SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended                     Commission File Number 0-19799
     September 30, 1997

                             PILGRIM AMERICA CAPITAL
                                   CORPORATION
                  (f/k/a Express America Holdings Corporation)
         Delaware                                       86-0670679
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                             Two Renaissance Square
                          40 North Central, 12th Floor
                             Phoenix, Arizona 85004
                                 (602) 417-8100

                        Securities registered pursuant to
                            Section 12(g) of the Act:

                          Common Stock, $.01 par value

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [x]     No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [x]

         At December 11, 1997,  the  Registrant  had 3,866,330  shares of common
stock outstanding. On such date, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $47,173,863.

DOCUMENTS INCORPORATED BY REFERENCE
         Materials have been incorporated by reference into this Report from the
following documents: Materials from the Registrant's Proxy Statement relating to
the 1998 Annual Meeting of Stockholders have been incorporated by reference into
Part III, Items 10, 11, 12 and 13.

================================================================================
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I                                                                                             Page

<S>                                                                                                 <C>
     Item  1.   Business...........................................................................  3
     Item  2.   Properties......................................................................... 12
     Item  3.   Legal Proceedings.................................................................. 12
     Item  4    Submission of Matters to a Vote of
                    Security Holders............................................................... 13
                Executive Officers of the Registrant............................................... 13


PART II

     Item  5.   Market for the Registrant's Common
                    Stock and Related Stockholder Matters.......................................... 14
     Item  6.   Selected Consolidated Financial Data............................................... 14
     Item  7.   Management's Discussion and
                    Analysis of Financial Condition and Results of Operations...................... 18
     Item  8.   Financial Statements and Supplementary Data........................................ 23
     Item  9.   Changes in and Disagreements
                    with Accountants on Accounting and Financial Disclosure........................ 43


PART III.

     Item 10.   Directors and Executive Officers of the Registrant................................. 43
     Item 11.   Executive Compensation............................................................. 43
     Item 12.   Security Ownership of Certain Beneficial Owners and Management..................... 43
     Item 13.   Certain Relationships and Related Transactions..................................... 43

PART IV.

     Item I4.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 44


SIGNATURES......................................................................................... 49
</TABLE>
                                       2
<PAGE>
PART I


Item 1.  Business
General

       Pilgrim  America Capital  Corporation  (formerly known as Express America
Holdings  Corporation) (the "Company" or "Pilgrim America") is a holding company
that, through its wholly-owned subsidiaries,  provides investment management and
related  services  for seven  open-end  funds  (the  "Open-end  Funds")  and one
closed-end  fund (the  "Closed-end  Fund") (each a "Fund" and  collectively  the
"Pilgrim  America  Funds" or the  "Funds").  Pilgrim  America's  common stock is
traded on the Nasdaq  Stock Market  National  Market  System (the "Nasdaq  NMS")
under  the  symbol  PACC.  The  Company  commenced  its  investment   management
operations  on  April  7,  1995,  when  it  consummated  the  acquisition   (the
"Acquisition")  of certain of the assets of Pilgrim  Group,  Inc.  (now known as
Atlas Financial Group, Inc.) and its subsidiaries ("Atlas").

       Pilgrim America was incorporated as First Western Corporation and changed
its name to Express  America  Holdings  Corporation on September 20, 1993 and to
Pilgrim America  Capital  Corporation on April 28, 1997. The terms "Company" and
"Pilgrim America" refer to the Company and its consolidated subsidiaries.  Prior
to the  Acquisition,  the Company,  primarily  through the activities of Express
America  Liquidation  Corporation  formerly  known as Express  America  Mortgage
Corporation  ("EAMC"),  had  been  engaged  in the  mortgage  banking  business,
deriving  revenues  primarily  from  mortgage  loan  servicing and mortgage loan
originations.  On September 30, 1994, the Company sold  substantially all of its
servicing assets to NationsBanc Mortgage Corporation.  On February 28, 1995, the
Company  announced  the   discontinuance  of  all  remaining   mortgage  banking
operations.  The remaining  mortgage banking related assets are being sold. (See
Item 7.  "Management's  Discussion  and  Analysis of  Financial  Conditions  and
Results of Operations" for further discussion of discontinued operations.)

       The Company  paid Atlas and its  shareholders  $28.1  million and assumed
certain liabilities. The Company recorded costs assigned to management contracts
acquired in connection with the Acquisition of $32.3 million, which included the
purchase  price as well as provisions for certain  transaction  costs related to
the  Acquisition  and the cost of moving the  acquired  operations  to  Phoenix,
Arizona, which occurred in the fourth quarter of 1995.

