PILGRIM GOVERNMENT SECURITIES INCOME FUND INC, 485B24E, 1996-10-31

PILGRIM GOVERNMENT SECURITIES INCOME FUND INC
485B24E, 1996-10-31

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<PAGE>

As filed with the Securities and Exchange Commission on October 31, 1996
Registration No. 2-91302
811-4031

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO. |_|

POST-EFFECTIVE AMENDMENT NO. 19 |X|

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|

AMENDMENT NO. 19 |X|

---------

PILGRIM GOVERNMENT SECURITIES
INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)

Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, Arizona 85004
(Address of Principal Executive Office) (Zip Code)

Registrant's Telephone Number, including Area Code: (800) 551-0833

James M. Hennessy, Esq.
Pilgrim America Investments, Inc.
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, Arizona 85004
(Name and Address of Agent for Service of Process)
---------
With copies to:

Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005

---------

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

|X| Immediately upon filing pursuant to
paragraph (b)

|_| 60 days after filing pursuant to
paragraph (a)(1)

|_| 75 days after filing pursuant to
paragraph (a)(2)

|_| on (date) pursuant to paragraph (b)

|_| on (date) pursuant 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.

Registrant has registered an indefinite number of shares of common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. Registrant filed its Rule 24f-2 Notice for the fiscal year
ended June 30, 1996 on August 29, 1996.

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

Pilgrim Government Securities Income Fund, Inc.
Fiscal Year 1997

Calculation of Registration Fee
Title of
Securities Number of Proposed Maximum Proposed Maximum Amount
Being Shares Being Offering Price Per Aggregate Offering of Reg'n
Registered Registered Unit Price Fee
- ---------- ----------- ------------------ ------------------ ---------
Shares of 295,212 $ 13.30 $ 330,000 $100*
Common Stock,
No Par Value

The fee for 295,212 shares to be registered by this filing has been computed on
the basis of maximum offering price per share in effect on October 25, 1996.

*Calculation of the proposed maximum offering price has been made pursuant to
Rule 24e-2. During its fiscal year ended June 30, 1996, the Fund redeemed
$9,391,713 of securities. During the current fiscal year the Fund used

$5,795,389 of securities it redeemed during its fiscal year ended June 30, 1996,
for a reduction pursuant to Rule 24f-2(c). The Fund is currently registering
295,212 shares, which is equal to the remaining $3,596,324 redeemed during the
fiscal year ended June 30, 1996 (which, when divided by the offering price per
share on October 25, 1996, equals 270,400 shares) plus 24,812 shares. During its
current fiscal year the Fund has filed no other post-effective amendments for
the purpose of the reduction pursuant to Rule 24e-2(a).

<PAGE>

PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET

N-1A Location in
Item No. Registration Statement
- -------- ----------------------

Part A: Information Required in Prospectus

1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Summary of
Expenses
3. Condensed Financial Information Financial Highlights
4. General Description The Funds' Investment Objectives and
of Registrant Policies; Investment Practices and Risk
Considerations
5. Management of the Fund Management of the Funds
5A. Management's Discussion of Fund *
Performance
6. Capital Stock and Other Additional Information; Dividends,
Securities Distributions & Taxes
7. Purchase of Securities Shareholder Guide--Pilgrim America
Being Offered Purchase Options; Shareholder Guide --
Purchasing Shares
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings Not Applicable

Part B: Information Required in
Statement of Additional Information

10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Pilgrim America Group;
General Information
13. Investment Objectives Investment Objectives and Policies;
and Policies Investment Restrictions
14. Management of the Registrant Directors and Officers; Investment
Management
15. Control Persons and Principal Directors and Officers;
Holders of Securities General Information
16. Investment Advisory and Other Investment Management
Services
17. Brokerage Allocation Execution of Portfolio Transactions
18. Capital Stock and Other General Information; Distributions
Securities
19. Purchase, Redemption and Additional Purchase and Redemption
Pricing of Securities Information; Shareholder Services and
Being Offered Privileges; Determination of Share Price
20. Tax Status Tax Considerations
21. Underwriters Distributor

22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements

*Contained in the Annual Report of Registrant

<PAGE>
Prospectus

[LOGO]

Elite Series
Pilgrim America MagnaCap Fund
Pilgrim America High Yield Fund
Pilgrim Government Securities Income Fund

TWO RENAISSANCE SQUARE, 40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, ARIZONA
85004
(800) 331-1080

The Pilgrim America Funds are a family of diversified, open-end and closed-end
investment companies. This Prospectus describes three of the open-end investment
company portfolios, also known as mutual funds (the Funds), each of which has
its own investment objectives and policies. These three portfolios are referred
to as the Elite Series.
------------------------

THE FUNDS

PILGRIM AMERICA MAGNACAP FUND (MagnaCap Fund) seeks growth of capital,
with dividend income as a secondary consideration. In making investments,
the Fund also will consider preservation of capital. The Fund seeks to
achieve its objectives by investing in common stocks of companies that the
investment manager, Pilgrim America Investments, Inc. (Investment
Manager), determines are of high quality based upon the selection criteria
under its rising dividends standards.

PILGRIM AMERICA HIGH YIELD FUND (High Yield Fund) seeks high current
income as its primary objective. As a secondary objective, the Fund also
seeks capital appreciation and, in making any investment decision, will
consider the preservation of capital. The Fund seeks to achieve its
objectives by investing at least 65% of its assets in higher yielding debt
securities, preferred stocks and convertible securities.

PILGRIM GOVERNMENT SECURITIES INCOME FUND (Government Securities Income
Fund) seeks high current income, consistent with liquidity and
preservation of capital. The Fund seeks to achieve its objective by
investing at least 70% of its assets in securities issued or guaranteed by
the U.S. Government, or certain of its agencies and instrumentalities.

------------------------------
Each Fund offers three classes of shares, with varying types and amounts of
sales and distribution charges. These Pilgrim America Purchase Options(TM)
permit you to choose the method of purchasing shares that best suits your
investment strategy.

This Prospectus presents information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about each

Fund, dated October 31, 1996, has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus (that is, it
is legally considered a part of this Prospectus). This Statement is available
free upon request by calling Pilgrim America Group, Inc. (Shareholder
Servicing Agent) at (800) 331-1080.

INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING RISK OF LOSS OF
PRINCIPAL. THE FUNDS' SHARES ARE NOT OBLIGATIONS, DEPOSITS, OR ACCOUNTS OF A
BANK AND ARE NOT GUARANTEED BY A BANK. IN ADDITION, THE FUNDS' SHARES ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY. MOREOVER, THE HIGHER YIELDING SECURITIES IN WHICH HIGH
YIELD FUND WILL INVEST ARE ORDINARILY IN THE LOWER RATING CATEGORIES OF
RECOGNIZED RATING AGENCIES OR EQUIVALENT UNRATED SECURITIES, AND ARE COMMONLY
KNOWN AS 'JUNK BONDS.' INVESTMENT IN THIS FUND MAY INVOLVE A HIGHER DEGREE OF
RISK THAN A FUND THAT INVESTS IN INVESTMENT GRADE SECURITIES. INVESTORS SHOULD
ONLY INVEST IN THIS FUND THAT PORTION OF THEIR ASSETS THAT THEY WISH TO COMMIT
TO A PORTFOLIO THAT MAY BE ACCOMPANIED BY A HIGH DEGREE OF RISK.

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

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

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

The date of this Prospectus is October 31, 1996

<PAGE>
THE FUNDS AT A GLANCE*

<TABLE>
<S> <C> <C>
FUND OBJECTIVES AND POLICIES STRATEGY
MAGNACAP FUND Long term growth of capital with income as a The Investment Manager selects companies
secondary consideration. that meet the 'Rising Dividends'
Invests in equity securities that are criteria: consistent dividend increases;
determined to be of high quality by the substantial dividend increases;
Investment Manager based upon certain reinvested substantial earnings; strong
selection criteria. balance sheets; and attractive prices.
Normally fully invested. Principal risk factors: exposure to
financial and market risks that accompany
investment in equities. You can expect
fluctuation in the value of the Fund's
portfolio securities and the Fund's
shares.*
HIGH YIELD FUND High level of current income with capital The Investment Manager selects
appreciation as a secondary objective. high-yielding fixed income securities
Invests at least 65% of its assets in a that do not, in its opinion, involve
diversified portfolio of high-yielding debt undue risk relative to the securities'
securities commonly referred to as 'junk return characteristics.
bonds.' May also invest up to 35% of its Principal risk factors: exposure to
total assets in other types of fixed income financial, market and interest rate risks
securities, preferred and common stocks, and greater credit risks than with
warrants and other securities. higher-rated bonds. You can normally
Normally fully invested. expect greater fluctuation in the value
of the Fund's shares than for the
Government Securities Income Fund,
particularly in response to economic
downturns.*
GOVERNMENT SECURITIES INCOME FUND High level of current income consistent with The Investment Manager analyzes various
liquidity and preservation of capital. U.S. Government securities and selects
Normally invests at least 70% of its assets those offering the highest yield
in securities issued or guaranteed by the consistent with maintaining liquidity and
U.S. Government, or certain of its agencies preserving capital.
and instrumentalities. The Fund does not Principal risk factors: exposure to
invest in highly leveraging derivatives, such financial and interest rate risks, and
as swaps, interest-only or principal-only prepayment risk on mortgage related
stripped mortgage-backed securities or securities. You can normally expect
interest rate futures contracts. fluctuation in the value of the Fund's
Normally fully invested. shares in response to changes in interest
rates, and relatively little fluctuation
in the absence of such changes.*
Pilgrim America Investments, Inc. (the Investment Manager) serves as investment manager to each Fund.

Pilgrim America Investments, Inc. manages and administers over $1.5 billion in assets for the Pilgrim America Funds.
</TABLE>

* This summary description should be read in conjunction with the more

complete description of each Fund's investment objectives and policies and
the Investment Manager elsewhere in this Prospectus. For information
regarding the purchase and redemption of shares of each Fund, refer to the
'Shareholder Guide' below.

<PAGE>
SUMMARY OF EXPENSES

Shares of the Funds are available through independent financial professionals,
national and regional brokerage firms and other financial institutions
(Authorized Dealers). You may select from three separate classes of shares:
Class A, Class B and Class M.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M
-------- -------- --------
<S> <C> <C> <C>
Maximum initial sales charge imposed on purchases of MagnaCap Fund
(as a percentage of offering price)............................. 5.75%(1) None 3.50%(1)
Maximum initial sales charge imposed on purchases of High Yield
Fund and Government Securities Income Fund (as a percentage of
offering price)................................................. 4.75%(1) None 3.25%(1)
Maximum contingent deferred sales charge (CDSC) on each fund
(at the lower of original purchase price or the
redemption proceeds)............................................ None(2) 5.00%(3) None
</TABLE>

The Funds have no redemption fees, exchange fees or sales charges on reinvested
dividends.
- ------------------------
(1) Reduced for purchases of $50,000 and over. See 'Class A Shares: Initial
Sales Charge Alternative' and 'Class M Shares: Lower Initial Sales Charge
Alternative.'
(2) A CDSC of no more than 1.00% for shares redeemed in the first or second
year, depending on the amount of purchase, is assessed on redemptions of
Class A shares that were purchased without an initial sales charge as part
of an investment of $1 million or more. See 'Class A Shares: Initial Sales
Charge Alternative.'
(3) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See 'Class B Shares: Deferred Sales Charge
Alternative.'

The percentages shown below reflect the annual operating expenses incurred by
the Class A shares for each of the Funds for the fiscal year ended June 30, 1996
and the Class B and Class M shares of each Fund for the fiscal period July 17,
1995 (commencement of sales) through June 30, 1996. The annual operating

expenses of certain Funds are subject to waivers which are described in the
footnotes following the table.

ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
MAGNACAP FUND FEES FEES(1) EXPENSES EXPENSES
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.78% 0.30% 0.60% 1.68%
Class B.................... 0.78% 1.00% 0.60% 2.38%
Class M.................... 0.78% 0.75% 0.60% 2.13%

TOTAL FUND
OTHER OPERATING
EXPENSES EXPENSES
MANAGEMENT DISTRIBUTION (AFTER EXPENSE (AFTER EXPENSE
HIGH YIELD FUND FEES(2) FEES(1) REIMBURSEMENT)(2) REIMBURSEMENT)(2)
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.00% 0.25% 0.75% 1.00%
Class B.................... 0.00% 1.00% 0.75% 1.75%
Class M.................... 0.00% 0.75% 0.75% 1.50%
<CAPTION>

TOTAL FUND
OTHER OPERATING
EXPENSES EXPENSES
GOVERNMENT SECURITIES MANAGEMENT DISTRIBUTION (AFTER EXPENSE (AFTER EXPENSE
INCOME FUND FEES(3) FEES(1)(3) REIMBURSEMENT)(3) REIMBURSEMENT)(3)
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.50% 0.25% 0.76% 1.51%
Class B.................... 0.50% 1.00% 0.76% 2.26%
Class M.................... 0.50% 0.75% 0.76% 2.01%
</TABLE>

3
<PAGE>
- ------------------

(1) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by the
Rules of the National Association of Securities Dealers, Inc. (NASD).

(2) High Yield Fund pays the Investment Manager a fee at an annual rate of 0.75%

of the average daily net assets of the Fund on the first $25 million of net

assets; 0.625% of the average daily net assets over $25 million to $100
million; 0.50% of the average daily net assets over $100 million to $500
million; and 0.40% of the average daily net assets in excess of $500
million. Effective July 1, 1995, the Investment Manager has voluntarily
agreed to waive all or a portion of its fees and to reimburse operating
expenses of the Fund, excluding distribution fees, interest, taxes,
brokerage and extraordinary expenses, so that total operating expenses do
not exceed 1.00% for Class A, 1.75% for Class B and 1.50% for Class M
shares. This expense limitation will apply until June 30, 1997. Without such
waiver, the annualized total fund operating expenses for the fiscal year
ended June 30, 1996 would have been 2.19% for Class A, 2.94% for Class B,
and 2.69% for Class M.

(3) The Investment Manager has agreed to reimburse the Government Securities
Income Fund to the extent that the gross operating costs and expenses of the
Fund, excluding any interest, taxes, brokerage commissions, amortization of
organizational expenses, extraordinary expenses, and distribution (Rule
12b-1) fees on Class B and Class M shares in excess of an annual rate of
0.25% of the average daily net assets of these classes, exceed 1.50% of the
Fund's average daily net assets on the first $40 million of net assets and
1.00% of average daily net assets in excess of $40 million for any one
fiscal year. For the fiscal year ended June 30, 1996, without such
reimbursement, the Fund's operating expenses would have been 1.57% for Class
A, 2.41% for Class B, and 2.16% for Class M.

The purpose of the above table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly as a shareholder in
a Fund. For more complete descriptions of the various costs and expenses, please
refer to 'Shareholder Guide' and 'Management of the Funds.'

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming (i) 5%
annual return and (ii) redemption at the end of the period (unless otherwise
noted):

<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
MAGNACAP FUND HIGH YIELD FUND INCOME FUND
------------------------------- -------------------------------- --------------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A............... $ 74 $ 107 $ 144 $ 245 $ 67 $ 88 $ 110 $ 173 $ 62 $ 93 $ 126 $ 219
Class B............... 74 104 147 272 68 85 115 206 73 101 141 260
Class B (assuming no
redemption)......... 24 74 127 272 18 55 95 206 23 71 121 260
Class M............... 56 99 145 273 47 78 112 206 52 94 137 259

</TABLE>

Use of the assumed 5% return is required by the Securities and Exchange
Commission. The example is not an illustration of past or future investment
results. This example should not be considered a representation of past or
future expenses; actual expenses may be more or less than those shown.

<PAGE>

FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

The following tables present condensed financial information about each Fund.
The tables present historical information based upon a share outstanding through
each Fund's fiscal year. This information has been derived from the financial
statements that are in the Annual Report dated as of June 30, 1996 for MagnaCap
Fund, High Yield Fund, and Government Securities Income Fund. For the periods
ended June 30, 1996 and 1995 for MagnaCap Fund and Government Securities Income
Fund and for the fiscal year ended June 30, 1996 and the eight-month period
ended June 30, 1995 for High Yield Fund, the information in the tables below has
been audited by KPMG Peat Marwick LLP, independent auditors. For all periods
ending prior to July 1, 1994, for MagnaCap Fund and Government Securities Income
Fund, and all periods ending prior to November 1, 1994, for High Yield Fund, the
financial information was audited by another independent auditor. Information
for High Yield Fund for the fiscal years ended October 31, 1986 through October
31, 1989 was not included in such Fund's 1994 financial statements. Further
information about each Fund's performance is contained in that Fund's Annual
Report, which may be obtained without charge.

MAGNACAP FUND

investments............ 0.24 0.24 0.24 0.60 0.59 0.77 -- 0.18
------------- ------- ------- -------- -------- -------- -------- --------
Total distributions.... 0.30 0.30 0.30 0.74 0.73 0.89 0.24 0.34
------------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $ 16.69 $ 16.59 $ 16.63 $ 14.03 $ 12.36 $ 12.05 $ 11.98 $ 10.93
------------- ------- ------- -------- -------- -------- -------- --------
------------- ------- ------- -------- -------- -------- -------- --------
TOTAL RETURN(C)............ 21.31% 18.98% 19.26% 20.61% 9.13% 8.21% 11.93% 5.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)........... $ 235,393 $10,509 $ 1,961 $211,330 $190,435 $197,250 $196,861 $199,892
Ratios to average net
assets:
Expenses................. 1.68% 2.38%(d) 2.13%(d) 1.59% 1.53% 1.53% 1.60% 1.50%
Net investment income.... 0.54% 0.07%(d) 0.32%(d) 0.98% 1.16% 1.09% 1.20% 2.00%
Portfolio turnover rate.... 15% 15% 15% 6% 7% 36% 49% 182%

1990 1989 1988 1987
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period...... $ 10.52 $ 9.12 $ 11.56 $ 10.66
Income from investment
operations:
Net investment income.... 0.15 0.17 0.15 0.18
Net realized and
unrealized gain (loss)
on investments......... 1.24 1.39 (0.74) 1.21
-------- -------- -------- --------
Total from investment
operations........... 1.39 1.56 (0.59) 1.39
-------- -------- -------- --------
Less distributions from:
Net investment income.... 0.17 0.16 0.12 0.26
Realized gains on
investments............ 1.00 -- 1.73 0.23
-------- -------- -------- --------
Total distributions.... 1.17 0.16 1.85 0.49
-------- -------- -------- --------
Net asset value, end of
period................... $ 10.74 $ 10.52 $ 9.12 $ 11.56
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(C)............ 13.84% 17.32% (6.64)% 13.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)........... $224,059 $204,552 $211,064 $243,729
Ratios to average net
assets:

Expenses................. 1.50% 1.60% 1.50% 1.40%
Net investment income.... 1.40% 1.80% 1.60% 1.70%
Portfolio turnover rate.... 12% 129% 206% 127%
</TABLE>

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

(a) Commencement of offering of shares.
(b) Pilgrim America Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.
(d) Annualized.

<PAGE>

HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE PERIOD JULY
FOR THE 17, 1995(A) TO JUNE EIGHT MONTHS
YEAR ENDED 30, 1996 ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1996 ---------------------- JUNE 30, --------------------------------
CLASS A CLASS B CLASS M 1995(B)(C) 1994 1993 1992
------------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 6.15 $ 6.20 $ 6.20 $ 5.95 $ 6.47 $ 5.77 $ 5.70
Income (loss) from investment
operations:
Net investment income.......... 0.59 0.48 0.50 0.35 0.54 0.53 0.63
Net realized and unrealized
gain (loss) on investments... 0.16 0.14 0.14 0.21 (0.51) 0.70 0.07
------------- ------- ------- ------------ ------- ------- -------
Total from investment
operations................. 0.75 0.62 0.64 0.56 0.03 1.23 0.70
------------- ------- ------- ------------ ------- ------- -------
Less distributions from:
Net investment income.......... 0.54 0.46 0.48 0.36 0.55 0.53 0.63
Realized gains on
investments.................. -- -- -- -- -- -- --
------------- ------- ------- ------------ ------- ------- -------
Total distributions.......... 0.54 0.46 0.48 0.36 0.55 0.53 0.63
------------- ------- ------- ------------ ------- ------- -------
Net asset value, end of
period......................... $ 6.36 $ 6.36 $ 6.36 $ 6.15 $ 5.95 $ 6.47 $ 5.77
------------- ------- ------- ------------ ------- ------- -------
------------- ------- ------- ------------ ------- ------- -------
TOTAL RETURN(D)................. 12.72% 10.37% 10.69% 9.77% 0.47% 22.12% 12.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)................. $18,691 $ 2,374 $1,243 $ 15,950 $16,046 $18,797 $17,034
Ratios to average net assets:
Expenses....................... 1.00%(e) 1.75%(e)(f) 1.50%(e)(f) 2.25%(f)(g) 2.00%(g) 2.02% 2.03%
Net investment income.......... 9.46%(e) 9.02%(e)(f) 9.41%(e)(f) 8.84%(f)(g) 8.73%(g) 8.36% 10.93%
Portfolio turnover rate......... 339% 339% 339% 166% 192% 116% 193%

1991 1990 1989 1988 1987
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 5.03 $ 6.46 $ 7.29 $ 7.25 $ 8.15
Income (loss) from investment
operations:

Net investment income.......... 0.66 0.82 0.88 0.89 0.95
Net realized and unrealized
gain (loss) on investments... 0.74 (1.40) (0.80) 0.03 (0.89)
------- ------- ------- ------- -------
Total from investment
operations................. 1.40 (0.58) 0.08 0.92 0.06
------- ------- ------- ------- -------
Less distributions from:
Net investment income.......... 0.68 0.85 0.91 0.88 0.96
Realized gains on
investments.................. 0.05 -- -- -- --
------- ------- ------- ------- -------
Total distributions.......... 0.73 0.85 0.91 0.88 0.96
------- ------- ------- ------- -------
Net asset value, end of
period......................... $ 5.70 $ 5.03 $ 6.46 $ 7.29 $ 7.25
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(D)................. 30.00% (10.08)% 0.94% 13.54% 0.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)................. $23,820 $21,598 $31,356 $41,910 $56,523
Ratios to average net assets:
Expenses....................... 1.89% 1.75% 1.79% 1.46% 1.34%
Net investment income.......... 12.40% 14.11% 12.61% 12.20% 11.68%
Portfolio turnover rate......... 173% 183% 210% 80% 114%
</TABLE>

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

(a) Commencement of offering of shares.

(b) Pilgrim America Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.

(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.

(e) Prior to the waiver and reimbursement of expenses, and for the period ended
June 30, 1996, the annualized ratio of expenses to average net assets was
2.19%, 2.94% and 2.69% for Class A, B and M shares, respectively. Prior to
the waiver and reimbursement of expenses, and for the period ended June 30,
1996, the annualized ratio of net investment income to average net assets
was 8.27%, 8.05% and 8.51% for Class A, B and M shares, respectively.

(f) Annualized.

(g) Prior to the waiver of expenses, the annualized ratio of expenses to average
net assets was 2.35% in 1995 and 2.07% in 1994. Prior to the waiver of

expenses, the annualized ratio of net investment income to average net
assets was 8.74% in 1995 and 8.66% in 1994.

