terminates this Agreement by written notice to the other party at
least sixty (60) days prior to the expiration of the initial term. Either party
may terminate this Agreement at any time after the initial term upon at least
sixty (60) days' prior written notice to the other party. Termination of this
Agreement with respect to any given Investment Fund shall in no way affect the
continued validity of this Agreement with respect to any other Investment Fund.
Upon termination of this Agreement, the Company shall pay to the Administrator
such compensation and any reimbursable expenses as may be due under the terms
hereof as of the date of such termination, including reasonable out-of-pocket
expenses associated with such termination. This Agreement may be modified or
amended from time to time by mutual written agreement of the parties hereto.

13. NOTICES

Any notice or other communication authorized or required by this
Agreement to be given to either party shall be in writing and deemed to have
been given when delivered in person or by confirmed facsimile, or posted by
certified mail, return receipt requested, to the following address (or such
other address as a party may specify by written notice to the other): if to the
Company: Security Capital Real Estate Mutual Funds Incorporated, 11 South
LaSalle St., Chicago, Illinois 60603 Attn: John H. Gardner, Managing Director;
cc: David Novick, Esq., Chief Compliance Officer; fax:312-345-0818; if to the
Administrator: State Street Bank and Trust Company, 1776 Heritage Drive, AFB-4,
North Quincy, Massachusetts 02171, Attn: Joseph McBrien, Vice President and
Counsel; fax: 617-985-4867.

14. NON-ASSIGNABILITY

This Agreement shall not be assigned by either party hereto without
the prior consent in writing of the other party, except that the Administrator
may assign this Agreement to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by or under common control with
the Administrator.

15. SUCCESSORS

This Agreement shall be binding on and shall inure to the benefit of
the Company and the Administrator and their respective successors and permitted
assigns.

16. ENTIRE AGREEMENT

This Agreement contains the entire understanding between the parties
hereto with respect to the subject matter hereof and supersedes all previous
representations, warranties or commitments regarding the services to be
performed hereunder whether oral or in writing.

17. WAIVER

The failure of a party to insist upon strict adherence to any term of
this Agreement on any occasion shall not be considered a waiver nor shall it
deprive such party of the right thereafter to insist upon strict adherence to
that term or any term of this Agreement. Any waiver must be in writing signed by
the waiving party.

8
<PAGE>

18. SEVERABILITY

If any provision of this Agreement is invalid or unenforceable, the
balance of the Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance it shall nevertheless remain
applicable to all other persons and circumstances.

19. GOVERNING LAW

This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.

20. REPRODUCTION OF DOCUMENTS

21. YEAR 2000

The Administrator will take reasonable steps to ensure that its
products (and those of its third-party suppliers) reflect the available state of
the art technology to offer products that are Year 2000 compliant, including but
not limited to, century recognition of dates, calculations that correctly
compute same century and multi-century formulas and date values, and interface
values that reflect the date issues arising between now and the next one hundred
years. If any changes are required, the Administrator will make the changes to
its products at no cost to the Company and in a commercially reasonable time
frame and will require third-party suppliers to do likewise.

9
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first written
above.

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

By: /s/ John H. Gardner, Jr.
-----------------------------
Name: John H. Gardner, Jr.
-----------------------------
Title: Managing Director
-----------------------------

STATE STREET BANK AND TRUST COMPANY

By: /s/ Kathleen C. Cuocolo
----------------------------
Name: Kathleen C. Cuocolo
----------------------------
Title: Senior Vice President
----------------------------

10
<PAGE>

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
ADMINISTRATION AGREEMENT

SCHEDULE A
Listing of Investment Funds and Authorized Shares

<TABLE>
<CAPTION>
Investment Fund Authorized Shares

<S> <C>
Security Capital U.S. Real Estate Shares(1) (Class I and Class R) 50,000,000
Security Capital European Real Estate Shares (Class I and Class R) 50,000,000
Security Capital Asia/Pacific Real Estate Shares (Class I and Class R) 50,000,000
Security Capital Real Estate Arbitrage Shares (Class I) 50,000,000

</TABLE>

- ------------------------------
/1/ Services and fees related thereto to commence August 10, 1998.