       As a result of the  Acquisition,  the Company  became the manager of five
funds:  Pilgrim America MagnaCap Fund,  Pilgrim America High Yield Fund, Pilgrim
Government  Securities Income Fund, Pilgrim America Prime Rate Trust and Pilgrim
America Bank and Thrift Fund,  Inc.  These Funds had combined net assets of $1.3
billion on the date of the  Acquisition.  The Company also became a  distributor
and servicing agent for a money market fund.

       In  connection  with  the  Acquisition,  the  Company  formed  three  new
wholly-owned  subsidiaries:   Pilgrim  America  Investments,   Inc.  ("PAI"),  a
registered investment adviser which serves as the investment manager for Pilgrim
America  Funds;  Pilgrim  America  Securities,  Inc.  ("PAS"),  a  broker-dealer
registered  with the National  Association  of  Securities  Dealers,  Inc.  (the
"NASD"),  which  serves as the  distributor  of the Funds;  and Pilgrim  America
Group, Inc. ("PAG"), the parent of PAI and PAS.

       On September 1, 1995,  the Company  introduced  three new Funds:  Pilgrim
America Masters  Asia-Pacific  Equity Fund, Pilgrim America Masters MidCap Value
Fund and Pilgrim  America  Masters  LargeCap Value Fund. Each of these funds has
its own  investment  objectives  and  policies  and  originally,  each  fund was
subadvised  by a money  manager  ("Sub-Advisor")  selected  by the  Company  and
approved  by the  applicable  Fund Board  based on the  Sub-Advisor's  extensive
knowledge and proven  experience in its specialized  market segment.  On October
31, 1997, the  Sub-Advisor to the Pilgrim  America  Masters  LargeCap Value Fund
resigned and PAI became fully  responsible  for advising this Fund.  Pursuant to
portfolio  management  agreements between the Company and each Sub-Advisor,  the
Company  pays  subadvisory  fees to the  Sub-Advisors  based on the  average net
assets of the fund managed by each particular Sub-Advisor.
                                       3
<PAGE>
       On November  13,  1997,  the Company was engaged by a non-U.S.  issuer to
manage  approximately $509 million in assets ("Private  Account").  These assets
have been  invested in both senior  floating rate loans and high yield bonds and
are managed by the  Company's  current  staff.  The Company will receive  annual
revenues for managing these assets equal to .50% of the average assets  managed.
The  Company  is  entitled  to  receive   additional   compensation  if  certain
performance standards are met. In addition to managing these assets, the Company
acquired a $5 million (approximately 10%) equity investment in the issuer.


Investment Management Services

       The Company provides investment advisory, distribution and administrative
services  for  the  Pilgrim  America  Funds  under  investment   management  and
administration agreements and distribution plans with the Funds. Pursuant to the
investment management agreements with each of the Funds, PAI provides investment
advisory  services to each Fund,  subject to  authority  of each Fund's board of
directors or trustees (the "Boards") and to each Funds'  fundamental  investment
objectives, policies and restrictions. The investment management agreements must
be approved annually by the Boards of the respective Funds, including a majority
of the independent  trustees or directors  (i.e.,  those who are not "interested
persons" with respect to PAI, as defined in section  2(a)(19) of the  Investment
Company Act of 1940, as amended (the "Investment  Company Act")). The agreements
generally are  terminable by the Company or the Fund upon 60 days notice without
penalty.

       All Fund's are managed by  portfolio  managers  employed by the  Company,
except the Pilgrim  America Masters MidCap Value and  Asia-Pacific  Equity Funds
which are managed by  Sub-Advisors.  The Company's  portfolio  management  staff
includes  seven  portfolio  managers,  two assistant  portfolio  managers,  four
analysts and a chief investment officer.

       Generally, the Company employs the personnel who serve as officers of the
Funds and who manage the day-to-day business operations,  including  maintaining
the  Funds'  portfolio  records,  answering  shareholder  inquiries,   providing
information,  creating and publishing  information,  monitoring  compliance with
securities laws and regulations,  and other administrative activities. The Funds
generally  pay their own  expenses  such as legal and auditing  fees,  board and
shareholder meeting costs, Securities and Exchange Commission (the "Commission")
and state registration fees and similar expenses.