<PAGE>

GOVERNMENT SECURITIES INCOME FUND

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JULY 17, 1995(A) TO
YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30,
JUNE 30, 1996 --------------------- ----------------------------------------
CLASS A CLASS B CLASS M 1995(B) 1994 1993(C) 1992
------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $ 12.97 $ 12.95 $ 12.95 $ 12.73 $ 13.96 $ 13.76 $ 13.76
Income (loss) from investment operations:
Net investment income...................... 0.75 0.66 0.68 0.84 0.84 1.13 1.19
Net realized and unrealized
gain (loss) on investments............... (0.32) (0.37) (0.36) 0.24 (1.17) 0.18 --
------------- ------- ------- ------- ------- ------- -------
Total from investment operations......... 0.43 0.29 0.32 1.08 (0.33) 1.31 1.19
------------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income...................... 0.75 0.65 0.68 0.84 0.90 1.11 1.19
Tax return of capital...................... 0.06 -- -- -- -- -- --
------------- ------- ------- ------- ------- ------- -------
Total distributions...................... 0.81 0.65 0.68 0.84 0.90 1.11 1.19
------------- ------- ------- ------- ------- ------- -------
Net asset value, end of period............... $ 12.59 $ 12.59 $ 12.59 $ 12.97 $ 12.73 $ 13.96 $ 13.76
------------- ------- ------- ------- ------- ------- -------
------------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(D).............................. 3.34% 2.25% 2.52% 8.96% (2.50)% 9.82% 8.98%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)...... $38,753 $ 73 $ 24 $43,631 $61,100 $87,301 $96,390
Ratios to average net assets:
Expenses................................... 1.51%(e) 2.26%(e)(f) 2.01%(e)(f) 1.40%(g) 1.21% 1.12% 1.10%
Net investment income...................... 5.84%(e) 4.98%(e)(f) 5.73%(e)(f) 6.37%(g) 6.44% 8.06% 8.59%
Portfolio turnover rate...................... 170% 170% 170% 299% 402% 466% 823%

1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $ 13.79 $ 14.23 $ 14.23 $ 14.51 $ 15.15
Income (loss) from investment operations:
Net investment income...................... 1.25 1.25 1.31 1.34 1.40
Net realized and unrealized
gain (loss) on investments............... (0.03) (0.38) 0.02 (0.25) (0.62)
-------- -------- -------- -------- --------
Total from investment operations......... 1.22 0.87 1.33 1.09 0.78
-------- -------- -------- -------- --------

Less distributions from:
Net investment income...................... 1.25 1.31 1.33 1.37 1.42
Tax return of capital...................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions...................... 1.25 1.31 1.33 1.37 1.42
-------- -------- -------- -------- --------
Net asset value, end of period............... $ 13.76 $ 13.79 $ 14.23 $ 14.23 $ 14.51
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(D).............................. 9.27% 6.51% 10.10% 8.00% 5.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)...... $110,674 $122,212 $144,769 $183,979 $288,024
Ratios to average net assets:
Expenses................................... 1.14% 1.14% 1.06% 0.98% 0.93%
Net investment income...................... 9.09% 9.02% 9.45% 9.50% 9.16%
Portfolio turnover rate...................... 429% 448% 537% 360% 433%
</TABLE>

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

(a) Commencement of offering of shares.

(c) During this period, average daily borrowings were $11,038,044, average
monthly shares outstanding were 6,429,755 and average daily borrowings per
share were $1.72. The Fund earned income and realized capital gains as a
result of entering into reverse repurchase agreements during the six months
from July to December 1992. Such transactions constituted borrowing
transactions and, as a result, the Fund exceeded its 10% borrowing
limitations during that period. Therefore, the Fund's performance was higher
than it would have been had the Fund adhered to its investment restrictions.
This borrowing technique was discontinued subsequent to December 1992 until
April 4, 1995, when shareholders approved a change in the Fund's investment
policies.

(e) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the annualized ratio of expenses to average net assets was 1.57%,
2.41% and 2.16% for Class A, B and M shares, respectively. Prior to the
waiver and reimbursement of expenses for the period ended June 30, 1996, the
annualized ratio of net investment income to average net assets was 5.74%,
4.83% and 5.58% for Class A, B and M shares, respectively.

(f) Annualized.

(g) Prior to the waiver of expenses the ratio of expenses to average net assets
was 1.54% and the ratio of net investment income to average net assets was
6.23%.

<PAGE>

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

MAGNACAP FUND. This Fund's objective is growth of capital, with dividend income
as a secondary consideration. In selecting investments for the Fund,
preservation of capital is also an important consideration. The Fund normally
seeks to achieve its objectives by investing in equity securities issued by
companies that the Investment Manager determines are of high quality based upon
selection criteria described below. These companies tend to be leaders in their
respective industries and command a high market share. The equity securities in
which the Fund may invest include common stocks, securities convertible into
common stocks, rights or warrants to subscribe for or purchase common stocks,
repurchase agreements and foreign securities (including American Depository
Receipts (ADRs)). Traditionally, the Fund has invested exclusively in common
stocks and cash equivalents and it is anticipated that the Fund normally will be
invested as fully as practicable in equity securities in accordance with its
investment policies. Assets of the Fund not invested in equity securities may be
invested in high-quality debt securities, as described in 'Investment
Techniques--Temporary Defensive and Other Short-Term Positions.' In a period
that the Investment Manager believes presents weakness in the stock market or in
economic conditions, the Fund may establish a defensive position to attempt to
preserve capital and increase its investment in these instruments.

MagnaCap Fund will be managed in accordance with the Rising Dividends Philosophy
that the Investment Manager has employed in evaluating companies for the Fund
since 1979. The Investment Manager generally requires that portfolio companies
meet the following criteria:

1. CONSISTENT DIVIDEND INCREASES. A company must have increased its dividend at
least eight out of the last ten years with no year showing a decrease.

2. SUBSTANTIAL DIVIDEND INCREASES. A company must have increased its dividend
at least 100% over the past ten years.

3. REINVESTED EARNINGS. Dividend payout must be less than 65% of current
earnings.

4. STRONG BALANCE SHEET. Long-term debt should be no more than 25% of total
capitalization.

5. ATTRACTIVE PRICE. The current price should be in the lower half of the
stock's price/earnings ratio range for the past ten years.

While the Investment Manager also considers other factors in selecting
investments for the Fund, it believes that companies with a pattern of rising
dividends will help the Fund attain its principal objective of growth of
capital. Historically, regulated utility companies generally have met the Fund's
investment philosophy and the Fund has invested in utility companies with
long-term debt in excess of 25% of total capitalization. MagnaCap Fund may not
invest more than 5% of its total assets in the securities of companies which,
including predecessors, have not had a record of at least three years of
continuous operations, and it may not invest in any restricted securities.

HIGH YIELD FUND. This Fund's primary investment objective is to seek a high
level of current income and its secondary objective is capital appreciation,
with preservation of capital as a consideration. The Fund normally seeks to
achieve its objectives by investing at least 65% of its assets in a diversified
portfolio of higher yielding debt securities, including preferred stock and
convertible securities (High Yield Securities),that do not in the opinion of the
Investment Manager involve undue risk relative to their expected return
characteristics. High Yield Securities, which are commonly known as junk bonds,
are ordinarily lower rated and include equivalent unrated securities.

Assets of the Fund not invested in High Yield Securities may be invested
(ordinarily not to exceed 35% of the Fund's assets) in common stocks; preferred
stocks rated Baa or better by Moody's Investor Services, Inc. (Moody's) or BBB
or better by Standard and Poor's Corporation (S&P); debt obligations of all
types rated Baa or higher by Moody's or BBB or better by S&P; U.S. Government
securities; warrants; foreign debt securities of any rating (not to exceed 10%
of the Fund's total assets at the time of investment); money market instruments,
including repurchase agreements on U.S. Government securities; other mortgage-
related securities; financial futures and related options; and participation
interests and assignments in

8
<PAGE>
floating rate loans and notes. See 'Investment Practices and Risk
Considerations--High Yield Securities' for information on High Yield Securities.

GOVERNMENT SECURITIES INCOME FUND. This Fund's investment objective is to seek
high current income, consistent with liquidity and preservation of capital. The
Fund normally seeks to achieve its objectives by investing at least 70% of its
total assets in securities issued or guaranteed by the U.S. Government and the
following agencies or instrumentalities of the U.S. Government: GNMA, Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Association (FHLMC). The 70% threshold may not be met due to changes in value of
the Fund's portfolio or due to the sale of portfolio securities due to
redemptions. In such instances, further purchases by the Fund will be of U.S.
Government Securities until the 70% level is restored. The remainder of the
Fund's assets may be invested in securities issued by other agencies and
instrumentalities of the U.S. Government and in instruments collateralized by
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.

The U.S. Government Securities in which the Fund may invest include, but are not
limited to, the following: (1) direct obligations of the U.S. Treasury including
Treasury bills (maturities of one year or less), Treasury notes (maturities of
one to ten years), and Treasury bonds (generally maturities of greater than ten
years and up to 30 years), and (2) mortgage-backed securities that are issued or
guaranteed by GNMA, FNMA, or FHLMC. The Fund may invest in short-term,
intermediate-term and long term U.S. Government Securities. The Investment
Manager will determine the exact composition and weighted average maturity of
the Fund's portfolio on the basis of its judgment of existing market conditions.
The Fund does not invest in highly leveraged derivatives, such as swaps,
interest-only or principal-only stripped mortgage-backed securities, or interest
rate futures contracts.

INVESTMENT PRACTICES AND RISK CONSIDERATIONS

The following pages contain information about certain types of securities in
which the Funds may invest and strategies the Funds may employ in pursuit of the
investment objectives. See the Statement of Additional Information of each Fund
for more detailed information on these investment techniques and the securities
in which the Funds may invest.

CONSIDERATIONS BEFORE INVESTING. The investment objectives and policies of the
Funds described above should be carefully considered before investing. There is
no assurance that a Fund will achieve its investment objectives. As with any
security, an investment in a Fund's shares involves certain risks, including
loss of principal. The Funds are subject to varying degrees of financial, market
and credit risks.

HIGH YIELD SECURITIES. High Yield Fund will invest in High Yield Securities,
which are high yield/high risk debt securities that are rated lower than Baa by
Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent quality.
High Yield Securities often are referred to as 'junk bonds' and include certain
corporate debt obligations, higher yielding preferred stock and mortgage-related
securities, and securities convertible into the foregoing. Investments in High
Yield Securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk. Generally, the Fund will invest in securities rated no lower than B
by Moody's or S&P, unless the Investment Manager believes the financial
condition of the issuer or other available protections reduce the risk to the
Fund. For example, the Fund may invest in such a security if the Investment
Manager believes the issuer's assets are sufficient for the issuer to repay its
outstanding obligations. Nevertheless, the Fund may invest in securities rated C
or D if the Investment Manager perceives greater value in these securities than
it believes is reflected in such securities' prevailing market price.

High Yield Securities are not considered to be investment grade. They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of High
Yield Securities have been found to be less sensitive to interest-rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in High
Yield Securities prices. In the case of High Yield Securities structured as

9
<PAGE>
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities that pay interest periodically and in cash.

The secondary market in which High Yield Securities are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Fund could sell a
High Yield Security, and could adversely affect the daily net asset value of the
Fund's shares. At times of less liquidity, it may be more difficult to value
High Yield Securities because this valuation may require more research, and

elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available. In pursuing the Fund's objectives, the
Investment Manager seeks to identify situations in which the rating agencies
have not fully perceived the value of the security.

Based upon the weighted average ratings of all High Yield Securities held during
High Yield Fund's most recent fiscal year, the percentage of the Fund's total
High Yield Securities represented by (1) High Yield Securities rated by a
nationally recognized statistical rating organization, separated into each
applicable rating category (Aaa, Baa, Ba, B, Caa, or Ca by Moody's or AAA, BBB,
BB, B, CCC, or CC by S&P) by monthly dollar-weighted average is AAA-0%, BBB-0%,
BB-22.67%, B-68.25%, CCC-3.51%, and CC-0%, respectively, and (2) unrated High
Yield Securities as a group-5.57%.

The following are excerpts from Moody's description of its bond ratings:
Ba--judged to have speculative elements; their future cannot be considered as
well assured. B--generally lack characteristics of the desirable investment.
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--speculative in a
high degree; often in default. C--lowest rate class of bonds; regarded as having
extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3
to rating categories. The modifier 1 indicates that the security is in the
higher end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking towards the lower end of the category. The following are
excerpts from S&P's description of its bond ratings: BB, B, CCC, CC,
C--predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of the obligation; BB indicates the lowest
degree of speculation and C the highest. S&P applies indicators '+,' no
character, and '-' to its rating categories. The indicators show relative
standing within the major rating categories.

INTERNATIONAL SECURITIES. MagnaCap Fund may invest up to 5% of its total assets
in certain foreign securities (including ADRs). High Yield Fund may invest up to
10% of its total assets in debt obligations (including preferred stocks) issued
or guaranteed by foreign corporations, certain supranational entities (such as
the World Bank) and foreign governments (including political subdivisions having
taxing authority) or their agencies or instrumentalities, including ADRs. These
securities may be denominated in either U.S. dollars or in non-U.S. currencies.
There are certain risks in owning foreign securities, including those resulting
from: (i) fluctuations in currency exchange rates; (ii) devaluation of
currencies; (iii) political or economic developments and the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions; (iv) reduced availability of public information concerning
issuers; (v) accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; and (vi) limitations on foreign
ownership of equity securities. Also, securities of many foreign companies may
be less liquid and the prices more volatile than those of domestic companies.
With certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Funds, including the withholding of dividends.

MORTGAGE-RELATED SECURITIES. Government Securities Income Fund may invest up to
100% of its assets in certain types of mortgage-related securities. High Yield
Fund may invest up to 35% of its total assets in mortgage-related securities.
Investments in mortgage-related securities involve certain risks. Although
mortgage loans underlying a mortgage-backed security may have maturities of up
to 30 years, the actual average life of a mortgage-backed security typically
will be substantially less because (1) the mortgages will be subject to normal
principal amortization, and (2) may be prepaid prior to maturity due to the sale
of the underlying property, the refinancing of the loan or foreclosure.
Prepayment rates vary widely and cannot be accurately predicted. They may be
affected by changes in market interest rates. Therefore,

10
<PAGE>
prepayments will be reinvested at rates that are available upon receipt, which
likely will be higher or lower than the original yield on the certificates.
Accordingly, the actual maturity and realized yield on mortgage-backed
securities will vary from the designated maturity and yield on the original
security based upon the prepayment experience of the underlying pool of
mortgages.

In periods of declining interest rates, prices of fixed income securities tend
to rise. However, during such periods, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
these prepayments must be reinvested at lower rates. In addition, the value of
these securities may fluctuate in response to the market's perception of the
creditworthiness of the issuers of mortgage-related securities owned by a Fund.
Additionally, although mortgages and mortgage-related securities are generally
supported by some form of government or private guarantee and/or insurance,
there is no assurance that private guarantors or insurers will be able to meet
their obligations.

RESTRICTED AND ILLIQUID SECURITIES. High Yield Fund may invest up to 15% of its
net assets in restricted and illiquid securities. The Fund may invest in an
illiquid or restricted security if the Investment Manager believes that it
presents an attractive investment opportunity. Generally, a security is
considered illiquid if it cannot be disposed of within seven days. This
illiquidity might prevent the sale of the security at a time when the Investment
Manager might wish to sell, and these securities could have the effect of
decreasing the overall level of the Fund's liquidity. Further, the lack of an
established secondary market may make it more difficult to value illiquid
securities, requiring the Fund to rely on judgments that may be somewhat
subjective in determining value, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, including private placements,
are subject to legal or contractual restrictions on resale. They can be eligible
for purchase without Securities and Exchange Commission registration by certain
institutional investors known as 'qualified institutional buyers,' and under the
Fund's procedures, restricted securities could be treated as liquid. However,
some restricted securities may be illiquid and restricted securities that are
treated as liquid could be less liquid than registered securities traded on
established secondary markets. The Fund also may be subject to a more
restrictive limitation on its investment in illiquid securities as required by
the securities laws of certain states.

U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities.
U.S. Government securities include direct obligations of the U.S. Treasury (such
as U.S. Treasury bills, notes and bonds) and obligations directly issued or
guaranteed by U.S. Government agencies or instrumentalities. Some obligations
issued or guaranteed by agencies or instrumentalities of the U.S. Government are
backed by the full faith and credit of the U.S. Government (such as GNMA
certificates); others are backed only by the right of the issuer to borrow from
the U.S. Treasury (such as obligations of FNMA); and still others are backed
only by the credit of the instrumentality (such as obligations of FHLMC), and
thus may be subject to varying degrees of credit risk. While U.S. Government
securities provide substantial protection against credit risk, they do not
protect investors against price declines in the securities due to changing
interest rates. Investors also should refer to the discussion of
'Mortgage-Related Securities.'

BORROWING. The Funds may borrow from banks solely for temporary or emergency
purposes up to certain amounts (10% of net assets in the case of Government
Securities Income Fund, 5% of net assets in the case of MagnaCap Fund and High
Yield Fund). Government Securities Income Fund may not make any additional
investment while any such borrowings exceed 5% of its total assets. The
Government Securities Income Fund's entry into reverse repurchase agreements and
dollar-roll transactions and any Fund's entry into delayed delivery transactions
(including those related to pair-offs) shall not be subject to the above limits
on borrowings. Borrowing may exaggerate the effect on net asset value (NAV) of
any increase or decrease in the NAV of a Fund, and money borrowed will be
subject to interest costs.

DOLLAR ROLL TRANSACTIONS. Government Securities Income Fund may engage in
dollar roll transactions with respect to mortgage-backed securities issued by
GNMA, FNMA and FHLMC in order to enhance portfolio returns and manage prepayment
risks. In a dollar roll transaction, the Fund sells a mortgage security held in
the portfolio to a financial institution such as a bank or broker-dealer, and
simultaneously agrees to repurchase a substantially similar security from the
institution at a later date at an agreed upon price. During the period between
the sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term

11
<PAGE>
instruments, and the income from these investments, together with any additional
fee income received on the sale, could generate income for the Fund exceeding
the yield on the sold security. When it enters into a dollar roll transaction,
the Fund will maintain with its custodian in a segregated account cash or high-
quality debt securities in a dollar amount sufficient to make payment for the
obligations to be repurchased. These securities are marked to market daily and
are maintained until the transaction is settled.

LENDING PORTFOLIO SECURITIES. In order to generate additional income, each Fund
may lend its portfolio securities in an amount up to 33 1/3% of total Fund
assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with the Investment Manager. The borrower at all times during the
loan must maintain with that Fund cash or high quality securities or an

irrevocable letter of credit equal in value to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the Fund any dividends or interest paid on such securities, and
the Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.

PAIRING OFF TRANSACTIONS. Government Securities Income Fund engages in a
pairing-off transaction when it commits to purchase a security at a future date,
and then the Fund 'pairs-off' the purchase with a sale of the same security
prior to or on the original settlement date. At all times when the Fund has an
outstanding commitment to purchase securities, the Fund will maintain with its
custodian in a segregated account cash or high-quality debt securities equal to
the value of the outstanding purchase commitments. When the time comes to pay
for the securities acquired on a delayed delivery basis, the Fund will meet its
obligations from the available cash flow, sale of the securities held in the
separate account, sale of other securities or, although it would not normally
expect to do so, from sale of the when-issued securities themselves (which may
have a market value greater or less than the Fund's payment obligation). Whether
a pairing-off transaction produces a gain for the Fund depends upon the movement
of interest rates. If interest rates decease, then the money received upon the
sale of the same security will be greater than the anticipated amount needed at
the time the commitment to purchase the security at the future date was entered
and the Fund will experience a gain. However, if interest rates increase, then
the money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.

REVERSE REPURCHASE AGREEMENTS. Government Securities Income Fund may enter into
reverse repurchase agreement transactions, which involve the sale of U.S.
Government Securities held by the Fund, with an agreement that the Fund will
repurchase the securities at an agreed upon price and date. The Fund will employ
reverse repurchase agreements when necessary to meet unanticipated net
redemptions and avoid liquidation of portfolio investments during unfavorable
market conditions. At the time it enters into a reverse repurchase agreement,
the Fund will place in a segregated account with its custodian cash or
high-quality debt securities having a dollar value equal to the repurchase
price. Reverse repurchase agreements, together with the Fund's other borrowings,
may not exceed 33 1/3% of the Fund's total assets.

USE OF DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. The Funds will not invest in highly leveraging
derivatives, such as interest-only or principal-only stripped mortgage-backed
securities or swaps. Government Securities Income Fund and High Yield Fund may
invest in U.S. Government agency mortgage-backed securities issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities, including
GNMA, FNMA, and FHLMC. These instruments might be considered derivatives. The
primary risks associated with these instruments is the risk that their value
will change with changes in interest rates and prepayment risk. For information
on mortgage-backed securities, see "Investment Practices and Risk

Considerations--Mortgage-Related Securities" in this Prospectus, "Investment
Objective and Policies--U.S. Government Securities" in Government Securities
Income Fund's Statement of Additional Information, and "Investment Objectives
and Policies--Mortgage-Related Securities" in High Yield Fund's Statement of
Additional Information.

Other uses of derivatives that may be employed only by High Yield Fund include
writing covered call options; purchasing call options; and engaging in financial
futures and related options. It is expected that these instruments ordinarily
will not be used for High Yield Fund; however, the Fund may make occasional use
of these techniques. When the Fund writes a covered call option, it receives a
premium for entering into a contract to sell a security in the future at an
agreed upon price and date. The Fund would write a call option if it believes
that the premium would increase total return. The primary risk of writing call
options is that, during the option period, the covered call writer has, in
return for the premium on the option, given up the opportunity to profit from a
price increase in the underlying securities above the exercise price. The Fund
may purchase call options for the purpose of "closing out" a position on a
security on which it as already written a call option.

High Yield Fund also may use financial futures contracts and related options for
"hedging" purposes. The Fund would purchase a financial futures contract (such
as an interest rate futures contract or securities index futures contract) to
protect against a decline in the value of its portfolio or to gain exposure to
securities which the Fund otherwise wishes to purchase. A risk of using
financial futures contracts for hedging purposes is that the Investment Manager
might imperfectly judge the market's direction, so that the hedge might not
correlate to the market's movements and may be ineffective. Furthermore, if the
Fund buys a futures contract to gain exposure to securities, the Fund is exposed
to the risk of change in the value of the underlying securities. For information
on options on securities and financial futures and related options, see
"Investment Objectives and Policies--Option Writing" and "--Financial Futures
Contracts and Related Options" in High Yield Fund's Statement of Additional
Information.

TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS. Each Fund's assets may be
invested in certain short-term, high-quality debt instruments for the following
purposes: (i) to meet anticipated day-to-day operating expenses; (ii) pending
the Investment Manager's ability to invest cash inflows; (iii) to permit a Fund
to meet redemption requests; and (iv) for temporary defensive purposes. The
short-term instruments in which MagnaCap and High Yield Funds may invest
include: (i) short-term obligations of the U.S. Government, foreign governments
and their agencies, instrumentalities, authorities or political subdivisions;
(ii) other high-quality short-term debt securities; (iii) commercial paper,
including master notes; (iv) bank obligations, including certificates of
deposit, time deposits and bankers' acceptances; and (v) repurchase agreements.
The short-term instruments in which the Government Securities Income Fund may
invest include short-term U.S. Government Securities and repurchase agreements

on U.S. Government Securities.

12
<PAGE>
ALL FUNDS: DIVERSIFICATION AND CHANGES IN POLICIES

Each Fund is diversified, so that with respect to 75% of its assets, it may not
invest more than 5% of its assets (measured at market value at the time of
investment) in securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.

The first sentence in the description of each Fund under 'The Funds' Investment
Objectives and Policies,' above, states the Fund's investment objectives. These
investment objectives are 'fundamental.' The other investment policies of
Government Securities Income Fund described in the first paragraph under 'The
Funds' Investment Objectives and Policies,'--'Government Securities Income Fund'
are also 'fundamental.' Fundamental policies may only be changed with the
approval of a majority of shareholders of the pertinent Fund. Other investment
policies of any of the Funds may be changed by the Board of Directors of that
Fund. Each Fund is subject to investment restrictions that are described in that
Fund's Statement of Additional Information under 'Investment Restrictions.' Some
of those restrictions are designated as 'fundamental.' These fundamental
restrictions as well as the diversified status of each Fund require a vote of a
majority of the shareholders of the relevant Fund to be changed.