11
<PAGE>

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
ADMINISTRATION AGREEMENT
SCHEDULE B
NOTICE FILING WITH
STATE SECURITIES ADMINISTRATORS

AT THE SPECIFIC DIRECTION OF THE COMPANY, THE ADMINISTRATOR WILL PREPARE
REQUIRED DOCUMENTATION AND MAKE NOTICE FILINGS IN ACCORDANCE WITH THE SECURITIES
LAWS OF EACH JURISDICTION IN WHICH COMPANY SHARES ARE TO BE OFFERED OR SOLD
PURSUANT TO INSTRUCTIONS GIVEN TO THE ADMINISTRATOR BY THE COMPANY.

THE COMPANY SHALL BE SOLELY RESPONSIBLE FOR THE DETERMINATION (I) OF THOSE
JURISDICTIONS IN WHICH NOTICE FILINGS ARE TO BE SUBMITTED AND (II) THE NUMBER OF
COMPANY SHARES TO BE PERMITTED TO BE SOLD IN EACH SUCH JURISDICTION. IN THE
EVENT THAT THE ADMINISTRATOR BECOMES AWARE OF (A) THE SALE OF COMPANY SHARES IN
A JURISDICTION IN WHICH NO NOTICE FILING HAS BEEN MADE OR (B) THE SALE OF
COMPANY SHARES IN EXCESS OF THE NUMBER OF COMPANY SHARES PERMITTED TO BE SOLD IN
SUCH JURISDICTION, THE ADMINISTRATOR SHALL REPORT SUCH INFORMATION TO THE
COMPANY, AND IT SHALL BE THE COMPANY'S RESPONSIBILITY TO DETERMINE APPROPRIATE
CORRECTIVE ACTION AND INSTRUCT THE ADMINISTRATOR WITH RESPECT THERETO.

The Blue Sky services to be provided by the Administrator shall consist of the
following:

1. Filing of Company's Initial Notice Filings, as directed by the
Company;

2. Filing of Company's renewals and amendments as required;

3. Filing of amendments to the Company's registration statement where
required;

4. Filing Company sales reports where required;

5. Payment at the expense of the Company of all Company Notice Filing
fees;

6. Filing the Prospectuses and Statements of Additional Information and
any amendments or supplements thereto where required;

7. Filing of annual reports and proxy statements where required;

8. Quarterly provide to the Company and the Company's Transfer Agent a
registration period sales report; and

9. The performance of such additional services as the Administrator and
the Company may agree upon in writing.

Unless otherwise specified in writing by the Administrator, Blue Sky services by
the Administrator shall not include determining the availability of exemptions
under a jurisdiction's blue sky law. Any such determination shall be made by
the Company or its legal counsel. In connection with the services described
herein, the Company shall issue in favor of the Administrator a power of
attorney to submit

12
<PAGE>

Notice Filings on behalf of the Company, which power of attorney shall be
substantially in the form of Exhibit I attached hereto.

13
<PAGE>

EXHIBIT I

LIMITED POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, as of June 30, 1998 that Security Capital Real
Estate Mutual Funds Incorporated with principal offices at 11 South LaSalle
Street, Chicago, Illinois 60603 (the "Company") makes, constitutes, and appoints
STATE STREET BANK AND TRUST COMPANY (the "Administrator") with principal offices
at 225 Franklin Street, Boston, Massachusetts its lawful attorney-in-fact for it
to do as if it were itself acting, the following:

1. REGISTRATION OF TRUST SHARES. The power to register shares of the
Company in each jurisdiction in which Company shares are offered or sold
and in connection therewith the power to prepare, execute, and deliver and
file any and all Company applications, including without limitation,
applications to register shares, consents, including consents to service of
process, reports, including without limitation, all periodic reports,
claims for exemption, or other documents and instruments now or hereafter
required or appropriate in the judgment of the Administrator in connection
with the registration of Company shares.