<PAGE>
SHAREHOLDER GUIDE

PILGRIM AMERICA PURCHASE OPTIONS(TM)

You may select from three separate classes of shares: Class A, Class B and Class
M, each of which represents an identical interest in a Fund's investment
portfolio, but are offered with different sales charges and distribution fee
(Rule 12b-1) arrangements. These sales charges and fees are shown and contrasted
in the chart below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases of MagnaCap Fund (1)... 5.75% None 3.50%
Maximum Sales Charge on Purchases of High Yield Fund and
Government Securities Income Fund (1).................. 4.75% None 3.25%
CDSC..................................................... None (2) 5.00% (3) None
Annual Distribution Fees (4)............................. 0.25% (5) 1.00% 0.75%
Maximum Purchase......................................... Unlimited $ 250,000 $1,000,000
Automatic Conversion to Class A.......................... N/A 8 Years N/A
</TABLE>

----------------------------
(1) Imposed upon purchase. Reduced for purchases of $50,000 or more.
(2) For investments of $1 million or more, a CDSC of no more than 1%
is assessed on redemptions made within one or two years from
purchase, depending on the amount of purchase. See 'Class A
Shares: Initial Sales Charge Alternative.'
(3) Imposed upon redemption within 6 years from purchase. Fee has
scheduled reductions after the first year. See 'Class B Shares:
Deferred Sales Charge Alternative.'
(4) Annual asset-based distribution charge.
(5) MagnaCap Fund imposes an annual distribution fee of 0.30%.

When choosing between classes, investors should carefully consider the ongoing
annual expenses along with the initial sales charge or CDSC. The relative impact
of the initial sales charges and ongoing annual expenses will depend on the
length of time a share is held. Orders for Class B shares and Class M shares in
excess of $250,000 and $1,000,000, respectively, will be accepted as orders for
Class A shares or declined. You should discuss which Class of shares is right
for you with your Authorized Dealer.

CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the Funds
are sold at the NAV per share in effect plus a sales charge as described in the
following table. For waivers or reductions of the Class A shares sales charges,
see 'Special Purchases without a Sales Charge' and 'Reduced Sales Charges.'

<TABLE>
<CAPTION>
MAGNACAP FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.......................... 4.50% 4.71% 3.75%
$100,000 but less than $250,000......................... 3.50% 3.63% 2.75%
$250,000 but less than $500,000......................... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000....................... 2.00% 2.04% 1.75%
</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000.......................... 4.50% 4.71% 4.00%

$100,000 but less than $250,000......................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000......................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000....................... 2.00% 2.04% 1.75%
</TABLE>

There is no initial sales charge on purchases of $1,000,000 or more. However,
the Distributor will pay Authorized Dealers of record commissions at the rates
shown in the table below for investments subject to

14
<PAGE>
a CDSC. If shares are redeemed within one or two years of purchase, depending on
the amount of the purchase, a CDSC will be imposed on certain redemptions as
follows:

<TABLE>
<CAPTION>
DEALER PERIOD DURING
ON PURCHASES OF: CDSC ALLOWANCE WHICH CDSC APPLIES
- ------------------------------------------------------------ ----- --------- ------------------
<S> <C> <C> <C>
$1,000,000 but less than $2,500,000......................... 1.00% 1.00% 2 Years
$2,500,000 but less than $5,000,000......................... 0.50% 0.50% 1 Year
$5,000,000 and over......................................... 0.25% 0.25% 1 Year
</TABLE>

CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. If you choose the deferred
sales charge alternative, you will purchase Class B shares at their NAV per
share without the imposition of a sales charge at the time of purchase. Class B
shares that are redeemed within six years of purchase, however, will be subject
to a CDSC as described in the table that follows. Class B shares of the Funds
are subject to a distribution fee at an annual rate of 1.00% of the average
daily net assets of the Class, which is higher than the distribution fees of
Class A or Class M shares. The higher distribution fees mean a higher expense
ratio, so Class B shares pay correspondingly lower dividends and may have a
lower NAV than Class A or Class M shares. In connection with sales of Class B
shares, the Distributor compensates Authorized Dealers at a rate of 4% of
purchase payments subject to a CDSC. Orders for Class B shares in excess of
$250,000 will be accepted for Class A shares or declined.

The amount of the CDSC charge is determined as a percentage of the lesser of the
NAV of the Class B shares at the time of purchase or redemption. No charge will
be imposed for any net increase in the value of shares purchased during the
preceding six years in excess of the purchase price of such shares or for shares
acquired either by reinvestment of net investment income dividends or capital
gain distributions. The percentage used to calculate the CDSC will depend on the
number of years since you invested the dollar amount being redeemed according to
the following table:

<TABLE>
<CAPTION>
YEAR OF
REDEMPTION

AFTER PURCHASE CDSC
- ------------------------------------------------------------------ ----
<S> <C>
First........................................................... 5%
Second.......................................................... 4%
Third........................................................... 3%
Fourth.......................................................... 3%
Fifth........................................................... 2%
Sixth........................................................... 1%
Seventh and following........................................... 0%
</TABLE>

To determine the CDSC payable on redemptions of Class B shares, the Funds will
first redeem shares in accounts that are not subject to a CDSC; second, shares
acquired through reinvestment of net investment income dividends and capital
gain distributions; third, shares purchased more than 6 years prior to
redemption; and fourth, shares subject to a CDSC in the order in which such
shares were purchased. Using this method, your sales charge, if any, will be at
the lowest possible CDSC rate.

Class B shares will automatically convert into Class A shares approximately
eight years after purchase. For additional information on the CDSC and the
conversion of Class B shares, see the Statement of Additional Information.

CLASS M SHARES: LOWER INITIAL SALES CHARGE ALTERNATIVE. An investor who
purchases Class M shares pays a sales charge at the time of purchase that is
lower than the sales charge applicable to Class A shares and does not pay any
CDSC upon redemption. Class M shares have a higher annual distribution fee than
Class A shares, but lower than Class B. The higher distribution fees mean a
higher expense ratio than Class A but lower than Class B. Class M shares pay
correspondingly lower dividends and may have a lower NAV per share than Class A
shares, but generally pay higher dividends and have a higher NAV per share than
Class B shares. Orders for Class M shares in excess of $1,000,000 will be
accepted as an order for Class A

15
<PAGE>
shares or declined. The public offering price of Class M shares is the NAV of
each Fund plus a sales charge, which, as set forth below, varies based on the
size of the purchase:

$50,000 but less than $100,000.......................... 2.50% 2.56% 2.00%
$100,000 but less than $250,000......................... 1.50% 1.52% 1.00%
$250,000 but less than $500,000......................... 1.00% 1.01% 1.00%
$500,000 and over....................................... None None None
</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 3.25% 3.36% 3.00%
$50,000 but less than $100,000.......................... 2.25% 2.30% 2.00%
$100,000 but less than $250,000......................... 1.50% 1.52% 1.25%
$250,000 but less than $500,000......................... 1.00% 1.01% 1.00%
$500,000 and over....................................... None None None
</TABLE>

Class M shares do not convert to Class A.

REDUCED SALES CHARGES. An investor may immediately qualify for a reduced sales
charge on a purchase of Class A or Class M shares of a Fund or for other Funds
in the Pilgrim America Group which offer Class A shares, Class M Shares, or
shares with front-end sales charges ('Participating Funds') by completing the
Letter of Intent section of the Application. Executing the Letter of Intent
expresses an intention to invest during the next 13 months a specified amount,
which, if made at one time, would qualify for a reduced sales charge. An amount
equal to the Letter amount multiplied by the maximum sales charge imposed on
purchases of the applicable Fund and class will be restricted within your
account to cover additional sales charges that may be due if your actual total
investment fails to qualify for the reduced sales charges. See the New Account
Application or the Statement of Additional Information for details on the Letter
of Intent option or contact the Shareholder Servicing Agent at (800) 331-1080
for more information.

The sales charge for your investment may also be reduced by taking into account
the current value of your existing holdings in the Fund or may other funds in
the Pilgrim America Group (excluding Pilgrim America Money Market Shares)
('Rights of Accumulation'). The reduced sales charges apply to quantity
purchases made at one time or on a cumulative basis over any period of time by:
(I) an investor; (ii) the investor's spouse and children under the age of
majority; (iii) the investor's custodian account(s) for the benefit of a child
under the Uniform Gifts to Minors Act; (iv) a trustee or other fiduciary of a
single trust estate or a single fiduciary account (including a pension,
profit-sharing and other employee benefit plans qualified under Section 401 of
the Internal Revenue Code); and (v) by trust companies, registered investment

advisers, banks and bank trust departments for accounts over which they exercise
exclusive discretionary investment authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity. See the New Account Application
or the Statement of Additional Information for details or contact the
Shareholder Servicing Agent at (800) 331-1080 for more information.

For the purposes of Rights of Accumulation and the Letter of Intent Privilege,
shares held by investors in the Pilgrim America Group of Funds which impose a
CDSC may be combined with Class A or Class M shares for a reduced sales charge
but will not affect any CDSC which may be imposed upon the redemption of shares
of a Fund which imposes a CDSC.

WAIVERS OF CDSC. The CDSC on Class A or Class B shares will be waived in the
case of redemption following the death or permanent disability of a shareholder
if made within on year of death or initial determination of permanent
disability. The waiver is available for total or partial redemptions of shares
of each Fund owned by an individual or an individual in joint tenancy (with
rights of survivorship), but only for those share held at the time of death or
initial determination of permanent disability. The CDSC also may be waived for
Class B Shares redeemed pursuant to a Systematic Withdrawal Plan, up to a
maximum of 12% per year of a shareholder's

16
<PAGE>
account value based on the value of the account at the time the plan is
established and annually thereafter, provided all dividends and distributions
are reinvested and the total redemptions do not exceed 12% annually. In
determining whether a CDSC is applicable, it will be assumed that shares held in
the shareholder's account that are not subject to such charge are redeemed
first.

The CDSC also will be waived in the case of a total or partial redemption of
shares in a Fund in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The shareholder must have attained the
age of 70 1/2 to qualify for the CDSC waiver relating to mandatory
distributions. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation of service. The
shareholder must notify the Transfer Agent either directly or through the
Distributor, at the time of redemption, that the shareholder is entitled to a
waiver of the CDSC. The CDSC Waiver Form included in the New Account Application
must be completed and provided to the Transfer Agent at the time of the
redemption request. The waiver will be granted subject to confirmation of the
grounds for the waiver. The foregoing waivers may be changed at any time.

REINSTATEMENT PRIVILEGE. Class B shareholders who have redeemed their shares in
any Pilgrim America Group mutual fund within the previous 90 days may repurchase
Class B shares at NAV (at the time of reinstatement) in an amount up to the
redemption proceeds. Reinstated Class B shares will retain their original cost
and purchase date for purposes of the CDSC. The amount of any CDSC also will be
reinstated.

To exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent or be postmarked within 90 days after the date of
redemption. This privilege can be used only once per calendar year. If a loss is
incurred on the redemption and the reinstatement privilege is used, some or all
of the loss may not be allowed as a tax deduction. See 'Tax Considerations' in
the Statement of Additional Information.

SPECIAL PURCHASE WITHOUT A SALES CHARGE. Class A or Class M shares may be
purchased at NAV without a sales charge by:

1) Class A or Class M shareholders who have redeemed their shares in any
Pilgrim America Group mutual fund withing the previous 90 days may
repurchase shares at NAV in an amount equal to their net redemption
proceeds. Authorized Dealers who handle these purchases may charge fees
for this service.

2) Any person who can document that Fund shares were purchased with
proceeds from the redemption (within the previous 90 days) of shares
from any unrelated mutual fund on which a sales charge was paid or which
were subject at any time to a CDSC.

3) Any charitable organization or governmental entity that has determined
that a Fund is a legally permissible investment and which is prohibited
by applicable law from paying a sales charge or commission in connection
with the purchase of shares of any mutual fund.

4) Officers, directors and full-time employees of Express America Holdings
Corporation (Express America) and its subsidiaries.

5) Certain fee based broker-dealers or registered representatives thereof
or registered investment advisers under certain circumstances making
investments on behalf of their clients.

6) Shareholders who have authorized the automatic transfer of dividends
from the same class of another Pilgrim America Fund distributed by the
Distributor or from Pilgrim America Prime Rate Trust.

7) Registered investment advisors, trust companies and bank trust
departments investing in Class A shares on their own behalf or on behalf
of their clients, provided that the aggregate amount invested in any
Fund alone or in any combination of shares of any Fund plus Class A
shares of certain other Participating Funds as described herein under
'Pilgrim America Purchase Options(Trademark)--Reduced Sales Charges',

during the 13 month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Authorized
Dealers through which purchases are made an amount up to 0.50% of the
amount invested, over a 12 month period following the transaction.

8) Accounts as to which a banker or broker-dealer charges an account
management fee ('wrap accounts'), provided the bank or broker-dealer has
a separate agreement with the Distributor.

17
<PAGE>
The Funds may terminate or amend the terms of offering shares at NAV to these
investors at any time. For additional information, contact the Shareholder
Servicing Agent at (800) 331-1080, or see the Statement of Additional
Information.

INCENTIVES. The Distributor, at its expense, will provide additional
promotional incentives to Authorized Dealers in connection with sales of shares
of the Funds and other mutual funds in the Pilgrim America Group. In some
instances, additional compensation or promotional incentives will be offered to
Authorized Dealers that have sold or may sell significant amounts of shares
during specified periods of time. Such compensation and incentives may include,
but are not limited to, cash, merchandise, trips and financial assistance in
connection with pre-approved conferences or seminars, sales or training programs
for invited sales personal, payment for travel expenses (including meals and
lodging) incurred by sales personnel and members of their families, or other
invited guests, to various locations for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding the Funds or
other mutual funds in the Pilgrim America Group and/or other events sponsored by
Authorized Dealers.

In addition, the Distributor may, at its own expense, pay concessions in
addition to those described above to dealers that satisfy certain criteria
established from time to time by the Distributor. These conditions relate to
increasing sales of shares of the Funds over specified periods and to certain
other factors. These payments may, depending on the dealer's satisfaction of the
required conditions, be periodic and may be up to (1) 0.25% of the value of
the Funds' shares sold by the dealer during a particular period, and (2) 0.10%
of the value of the Funds' shares held by the dealer's customers for more than
one year, calculated on an annual basis.

RULE 12B-1 PLAN. Each Fund has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares of that Fund (Rule 12b-1 Plan).
Under the Rule 12b-1 Plan, the Distributor may receive from each Fund an annual
fee in connection with the offering sale and shareholder servicing of Class A,
Class B and Class M shares at an annual rate of up to .25% (.30% in the case of
MagnaCap Fund), 1.00%, and 1.00%, respectively, of the average daily net assets
of the Funds. Currently, the Board of Directors has approved annual fees of .25%

(.30% in the case of MagnaCap Fund), 1.00%, and .75%, respectively, which are
accrued daily and paid monthly. Of these amounts, fees equal to an annual rate
of .25% of the average daily net assets of each Fund is for shareholder
servicing for each of the classes. Fees paid under the Rule 12b-1 Plan may be
used to cover the expenses of the Distributor from the sale of Class A, Class B
or Class M shares of the Funds, including payments to Authorized Dealers, and
for shareholder servicing. These fees may be used to pay the costs of the
following; payments to Authorized Dealers; promotional activities; preparation
and distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
supplemental payments to Authorized Dealers that provide shareholders services;
interest on accrued distribution expenses; and costs of administering the Rule
12b-1 Plan. No more than 0.75% per annum of a Fund's average net assets may be
used to finance distribution expenses, exclusive of shareholder servicing
payments, and no Authorized Dealer may receive shareholder servicing payments in
excess of 0.25% per annum of a Fund's average net assets held by the Authorized
Dealer's clients or customers. The Distributor will be reimbursed for its actual
expenses incurred under the 12b-1 Plan, with respect to the Class A shares. With
respect to the Class B and Class M shares, the Distributor will receive payment
without regard to actual distribution expenses that it incurs. Fees paid by one
of the Funds under the Rule 12b-1 Plan may be used to finance distribution of
the shares of that Fund and the servicing of shareholders of the Fund as will as
the other Pilgrim America Funds. The Distributor has informed MagnaCap Fund,
High Yield Fund and Government Securities Income Fund that it incurred costs and
expenses with respect to Class A shares that may be reimbursable in future
months or years in the amounts of $2,352,801 for MagnaCap Fund (.95% of its net
assets), $150,269 for High Yield Fund (0.67% of its net assets), and $466,046
for Government Securities Income Fund (1.20% of its net assets) as of June 30,
1996.

Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for distribution and shareholder servicing at the annual rate
of .25%, .25%, and .40% (.65% in the case of MagnaCap Fund) of the Fund's
average daily NAV of Class A, Class B, and Class M shares, respectively, that
are registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates that Authorized Dealer as the dealer of
record. Rights to these ongoing payments begin to accrue in the 13th month
following a purchase of Class A or B shares and on the anniversary date in the
1st month following the date of purchase of Class M shares, and they cease upon
exchange (or purchase) into Pilgrim America Money Market Shares. The payments
are also subject to the continuation of the relevant distribution plan, the
terms of the service agreements between dealers and the Distributor, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc.

OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian out-of-pocket fees, proxy solicitation costs, and the compensation
of Directors who are not affiliated with the Investment Manager. Most Fund

expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, the Rule 12b-1 Plan fees for each class of shares are
charged proportionately only to the outstanding shares of that class.

<PAGE>
PURCHASING SHARES

Your Authorized Dealer can help you establish and maintain your account, and the
Shareholder Servicing Agent is available to assist you with any questions you
may have.

The Fund reserves the right to liquidate sufficient shares to recover annual
Transfer Agent fees should the investor fail to maintain his/her account value
at a minimum of $1,000.00 ($250.00 for IRA's).

<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
<S> <C> <C>
By contacting your The minimum initial investment in a Fund is The minimum for additional investment in a
Authorized Dealer $1,000 ($250 for IRAs). Fund is $100.

Visit or consult an Authorized Dealer. Visit or consult your Authorized Dealer.

By mail Make your check payable to the Pilgrim Fill out the Account Additions form
America Group and mail it, along with a included on the bottom of your account
completed Application, to the address statement along with your check payable to
indicated on the Application. Please the Fund and mail them in the envelope
indicate an Authorized Dealer on the New provided with the account statement.
Account Application. Remember to write your account number on
the check.

By wire Call the Pilgrim America Order Department Call the Pilgrim America Order Department
at (800) 336-3436 to obtain an account at (800) 336-3436 to obtain a wire
number and indicate an Authorized Dealer on reference number. Give that number to your
the account. Instruct your bank to wire bank and have them wire the funds in the
funds to the Fund in care of: same manner described under 'Initial
Investors Fiduciary Trust Co. Investment.'
ABA #101003621
Kansas City, MO
credit to:
Pilgrim ------------------------------
(Fund)
A/C #752-4854; for further credit to:
Shareholder A/C
#
------------------------------------------
(A/C # you received over the telephone)
Shareholder Name:
------------------------------------------
(Your Name Here)

After wiring funds you must complete the
New Account Application and send it to:
Pilgrim America Order Dept.
P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>

The Funds and the Distributor reserve the right to reject any purchase order.
Please note third party checks will not be accepted. The Manager reserves the
right to waive minimum investment amounts.

PRICE OF SHARES. Purchase, sale and exchange orders are effected at NAV for the
respective class of shares of each Fund, determined after the order is received
by the Transfer Agent or Distributor, plus any applicable sales charge (Public
Offering Price).

Purchases of each class of a Fund's shares are effected at that Fund's Public
Offering Price determined after a purchase order has been received in proper
form. A purchase order will be deemed to be in proper form when all of the
required steps have been completed. In the case of an investment by wire,
however, the order will be deemed to be in proper form after the telephone
notification and the federal funds wire have

19
<PAGE>
been received. A shareholder who purchases by wire must submit an application
form in a timely fashion. If an order or payment by wire is received after the
close of the New York Stock Exchange, 4:00 p.m. Eastern Time (1:00 p.m., Pacific
Time), the shares will not be credited until the next business day.

You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.

DETERMINATION OF NET ASSET VALUE. The NAV of each class of each Fund's shares
will be determined daily as of the close of trading on the New York Stock
Exchange (usually at 4:00 p.m. New York City time) on each day that it is open
for business. Each class' NAV represents that class' pro rata share of that
Fund's net assets as adjusted for any class specific expenses (such as fees
under a Rule 12b-1 plan), and divided by that class' outstanding shares. In
general, the value of each Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations and short-term debt securities. The NAV per share of each class of
each Fund will fluctuate in response to changes in market conditions and other
factors. Portfolio securities for which market quotations are readily available
are stated at market value. Short-term debt securities having a maturity of 60
days or less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. In other cases, securities are valued at their fair value as
determined in good faith by the Board of Directors, although the actual

calculations will be made by persons acting under the supervision of the Board.
For information on valuing foreign securities, see each Fund's Statement of
Additional Information.

PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized investment
plan to purchase shares with automatic bank account debiting. For further
information on pre-authorized investment plans, see the New Account Application
or contact the Shareholder Servicing Agent at (800) 331-1080.

RETIREMENT PLANS. The Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
available prototype IRA plans (for both individuals and employers), Simplified
Employee Pension Plans, Pension and Profit Sharing Plans and Tax Sheltered
Retirement Plans for employees of public educational institutions and certain
non-profit, tax-exempt organizations. Investors Fiduciary Trust Company ('IFTC')
acts as the custodian under these plans. For further information, contact the
Shareholder Servicing Agent at (800) 331-1080. IFTC currently receives a $12
custodian fee annually for the maintenance of IRA accounts.

TELEPHONE ORDERS. The Funds and their Transfer Agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their Transfer Agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include: (i) recording telephone instructions for
exchanges and expedited redemptions; (ii) requiring the caller to give certain
specific identifying information; and (iii) providing written confirmation to
shareholders of record not later than five days following any such telephone
transactions. If the Funds and their Transfer Agent do not employ these
procedures, they may be liable for any losses due to unauthorized or fraudulent
telephone instructions. Telephone redemptions may be executed on all accounts
other than retirement accounts.

EXCHANGE PRIVILEGES AND RESTRICTIONS

An exchange privilege is available. Exchange requests may be made in writing to
the Transfer Agent or by calling the Transfer Agent at (800) 992-0180. There is
no specific limit on exchange frequency; however, the Funds are intended for
long term investment and not as a trading vehicle. The Investment Manager
reserves the right to prohibit excessive exchanges (more than four per year).
The Investment Manager reserves the right, upon 60 days' prior notice, to
restrict the frequency of, otherwise modify, or impose charges of up to $5.00
upon exchanges. The total value of shares being exchanged must at least equal
the minimum investment requirement of the fund into which they are being
exchanged.

Shares of one class of a Fund may be exchanged for shares of that same class of
any other Pilgrim America Group mutual fund other than Pilgrim America Money

Market Shares ('Money Market'), at NAV without payment of any additional sales
charge. If you exchange and subsequently redeem your shares, any applicable CDSC
will be based on the full period of the share ownership. Shares of a Fund that
are not subject to a CDSC may be exchanged for shares of Money Market, and
shares of Money Market acquired in the exchange may

20
<PAGE>
subsequently be exchanged for shares of a mutual fund in the Pilgrim America
Group of the same class as the original shares acquired. Shares of a Fund that
are subject to a CDSC may be redeemed to purchase shares of Money Market upon
payment of the CDSC. Shareholders exercising the exchange privilege with any of
Pilgrim America Group's other funds should carefully review the prospectus of
that fund. Exchanges of shares are sales and may result in a gain or loss for
federal and state income tax purposes. You will automatically be assigned the
telephone exchange privilege unless you mark the box on the New Account
Application that signifies that you do not wish to have this privilege. The
exchange privilege is only available in states where shares of the Fund being
acquired may be legally sold.

SYSTEMATIC EXCHANGE PRIVILEGE

Subject to the information and limitations outlined above, you may elect to have
a specified dollar amount of shares systematically exchanged, monthly,
quarterly, semi-annual or annual (on or about the 10th of the applicable month),
from your account to an identically registered account in the same class of any
other Pilgrim America Fund.

The exchange privilege may be modified at any time or terminated upon 60 days
written notice to shareholders.

HOW TO REDEEM SHARES

Shares of each Fund will be redeemed at the NAV (less any applicable CDSC and/or
federal income tax withholding) next determined after receipt of a redemption
request in good form on any day the New York Stock Exchange is open for
business.

<TABLE>
<CAPTION>
METHOD PROCEDURES
<S> <C>
Redemption By Contacting Your Authorized Dealers may communicate redemption orders by wire or telephone to the
Distributor. These firms may charge for their services in connection with your
redemption request but neither the Funds nor the Distributor imposes any such
charge.
Redemption
By Mail A written request for redemption must be received by the Transfer Agent in order
to constitute a valid tender. If certificated shares have been issued, the
certificate must accompany the written request. The Transfer Agent may also
require a signature guarantee by an eligible guarantor. It will also be necessary

for corporate investors and other associations to have an appropriate
certification on file authorizing redemptions by a corporation or an association
before a redemption request will be considered in proper form. A suggested form
of such certification is provided on the New Account Application. If you are
entitled to a CDSC waiver, you must complete the CDSC waiver form in the New
Account Application. To determine whether a signature guarantee or other
documentation is required, shareholders may call the Shareholder Servicing Agent
at (800) 331-1080.

Expedited Redemption The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (maximum $50,000) mailed to an
address which has been on record with Pilgrim America for at least 60 days. This
privilege is automatically assigned to you unless you check the box on the New
Account Application which signifies that you do not wish to utilize such option.
The Expedited Redemption Privilege additionally allows you to effect a
liquidation from your account and have the proceeds (minimum $5,000) wired to
your pre-designated bank account. But, this aspect of the Expedited Redemption
privilege will NOT automatically be assigned to you. If you want to take
advantage of this aspect of the privilege, please check the appropriate box and
attach a voided check to the New Account Application. Under normal circumstances,
proceeds will be transmitted to your bank on the second business day following
receipt of your instructions, provided redemptions may be made. To effect an
Expedited Redemption, please call the Transfer Agent at (800) 992-0180. In the
event that share certificates have been issued, you may not request a wire
redemption by telephone or wire. This option is not available for retirement
accounts.
</TABLE>

21
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount in excess of $100 made to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000. During the withdrawal period, you may
purchase additional shares for deposit to your account if the additional
purchases are equal to at least one year's scheduled withdrawals, or $1,200
whichever is greater. There are no separate charges to you under this Plan,
although a CDSC may apply if you purchased Class A or B shares.

The number of full and fractional shares equal in value to the amount of the
payment will be redeemed at NAV (less any applicable CDSC). Such redemptions are
normally processed on the fifth day prior to the end of the month, quarter or
year. Checks are then mailed or proceeds are forwarded to your bank account on
or about the first of the following month. Shareholders who elect to have a
systematic cash withdrawal must have all dividends and capital gains reinvested.
To establish a systematic cash withdrawal, please complete the Systematic
Withdrawal Plan section of the New Account Application. To have funds deposited
to your bank account, follow the instructions on the New Account Application.

You may change the amount, frequency and payee, or terminate this plan by giving
written notice to the Transfer Agent. As shares of a Fund are redeemed under the
Plan, you may realize a capital gain or loss for income tax purposes. A
Systematic Withdrawal Plan may be modified at any time by the Fund or terminated

upon written notice by you or the relevant Fund.

PAYMENTS. Payment to shareholders for shares redeemed or repurchased ordinarily
will be made within seven days after receipt by the Transfer Agent of a written
request in good order. A Fund may delay the mailing of a redemption check until
the check used to purchase the shares being redeemed has cleared which may take
up to 15 days or more. To reduce such delay, all purchases should be made by
bank wire or federal funds. A Fund may suspend the right of redemption under
certain extraordinary circumstances in accordance with the Rules of the
Securities and Exchange Commission. Due to the relatively high cost of handling
small investments, the Funds reserve the right upon 30 days written notice to
redeem, at NAV, the shares of any shareholder whose account (except for IRAs)
has a value of less than $1,000, other than as a result of a decline in the NAV
per share. Each Fund intends to pay in cash for all shares redeemed, but under
abnormal conditions that make payment in cash unwise, a Fund may make payment
wholly or partly in securities at their then current market value equal to the
redemption price. In such case, a Fund could elect to make payment in securities
for redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.

MANAGEMENT OF THE FUNDS

MORE ABOUT THE FUNDS. MagnaCap Fund and High Yield Fund are series of Pilgrim
America Investment Funds, Inc., which is a registered investment company that
was organized as a Maryland corporation in July 1969. Government Securities
Income Fund is the single series of Pilgrim Government Securities Income Fund,
Inc., which is a registered investment company that was organized as a
California corporation in May 1984. Each Fund is governed by its Board of
Directors, which oversees the operations of the Fund. The majority of Directors
are not affiliated with the Investment Manager.

INVESTMENT MANAGER. The Investment Manager serves as investment manager to each
Fund. The Investment Manager is responsible for managing the general day-to-day
operations of each Fund including selecting the Fund's investments and placing
each Fund's portfolio transactions. Each Fund and the Investment Manager have
entered into an agreement that requires the Investment Manager to provide all
investment advisory and portfolio management services for the Fund. It also
requires the Investment Manager to assist in managing and supervising all
aspects of the general day-to-day business activities and operations of the
Funds, including custodial, transfer agency, dividend disbursing, accounting,
auditing, compliance and related services. The Investment Manager provides the
Funds with office space, equipment and personnel necessary to administer the
Funds. The agreement with the Investment Manager can be canceled by the Board of
Directors of each Fund upon 60 days written notice. Organized in December 1994,
the Investment Manager is registered as an investment adviser with the
Securities and Exchange Commission.

The Investment Manager acquired assets of the previous adviser to the Funds in a
transaction that closed on April 7, 1995. Although the Investment Manager has
not previously served as an investment adviser to a registered investment
company, investment personnel of the Investment Manager have managed other

22
<PAGE>
registered investment companies and private accounts. In addition, other
personnel of the Investment Manager have serviced registered investment
companies.

The Investment Manager and Pilgrim America Securities, Inc. (Distributor), the
Funds' principal underwriter, are indirect, wholly owned subsidiaries of Express
America (NASDAQ: EXAM). Through its subsidiaries, Express America engages in the
financial services business, focusing on providing investment advisory,
administrative and distribution services to open-end and closed-end investment
companies.

The Investment Manager bears its expenses of providing the services described
above. MagnaCap Fund pays the Investment Manager a fee at an annual rate of
1.00% of the average daily net assets of the Fund up to $30 million; 0.75% of
the average daily net assets above $30 million to $250 million; 0.625% of the
average daily net assets above $250 million to $500 million; and 0.50% of the
average daily net assets in excess of $500 million. These fees are computed and
accrued daily and paid monthly. High Yield Fund pays the Investment Manager a
fee at an annual rate of 0.75% of the average daily net assets of the Fund on
the first $25 million of net assets; 0.625% of the average daily net assets over
$25 million to $100 million; 0.50% of the average daily net assets over $100
million to $500 million; and 0.40% of the average daily net assets in excess of
$500 million. Effective July 1, 1995, the Investment Manager has voluntarily
agreed to waive all or a portion of its fees and to reimburse operating expenses
of the Fund, excluding distribution fees, interest, taxes, brokerage and
extraordinary expenses, so that total operating expenses do not exceed 1.00% for
Class A, 1.75% for Class B and 1.50% for Class M. This expense limitation will
apply until the earlier of December 31, 1996 or until the Fund reaches $50
million in net assets. Government Securities Income Fund pays the Investment
Manager a fee at an annual rate of 0.50% of the average daily net assets of the
Fund up to $500 million; 0.45% of the average daily net assets above $500
million to $1 billion; and 0.40% of the average daily net assets in excess of $1
billion. The agreement with the Investment Manager for the Government Securities
Income Fund provides that the Investment Manager will reimburse the Government
Securities Income Fund to the extent that the gross operating costs and expenses
of that Fund, excluding any interest, taxes, brokerage commissions, amortization
of organizational expenses, extraordinary expenses, and distribution (Rule
12b-1) fees on Class B and Class M shares in excess of an annual rate of .25% of
the average daily net assets of these classes, exceed 1.50% of the Fund's
average daily net asset value for the first $40 million of net assets and 1.00%
of average daily net assets in excess of $40 million for any one fiscal year.
This reimbursement policy cannot be changed unless the agreement is amended,
which would require shareholder approval.

The Investment Manager of MagnaCap Fund and High Yield Fund will reduce its
aggregate fees for any fiscal year, or reimburse the Fund, to the extent
required so that the Funds' expenses do not exceed the expense limitations
applicable to the Funds under the securities laws or regulations of those states
or jurisdictions in which the Funds' shares are registered or qualified for

sale. See the Statement of Additional Information for further information.

INVESTMENT PERSONNEL. Howard N. Kornblue, Vice President, Head of Equity and
Senior Portfolio Manager for the Investment Manager, has served as portfolio
manager of MagnaCap Fund since 1989. Prior to joining Pilgrim America Group (and
its predecessor) in 1986, Mr. Kornblue was Vice President, Director of Research
and Portfolio Manager at First Wilshire Securities Management; supervised
mergers and acquisitions for Getty Oil Company; was portfolio manager and
research analyst in both the fixed-income and equity departments for Western
Asset Management Company; and was research analyst and pension fund manager at
Southern California Edison Company. Mr. Kornblue received a B.S. from U.C.L.A.,
and M.S. and M.B.A. from U.S.C.

Kevin G. Mathews, Vice President and Senior Portfolio Manager of the Investment
Manager, has served as portfolio manager of High Yield Fund since June 1995.
Prior to joining the Investment Manager, Mr. Mathews was Vice President and
Senior Portfolio Manager of Van Kampen American Capital. Since 1987, Mr.
Mathews' responsibilities included the management of open-end high yield bond
funds, two New York Stock Exchange listed closed-end bond funds, variable
annuity high yield products and individual institutional high yield asset
managed accounts. In a prior position, Mr. Mathews was a high yield portfolio
fixed income credit analyst. Mr. Mathews received a B.A. from the University of
Illinois and an M.B.A. from Drake University.

Charles G. Ullerich, has served as portfolio manager of Government Securities
Income Fund since 1996 and co-manager of the Fund since August, 1995. Prior to
joining Pilgrim America Group, Mr. Ullerich was Vice President of Treasury
Services for First Liberty Bank of Macon, GA, where he was portfolio manager

23
<PAGE>
for a conservatively-managed $150 million mortgage and treasury security
portfolio, since 1991. Before that, he was an internal auditor for Georgia
Federal Bank in Atlanta. Mr. Ullerich received a B.S. from Arizona State
University, and he holds the professional designations of Chartered Financial
Analyst and Certified Internal Auditor. He is Past President of the Georgia
Chapter of the Arizona State University Alumni Association.

DISTRIBUTOR. In addition to providing for the expenses discussed above, the Rule
12b-1 Plan also recognizes that the Investment Manager may use its investment
management fees or other resources to pay expenses associated with activities
primarily intended to result in the promotion and distribution of the Funds'
shares. The Distributor may, from time to time, pay to Authorized Dealers in
connection with the sale or distribution of shares of a Fund material
compensation in the form of merchandise or trips. Salespersons and any other
person entitled to receive any compensation for selling or servicing Fund shares
may receive different compensation with respect to one particular class of
shares over another in a Fund.

PORTFOLIO TRANSACTIONS. The Investment Manager will place orders to execute

securities transactions that are designed to implement each Fund's investment
objectives and policies. The Investment Manager will use its reasonable efforts
to place all purchase and sale transactions with brokers, dealers and banks
('brokers') that provide 'best execution' of these orders. In placing purchase
and sale transactions, the Investment Manager may consider brokerage and
research services provided by a broker to the Investment Manager, and a Fund may
pay a commission for effecting a securities transaction that is in excess of the
amount another broker would have charged if the Investment Manager determines in
good faith that the amount of commission is reasonable in relation to the value
of the brokerage and research services provided by the broker. In addition, the
Investment Manager may place securities transactions with brokers that provide
certain services to a Fund. The Investment Manager also may consider a broker's
sale of Fund shares if the Investment Manager is satisfied that the Fund would
receive best execution of the transaction from that broker.

DIVIDENDS, DISTRIBUTIONS & TAXES

DIVIDENDS AND DISTRIBUTIONS. MagnaCap Fund makes semi-annual payments from net
investment income and one or more payments from net realized capital gains, if
any. High Yield Fund and Government Securities Income Fund each have a policy of
paying monthly dividends from their net investment income, and paying capital
gains, if any, annually following the Fund's fiscal year end. Dividends and
distributions will be determined on a class basis.

Any dividends and distributions paid by a Fund will be automatically reinvested
in additional shares of the respective class of that Fund, unless you elect to
receive distributions in cash. When a dividend or distribution is paid, the NAV
per share is reduced by the amount of the payment.

You may, upon written request or by completing the appropriate section of the
New Account Application in this Prospectus, elect to have all dividends and
other distributions paid on a Class A, B or M account in a Fund invested into a
Pilgrim America Fund which offers Class A, B or M shares. Both accounts must be
of the same class. If you are a shareholder of Pilgrim America Prime Rate Trust,
whose shares are not held in a broker or nominee account, you may, upon written
request, elect to have all dividends invested into a pre-existing Class A
account of any of the Participating Funds. Distributions are invested into the
selected funds at the net asset value as of the payable date of the distribution
only if shares of such selected funds have been registered for sale in the
investor's state.

FEDERAL TAXES. Each Fund intends to operate as a 'regulated investment company'
under the Internal Revenue Code. In any fiscal year in which a Fund so qualifies
and distributes to shareholders all of its net investment income and net capital
gains, the Fund itself is relieved of federal income tax.

All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Early each year, you will be notified as to the amount and federal tax
status of all dividends and capital gains paid during the prior year. Such
dividends and capital gains may also be subject to state or local taxes.
Dividends declared in October, November, or December with a record date in such

month and paid during the following January will be treated as having been paid
by a Fund and received by shareholders on December 31 of the calendar year in
which declared, rather than the calendar year in which the dividends are
actually received.

24
<PAGE>
If you have not furnished a certified correct taxpayer identification number
(generally your Social Security number) and have not certified that withholding
does not apply, or if the Internal Revenue Service has notified the Fund that
the taxpayer identification number listed on your account is incorrect according
to their records or that you are subject to backup withholding, federal law
generally requires the Fund to withhold 31% from any dividends and/or
redemptions (including exchange redemptions). Amounts withheld are applied to
your federal tax liability; a refund may be obtained from the Service if
withholding results in overpayment of taxes. Federal law also requires the Fund
to withhold 30% or the applicable tax treaty rate from ordinary dividends paid
to certain nonresident alien, non-U.S. partnership and non-U.S. corporation
shareholder accounts.

The Funds may be required to pay withholding and other taxes imposed by various
countries in connection with its investments outside the U.S. generally at rates
from 10% to 40%, which would reduce a Fund's investment income.

This is a brief summary of some of the tax laws that affect your investment in a
Fund. Please see the Statement of Additional Information and your tax adviser
for further information.

PERFORMANCE INFORMATION

From time to time, a Fund may advertise its average annual total return over
various periods of time as well as the Fund's current yield. The total return
figures show the average percentage change in value of an investment in the Fund
from the beginning date of the measuring period. The figures reflect changes in
the price of the Fund's shares and assume that any income dividends and/or
capital gains distributions made by the Fund during the period were reinvested
in shares of the Fund. Figures will be given for one, five and ten year periods
(if applicable) and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). Total
returns and current yield are based on past results and are not necessarily a
prediction of future performance. The Fund will compute its yield by dividing
its net investment income per share during a 30-day base period by the maximum
offering price on the last day of the base period. This 30-day yield is then
compounded over six monthly periods and multiplied by two to provide an
annualized yield.

The Fund may also publish a distribution rate in investor communications
preceded or accompanied by a copy of the current Prospectus. The current
distribution rate for the Fund will be calculated by dividing the maximum
offering price per share into the annualization of the total distributions made
by the Fund during a 30-day period. The current distribution rate may differ
from current yield because the distribution rate may contain items of capital
gain and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures

will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load.

ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return will always
show a calculation that includes the effect of the maximum sales charge but may
also show total return without giving effect to that charge. Because these
additional quotations will not reflect the maximum sales charge payable, these
performance quotations will be higher than the performance quotations that
reflect the maximum sales charge.

ADDITIONAL INFORMATION

MORE ABOUT THE FUNDS. The Articles of Incorporation permit the Directors to
authorize the creation of additional funds, each of which may issue separate
classes of shares. A Fund may be terminated and liquidated under certain
circumstances.

SHAREHOLDERS HAVE CERTAIN VOTING RIGHTS. Each share of each Fund is given one
vote. Matters such as approval of new investment advisory agreements and changes
in fundamental policies of a Fund will require the affirmative vote of the
shareholders of that Fund. Matters affecting a certain class of a Fund will only
be voted on by shareholders of that particular class and Fund. The Funds are not
required to hold annual shareholder meetings, although special shareholder
meetings may be held from time to time.

25
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
[LOGO]

NEW ACCOUNT APPLICATION

SEND COMPLETED APPLICATION TO: PILGRIM AMERICA FUNDS, P.O. BOX 419368, KANSAS
CITY, MISSOURI 64141-6368
SECTIONS 1 THROUGH 6 MUST BE COMPLETED FOR YOUR ACCOUNT TO BE ESTABLISHED.

- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION

TYPE OF ACCOUNT
(Check one only)
/ / INDIVIDUAL

- ------------------------- ---------- ---------------------------------- ---------------------------------------
First Name Middle Last Name Social Security Number*
Initial (first individual only)

/ / JOINT TENANT

- ------------------------- ---------- ---------------------------------- ---------------------------------------
Joint Tenant's First Name Middle Last Name
Initial

/ / GIFT/TRANSFER TO MINOR

- ------------------------------------------------------------------------- -------------------------------------------
Custodian's Name (one only) Minor's Name (one only)
</TABLE>

/ / GUARDIANSHIP/CONSERVATORSHIP

- ------------------------------------------------------------------------- -------------------------------------------
Minor's Social Security
Under Uniform Gift/Transfers to Minors Act of (State) Number*
</TABLE>

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

Guardian/Conservator Ward/Incompetent or Minor's Ward/Incompetent or Minor's
Name (one only) Social Security Number*
</TABLE>

/ / CORPORATION, PARTNERSHIP, TRUST OR OTHER ORGANIZATION

<TABLE>
<S> <C>
- -------------------------------------------------------------------- ------------------------------------------
Exact Name of Corporation, Partnership or other Organization Tax Identification Number*

Trustee Accounts Only: Name of all Trustees required by trust agreement to sell/purchase shares
</TABLE>

<TABLE>
<S> <C> <C>
- -------------------------- --------------------------------------------------- ----------------------------------------
Date of Trust Agreement Name of Trust Tax Identification Number*
</TABLE>

/ / OTHER

<TABLE>
<S> <C>
/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING.
/ / CHECK HERE IF YOU ARE AWAITING THE ISSUANCE OF
SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER.
</TABLE>

* Pilgrim America reserves the right to reject any application which does not
include a certified Social Security Number or Taxpayer Identification Number,
or does not indicate that such number has been applied for by checking the
'awaiting Social Security or Taxpayer Identification Number' box.
- --------------------------------------------------------------------------------
2. MAILING ADDRESS

<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- ----------- ---------- ---------------------------
Street Address Apartment City State Zip Code
Number
</TABLE>

( ) ( )
- ------------------------------ -----------------------------
Business Phone Home Phone

<PAGE>

- --------------------------------------------------------------------------------
3. INVESTMENT INFORMATION

PLEASE INDICATE DOLLAR AMOUNT AND FUND IN SPACES PROVIDED. $1,000 MINIMUM FOR
EACH FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNT MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS. IF NO CLASS OF SHARES IS SELECTED,
CLASS A SHARES WILL BE AUTOMATICALLY SELECTED.

<TABLE>
<CAPTION>
FUND NAME AMOUNT CLASS OF SHARES (CHECK ONE)
<S> <C> <C>
1. $ A / / B / / M / /
------------------------------------------ -----------
2. $ A / / B / / M / /
------------------------------------------ -----------
3. $ A / / B / / M / /
------------------------------------------ -----------
4. $ A / / B / / M / /
------------------------------------------ -----------
5. $ A / / B / / M / /
------------------------------------------ -----------
6. $ A / / B / / M / /
------------------------------------------ -----------
</TABLE>

/ / A check payable to the Pilgrim America Group is included for $__________.

/ / Payment has been made by Dealer purchase on

____________ $_____________ _____________________________________________
(Date) (Amount) (Order Number)

/ / Payment has been made by Federal funds wire _____________ on ___________
(Reference No.) (Date)

_________________ $_______________
(Account No.) (Amount)

- -------------------------------------------------------------------------------
4. DIVIDEND AND DISTRIBUTION OPTIONS

(Check one only) -- If no option is selected, all distributions will be
reinvested.

/ / Reinvest all dividends and capital gains.

/ / Reinvest all dividends and capital gains into an existing account in
another Pilgrim America Account using the Dividend Transfer Option.

_________________________________ ________________________________
Fund Name Account Number

/ / Pay all dividends and reinvest capital I request the payable distributions be: (Check one.)
gains.
/ / Pay all capital gains in cash and
reinvest dividends. / / Sent to the address in Section 2.
/ / Pay all dividends and capital gains. / / Directly deposited in my bank account. (Please attach a
(IF ANY PAY OPTION IS SELECTED, voided check to Section 6). If voided check is not enclosed,
COMPLETE INFORMATION AT RIGHT) will be sent to address in Section 2.
/ / Sent to a special payee listed in Section 9.
</TABLE>

- --------------------------------------------------------------------------------
5. AUTHORIZED DEALER INFORMATION

<TABLE>
<S> <C>
- ---------------------------------------- ------------------------------------------
Authorized Dealer Name Registered Representative's Name

- ---------------------------------------- ------------------------------------------
Branch Office Address Registered Representative's Number

- ---------------------------------------- ---------------- --------------
City State Zip Code

- ---------------------------------------- ------------------------------------------
Registered Representative's Phone Authorized Signature of Authorized Dealer
</TABLE>

<PAGE>
- --------------------------------------------------------------------------------
6. SIGNATURES

I have read the prospectus and application for the Fund in which I am investing
and agree to its terms. I am also aware that a Telephone Exchange and Redemption
Privileges exist and that these privileges are automatically available unless
affirmatively declined. I also understand that if Pilgrim America, the Fund, the
Transfer Agent or the Sub-Transfer Agent fail to follow the procedures outlined
in the prospectus and in the Telephone Transaction Authorization hereto, such
entity may be liable for losses due to unauthorized or fraudulent instructions.
I further understand that I must carefully review each account confirmation
statement or other documentation of transaction that I receive to ensure that my
instructions have been properly acted upon. If any discrepancies are noted, I
agree to notify Pilgrim America, the Fund, the Transfer Agent or the
Sub-Transfer Agent in a timely manner, but in no event more than 15 days from
receipt of such confirmation statement or documentation of transaction. Failure
to notify one of the above entities on a timely basis will relieve such entities

of any liability with respect to the transaction and any discrepancy. See the
Exchange Privileges and Restrictions and How to Redeem Shares sections in the
Prospectus for procedures. I am of legal age. Sign below exactly as printed in
Section 1. For joint registration, all must sign. Under penalty of perjury, I
certify with my signature below that the number shown in Section 1 is my correct
taxpayer identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.

ATTACH VOIDED CHECK HERE ----->
(IF APPROPRIATE)

For Corporations, Trusts, or Partnerships: We hereby certify that each of the
persons listed below have been duly elected, and are now legally holding the
offices set forth opposite his/her name and have the authority to make this
authorization. Please print titles below if signing on behalf of a business or
trust to establish this account.

<TABLE>
<S> <C>
- ---------------------------------------- ----------------------------------------------------------
Signature Date President, Trustee, General Partner or Title

- ---------------------------------------- ----------------------------------------------------------
Signature Date Co-owner, Secretary of Corporation, Co-Trustee, etc.
</TABLE>

CHECK THE APPROPRIATE BOXES BELOW AND PROVIDE THE REQUESTED INFORMATION

/ / I am a United States Citizen

/ / I am a non-resident alien* (a Form W-8 will be provided to you by Pilgrim
America. Please complete it as requested as soon as possible).

/ / I am a resident alien and a social security number has been supplied on page
one of this New Account application (a Form 1078 will be provided to you by
Pilgrim America. Please complete it and return it as requested).

/ / If not a United Citizen, please indicate what country you are a permanent
tax resident of:

____________________________________________________________________________

* If the Pilgrim America account will be registered in joint registration with
another individual or individuals, each non-resident alien must complete and
return a Form W-8.

- --------------------------------------------------------------------------------
7. PURCHASE OPTIONS

REDUCED SALES CHARGE

/ / I qualify for Reduced Sales Charge with the account(s) listed below.
Included are the account numbers of all classes of shares of Pilgrim America
Funds that I or my immediate family (spouse and children under age 21) already
own.