2. AUTHORIZED SIGNERS. Pursuant to this Limited Power of Attorney, individuals
holding the titles of Officer, Blue Sky Manager, or Senior Blue Sky
Administrator at the Administrator shall have authority to act on behalf of
the Company with respect to item 1 above.

The execution of this limited power of attorney shall be deemed coupled with an
interest and shall be revocable only upon receipt by the Administrator of such
termination of authority. Nothing herein shall be construed to constitute the
appointment of the Administrator as or otherwise authorize the Administrator to
act as an officer, director or employee of the Company.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
name and on its behalf by and through its duly authorized officer, as of the
date first written above.

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

By: /s/ John H. Gardner, Jr.
- ----------------------------
Name: John H. Gardner, Jr.
- ----------------------------
Title: Managing Director
- ----------------------------

14
<PAGE>

STATE STREET BANK AND TRUST COMPANY
SECURITY CAPITAL
FUND ADMINISTRATION FEE SCHEDULE

COMPLEX FEE SCHEDULE FOR UP TO 10 PORTFOLIOS

I. FUND ADMINISTRATION SERVICES

<TABLE>
<CAPTION>
Annual Fee
Average Complex Assets Expressed in Basis Points: 1/100 of 1%
---------------------- --------------------------------------

Administration
--------------

<S> <C>
First $750 million 8
Next $250 million 6
Thereafter 4

Minimum/Fund
1st Fund $90,000
2nd Fund $80,000
3rd Fund $70,000
4th Fund $60,000
5th Fund $50,000
</TABLE>

Administration services include Treasurer's office support, financial reporting,
daily and monthly SEC and IRS compliance as appropriate, tax reporting, and Blue
Sky compliance support.

II. MULTIPLE CLASSES OF SHARES

An additional $2,500 annual fee will be applied for each class of shares,
excluding the initial class of shares, if more than one class of shares
is operational in a fund.

III. BLUE SKY ADMINISTRATION SERVICES

A base blue sky fee of $5,000 per fund.

IV. LEVERAGE

An additional $10,000 annual fee will be applied if a fund engages in
leverage transactions other than temporary borrowing.

<PAGE>

V. OUT OF POCKET EXPENSES - INCLUDE BY MAY NOT BE LIMITED TO:

- Printing for shareholder reports and SEC filings
- Legal fees, audit fees and other professional fees
- Postage, telephone, fax, and photocopying
- Supplies related to Fund records
- Travel and lodging for Board and Operations meetings
- Preparation of financials other than Annual, Semi-Annual, and
Quarterly Board Reporting - $3,000 per financial report

VI. SPECIAL ARRANGEMENTS

Fees for activities of a non-recurring nature such as fund consolidations
or reorganization, and/or preparation of special reports will be subject to
negotiation.

VII. TERM OF THE CONTRACT

The parties agree that this fee schedule shall remain in effect through
December 31, 1999, and from year to year thereafter until it is revised as a
result of negotiations initiated by either party.

SECURITY CAPITAL STATE STREET BANK

By:/s/ John H. Gardner, Jr. By:/s/ Kathleen C. Cuocolo
------------------------ -------------------------
Title: Managing Director Title: Senior Vice President
--------------------- ----------------------
Date: 8/27/98 Date: 9/2/98
---------------------- -----------------------

<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. 10 to the Form N-1A
Registration Statement of Security Capital Real Estate Mutual Funds
Incorporated, File Nos. 333-20649 and 811-8033.

/s/ Mayer, Brown & Platt

MAYER, BROWN & PLATT

Washington, D.C.
March 1, 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 __, 1999