- ---------------------------------------- ----------------------------------------------------------
Fund Name Account Number

- ---------------------------------------- ----------------------------------------------------------
Fund Name Account Number
</TABLE>

<PAGE>

LETTER OF INTENT (Check one only)

/ / I wish to establish a new Letter of Intent. (If Reduced Sales Charge or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.) I agree to the terms of the Letter of
Intent as set forth in the Prospectus and Statement of Additional
Information, and grant Pilgrim America Securities, Inc. a security
interest in the escrowed shares as set forth in the Statement of
Additional Information. I understand that I am not obligated to invest
an aggregate amount equal to the amount checked below, but if I do not,
Pilgrim America Securities, Inc. may deduct the amount of any sales
charge owed from the escrowed shares.

/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.

/ / Please amend my existing Letter of Intent with the new amount indicated
below.

If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the Prospectus
and Statement of Additional Information. The aggregate amount of these
purchases will be at least equal to the amount listed below:

/ / $50,000 / / $100,000 / / $250,000 / / $500,000 / / $1,000,000

<TABLE>
<S> <C>
- ---------------------------------------- --------------------------------------------
Fund Name Account Number

- ---------------------------------------- --------------------------------------------
Fund Name Account Number
</TABLE>

- --------------------------------------------------------------------------------
PRE-AUTHORIZED INVESTMENT PLAN -- AUTOMATIC INVESTING

/ / I wish to invest on a monthly, quarterly, semi-annual or annual basis,
directly from my checking account into the following fund(s).
(PLEASE COMPLETE THE PRE-AUTHORIZED INVESTMENT PLAN AGREEMENT HEREIN AND
ATTACH A VOIDED CHECK TO SECTION 6.)

Amount $________________________, to start / / 5th or
Minimum $100

/ / 20th of
_______________, ___________________
Month Year

/ / monthly / / quarterly / / semi-annual / / annual

- --------------------------------------------------------------------------------
SPECIAL PURCHASE WITHOUT A SALES CHARGE

/ / I (We) declare that the investment referenced herein is exempt from the
imposition of the normal front-end sales charge for the reason(s)
listed below (please refer to the 'Special Purchases Without a Sales
Charge' section of the prospectus):

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

The privilege will only be granted upon confirmation of your entitlement.
- --------------------------------------------------------------------------------
8. ADDITIONAL OPTIONS

TELEPHONE EXCHANGE PRIVILEGE -- IF ACCEPTED ACCOUNTS MUST HAVE THE SAME
ACCOUNT INFORMATION, OPTIONS AND CLASS OF SHARES. UNLESS YOU DECLINE THIS

PRIVILEGE BY CHECKING THE BOX BELOW, YOU WILL AUTOMATICALLY BE ASSIGNED
IT.*

/ / I decline telephone exchange, and do not want this privilege. (See
Exchange Privileges and Restrictions section for procedures.)

EXPEDITED REDEMPTION PRIVILEGE -- AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.
UNLESS YOU DECLINE THIS PRIVILEGE, YOU WILL AUTOMATICALLY BE ASSIGNED THE
ABILITY TO REQUEST, VIA THE TELEPHONE, REDEMPTION PROCEEDS TO BE SENT TO THE
ADDRESS IN SECTION 2.

/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided check
to Section 6.) (If voided check is not enclosed, will be sent to address
in Section 2.)

/ / I decline telephone redemption, and do not want this privilege.

See Expedited Redemption section for procedures.

* Pilgrim America is authorized to act upon instructions received from you or
anyone other than yourself representing himself as acting as your
representative who can provide personal identification information as it
appears in Pilgrim America's records.

Pilgrim America will employ reasonable procedures to confirm that instructions
communicated over the telephone are genuine. The Funds and their agents will
not be liable for any loss, injury, damage, or expense incurred as a result of
instructions communicated by telephone reasonably believed to be genuine. By
accepting this privilege, you agree to hold the Funds and

<PAGE>

their agents harmless from any loss, claims, or liability arising from their
compliance with such instructions. Telephone exchange and expedited
redemption privileges are subject to the terms and conditions set forth in
the Prospectus and each Fund's Statement of Additional Information.

- --------------------------------------------------------------------------------
SYSTEMATIC EXCHANGE PRIVILEGE

/ / I have at least $5,000 in my Pilgrim America________________Fund account,
for which no certificates have been issued and I would like to exchange:

$________(min. of $50) into the __________ Fund, Account #_______________

on a / / monthly or / / quarterly basis starting in the month of
_____________

(Systematic Exchange Privilege is only available within the same Class of
Shares)
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (SWP)
(Minimum account balance for a SWP is $10,000.)
(Class B SWP's are processed free of contingent deferred sales charge if 12%
or less of account value is redeemed on an annual basis.)

/ / I wish to automatically withdraw $_____________________ from this account.
Minimum $100

/ / Monthly / / Quarterly / / Semi-Annually / / Annually

I request this distribution be: (Check One)

/ / Sent to the address listed in Section 2. To begin
_____________of_________. (Withdrawal will occur about 5 business days
prior to the end of the month.)

/ / Sent to the payee listed in Section 9. To begin
_____________of_________. (Withdrawal will occur about 5 business days
prior to the end of the month.)

/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.)
To begin _____________of_________. (Withdrawal will occur about 5
business days prior to the end of the month.)
- --------------------------------------------------------------------------------

9. INTERESTED PARTY MAIL/DIVIDEND MAIL

/ / I wish to have my distributions sent to the address listed below.

/ / I wish to have duplicate confirmation statements sent to the interested
party listed below.

- --------------------------------------------------------------------------------
Name of Individual

- --------------------------------------------------------------------------------
Street Address

- ----------------------------- ------------------------------- ----------------
City State Zip Code

- --------------------------------------------------------------------------------
THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.

<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

AUTHORIZED DEALER AGREEMENT

Under these plans, the Authorized Dealer signing the application acts as
principal in all purchases of Fund shares and appoints Pilgrim America as its
agent to execute the purchases and to confirm each purchase to the Investor.
PilgrimAmerica remits semi-monthly to the Authorized Dealer the amount of its
commissions. The Authorized Dealer hereby guarantees the genuineness of the
signature(s) on the application and represents that he is a duly licensed
Authorized Dealer and may lawfully sell Fund shares in the state designated by
the Investor's mailing address, and that he has entered into a Selling Group
Agreement with the Distributor with respect to the sale of fund shares. The
Authorized Dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.

Cut on perforated line

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

DETACH HERE AND RETURN THIS TO YOUR BANK IF YOU ARE
ESTABLISHING A PRE-AUTHORIZED INVESTMENT PLAN
(AUTHORIZATION TO HONOR CHECKS OR DEBIT INSTRUCTIONS DRAWN BY DST SYSTEMS, INC.,
ON BEHALF OF THE PILGRIM AMERICA FUNDS, FOR AUTOMATIC PURCHASE PLAN)

PRE-AUTHORIZED INVESTMENT PLAN AGREEMENT

As a convenience, I (we) hereby request and authorize you to pay and charge
to my (our) account checks or debit instructions drawn on my (our) account by
DST Systems, Inc., the Fund's Agent and payable to the order of the Fund
provided there are sufficient collected funds in said account to pay the same
upon presentation: I (we) agree that your rights with respect to each such check
or debit instruction shall be the same as if it were a check or debit
instructions drawn on you and signed personally by me (us). This authority is to
remain in effect until revoked in writing and until you actually receive such
notice. I (we) agree that you shall be fully protected in honoring any such
checks or debit instructions.

I (we) further agree that if any such check or debit instruction is
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability whatsoever.

Signature(s) of Depositor(s) (signed exactly as shown on bank records)

X_______________________________________________________________________________

________________________________________________________________ 19 ____________
Date Signed

(PLEASE PRINT)

Name of Depositor (as shown on bank records)____________________________________

Bank Account Number_____________________________________________________________

Name of Bank____________________________________________________________________

Address of Bank_________________________________________________________________

City/State/Zip of Bank__________________________________________________________

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

[LOGO]

INSTRUCTIONS FOR COMPLETING THE NEW ACCOUNT APPLICATION

This New Account Application can be used to open a new Pilgrim America Account,
establish Shareholder privileges on existing accounts and be used in providing
documentation for certain transactions. The completed Application should be
forwarded along with your investment check payable to the Pilgrim America Group,
or other appropriate documentation to: PILGRIM AMERICA FUNDS, P.O. BOX 419368,
KANSAS CITY, MISSOURI 64141-6368.

This New Account Application may not be used to open a qualified retirement plan
account for which Investors Fiduciary Trust Company acts as custodian.

1 ACCOUNT REGISTRATION
- --------------------------------------------------------------------------------

Check the appropriate box and provide the information requested. Unless
specified, accounts with more than one owner will be assumed to be 'Joint
Tenants With Rights of Survivorship'.

All investors must sign the Account Application, and authorize the requested
privileges.

For a child who is under the age of majority in your state of residence,
'Gift/transfer to minor' registration must be utilized.

2 MAILING ADDRESS
- --------------------------------------------------------------------------------

This is the address of record for your account. All account confirmation
statements will be forwarded to this address.

3 INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

State the fund(s) in which you are investing and the dollar amount of the
investment. (Minimum initial investment is $1,000).

4 DIVIDEND AND DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------

Pilgrim America offers several options for the treatment of dividends and
capital gains distributions, if any, from your Pilgrim America investment.

You can have these payments distributed to you, or any other recipient you
choose, in cash; in additional shares of the Fund which is paying the
distribution or; in shares of another Pilgrim America Fund, at NAV without sales
charge, via the Dividends Transfer Option. The Dividend Transfer Option is
available only for open-end funds within the Pilgrim America Group.

5 AUTHORIZED DEALER INFORMATION
- --------------------------------------------------------------------------------

Your financial professional can complete this section.

6 SIGNATURES
- --------------------------------------------------------------------------------

All investors and authorized signers should sign in order to process the New
Account Application and to certify your Social Security, Tax identification
Number or if applicable, your foreign status.

<PAGE>

7 PILGRIM AMERICA PURCHASE OPTIONS(TRADEMARK)
- --------------------------------------------------------------------------------

You can qualify for reduced sales charges via the Letter of Intent or Cumulative
Discount privileges.

The Letter of Intent allows you to qualify for reduced sales charges
immediately.

Cumulative Discount allows you to use the total of all of your Pilgrim America
open-end fund investments in determining the sales charge of a current
investment.

The Pre-Authorized Investment Plan provides a systematic method of investing
periodically in the Pilgrim America Fund(s) of your choice. Minimum investments
of at least $100 can be automatically debited from your bank account

periodically for investment purposes.

8 ADDITIONAL OPTIONS
- --------------------------------------------------------------------------------

The Telephone Exchange privilege will automatically be assigned to you unless
you check the box in Section 8 which states that you do not wish to have this
privilege.

The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (Maximum of $50,000) mailed
to your address of record. This privilege is automatically assigned to you
unless you check the box in this section which states you do not want to take
advantage of this privilege.

The Expedited Redemption privilege additionally allows you to effect a
liquidation from your account and have the proceeds (minimum $5,000) wired to
your pre-designated bank account. This privilege is NOT automatically assigned
to you. If you want to take advantage of this privilege, please check the
appropriate box and attach a voided check to section 6 of the New Account
Application.

The Systematic Exchange Privilege allows you to automatically exchange shares of
one fund for shares of the same class of another fund in regular pre-determined
amounts and at regular pre-determined intervals.

The Systematic Withdrawal Plan allows you to automatically have a specific share
or dollar amount ($100 minimum) liquidated from your account monthly, quarterly,
semi-annually, or annually and forwarded to you or the payee of your choosing as
long as the account has a current value of at least $10,000. Amounts designated
for deposit to your bank account can be forwarded via the Automated Clearing
House system by attaching a voided check for such basic account to Section 6 of
the New Account Application.

9 INTERESTED PARTY MAIL/DIVIDEND MAIL
- --------------------------------------------------------------------------------

You may authorize an additional party to receive copies of your confirmation
statements (your Authorized Dealer will automatically receive such copies). If
you wish to have additional copies of your confirmation statements mailed to an
address other than your address of record, check the appropriate box in Section
9 and indicate such address.

You may have your cash dividend payments forwarded to an address other than your
address of record by so indicating in Section 9. (If you wish your cash
dividends to be forwarded to a bank for deposit to an account, refer to Section
4 of the New Account Application).

<PAGE>

PILGRIM AMERICA FUNDS CLASS A AND B
CONTINGENT DEFERRED SALES CHARGE WAIVER FORM
(TO BE COMPLETED ONLY IF THE UNDERSIGNED BELIEVES THAT HE IS ENTITLED
TO A WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE.)

If you believe you are entitled to a waiver of the Contingent Deferred
Sales Charge in accordance with the terms set forth in the prospectus, you must
complete this Contingent Deferred Sales Charge Waiver Form and send it the
Fund's Transfer Agent at its address given below. The waiver will only be
granted upon confirmation of your entitlement.

Check the item below which the undersigned is relying upon for a waiver of
the Contingent Deferred Sales Charge and send any required documents specified
therein:

/ / Redemption is made upon the death or permanent disability of
shareholder. (Enclose either a certified death certificate or
certification of permanent disability (see below), whichever is
appropriate).

/ / Redemption is made in connection with mandatory distributions (upon
attainment of age 70 1/2) from and IRA or other qualified retirement
plan. (Enclose a certified birth certificate. Please contact Pilgrim
America for a Distribution Request Form for IRA or other qualified
retirement plan accounts where IFTC acts as custodian which must
accompany this Contingent Deferred Sales Charge Waiver Form).

________________________________________________________________________

Signature ______________________________________________________________
(Exactly as on Account Registration)

DATE ___________________________________________________________________

Name(s) ________________________________________________________________

________________________________________________________________________
(Please Print)

MAIL THE COMPLETED WAIVER FORM TO:
PILGRIM AMERICA FUNDS, P.O. BOX 419368, KANSAS CITY, MO 64141-6368
DEFINITION OF DISABILITY

An individual will be considered disabled if he meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code, which in pertinent

part defines a person as disabled if such peron is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long
continued and indefinite duration.

CERTIFICATION OF DISABILITY

I _____________________________________ certify that I am a licensed physician
Licensed Physician Name
in the State of _______________________________________________________________,
License # ____________ and that _________________ is under my care and is unable
to perform the material duties of his or her regular occupation or employment;
or is unable to engage in any substantial gainful activity by reason of a
physical or mental impairment which may result in death or be of continued and
indefinite duration. Date of determination of disability _______________________

Physician Signature _______________________ Date ______________________________

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

IMPORTANT INFORMATION REGARDING COMPLETION OF THE APPLICATION

Effective in 1989, the Fund, and other payers, must, according to IRS
regulations, withhold 31% of reportable dividends (whether paid or accrued) and
redemption payments if a shareholder fails to provide a taxpayer identification
number, and a certification that he is not subject to backup withholding in the
SHAREHOLDER CERTIFICATION section of the Account Application form.

(Section references are to the Internal Revenue Code, as amended).

BACKUP WITHHOLDING
You are subject to backup withholding if:
(1) You fail to furnish your taxpayer identification number to the Fund in
the manner required, OR
(2) The Internal Revenue Service notifies the Fund that you furnished an
incorrect taxpayer identification number, OR
(3) You are notified that you are subject to backup withholding under
section 3406(a)(1)(C), OR
(4) For an interest or dividend account opened after December 31, 1983, you
fail to certify to the payer that you are not subject to backup withholding
under (3) above, or fail to certify your taxpayer identification number.
For payments other than interest or dividends, you are subject to backup
withholding only if (1) or (2) above applies.

OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS 5, application for a Social Security Number Card, or Form
SS 4, application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number. Write 'applied for' in the space provided for a taxpayer identification
number on the application. Circle paragraph 3(b) of the Shareholder
Certification section.

WHAT NUMBER TO GIVE
Give the social security number or employer identification number of the record
owner of the account. If the account belongs to you as an individual, give your
social security number. If the account is in more than one name or is not in the
name of the actual owner, see the chart below for guidelines on which number to
report in completing the account registration section:
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.

PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable

cause and not to willful neglect.

(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
underpayment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.

PAYEES EXEMPT FROM BACKUP WITHHOLDING
Certain payees are specifically exempted from backup withholding on ALL
payments. Write 'exempt payee' after paragraph (3) of the Shareholder
Certification and Signature Certification section if your account falls into one
of the following categories. We will still need your taxpayer identification
number.
o A corporation
o A financial institution.
o An organization exempt from tax under section 501(a), or an individual
retirement plan.
o A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under section 584(a).
o An exempt charitable remainder trust, or a non exempt trust described in
section 4947(a)(1).
o An entity registered at all times under the Investment Company Act of 1940.
Payments of DIVIDENDS not generally subject to backup withholding include the
following:
o Payments to nonresident aliens subject to withholding under section 1441.
o Payments to partnerships NOT engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Beginning January 1, 1984, payers
must generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.

<TABLE>
<CAPTION>
- ---------------------------------- ----------------------------
GUIDELINES FOR DETERMINING GIVE THE
PROPER NUMBER SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF--

---------------------------------- ----------------------------
<S> <C> <C>
1. An individual's account The individual

2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds any one of the
individuals(1)

3. Husband and wife (joint The actual owner of the
account) account or, if joint funds,
either person(1)

4. Custodian account to a minor The minor(2)
(Uniform Gift to Minors Act)

5. Adult and minor The adult or if the minor is
the only contributor, the
minor(1)

6. Account in the name of The ward, minor, or
guardian or committee for a incompetent person(3)
designated ward, minor or
incompetent person

7. a. The usual revocable The grantor-trustee(5)
savings trust account
(grantor is also trustee)

b. So called trust account
that is not a legal or valid The actual owner(1)
trust under state law

8. Sole proprietorship account The owner(1)

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

<CAPTION>
- ---------------------------------- ----------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- ---------------------------------- ----------------------------
<S> <C> <C>
9. A valid trust, estate or Legal entity (Do not furnish
pension trust the identifying number of
the personal representative
or trustee unless the legal
entity itself is not
designated in the account
title.)(5)

10. Corporate account The corporation

11. Religious, charitable, or The organization
educational organization
account

12. Partnership account held in The partnership
the name of the business

13. Association, club or other The organization
tax exempt organization

14. A broker or registered The broker or nominee
nominee

15. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a state or local government,
school district, or prison)
that receives agricultural
program payments
- ---------------------------------- ----------------------------
</TABLE>

<PAGE>

ELITE SERIES
PILGRIM AMERICA MAGNACAP FUND
PILGRIM AMERICA HIGH YIELD FUND
PILGRIM GOVERNMENT
SECURITIES INCOME FUND

TWO RENAISSANCE SQUARE, 40 NORTH CENTRAL AVENUE, SUITE 1200,
PHOENIX, ARIZONA 85004
1-800-331-1080

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
THE FUNDS............................................... 1

THE FUNDS AT A GLANCE................................... 2

SUMMARY OF EXPENSES..................................... 3

FINANCIAL HIGHLIGHTS.................................... 5

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES........... 8

INVESTMENT PRACTICES AND RISK CONSIDERATIONS............ 9

SHAREHOLDER GUIDE....................................... 14
Pilgrim America Purchase Options(TM).................. 14
Purchasing Shares..................................... 19
Exchange Privileges and Restrictions.................. 20
How to Redeem Shares.................................. 21

MANAGEMENT OF THE FUNDS................................. 22

DIVIDENDS, DISTRIBUTIONS AND TAXES...................... 24

PERFORMANCE INFORMATION................................. 25

ADDITIONAL INFORMATION.................................. 25

NEW ACCOUNT APPLICATION................................. 27
</TABLE>

[LOGO]

INVESTMENT MANAGER
Pilgrim America Investments, Inc.

Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

DISTRIBUTOR
Pilgrim America Securities, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

SHAREHOLDER SERVICING AGENT
Pilgrim America Group, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

TRANSFER AGENT
Investors Fiduciary Trust Company
c/o DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141-6368

CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street/14th Floor
Kansas City, Missouri 64105

LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, California 90017

PROSPECTUS

October 31, 1996

<PAGE>
STATEMENT OF ADDITIONAL INFORMATION

October 31, 1996

PILGRIM GOVERNMENT SECURITIES INCOME FUND
Two Renaissance Square, Suite 1200
40 North Central Avenue
Phoenix, Arizona 85004
(800) 331-1080

Pilgrim Government Securities Income Fund, the sole series of Pilgrim Government
Securities Income Fund, Inc. (the "Fund"), is a diversified, open-end management
investment company seeking high current income, consistent with liquidity and
preservation of capital.

This document is not the Prospectus of the Fund and should be read in
conjunction with that Prospectus dated October 31, 1996, which may be obtained
without charge upon written request to the address above or by calling
(800) 331-1080.

TABLE OF CONTENTS

Page
----

Investment Objective And Policies....................................... 2
Investment Restrictions................................................. 7
Directors And Officers.................................................. 8

Principal Shareholders................................................. 11

Investment Management.................................................. 11
Distributor............................................................ 13
Pilgrim America Group................................................... 13

Distribution Plan...................................................... 13
Execution Of Portfolio Transactions.................................... 15
Additional Purchase and Redemption Information......................... 16
Determination of Share Price........................................... 20
Shareholder Services And Privileges.................................... 20
Distributions.......................................................... 21
Tax Considerations...................................................... 22
Performance Information................................................ 24
General Information.................................................... 26
Custodian.............................................................. 26
Independent Auditors................................................... 26
Legal Counsel.......................................................... 26

Financial Statements................................................... 28

<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

As described in the Fund's Prospectus, the Fund is a diversified, open-end
management investment company seeking high current income consistent with
liquidity and preservation of capital. There can be no assurance that the Fund's
objective will be attained.

U.S. Government Securities

The Fund's investment objective and the investment policies described in the
first paragraph of the description of the Fund in the prospectus under "The
Funds' Investment Objectives and Policies", "Government Securities Income Fund"
are fundamental and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund.

The U.S. Government securities which may be purchased by the Fund include (1)
U.S. Treasury obligations such as Treasury Bills (maturities of one year or
less), Treasury Notes (maturities of one to ten years) and Treasury Bonds
(generally maturities of greater than ten years) and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities ("Agency
Securities") which are supported by any of the following: (a) the full faith and
credit of the U.S. Treasury, such as obligations of the Government National
Mortgage Association ("GNMA"), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the U.S. Treasury, such as obligations
of the Federal National Mortgage Association, or (c) the credit of the agency or
instrumentality, such as obligations of the Federal Home Loan Mortgage
Corporation.

The Fund may invest in U.S. Government Agency Mortgage-Backed Securities. These
securities are obligations issued or guaranteed by the U.S. Government or by one
of its agencies or instrumentalities, including but not limited to GNMA, FNMA or
FHLMC. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro rata share of monthly payments (including
any principal prepayments) made by the individual borrowers on the pooled
mortgaged loans, net of any fees paid to the guarantor of such securities and
the services of the underlying mortgage loans. GNMA, FNMA and FHLMC each
guarantee timely distributions of interest to certificate holders. GNMA and FNMA
guarantee timely distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the underlying mortgage
loan; however, FHLMC Gold Participation Certificates now guarantee timely
payment of monthly principal reductions. Although their close relationship with
the U.S. Government is believed to make them high-quality securities with
minimal credit risks, the U.S. Government is not obligated by law to support
either FNMA or FHLMC. However, historically there have not been any defaults of
FNMA or FHLMC issues. Mortgage-backed securities consist of interests in
underlying mortgages with maturities of up to thirty years. However, due to
early unscheduled payments of principal on the underlying mortgages, the
securities have a shorter average life and, therefore, less volatility than a
comparable thirty-year bond. When interest rates fall, high prepayments could
force the Fund to reinvest principal at a time when investment opportunities are
not attractive. The value of U.S. Government Agency Mortgage-Backed Securities,

like other traditional debt instruments, will tend to move in a direction
opposite to that of interest rates.

The Fund purchases primarily fixed-rate securities, including but not limited to
high coupon U.S. Government Agency Mortgage-Backed Securities, which provide a
higher coupon at the time of purchase than the then prevailing market rate
yield. The prices of high coupon U.S. Government Agency Mortgage-Backed
Securities do not tend to rise as rapidly as those of traditional fixed-rate
securities at times when interest rates are decreasing, and tend to decline more
slowly at times when interest rates are increasing. The Fund may purchase such
securities at a premium, which means that a faster principal prepayment rate
than expected will reduce the market value of and income from such securities,
while a slower prepayment rate will tend to increase the market value of and
income from such securities.

- 2 -
<PAGE>

The composition and weighted average maturity of the Fund's portfolio will vary
from time to time, based upon the determination of Pilgrim America Investments,
Inc. (the "Investment Manager") of how best to further the Fund's investment
objective. The Fund may invest in Government securities of all maturities,
short-term, intermediate-term and long-term.

GNMA Certificates or "Ginnie Maes" are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration.

The Fund will purchase only GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal and interest on GNMA Certificates of
the "modified pass-through" type is guaranteed by GNMA.

The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return on the greater part of principal invested far in advance of
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.

As the prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of a single-family dwelling mortgage with 25-to-30 year maturity, the type
of mortgage which backs the vast majority of GNMA Certificates, is approximately
12 years. It is therefore customary practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.

As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,

the coupon rate of interest of GNMA Certificates is lower than the interest paid
on the VA-guaranteed or FHA-insured mortgages underlying the Certificates.

The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.

Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.

FNMA Mortgage Securities are pass-through mortgage-backed securities that are
issued by FNMA, a U.S. Government sponsored corporation owned by private
stockholders. FNMA mortgage securities are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. In addition, FNMA Mortgage Securities may include any
obligations of, or instruments issued by or fully guaranteed as to principal and
interest by, FNMA.

- 3 -
<PAGE>

FHLMC Mortgage Securities are mortgage-backed securities representing interests
in residential mortgage loans pooled by FHLMC, a U.S. Government sponsored
corporation. FHLMC mortgage securities are guaranteed as to timely payment of
interest and ultimate collection of principal but are not backed by the full
faith and credit of the U.S. Government. ln addition, FHLMC Mortgage Securities
may include any obligations of, or instruments issued by or fully guaranteed as
to principal and interest by, FHLMC.

Portfolio Turnover Rate

The annual rate of the Fund's portfolio turnover during the fiscal years ended
June 30, 1994, 1995 and 1996 was 402%, 299%, and 170% respectively. The Fund
places no restrictions on portfolio turnover and it may sell any portfolio
security without regard to the period of time it has been held.

Delayed Delivery Transactions

The Fund may, from time to time, purchase securities on a "delayed delivery" or
"when-issued" basis, which means that, while the Fund has ownership rights to
the securities, delivery and payment for the securities normally takes place 15

to 45 days after the date of the transaction. The payment obligation and the
interest rate that will be received on the securities are each fixed at the time
the buyer enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities before the settlement date if
it is deemed advisable as a matter of investment strategy. A separate account of
the Fund consisting of cash or liquid debt securities equal to the amount of the
above commitments will be maintained at the Fund's Custodian Bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market. If the market value of such
securities declines, additional cash or securities will be placed in the account
on a daily basis so that the market value of the account will equal the amount
of such commitments by the Fund.

Securities purchased on a delayed delivery basis and the securities held in the
Fund's portfolio are subject to changes in market value based upon changes in
the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, to the extent that the Fund remains substantially fully
invested at the same time that it has purchased securities on a delayed delivery
basis, which it would normally expect to do, there will be greater fluctuations
in the Fund's net asset value than if it solely set aside cash to pay for the
securities when delivered.

When the time comes to pay for the securities acquired on a delayed delivery
basis, the Fund will meet its obligations from the available cash flow, sale of
the securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).

Depending on market conditions, the Fund could experience fluctuations in share
price as a result of delayed delivery or when-issued purchases. In addition, the
Fund may, at any time, sell certain of its portfolio securities on a delayed
delivery or when-issued basis. In such cases the Fund will not receive payment
for these securities until they are delivered to the purchaser, normally 15 to
45 days later.

Lending of Portfolio Securities

In order to generate additional income, the Fund may lend its portfolio
securities in an amount up to 33-1/3% of total Fund assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made with any companies affiliated with the Investment
Manager. The borrower at all times during the loan must maintain with the Fund
cash or cash equivalent collateral or

- 4 -
<PAGE>

provide to the Fund an irrevocable letter of credit equal in value to at least
100% of the value of the securities loaned. During the time portfolio securities
are on loan, the borrower pays the Fund any interest paid on such securities,

and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the Fund or the borrower at any time. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.

Dollar Roll Transactions

In order to enhance portfolio returns and manage prepayment risks, the Fund may
engage in dollar roll transactions with respect to mortgage securities issued by
GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a mortgage
security held in the portfolio to a financial institutional such as a bank or
broker-dealer, and simultaneously agrees to repurchase a substantially similar
security (same type, coupon and maturity) from the institution at a later date
at an agreed upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, and the income from these
investments, together with any additional fee income received on the sale, could
generate income for the Fund exceeding the yield on the sold security. When the
Fund enters into a dollar roll transaction, cash or liquid securities of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
repurchased, are segregated with its custodian at the trade date. These
securities are marked daily and are maintained until the transaction is settled.

Pairing-Off Transactions

The Fund engages in a pairing-off transaction when the Fund commits to purchase
a security at a future date ("delayed delivery" or "when issued"), and then
prior to the predetermined settlement date, the Fund "pairs-off" the purchase
with a sale of the same security prior to, or on, the original settlement date.
At all times when the Fund has an outstanding commitment to purchase securities,
cash or liquid high-grade securities equal to the value of the outstanding
purchase commitments will be segregated from general investible funds and marked
to the market daily.

Whether a pairing-off transaction produces a gain for the Fund, depends upon the
movement of interest rates. If interest rates decrease, then the money received
upon the sale of the same security will be greater than the anticipated amount
needed at the time the commitment to purchase the security at the future date
was entered. Consequently, the Fund will experience a gain. However, if interest
rates increase, than the money received upon the sale of the same security will
be less than the anticipated amount needed at the time the commitment to

purchase the security at the future date was entered. Consequently, the Fund
will experience a loss.

Repurchase Agreements

The Fund may enter into repurchase agreements involving U.S. Government
securities. Under a repurchase agreement, the Fund acquires a debt instrument
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such debt
instrument at a

- 5 -
<PAGE>

fixed price. The resale price is in excess of the purchase price in that it
reflects an agreed-upon market interest rate effective for the period of time
during which the Fund's money is invested. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the purchase
price including accrued interest earned on the underlying U.S. Government
securities. The instruments held as collateral are valued daily, and as the
value of instruments declines, the Fund will require additional collateral. If
the seller defaults, the Fund might incur a loss or delay in the realization of
proceeds if the value of the collateral securing the repurchase agreement
declines and it might incur disposition costs in liquidating the collateral.
Repurchase agreements will be made only with U.S. Government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System. The Investment Manager will monitor the value of the collateral
to ensure that it meets or exceeds the repurchase price. In all cases, the
Investment Manager must find the creditworthiness of the other party to the
transaction satisfactory before execution. The Fund will make payment for
securities it receives as collateral only upon physical delivery or evidence of
book entry transfer to the account of its Custodian Bank. Repurchase agreements
are considered by the staff of the Securities and Exchange Commission to be
loans by the Fund. The Fund may not enter into a repurchase agreement with more
than seven days to maturity if, as a result, more than 10% of the value of the
Fund's total assets would be invested in such repurchase agreements.

Reverse Repurchase Agreements

The Fund may enter into reverse repurchase agreement transactions. Such
transactions involve the sale of U.S. Government securities held by the Fund,
with an agreement that the Fund will repurchase such securities at an agreed
upon price and date. The Fund will employ reverse repurchase agreements when
necessary to meet unanticipated net redemptions so as to avoid liquidating other
portfolio investments during unfavorable market conditions. At the time it
enters into a reverse repurchase agreement, the Fund will place in a segregated
custodial account high-quality liquid debt securities having a dollar value
equal to the repurchase price. Reverse repurchase agreements are considered to
be borrowing under the Investment Company Act of 1940 (the "1940 Act"). Reverse
repurchase agreements, together with other permitted borrowing, may constitute
up to 33 1/3% of the Fund's total assets. Under the 1940 Act, the Fund is
required to maintain continuous asset coverage of 300% with respect to borrowing
and to sell (within three days) sufficient portfolio holdings to restore such

coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if such liquidations of the Fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities or the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.

Borrowing

The Fund may borrow up to 10% of the value of its total assets for temporary or
emergency purposes. No additional investment may be made while any such
borrowing are in excess of 5% of total assets. For purposes of this investment
restriction, the Fund's entry into reverse repurchase agreements and
dollar-rolls and delayed delivery transactions, including those relating to
pair-offs, shall not constitute borrowing. Such borrowing, together with reverse
repurchase agreements, may constitute up to 33% of the Fund's total assets.
Under the Investment Company Act of 1940, the Fund is required to maintain
continuous asset coverage of 300% with respect to such borrowing and to sell
(within three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint. Leveraging by means of borrowing may exaggerate the
effect of any increase or decrease in the value of portfolio securities or the
Fund's net asset value, and money borrowed will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.

- 6 -
<PAGE>

The Fund may not mortgage, pledge or hypothecate its assets, except to the
extent necessary to secure permitted borrowing and to the extent related to the
deposit of assets in escrow in connection with the Fund's purchasing of
securities on a forward commitment or delayed delivery basis, entering into
reverse repurchase agreements and engaging in dollar-roll transactions.

Risk Factors

Whether a reverse repurchase agreement or dollar-roll transaction produces a
gain for the Fund depends upon the "costs of the agreements" (e.g., a function
of the difference between the amount received upon the sale of its securities
and the amount to be spent upon the purchase of the same or "substantially the
same" security) and the income and gains of the securities purchased with the
proceeds received from the sale of the mortgage security. If the income and
gains on the securities purchased with the proceeds of the agreements exceed the
costs of the agreements, then the Fund's net asset value will increase faster

than otherwise would be the case; conversely, if the income and gains on such
securities purchased fail to exceed the costs of the structure, net asset value
will decline faster than otherwise would be the case. Reverse repurchase
agreements and dollar-roll transactions, as leveraging techniques, may increase
the Fund's yield in the manner described above; however, such transactions also
increase the Fund's risk to capital and may result in a shareholder's loss of
principal.

Whether a pairing-off transaction produces a gain for the Fund depends upon the
movement of interest rates. If interest rates decrease, then the money received
upon the sale of the same security will be greater than the anticipated amount
needed at the time the commitment to purchase the security at the future date
was entered. Consequently, the Fund will experience a gain. However, if interest
rates increase, than the money received upon the sale of the security will be
less than the anticipated amount needed at the time the commitment to purchase
the security at the future date was entered. Consequently, the Fund will
experience a loss.

INVESTMENT RESTRICTIONS

The Fund has adopted the following investment restrictions as fundamental
policies that cannot be changed without approval by the holders of a majority of
its outstanding shares, which means the lesser of (1) 67% of the Fund's shares
present at a meeting at which the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:

1. Purchase any securities other than obligations issued or
guaranteed by the United States Government or its agencies, some of which may be
subject to repurchase agreements. There is no limit on the amount of the Fund's
assets that may be invested in the securities of any one issuer of such
obligations.

2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies, (b) to the
extent the entry into a repurchase agreement is deemed to be a loan or (c) by
the loan of its portfolio securities in accordance with the policies described
under "Investment Objective and Policies."

3. (a) Borrow money, except temporarily for extraordinary or
emergency purposes from a bank and then not in excess of 10% of its total assets
(at the lower of cost or fair market value). No additional investment may be
made while any such borrowing are in excess of 5% of total assets. For purposes
of this investment restriction, the entry into reverse repurchase agreements,
dollar-rolls and delayed delivery transactions, including those relating to
pair-offs, shall not constitute borrowing.

(b) Mortgage, pledge or hypothecate any of its assets except
to the extent necessary to secure permitted borrowing and to the extent related
to the deposit of assets in escrow in

- 7 -
<PAGE>

connection with (i) the purchase of securities on a forward commitment or
delayed delivery basis, and (ii) reverse repurchase agreements and dollar-rolls.

(c) Borrow money, including the entry into reverse repurchase
agreements and dollar roll transactions and purchasing securities on a delayed
delivery basis, if, as a result of such borrowing, more than 33-1/3 of the total
assets of the Fund, taken at market value at the time of such borrowing, is
derived from borrowing. For purposes of this limitation, a delay between
purchase and settlement of a security that occurs in the ordinary course for the
market on which the security is purchased or issued is not considered a purchase
of a security on a delayed delivery basis.

4. Purchase securities on margin, sell securities short or
participate on a joint or joint and several basis in any securities trading
account. (Does not preclude the Fund from obtaining such short-term credit as
may be necessary for the clearance of purchases and sales of its portfolio
securities.)

5. Underwrite any securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held in
its portfolio.

6. Buy or sell interests in oil, gas or mineral exploration or
development programs, or purchase or sell commodities, commodity contracts or
real estate. (Does not preclude the purchase of GNMA mortgage-backed
certificates.)

7. Purchase or hold securities of any issuer, if, at the time of
purchase or thereafter, any of the Officers and Directors of the Fund or its
Investment Manager own beneficially more than 1/2 of 1%, and such Officers and
Directors holding more than 1/2 of 1% together own beneficially more than 5%, of
the issuer's securities.

8. Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or acquisition of
assets.

9. Issue senior securities, except insofar as the Fund may be deemed
to have issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies or investment techniques, and except for purposes
of this investment restriction, collateral, escrow, or margin or other deposits
with respect to the making of short sales, the purchase or sale of futures
contracts or related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to be an
issuance of a senior security.

The Fund is also subject to the following restrictions and policies that are not
fundamental and may, therefore, be changed by the Board of Directors without
shareholder approval. The Fund will not invest more than 5% of the net assets of

the Fund in warrants, whether or not listed on the New York or American Stock
Exchanges, including no more than 2% of its total assets which may be invested
in warrants that are not listed on those exchanges. Warrants acquired by the
Fund in units or attached to securities are not included in this restriction.
The Fund will not, so long as its shares are registered in the State of Texas,
invest in oil, gas, or other mineral leases or real estate limited partnership
interests. The Fund will not make loans to others, unless collateral values are
continuously maintained at no less than 100% by "marking to market" daily.

DIRECTORS AND OFFICERS

The Board of Directors of the Fund is elected by the shareholders. The Board has
responsibility for the overall management of the Fund, including general
supervision and review of its investment activities. The Directors, in turn,
elect the Officers of the Fund who are responsible for administering the
day-to-day

- 8 -
<PAGE>

operations of the Fund. Current Directors and Officers, and their affiliations
and principal occupations during the past five years, are:

Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 55.) Director. Realtor, The Prudential Arizona Realty, for more than
the last five years. Ms. Baldwin is also Treasurer, United States Olympic
Committee, and formerly was on the teaching staff at Arizona State University.
Ms. Baldwin also is a director or trustee of each of the funds managed by the
Investment Manager.

Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 67.)
Director. President of Al Burton Productions, for more than the last five years,
and Executive Producer, Castle Rock Entertainment. Mr. Burton also is a director
or trustee of each of the funds managed by the Investment Manager.

Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida 33140.
(Age 55.) Director. President, South Beach Capital Markets Advisory Corporation
(since January 1995). Mr. Foerster was formerly Managing Director, U.S. Equity
Syndicates Desk, Lehman Brothers (June 1992 - December 1994) and Managing
Director, Equity Transactions Group/Equity Syndicate, PaineWebber Incorporated
(September 1984 - May 1992). Mr. Foerster also is a director or trustee of each
of the funds managed by the Investment Manager.

Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 50.) Director.
President, StockVal, Inc. (1992 - present); director and co-owner, StockVal,
Inc. (1982 - present); director of Artisoft, Inc. Mr. Patton was formerly a

partner and director of the law firm of Streich, Lang, P.A. (1972 - 1992). Mr.
Patton is also a director or trustee of each of the funds managed by the
Investment Manager.

*Robert W. Stallings, Two Renaissance Square, 12th Floor, 40 North Central
Avenue, Phoenix, Arizona 85004. (Age 46.) Chairman, Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim America
Group, Inc. ("Pilgrim America Group") and a director of Pilgrim America
Securities, Inc. and Pilgrim America Investments, Inc. (since December 1994).
Chairman, Chief Executive Officer and President of Pilgrim America Masters
Series, Inc., Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America
Investment Funds, Inc. and Pilgrim America Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Express America Holdings Corporation
(since August 1990) and Express America Mortgage Corporation (since May 1991)
and President of Express America Holdings Corporation and Express America
Mortgage Corporation (since December 1993). Mr. Stallings formerly was Chairman
and Chief Executive Officer of First Western Partners, Inc., a consulting and
management services firm to financial institutions and private investors
(February 1990 - December 1991) and Chairman and Chief Executive Officer of
Western Savings & Loan Assoc. (April 1989 - February 1990). Mr. Stallings also
is a director or trustee of each of the funds managed by the Investment Manager.

* Interested person of the Fund, as defined in the Investment Company Act of
1940, as amended.

The Fund pays each Director who is not an interested person a pro rata share, as
described below, of (i) an annual retainer of $20,000; (ii) $1,500 per quarterly
and special Board meeting; (iii) $500 per committee meeting; (iv) $100 per
special telephonic meeting; and (v) out of pocket expenses. During the fiscal
year ended June 30, 1996, the Fund paid an aggregate of $2,866 to the Directors.
The pro rata share paid by the Fund is based on the Fund's average net assets
for the previous quarter as a percentage of the average net assets of the Fund
and all the funds managed by the Investment Manager for which the Directors
serve in common as directors/trustees.

- 9 -
<PAGE>

Compensation of Directors

The following table sets forth information regarding compensation of Directors
by the Fund and other funds managed by the Investment Manager for the fiscal
year ended June 30, 1996. Officers of the Fund and Directors who are interested
persons of the Fund do not receive any compensation from the Fund or any other
fund managed by the Investment Manager. In the column headed "Total Compensation
From Registrant and Fund Complex Paid to Directors," the number in parentheses
indicates the total number of boards in the fund complex on which the Director

serves.

Compensation Table
Fiscal Year Ended June 30, 1996

<TABLE>
<CAPTION>
===================================================================================================
Pension or Total
Retirement Compensation
Benefits Estimated From
Aggregate Accrued Annual Registrant
Compensation As Part of Benefits and Fund
from Fund Upon Complex Paid
Name of Person, Position Registrant Expenses Retirement to Directors
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mary A. Baldwin, Director (1)(3)............. $ 728 N/A N/A $ 23,800
(5 boards)
- ---------------------------------------------------------------------------------------------------
Al Burton, Director (2)(3)................... $ 728 N/A N/A $ 23,800
(5 boards)
- ---------------------------------------------------------------------------------------------------
Bruce S. Foerster, Director (1)(3)........... $ 728 N/A N/A $ 23,900
(5 boards)
- ---------------------------------------------------------------------------------------------------
Jock Patton, Director (3)(4)................. $ 681 N/A N/A $ 22,400
(5 boards)
- ---------------------------------------------------------------------------------------------------
Robert W. Stallings, Director and
Chairman (1)(5)............................ $ 0 N/A N/A $ 0 (5 boards)
===================================================================================================
</TABLE>

- ----------
1 Current Board member, term commencing April 7, 1995.

2 Board member since 1985.

3 Member of Audit Committee.

4 Current Board member, term commencing August 28, 1995.

5 "Interested person", as defined in the Investment Company Act of 1940. As
an interested person of the Fund, Mr. Stallings will not receive any
compensation as a director.

Officers

James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 39.) Vice Chairman (since December 1994) and Executive Vice
President (since April 1995) of Pilgrim America Group, and Pilgrim America
Investments, Inc. and a director (since December 1994) and Assistant Secretary
(since January 1995) of Pilgrim America Securities, Inc. Executive Vice
President of Pilgrim America Masters Series, Inc., Pilgrim America Bank and
Thrift Fund, Inc., Pilgrim America Prime Rate Trust and Pilgrim America
Investment Funds, Inc. (since April 1995). Vice Chairman and Chief Financial
Officer of Express America Holdings Corporation (since December 1993) and
President and Chief Financial Officer of Express America Holdings Corporation
(May 1991 - December 1993). Mr. Reis is also Vice Chairman (since

- 10 -
<PAGE>

December 1993) of Express America Mortgage Corporation and formerly was
President (May 1991 - December 1993), and he was also the President and Chief
Financial Officer of First Western Partners, Inc. (February 1990 - December
1991).

Stanley Vyner, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 46.) Mr. Vyner has served as President and Chief Executive Officer
for Pilgrim America Investments, Inc. since August, 1996, Executive Vice
President of Pilgrim America Group since August, 1996, and Executive Vice
President of Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America
Investment Funds, Inc., and Pilgrim America Masters Series, Inc. He served as
Chief Executive Officer of HSBC Asset Management Americas, Inc. until December,
1995, and prior to that was the Chief Executive Officer of HSBC Life Assurance
Co., the largest provider of retirement services in Hong Kong, where Mr. Vyner
Worked for nearly 11 years. An actuary by profession, Mr. Vyner earned his
Honors Degree in Economics from Edinburgh University, UK. He is a Fellow of the
Faculty of Actuaries.

James M. Hennessy, Senior Vice President and Secretary
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 47.) Senior Vice President and Secretary, Express America Holdings
Corporation, Pilgrim America Group, Pilgrim America Investments, Inc., and
Pilgrim America Securities, Inc. (since April 1995). Senior Vice President and
Secretary, Pilgrim America Masters Series, Inc., Pilgrim America Bank and Thrift
Fund, Inc., Pilgrim America Prime Rate Trust, and Pilgrim America Investment
Funds, Inc. (since April 1995). Senior Vice President, Express America Mortgage
Corporation (June 1992 - August 1994). Mr. Hennessy was also the President of
Beverly Hills Securities Corp. (January 1990 - June 1992).

Michael J. Roland, CPA, Senior Vice President and Treasurer

Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 37.) Senior Vice President and Chief Financial Officer of Pilgrim
America Group, Pilgrim America Investments, Inc. and Pilgrim America Securities,
Inc. (since April 1995). Senior Vice President and Treasurer of Pilgrim America
Masters Series, Inc., Pilgrim America Bank and Thrift Fund, Inc., Pilgrim
America Investment Funds, Inc. and Pilgrim America Prime Rate Trust (since April
1995). From July 1994 through December 1994, Partner at the consulting firm of
Corporate Savings Group in Newport Beach, California. From 1992 to June 1994,
Vice President of Pacific Financial Asset Management Corp. Funds in Newport
Beach, California. From 1988 to 1992, Director of Financial Reporting for
Pacific Mutual Life Insurance Company in Newport Beach, California.

PRINCIPAL SHAREHOLDERS

As of September 30, 1996, the Directors and Officers of the Fund owned less than
1% of any class of the Fund's outstanding shares. As of September 30, 1996, to
the knowledge of management, no person owned beneficially or of record more than
5% of the outstanding shares of any class of the Fund, except with respect to
the Class A shares of the Fund, Merrill Lynch, Pierce, Fenner & Smith Inc., P.O.
Box 45286, Jacksonville, Florida 32232-5622, owned 17.73% of the shares and
Illinois Trust Company, for the benefit of Cook County Employees Annuity and
Benefit Fund, 209 W. Jackson Blvd., Chicago, Illinois 60606- 6905, owned 9.81%
of the shares. With respect to the Class B shares of the Fund, Prudential
Securities Inc., 108 Gardiner Street, Lynn, Massachusetts 01905-1717, owned
6.04% of the shares; Prudential Securities Inc., 6 Los Gatos Blvd., Los Gatos,
California 95032-6120, owned 7.78% of the shares; Prudential Securities Inc., 3
Beverly Road, Commack, New York 11725-1701, owned 32.68% of the shares;
Donaldson Lufkin Jurrette Securities Corporation Inc., P.O. Box 2052, Jersey
City, New Jersey 07303-2052, owned 13.46% of the shares; and Stephen J. Beny and
Laurie Beny, 10855 E. Mission Lane, Scottsdale, Arizona 85259-5946, owned 5.83%
of the shares. With respect to the Class M shares, Investors Fiduciary Trust
Company ("IFTC") as custodian, 7743 Davis Circle, Omaha, Nebraska 68134, owned
29.41% of the shares, and IFTC, as Custodian, 3611 36th Street, Lubbock, Texas
79413-2237, owned 66.47% of the shares.

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<PAGE>

INVESTMENT MANAGEMENT

Investment management and administrative services are provided to the Fund by
the Investment Manager, pursuant to an Investment Management Agreement (the
"Agreement") dated April 7, 1995. Pursuant to the Agreement, the Investment
Manager furnishes the Fund with investment advice and investment management and
administrative services with respect to the Fund's assets, including the making
of specific recommendations as to the purchase and sale of portfolio securities,
furnishes office space and most personnel needed by the Fund, and in general
superintends and manages the Fund's investments subject to the ultimate
supervision and direction of the Fund's Board of Directors.

As compensation for the foregoing services, the Investment Manager is paid

monthly a fee equal to 0.50% per annum of the average daily net assets of the
Fund on the first $500 million of net assets. The annual rate is reduced to
0.45% on net assets from $500 million to $1 billion and to 0.40% on net assets
in excess of $1 billion. Pursuant to the terms of the Investment Management
Agreement, the Investment Manager will reimburse the Fund to the extent that the
gross operating costs and expenses of that Fund, excluding any interest, taxes,
brokerage commissions, amortization of organizational expenses, extraordinary
expenses, and distribution (Rule 12b-1) fees on Class B and Class M shares in
excess of an annual rate of .25% of the average daily net assets of these
classes, exceed 1.50% of the Fund's average daily net asset value for the first
$40 million of net assets and 1.00% of average daily net assets in excess of $40
million for any one fiscal year. This reimbursement policy cannot be changed
unless the agreement is amended, which would require shareholder approval.

The Fund pays its own operating expenses, which are not assumed by the
Investment Manager, including the fees of its custodian, transfer and
shareholder servicing agent; cost of pricing and calculating its daily net asset
value and of maintaining its books of account required by the 1940 Act;
expenditures in connection with meetings of the Fund's Directors and
shareholders, except those called to accommodate the Investment Manager; fees
and expenses of Directors who are not affiliated with or interested persons of
the Investment Manager; salaries of personnel of the Investment Manager involved
in placing orders for the execution of the Fund's portfolio transactions,
shareholder servicing and in maintaining registration of Fund shares under state
securities laws; insurance premiums on property or personnel of the Fund that
inure to its benefit; costs of preparing and printing reports, proxy statements
and prospectuses of the Fund for distribution to its shareholders; legal
auditing and accounting fees; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under Federal
and applicable state securities laws; and all other expenses in connection with
the issuance, registration and transfer of its shares. Under the Agreement, the
Fund is required to pay for the salaries of any officers employed directly by
the Fund. However, no such officers have ever been employed by the Fund nor is
it the current intention of the Fund to employ any such officers.

The Investment Manager will reduce its aggregate fees for any fiscal year, or
reimburse the Fund, to the extent required so that the Fund's expenses do not
exceed the expense limitations applicable to the Fund under the securities laws
or regulations of those states or jurisdictions in which the Fund's shares are
registered or qualified for sale. Currently, the most restrictive of such
expense limitations would require the Investment Manager to reduce its
respective fees, or to reimburse the Fund, to the extent required so that the
Fund's expenses, as described above, for any fiscal year do not exceed 2.50% of
the first $30 million of the Fund's average daily net assets, 2.00% of the next
$70 million of the Fund's average net assets and 1.50% of the Fund's remaining
average net assets. Expenses for purposes of this expense limitation include the
management fee, but exclude distribution expenses, brokerage commissions and
fees, taxes, interest and extraordinary expenses such as litigation, paid or
incurred by the Fund. In addition, the Fund has been granted a variance that
permits it to exclude certain shareholder servicing expenses from this
limitation. The Fund's expense limitation may change to reflect changes in the
expense limitations of the state having the most restrictive limitation in which

shares of the fund are registered for sale. For the fiscal year ended June 30,
1996, and the fiscal period April 7, 1995 to June 30, 1995, the Fund paid
management fees to the current Investment Manager of approximately $208,689 and
$50,647, respectively. For the fiscal period July 1, 1994 to April 7, 1995 and
the fiscal year ended June 30, 1994, the Fund paid management fees to the former
manager of approximately $196,785 and $379,900, respectively. During the period
of April 7, 1995 to June 30, 1995, the Fund made no reimbursements to the
current Investment Manager for the costs of personnel involved with
recordkeeping and daily net asset value calculations, portfolio trading,
shareholder servicing, and state securities regulation and compliance. During
the period of July 1, 1994 to April 7, 1995 and the fiscal year ended June 30,
1994, the Fund reimbursed the former manager approximately $2,195

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<PAGE>

and $3,000, respectively, for the costs of personnel involved with recordkeeping
and daily net asset value calculations, portfolio trading, shareholder
servicing, and state securities regulation and compliance.

The Agreement will continue in effect for an initial period of two years and
thereafter from year to year so long as such continuation is approved at least
annually by (1) the Board of Directors or the vote of a majority of the
outstanding voting securities of the Fund, and (2) a majority of the Directors
of the Fund who are not interested persons of any party to the Agreement, cast
in person at a meeting called for the purpose of voting on such approval. The
Agreement may be terminated at any time, without penalty, by either the Fund or
the Investment Manager upon sixty (60) days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.

The use of the name "Pilgrim" in the Fund's name is pursuant to a license
granted by the Investment Manager, and in the event the Agreement is terminated,
the Fund has agreed to amend its corporate name to remove the reference to
"Pilgrim".

DISTRIBUTOR

Shares of the Fund are distributed by Pilgrim America Securities, Inc. (the
"Distributor") pursuant to a Distribution Agreement between the Fund and the
Distributor. The Distribution Agreement requires the Distributor to use its best
efforts on a continuing basis to solicit purchases of shares of the Fund. The
Fund and the Distributor have agreed to indemnify each other against certain
liabilities. At the discretion of the Distributor, all sales charges may at
times be reallowed to an authorized dealer ("Authorized Dealer"). The
Distribution Agreement will remain in effect for two years and from year to year
thereafter only if its continuance is approved annually by a majority of the
Board of Directors who are not parties to such agreement or "interested persons"
of any such party and must be approved either by votes of a majority of the
Directors or a majority of the outstanding voting securities of the Fund. See

the Prospectus of the Fund for information on how to purchase and sell shares of
the Fund, and the charges and expenses associated with an investment.

For the fiscal years ended June 30, 1994, 1995 and 1996, total commissions
allowed to other dealers under the Fund's underwriting arrangements were
approximately $20,000, $4,010, and $128,009, respectively. For the fiscal year
ended June 30, 1996, and the fiscal period April 7, 1995 to June 30, 1995, the
current Distributor retained approximately $56 and $324 or approximately 0.04%
and 7.05%, respectively, of the total commissions assessed on shares of the
Fund. For the period July 1, 1994 to April 7, 1995 and the fiscal year ended
June 30, 1994, the former distributor retained approximately $512 and $5,200, or
approximately 11.15% and 20.6%, respectively, of the total commissions assessed
on purchases of the Fund. The sales commissions allowed by the Distributor to
selling dealers on the sale of new Fund shares are not an expense of the Fund
and have no effect on the Fund's net asset value.

PILGRIM AMERICA GROUP

The Investment Manager and the Distributor are wholly-owned subsidiaries of
Pilgrim America Group, a Delaware corporation, which in turn is a wholly-owned
subsidiary of Express America Holdings Corporation ("Express America"), a
Delaware corporation the shares of which are traded on the NASDAQ National
Market System. Express America is a holding company that through its
subsidiaries engages in the financial services business, focusing primarily on
the business of providing investment advisory, administrative and distribution
services to mutual funds and closed-end investment companies. The Investment
Manager also acts as the investment manager to Pilgrim America Masters Series,
Inc., Pilgrim America MagnaCap Fund, Pilgrim America High Yield Fund, open-end
investment companies, and to Pilgrim America Bank and Thrift Fund, Inc. and
Pilgrim America Prime Rate Trust, closed-end investment companies. As of June
30, 1996, total assets under management in the Pilgrim America Group were
approximately $1.5 billion.

- 13 -
<PAGE>

On May 16, 1991, Express America Acquired a now discontinued mortgage banking
operation from the Resolution Trust Corporation ("RTC") following a competitive
bidding process. On December 8, 1995, the RTC filed a complaint in the United
States District Court of Arizona against Express America, its Chief Executive
Officer, who is also Chairman and an officer of the Trust, its Chief Financial
Officer, who is also an officer of the Trust, and others, including Smith
Barney, Harris Upham & Co., Incorporated and Rauscher Pierce Refsnes, Inc. The
RTC's complaint alleges various irregularities in the bidding process and the
closing of the acquisition. The RTC has asked for at least $20 million in actual
damages and at least $60 million in punitive damages from all defendants.

Express America and the officers have advised the Trust that they believe they
have meritorious defenses to the claims brought by the RTC, and that the
litigation is unlikely to have a material adverse effect on the operations of
the Investment Manager.

DISTRIBUTION PLAN

The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). The Fund
intends to operate the Rule 12b-1 Plan in accordance with its terms and the
National Association of Securities Dealers, Inc. ("NASD") rules concerning sales
charges. Under the Rule 12b-1 Plan, the Distributor may be entitled to payment
each month in connection with the offering, sale, and shareholder servicing of
Class A, Class B, and Class M shares in amounts not to exceed the following:
with respect to Class A shares at an annual rate of up to 0.35% of the average
daily net assets of the Class A shares of the Fund; with respect to Class B
shares at an annual rate of up to 1.00% of the average daily net assets of the
Class B shares of the Fund; and with respect to Class M shares at an annual rate
of up to 1.00% of the average daily net assets of the Class M shares of the
Fund. The Board of Directors has approved under the Rule 12b-1 Plan payments of
the following amounts to the Distributor will be made each month in connection
with the offering, sale, and shareholder servicing of Class A, Class B, and
Class M shares as follows: (i) with respect to Class A shares at an annual rate
equal to 0.25% of the average daily net assets of the Class A shares of the
Fund; (ii) with respect to Class B shares at an annual rate equal to 1.00% of
the average daily net assets of the Class B shares of the Fund; and (iii) with
respect to Class M shares at an annual rate equal to 0.75% of the average daily
net assets of the Class M shares of the Fund. Of these amounts, fees equal to an
annual rate of 0.25% of the average daily net assets of the Fund are for
shareholder servicing for each of the classes.

Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for both distribution and shareholder servicing at the annual
rate of 0.25%, 0.25%, and 0.40% of the Fund's average daily net assets of Class
A, Class B, and Class M shares, respectively, that are registered in the name of
that Authorized Dealer as nominee or held in a shareholder account that
designates that Authorized Dealer as the dealer of record. Rights to these
ongoing payments begin to accrue in the 13th month following a purchase of Class
A or B shares and in the 1st month following a purchase of Class M shares. These
fees may be used to cover the expenses of the Distributor primarily intended to
result in the sale of Class A, Class B, and Class M shares of the Fund,
including payments to Authorized Dealers for selling shares of the Fund and for
servicing shareholders of these classes of the Fund. Activities for which these
fees may be used include: preparation and distribution of advertising materials
and sales literature; expenses of organizing and conducting sales seminars;
overhead of the Distributor; printing of prospectuses and statements of
additional information (and supplements thereto) and reports for other than
existing shareholders; payments to dealers and others that provide shareholder
services; and costs of administering the Rule 12b-1 Plan.

In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of the Fund to make payments to the Distributor pursuant to the Rule
12b-1 Plan will cease and the Fund will not be required to make any payments for
expenses incurred after the date the Plan terminates. The Distributor will be
reimbursed for its actual expenses incurred under the Rule 12b-1 Plan with
respect to the Class A shares. With respect to the Class B shares and Class M
shares, the Distributor will receive payment without regard to actual
distribution expenses it incurs.

In addition to providing for the expenses discussed above, the Rule 12b-1 Plan
also recognizes that the Investment Manager and/or the Distributor may use their
resources to pay expenses associated with activities primarily intended to
result in the

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<PAGE>

promotion and distribution of the Fund's shares and other funds managed by the
Investment Manager. In some instances, additional compensation or promotional
incentives may be offered to dealers that have sold or may sell significant
amounts of shares during specified periods of time. Such compensation and
incentives may include, but are not limited to, cash, merchandise, trips and
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited sales personnel, payment for
travel expenses (including meals and lodging) incurred by sales personnel and
members of their families, or other invited guests, to various locations for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding the Fund or other funds managed by the Investment
Manager and/or other events sponsored by dealers.

The Rule 12b-1 Plan has been approved by the Board of Directors, including all
the Directors who are not interested persons of the Fund as defined in the 1940
Act, and by the Fund's shareholders. Each Rule 12b-1 Plan must be renewed
annually by the Board of Directors, including a majority of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such Directors be committed to the Directors who are not
interested persons. The Rule 12b-1 Plan and any distribution or service
agreement may be terminated as to a Fund at any time, without any penalty, by
such Directors or by a vote of a majority of the Fund's outstanding shares on 60
days' written notice. The Distributor or any Authorized Dealer may also
terminate its respective distribution or service agreement at any time upon
written notice.

In approving each Rule 12b-1 Plan, the Board of Directors has determined that
differing distribution arrangements in connection with the sale of new shares of

the Fund is necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Directors, including those
Directors who are not interested persons of the Fund, concluded that, in the
exercise of their reasonable business judgment and in light of their fiduciary
duties, there is a reasonable likelihood that the Rule 12b-1 Plan, as tailored
to each class of the Fund, will benefit the Fund and the shareholders.

Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of the Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement to its
sharesholders shall be approved by the Directors who are not interested persons
of the Fund, cast in person at a meeting called for the purpose of voting on any
such amendment.

The Distributor is required to report in writing to the Board of Directors at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably
requested in connection with the payments made under the Rule 12b-1 Plan in
order to enable the Board to make an informed determination of whether the Rule
12b-1 Plan should be continued.

Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of the Fund's Class A shares for the fiscal year
ended June 30, 1996 were $513,842, including expenses for: advertising -
$19,453; salaries and commissions - $293,163; printing, postage, and handling -
$68,968; brokers' servicing fees - $93,611; and miscellaneous and other
promotional activities - $38,647. Total distribution expenses incurred by the
Distributor for the costs of promotion and distribution of the Fund's Class B
shares for the fiscal year ended June 30, 1996 were $1,445, including expenses
for: advertising -- $64; salaries and commissions -- $753; printing, postage,
and handling -- $226; brokers' servicing fees -- $220; and miscellaneous and
other promotional activities -- $182. Total distribution expenses incurred by
the Distributor for the costs of promotion and distribution of the Fund's Class
M shares for the fiscal year ended June 30, 1996 were $0. Of the total amount
incurred by the Distributor during the last year, $210,257 was for the costs of
personnel of the Distributor and its affiliates involved in the promotion and
distribution of the Fund's shares.

Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no

- 15 -

<PAGE>

longer be able to avail themselves of any automatic investment or other service
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.

EXECUTION OF PORTFOLIO TRANSACTIONS

In all purchases and sales of securities for the portfolio of the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Investment Manager determines, subject
to the instructions of and review by the Board of Directors of the Fund, which
securities are to be purchased and sold by the Fund and which brokers or dealers
are to be eligible to execute its portfolio transactions.

In placing portfolio transactions, the Fund will use its best efforts to choose
a broker or dealer capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services available will be considered in making these determinations, such as
the size of the order, the difficulty of execution, the operational facilities
of the firm involved, the firm's risk in positioning a block of securities, and
other factors. In those instances where it is reasonably determined that more
than one broker or dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
brokers or dealers that supply research and statistical information to the Fund
and/or the Investment Manager, and provide other services in addition to
execution services. The Investment Manager considers such information, which is
in addition to and not in lieu of the services required to be performed by the
Investment Manager under its Agreement with the Fund, to be useful in varying
degrees but of indeterminable value. In selecting a broker or dealer, the
Investment Manager may also take into consideration the sale of the Fund's
shares.

Purchases of portfolio securities also may be made directly from issuers or from
underwriters. Where possible, purchase and sale transactions will be effected
through dealers (including banks) that specialize in the types of securities
that the Fund will be holding, unless better executions are available elsewhere.
Dealers and underwriters usually act as principal for their own account.
Purchases from underwriters will include a concession paid by the issuer to the
underwriter and purchases from dealers will include the spread between the bid
and the asked price. If the execution and price offered by more than one dealer
or underwriter are comparable, the order may be allocated to a dealer or
underwriter that has provided such research or other services as mentioned
above.

The Fund does not intend to effect any transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with the Investment
Manager, except for any sales of portfolio securities that may legally be made
pursuant to a tender offer, in which event the Investment Manager will offset
against its management fee a part of any tender fees that may be legally
received and retained by an affiliated broker-dealer.

Investment decisions for the Fund are made independently from those of other

funds in the Pilgrim America Group. Nevertheless, it is possible, that at times
identical securities will be acceptable for more than one of such funds.
However, in such event the position of each fund in the same issuer may vary and
the length of time that each fund may choose to hold its investment in the same
issuer may likewise vary. To the extent any of these funds seek to acquire the
same security at the same time, one or more of the funds may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price for such security. Similarly, if any of such funds simultaneously
purchases or sells the same security, each day's transaction in such security
will be averaged as to price and allocated between such funds. It is recognized
that in some cases this system could have a detrimental effect on the price or
value of the security insofar as the Fund is concerned.

A broker or dealer utilized by the Investment Manager may furnish statistical,
research and other information or services that are deemed by the Investment
Manager to be beneficial to a Fund's investment programs. Research services
received from brokers supplement the Investment Manager's own research, and may
include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities, markets,
specific industry groups and individual companies; information on political
developments; portfolio management strategies; performance information on
securities and information concerning prices of securities; and information
supplied by specialized services to the Investment Manager and to the Fund's
Board Members with

- 16 -
<PAGE>

respect to the performance, investment activities and fees and expenses of other
mutual funds. Such information may be communicated electronically, orally or in
written form. Research services may also include providing equipment used to
communicate research information, arranging meetings with management of
companies and providing access to consultants who supply research information.

The outside research assistance is useful to the Investment Manager since the
brokers utilized by the Investment Manager as a group tend to follow a broader
universe of securities and other matters than the Investment Manager's staff can
follow. In addition, this research provides the Investment Manager with a
diverse perspective on financial markets. Research services that are provided to
the Investment Manager by brokers are available for the benefit of all accounts
managed or advised by the Investment Manager. In some cases, the research
services are available only from the broker providing such services. In other
cases, the research services may be obtainable from alternative sources in
return for cash payments. The Investment Manager is of the opinion that because
the broker research supplements, rather than replaces, its research, the receipt
of such research does not tend to decrease its expenses, but tends to improve
the quality of its investment advice. However, to the extent that the Investment
Manager would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Investment
Manager could be considered to have been reduced accordingly. Certain research
services furnished by brokers or dealers may be useful to the Investment Manager
with respect to clients other than a specific Fund. The Investment Manager is of
the opinion that this material is beneficial in supplementing the Investment

Manager's research and analysis; and, therefore, it may benefit a Fund by
improving the quality of the investment advice. The advisory fees paid by a Fund
are not reduced because the Investment Manager receives such services.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares of the Fund are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Fund's
transfer agent, Investors Fiduciary Trust Company ("Transfer Agent"), plus, for
Class A and Class M shares, a varying sales charge depending upon the class of
shares purchased and the amount of money invested, as set forth in the
Prospectus. The Distributor may, from time to time, at its discretion, allow the
selling dealer to retain 100% of such sales charge, and such dealer may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended. The Distributor, at its expense, may also provide additional
promotional incentives to dealers in connection with sales of shares of the Fund
and other funds managed by the Investment Manager. In some instances, such
incentives may be made available only to dealers whose representatives have sold
or are expected to sell significant amounts of such shares. The incentives may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by qualifying registered representatives and members of their
families to locations within or outside of the United States, merchandise or
other items. Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of any state.

Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.

Special Purchases at Net Asset Value

Class A or Class M shares of the Fund may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
shares of the Fund (or shares of other funds managed by the Investment Manager
in accordance with the terms of such privileges established for such funds)
within the previous 90 days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption proceeds (or to
the nearest full share if fractional shares are not purchased). In order to
exercise this privilege, a written order for the purchase of shares must be
received by the Transfer Agent, or be postmarked, within 90 days after the date
of redemption. This privilege may only

- 17 -

<PAGE>

be used once per calendar year. Payment must accompany the request and the
purchase will be made at the then current net asset value of the Fund. Such
purchases may also be handled by a securities dealer who may charge a
shareholder for this service. If the shareholder has realized a gain on the
redemption, the transaction is taxable and any reinvestment will not alter any
applicable Federal capital gains tax. If there has been a loss on the redemption
and a subsequent reinvestment pursuant to this privilege, some or all of the
loss may not be allowed as a tax deduction depending upon the amount reinvested,
although such disallowance is added to the tax basis of the shares acquired upon
the reinvestment.

Class A or M shares may also be purchased at net asset value by any person who
can document that Fund shares were purchased with proceeds from the redemption
(within the previous 90 days) of shares from any unrelated mutual fund on which
a sales charge was paid or which were subject, at any time, to a contingent
deferred sales change.

Class A or Class M shares of the Fund may also be purchased at net asset value
by any charitable organization or any state, county, or city, or any
instrumentality, department, authority or agency thereof that has determined
that the Fund is a legally permissible investment and that is prohibited by
applicable investment law from paying a sales charge or commission in connection
with the purchase of shares of any registered management investment company (an
"eligible authority"). If an investment by an eligible authority at net asset
value is made though a dealer who has executed a selling group agreement with
respect to the Fund (or the other funds in the Pilgrim America Group), the
Distributor may pay the selling firm 0.25% of the amount invested.

Shareholders of Pilgrim America General Money Market Shares who acquired their
shares by using all or a portion of the proceeds from the redemption of Class A
or Class M shares of the Fund or other funds in the Pilgrim America Group may
reinvest such amount plus any shares acquired through dividend reinvestment in
Class A or Class M shares of the Fund at its current net asset value, without a
sales charge.

Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers or affiliated corporations thereof or any trust,
pension, profit-sharing or other benefit plan for such persons, broker-dealers,
for their own accounts or for members of their families (defined as current
spouse, children, parents, grandparents, uncles, aunts, siblings, nephews,
nieces, step-relations, relations at-law, and cousins) employees of such
broker-dealers (including their immediate families) and discretionary advisory
accounts of the Investment Manager may purchase Class A or Class M shares of the
Fund at net asset value without a sales charge. Such purchaser may be required
to sign a letter stating that the purchase is for his own investment purposes
only and that the securities will not be resold except to the Fund. The Fund
may, under certain circumstances, allow registered investment advisers to make
investments on behalf of their clients at net asset value without any commission

or concession.

Class A or M shares may also be purchased at net asset value by certain fee
based registered investment advisers, trust companies and bank trust departments
under certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another Participating Fund or from Pilgrim America Prime Rate
Trust.

Letters of Intent and Rights of Accumulation

An investor may immediately qualify for a reduced sales charge on a purchase of
Class A or Class M shares of the Fund or any fund in the Pilgrim America Group
which offers Class A shares, Class M shares or shares with front-end sales
charges, by completing the Letter of Intent section of the Shareholder
Application in the Prospectus (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for
the reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one Fund in the Pilgrim America
Group will be effective only after notification to the Distributor that the
investment qualifies for a discount. The shareholder's holdings in the
Investment Manager's funds

- 18 -
<PAGE>

(excluding Pilgrim America General Money Market Shares) acquired within 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
of sales charge until the Letter of Intent is fulfilled. Any redemptions made by
the shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less redemption)
during the period.

An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application in the Prospectus. A
minimum initial investment equal to 25% of the intended total investment is
required. An amount equal to 5.75% of the total intended purchase will be held
in escrow, in the form of shares, in the investor's name to assure that the full

applicable sales charge will be paid if the intended purchase is not completed.
The shares in escrow at the Pilgrim America Group will be included in the total
shares owned as reflected on the monthly statement; income and capital gain
distributions on the escrow shares will be paid directly to the investor. The
escrow shares will not be available for redemption by the investor until the
Letter of Intent has been completed, or the higher sales charge paid. If the
total purchases, less redemptions, equal the amount specified under the Letter,
the shares in escrow will be released. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by the Distributor and the dealer with whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before, and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the applicable offering price. If the total purchases, less
redemptions, are less than the amount specified under the Letter, the investor
will remit to the Distributor an amount equal to the difference in dollar amount
of sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single account in the name of the investor or to the investor's order. If
within 10 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of shares in escrow to realize
such difference will be made. If the proceeds from a total redemption are
inadequate, the investor will be liable to the Distributor for the difference.
In the event of a total redemption of the account prior to fulfillment of the
Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor. By
completing the Letter of Intent section of the Shareholder Application, an
investor grants to the Distributor a security interest in the shares in escrow
and agrees to irrevocably appoint the Distributor as his attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due and authorizes the Transfer
Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as
directed by the Distributor. The investor or the securities dealer must inform
the Transfer Agent or the Distributor that this Letter is in effect each time a
purchase is made.

If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.

The value of shares of the Fund plus shares of the other funds distributed by
the Distributor (excluding Pilgrim America General Money Market Shares) can be
combined with a current purchase to determine the reduced sales charge and

applicable offering price of the current purchase. The reduced sales charge
applies to quantity purchases made at one time or on a cumulative basis over any
period of time by (i) an investor, (ii) the investor's spouse and children under
the age of majority, (iii) the investor's custodian accounts for the benefit of
a child under the Uniform Gifts to Minors Act, (iv) a trustee or other fiduciary
of a single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies, registered investment advisers, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.

The reduced sales charge also applies on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.

Shares of the Fund and other funds of the Pilgrim America Group (excluding
Pilgrim America General Money Market Shares) purchased and owned of record or
beneficially by a corporation, including employees of a single employer (or
affiliates thereof) including shares held by its employees, under one or more
retirement plans, can be combined with a current purchase to determine the
reduced sales charge and applicable offering price of the current purchase,
provided such transactions are not prohibited by one or more provisions of the
Employee Retirement Income Security Act or the Internal Revenue Code.
Individuals and employees should consult with their tax advisors concerning the
tax rules applicable to retirement plans before investing.

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<PAGE>

Redemptions

Payment to shareholders for shares redeemed will be made within three days after
receipt by the Fund's Transfer Agent of the written request in proper form,
except that the Fund may suspend the right of redemption or postpone the date of
payment as to the Fund during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
(the "Commission") or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the Commission making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the Commission may
permit for the protection of the Fund's shareholders. At various times, the Fund
may be requested to redeem shares for which it has not yet received good
payment. Accordingly, the Fund may delay the mailing of a redemption check until
such time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.

The Fund intends to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise the Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In

the event the Fund must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount equivalent to the
pro-rated cost of such liquidation not to exceed one percent of the net asset
value of such shares.

Due to the relatively high cost of handling small investments, the Fund reserves
the right, upon 30 days' written notice, to redeem, at net asset value (less any
applicable deferred sales charge), the shares of any shareholder whose account
has a value of less than $1,000 in the Fund, other than as a result of a decline
in the net asset value per share. Before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount that will
increase the value of the account to at least $1,000 before the redemption is
processed. This policy will not be implemented where the Fund has previously
waived the minimum investment requirements.

The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the portfolio securities at
the time of redemption or repurchase.

Conversion of Class B Shares

A shareholder's Class B shares will automatically convert to Class A shares in
the Fund on the first business day of the month in which the eighth anniversary
of the issuance of the Class B shares occurs, together with a pro rata portion
of all Class B shares representing dividends and other distributions paid in
additional Class B shares. The conversion of Class B shares into Class A shares
is subject to the continuing availability of an opinion of counsel or an
Internal Revenue Service ("IRS") ruling to the effect that (1) such conversion
will not constitute taxable events for federal tax purposes; and (2) the payment
of different dividends on Class A and Class B shares does not result in the
Fund's dividends or distributions constituting "preferential dividends" under
the Internal Revenue Code of 1986. The Class B shares so converted will no
longer be subject to the higher expenses borne by Class B shares. The conversion
will be effected at the relative net asset values per share of the two Classes.

DETERMINATION OF SHARE PRICE

As noted in the Prospectus, the net asset value and offering price of the Fund's
shares will be determined once daily as of the close of trading on the New York
Stock Exchange (4:00 p.m. New York time) during each day on which that Exchange
is open for trading. As of the date of this Statement of Additional Information,
the New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

- 20 -
<PAGE>

Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last

reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market. The mortgage
securities held in the Fund's portfolio will be valued at the mean between the
most recent bid and asked prices as obtained from one or more dealers that make
markets in the securities when over-the counter market quotations are readily
available. Securities for which quotations are not readily available and all
other assets will be valued at their respective fair values as determined in
good faith by or under the direction of the Board of Directors of the Fund. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation.

In computing the Fund's net asset value, all liabilities incurred or accrued are
deducted from the Fund's total assets. The resulting net assets are divided by
the number of shares of the Fund outstanding at the time of the valuation and
the result (adjusted to the nearest cent) is the net asset value per share.

The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting daily
expense accruals of the higher distribution fees applicable to Class B and Class
M shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.

Orders received by dealers prior to the close of trading on the New York Stock
Exchange will be confirmed at the offering price computed as of the close of
trading on that Exchange provided the order is received by the Distributor prior
to its close of business that same day (normally 4:00 P.M. Pacific time). It is
the responsibility of the dealer to insure that all orders are transmitted
timely to the Fund. Orders received by dealers after the close of trading on the
New York Stock Exchange will be confirmed at the next computed offering price as
described in the Prospectus.

SHAREHOLDER SERVICES AND PRIVILEGES

As discussed in the Prospectus, the Fund provides a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of the Fund
on a regular basis. Such a Program may be started with an initial investment
($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no
obligation to continue. The Program may be terminated without penalty at any
time by the investor or the Fund. The minimum investment requirements may be
waived by the Fund for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.

For investors purchasing shares of the Fund under a tax-qualified individual
retirement or pension plan or under a group plan through a person designated for
the collection and remittance of monies to be invested in shares of the Fund on

a periodic basis, the Fund may, in lieu of furnishing confirmations following
each purchase of Fund shares, send statements no less frequently than quarterly
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
and the rules thereunder. Such quarterly statements, which would be sent to the
investor or to the person designated by the group for distribution to its
members, will be made within five business days after the end of each quarterly
period and shall reflect all transactions in the investor's account during the
preceding quarter.

All shareholders will receive a confirmation of each new transaction in their
accounts, which will also show the total number of Fund shares owned by each
shareholder, the number of shares being held in safekeeping by the Fund's
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of the Fund will not be issued
unless the shareholder requests them in writing.

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<PAGE>

Self-Employed and Corporate Retirement Plans

For self-employed individuals and corporate investors that wish to purchase
shares of the Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Fund.) The annual contract maintenance charge may
be waived from time to time. For further details, including the right to appoint
a successor Custodian, see the Plan and Custody Agreements as provided by the
Fund. Employers who wish to use shares of the Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.

Individual Retirement Accounts

Investors having earned income are eligible to purchase shares of the Fund under
an Individual Retirement Account ("IRA") pursuant to Section 408(a) of the
Internal Revenue Code. An individual who creates an IRA may contribute annually
certain dollar amounts of earned income, and an additional amount if there is a
non-working spouse. Copies of a model Custodial Account Agreement are available
from the Distributor. Investors Fiduciary Trust Company, Kansas City, Missouri,
will act as the Custodian under this model Agreement, for which it will charge
the investor an annual fee of $12.00 for maintaining the Account (such fee is in
addition to the normal custodial charges paid by the Fund). Full details on the
IRA are contained in an Internal Revenue Service required disclosure statement,
and the Custodian will not open an IRA until seven (7) days after the investor
has received such statement from the Fund. An IRA using shares of the Fund may
also be used by employers who have adopted a Simplified Employee Pension Plan.

Purchases of Fund shares by Section 403(b) and other retirement plans are also

available. Section 403(b) plans are arrangements by a public school organization
or a charitable, educational, or scientific organization that is described in
Section 501(c)(3) of the Internal Revenue Code under which employees are
permitted to take advantage of the federal income tax deferral benefits provided
for in Section 403(b) of the Code.

It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant.

Telephone Redemption and Exchange Privileges

As discussed in the Prospectus, the telephone redemption and exchange
privileges are available for all shareholder accounts; however,
retirement accounts may not utilize the telephone redemption privilege.
The telephone privileges may be modified or terminated at any time. The
privileges are subject to the conditions and provisions set forth below
and in the Prospectus.

1. Telephone redemption and/or exchange instructions received in
good order before the pricing of a Fund on any day on which the New
York Stock Exchange is open for business (a "Business Day"), but
not later than 4:00 p.m. eastern time, will be processed at that
day's closing net asset value. For each exchange, the shareholder's
account may be charged an exchange fee. There is no fee for
telephone redemption; however, redemptions of Class A and Class B
shares may be subject to a contingent deferred sales charge (See
"Redemption of Shares" in the Prospectus).

2. Telephone redemption and/or exchange instructions should be
made by dialing 1-800-992-0180.

3. Pilgrim America Group will not permit exchanges in violation
of any of the terms and conditions set forth in the Funds'
Prospectus or herein.

4. Telephone redemption requests must meet the following
conditions to be accepted by Pilgrim America Group:

(a) Proceeds of the redemption may be directly deposited into
a predetermined bank account, or mailed to the current address
on the registration. This address cannot reflect any change
within the previous sixty (60) days.

(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.

(c) Only one telephone redemption (where proceeds are being
mailed to the address of record) can be processed with in a 30
day period.

(d) The maximum amount which can be liquidated and sent to
the address of record at any one time is $50,000.

(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.

5. If the exchange involves the establishment of a new account,
the dollar amount being exchanged must at least equal the minimum
investment requirement of the Pilgrim America Fund being acquired.

6. Any new account established through the exchange privilege will
have the same account information and options except as stated in
the Prospectus.

7. Certificated shares cannot be redeemed or exchanged by
telephone but must be forwarded to Pilgrim America and deposited
into your account before any transaction may be processed.

8. If a portion of the shares to be exchanged are held in escrow
in connection with a Letter of Intent, the smallest number of full
shares of the Pilgrim America Fund to be purchased on the exchange
having the same aggregate net asset value as the shares being
exchanged shall be substituted in the escrow account. Shares held
in escrow may not be redeemed until the Letter of Intent has
expired and/or the appropriate adjustments have been made to the
account.

9. Shares may not be exchanged and/or redeemed unless an exchange
and/or redemption privilege is offered pursuant to the Funds'
then-current prospectus.

10. Proceeds of a redemption may be delayed up to 15 days or longer
until the check used to purchase the shares being redeemed has been
paid by the bank upon which it was drawn.

DISTRIBUTIONS

The policy of the Fund is to pay monthly dividends from its net investment
income. Distributions of any net realized long-term capital gains will be made
annually following its fiscal year ending on June 30.

The Fund's shareholders have the privilege of reinvesting both ordinary income
dividends and capital gain dividends, if any, in additional full or fractional
shares of the same class at the then current net asset value without a sales
charge. The Fund's management believes that most investors desire to take
advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Fund automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of the Fund is made
upon the condition and understanding that the Transfer Agent is automatically
appointed to receive the dividends and distributions upon all shares in the

shareholder's account and to reinvest them in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the
reinvestment date. A shareholder may still at any time after a purchase of Fund
shares request that dividends and/or capital gains distributions be paid to him
in cash.

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<PAGE>

TAX CONSIDERATIONS

The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in the Fund.

The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must,
among other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loaned, gains from the sale or
other disposition of stock or securities and gains from the sale or other
disposition of foreign currencies, or other income (including gains from
options, futures contracts and forward contracts) derived with respect to the
Fund's business of investing in stocks, securities or currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of the
following assets held for less than three months: (i) stock and securities, (ii)
options, futures and forward contracts (other than options, futures and forward
contracts on foreign currencies), and (iii) foreign currencies (and options,
futures and forward contracts on foreign currencies) which are not directly
related to the Fund's principal business of investing in stocks and securities
(or options and futures with respect to stock or securities); (c) diversify its
holdings so that, at the end of each quarter, (i) at least 50% of the value of
the Fund's total assets is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets in invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer or of any two or more issuers
that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses; and (d) distribute at least 90% of
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) each taxable year.

The status of the Fund as a regulated investment company does not involve
government supervision of management or of their investment practices, or
policies. As a regulated investment company, the Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes as
dividends to its shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a

nondeductible 4% excise tax. To prevent application of the excise tax, the Fund
intends to make distributions in accordance with the calendar year distribution
requirement.

Distributions

Dividends of investment company taxable income (including net short-term capital
gains) are taxable to shareholders as ordinary income. Distributions of
investment company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to the Fund's dividend
income from U.S. corporations and if other applicable requirements are met.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends are taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been hold by a shareholder, and are not eligible for the dividends-received
deduction. Generally, dividends and distributions are taxable to shareholders,
whether received in cash or reinvested in shares of the Fund. Any distributions
that are not from the Fund's investment company taxable income or net capital
gain may be characterized as a return of capital

- 23 -
<PAGE>

to shareholders or in some cases, as capital gain. Shareholders will be notified
annually as to the federal tax status of dividends and distributions they
receive and any tax withheld thereon.

Dividends, including capital gain dividends, declared in October, November or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.

Distributions by the Fund reduce the net asset value of the Fund shares. Should
a distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain an described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by the Fund. The price of shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.

Original Issue Discount/Market Discount

Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount that accrues on a debt
security in a given year generally is treated for federal income tax purposes as

interest and, therefore, such income would be subject to the distribution
requirements of the Code.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.

Sale of Shares

Upon the sale or exchange of his shares, a shareholder will realize a taxable
gain or loss depending upon his basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and generally will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a-period of 61 days beginning 30 days before and ending 30 days after the
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 the sale of the Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions or capital gain dividends received by the
shareholder with respect to such shares.

In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.

- 24 -
<PAGE>

Backup Withholding

The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he in not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.

Other Taxes

Distributions also may be subject to state, local and foreign taxes. Certain
states may exempt from state tax Fund dividends attributable to interest earned
on U.S. Treasury securities. U.S. tax rules applicable to foreign investors may
differ significantly from those outlined above. This discussion does not purport
to deal with all of the tax consequences applicable to shareholders.
Shareholders are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an investment in the Fund.

PERFORMANCE INFORMATION

The Fund may, from time to time, include "total return" or "yield" in
advertisements or reports to shareholders or prospective investors. Quotations
of average annual total return will be expressed in terms of the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5 and 10 years (up to the life of the Fund), calculated pursuant to the
following formula which is prescribed by the Commission:

n
P(1 + T) = ERV

where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period.

All total return figures assume that all dividends are reinvested when paid.

From time to time, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may

be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).

Quotations of yield for the 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:

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<PAGE>

a-b 6
2[( ----- + 1) - 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, and
d = the maximum offering price per
share on the last day of the period.

Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.

The Fund may also from time to time advertise its yield based on a 30-day or
90-day period ended on a date other than the most recent balance sheet included
in the Fund's Registration Statement, computed in accordance with the yield
formula described above, as adjusted to conform with the differing period for
which the yield computation is based.

Any quotation of performance stated in terms of yield (whether based on a 30-day
or 90-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

Additional Performance Quotations

Advertisements of total return will always show a calculation that includes the
effect of the maximum sales charge but may also show total return without giving
effect to that charge. Because these additional quotations will not reflect the
maximum sales charge payable, these performance quotations will be higher than
the performance quotations that reflect the maximum sales charge.

Total returns and yields are based on past results and are not necessarily a
prediction of future performance.

Performance Comparisons

In reports or other communications to shareholders or in advertising material,
the Fund may compare the performance of its Class A, Class B, and Class M shares
with that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc. or similar
independent services that monitor the performance of mutual funds or with other
appropriate indexes of investment securities. In addition, certain indexes may
be used to illustrate

- 26 -
<PAGE>

historic performance of select asset classes. The performance information may
also include evaluations of the Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If the Fund compares its performance to other funds or to
relevant indexes, the Fund's performance will be stated in the same terms in
which such comparative data and indexes are stated, which is normally total
return rather than yield. For these purposes the performance of the Fund, as
well as the performance of such investment companies or indexes, may not reflect
sales charges, which, if reflected, would reduce performance results.

The average annual rate of return of the Class A shares of the Fund for the one,
five, and ten year periods ended June 30, 1996 was -1.60%, 4.60%, and 6.18%,
respectively. The average total return for the Class B and Class M Shares for

the period from commencement of operations (July 17, 1995) through June 30,
1996, was -2.80% and -0.85%, respectively.

GENERAL INFORMATION

The Fund's authorized capital stock consists of 5,000,000,000 shares. All shares
when issued are fully paid, non-assessable, and redeemable. Shares have no
preemptive rights. All shares have equal voting, dividend and liquidation
rights. The Board of Directors may classify or reclassify any unissued shares by
setting or changing in any one or more respects from time to time, prior to the
issuance of such shares, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or qualifications of such
shares.

CUSTODIAN

The cash and securities owned by the Fund are held by Investors Fiduciary Trust
Company, Kansas City, Missouri, as Custodian, which takes no part in the
decisions relating to the purchase or sale of the Fund's portfolio securities.

INDEPENDENT AUDITORS

KPMG Peat Marwick LLP, 725 South Figueroa Street, Los Angeles, California,
90017, acts as independent auditors for the Fund.

LEGAL COUNSEL

Legal matters for the Fund are passed upon by Dechert Price & Rhoads, 1500 K
Street, N.W., Washington, D.C. 20005.

FINANCIAL STATEMENTS

The Financial Statements for the year ended June 30, 1996 are incorporated
herein by reference from the Fund's 1996 Annual Report to Shareholders dated
June 30, 1996. Copies of the Fund's Annual Report may be obtained without charge
by contacting the Fund at Two Renaissance Square, Suite 1200, 40 North Central
Avenue, Phoenix, Arizona 85004, (800) 331-1080.

- 27 -
<PAGE>

PART C
<PAGE>

PART C. OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits

List all financial statements and exhibits filed as part of the Registration

Statement.

(a) Financial Statements:

In Part A:

Financial Highlights.

In Part B:

Financial Statements are incorporated by reference from the Registrant's
Annual Report to Shareholders for the fiscal year ended June 30, 1996
(audited).

In Part C:

None.

(b) Exhibits

Exhibits filed under Registration Statement on Form N-1 and Amendments thereto
filed on Forms N-1 and N-1A are hereby incorporated by reference into this
post-effective amendment.

(10) Opinion of Dechert Price & Rhoads

(11) Consent of Independent Auditors--KPMG Peat Marwick LLP

(27) Financial Data Schedule

ITEM 25. Persons Controlled by or under Common
Control with Registrant

None.

ITEM 26. Number of Holders of Securities

The following information is given as of August 31, 1996:

Title of Class Number of Record Holders
- ----------------------------- ------------------------
Common Stock (no Par Value)
Class A 1,267
Class B 12
Class M 10

ITEM 27. Indemnification

Reference is made to Article VI of the Registrant's By-Laws previously filed as
Exhibit 2 to the Fund's Registration Statement on May 23, 1984.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to Directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission

C-1
<PAGE>

such indemnification is against policy as expressed in the Act and is, therefore
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 a Director, officer or controlling person of the Registrant in the
successful defense of any action, a suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities 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 issue.

ITEM 28. Business and Other Connections of Investment Adviser

The Investment Manager also serves as investment adviser to Pilgrim America
MagnaCap Fund, Pilgrim America High Yield Fund, Pilgrim America Masters Series,
Inc., Pilgrim America Prime Rate Trust and Pilgrim America Bank & Thrift Fund,
Inc. Certain of the officers and directors of the Registrant's investment
adviser also serve as officers and/or directors for other investment companies
in the Pilgrim America Family of Funds and with Pilgrim America Group, Inc. and
its subsidiaries. For additional information, please see Parts A and B.

ITEM 29. Principal Underwriters

(a) Pilgrim America Securities, Inc. is the principal underwriter for the
Registrant.

(b) The following are directors and officers of Pilgrim America
Securities, Inc. The principal address of these persons is Two Renaissance
Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona 85004.

Position and Positions and
Name Officers with Distributor Offices with Registrant
---- ------------------------- -----------------------

Daniel A. Norman...... President and Chairman Senior Vice President
of the Board

James M. Hennessy..... Senior Vice President Senior Vice President
and Secretary and Secretary

James R . Reis........ Director and Executive Vice
Assistant Secretary President

Michael J. Roland..... Senior Vice President and Vice President and
Chief Financial Officer Treasurer

Robert W. Stallings... Director Chairman, Chief
Executive Officer, and
President

C-2
<PAGE>

ITEM 30. Location of Accounts and Records

The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 will be kept by the Registrant or
its Shareholder Servicing Agent.

ITEM 31. Management Services

There are no management-related service contracts not discussed in Parts A and
B.

ITEM 32. Undertakings

Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.

C-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 19 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Phoenix and State of Arizona, on the 29th day of October, 1996.

PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.

/s/ Robert W. Stallings
By: ___________________________________
Robert W. Stallings
Chairman

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.

Signature Title Date
--------- ----- ----

/s/ Robert W. Stallings
__________________________ Chairman, President and Director October 29, 1996
Robert W. Stallings (Principal Executive Officer)

/s/ Michael J. Roland
___________________________ Treasurer and October 29, 1996
Michael J. Roland Principal Accounting Officer

___________________________ Director October 29, 1996
Mary A. Baldwin*

___________________________ Director October 29, 1996
Al Burton*

___________________________ Director October 29, 1996
Bruce S. Foerster*

___________________________ Director October 29, 1996
Jock Patton*

/s/ Robert W. Stallings

* By: _______________________
Robert W. Stallings

Attorney-in-Fact
<PAGE>

EXHIBIT INDEX

Exhibit
- -------

(10) Opinion of Dechert Price & Rhoads

(11) Consent of Independent Auditors -- KPMG Peat Marwick LLP

(27) Financial Data Schedule

LAW OFFICES OF
DECHERT PRICE & RHOADS
1500 K Street, N.W.
Washington, D.C. 20005-1208

Telephone: (202) 626-3300
Fax: (202) 626-3334

October 29, 1996

Pilgrim Government Securities Income Fund, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004

Dear Sirs:

As counsel for Pilgrim Government Securities Income Fund, Inc. (the
"Fund"), we are familiar with the registration of the Fund under the Investment
Company Act of 1940 (File No. 811-4031) and the registration statement relating
to its shares of common stock (the "Shares") under the Securities Act of 1933
(File No. 2-91302). We also have examined such other corporate records,
agreements, documents and instruments as we deemed appropriate.

Based upon the foregoing, it is our opinion that the Shares being
registered pursuant to Post-Effective Amendment No. 19 to the Fund's
Registration Statement will, when sold in accordance with the terms of the
Registration Statement and the prospectus included therein, and delivered by the
Fund against receipt of the net asset value of the Shares, in accordance with
the requirements of applicable law, have been duly and validly authorized,
legally and validly issued, and are fully paid and non-assessable.

We consent to the filing of this opinion in connection with
Post-Effective Amendment No. 19 which is filed on behalf of the Fund pursuant
to Section 24(e) of the Investment Company Act of 1940.

Very truly yours,

/s/ Dechert Price & Rhoads

INDEPENDENT AUDITORS' CONSENT
-----------------------------

The Board of Directors
Pilgrim Government Securities Income Fund, Inc.:

We consent to incorporation by reference in Pilgrim Government Securities Income
Fund, Inc.'s Post-Effective Amendment No. 19 to the Registration Statement
No. 2-91302 filed on Form N-1A under the Securities Act of 1933 and Amendment
No. 19 to the Registration Statement No. 811-4031 filed on Form N-1A under the
Investment Company Act of 1940 of our report dated August 16, 1996, on the
financial statements and financial highlights of the Pilgrim Government
Securities Income Fund, Inc. for the periods indicated therein, which report
has been incorporated by reference into the Statement of Additional Information.

We also consent to the reference to our firm under the heading "Financial
Highlights" in the Prospectus and under the heading "Independent Auditors" in
the Statement of Additional Information.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Los Angeles, California
October 28, 1996

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