Revenues

       Substantially  all of the Company's  revenues are derived from investment
management, administrative and distribution fees which are based on a percentage
of net assets under  management  plus, in the case of Pilgrim America Prime Rate
Trust, the proceeds of any borrowings (hereinafter,  collectively referred to as
("Assets")  (see "The  Closed-end  Funds"  below).  These  revenues  are  earned
pursuant to agreements with the Funds. Typically,  management fees earned by the
Company vary  depending  upon the  investment  style of the Fund or Account (see
"Pilgrim  America  Funds"  below).  Since the  Company's  revenues  are  largely
dependent  on the  total  value and  composition  of  Assets  under  management,
fluctuations  in  financial  markets  and in the  composition  of  Assets  could
significantly effect the Company's revenues and the results of its operations.

Pilgrim America Funds

       The Open-end Funds

       The Open-end Funds are marketed and distributed through PAS in accordance
with  distribution  plans  adopted  by each Fund  pursuant  to Rule 12b-1 of the
Investment Company Act and the rules of the NASD. Pursuant to the distribution
                                       4
<PAGE>
plans, as underwriter to each Fund, PAS receives distribution  ("12b-1") fees as
compensation or for  reimbursement  of expenses  incurred in connection with the
offering,  sale and shareholder  servicing of each Fund's shares. The 12b-1 fees
are limited based upon net assets of the  particular  Fund and share class sold.
The distribution  plans must be approved annually by the Board of the respective
Funds,  including a majority of the  independent  directors or  trustees.  These
distribution  plans are  terminable at any time without  notice or penalty.  The
termination of the distribution  plans would result in the loss of 12b-1 fees to
the Company.

       PAS   distributes  the  Open-end  Funds  on  a  wholesale  basis  through
independent financial professionals,  national and regional brokerage firms, and
other financial  institutions  ("Authorized  Dealers").  Although the Authorized
Dealers have entered into selling  agreements with the Company,  such agreements
(which  generally are terminable by either party without penalty) do not legally
obligate the  Authorized  Dealers to sell any specific  amount of the  Company's
investment  products (see  "Competition  and  Marketing  Strategy"  below).  PAS
maintains a sales force of wholesale sales representatives and sales assistants.
Wholesalers  and their  assistants  work closely with the Authorized  Dealers to
assist in selling shares of the Open-end Funds.

Distribution of Open-end Fund Shares

       All of the  Open-end  Funds  offer  Class A,  Class B and  Class M shares
except Pilgrim  America Bank and Thrift Fund which offers only Class A and Class
B shares.  Each share of these classes  represents an identical  interest in the
Funds but has varying types and amounts of sales and distribution charges.

       Class A shares are offered with a maximum  initial  sales charge of 5.75%
for equity Funds,  and 4.75% for fixed income Funds.  Sales charges are based on
the value of the shares  sold.  The  majority  of the sales  charge is paid,  or
"reallowed",  to  the  Authorized  Dealers.  PAS  receives  the  balance  as  an
underwriting  commission of up to .75% of the value of the shares sold. PAS also
receives  12b-1 fees from the Funds at an annual rate of .25% to .30% of Class A
share average daily net assets.

       Class B shares are  offered  with no  initial  sales  charge.  PAS pays a
commission  of up to 4.00% to the  Authorized  Dealer at the time of sale.  Such
payments are capitalized as deferred  acquisition costs and are amortized over a
six-year  period.  The shareholder then pays a contingent sales charge to PAS in
the  event  shares  are  redeemed  within  a  six-year  period  from the date of
purchase.  The  Company  uses  its own  funds  (which  may be  borrowed)  to pay
commissions to Authorized Dealers.  The Company "recovers" the broker commission
through a higher 12b-1 fee received  from the Funds,  which is paid at an annual
rate of 1.00% of Class B share average daily net assets.

       Class M shares are offered with a lower initial sales charge than Class A
shares.  The maximum  initial sales charge is 3.50% for equity Funds,  and 3.25%
for fixed income Funds. As with Class A shares,  the majority of this commission
is  reallowed  to  the  Authorized  Dealer.  PAS  receives  the  balance  as  an
underwriting  commission of up to .50% of the value of the shares sold. PAS also
receives  12b-1  fees from the Funds at an annual  rate of .75% of Class M share
average daily net assets.

       Under the Funds' distribution plans,  ongoing payments are made by PAS on
a  quarterly  basis to  Authorized  Dealers  for  distribution  and  shareholder
servicing,  based on each  Fund's  average  annual  Assets  at .25% for  Class A
shares,  .25% for Class B shares, and .40% to .65% for Class M shares.  Payments
begin in the 13th month following purchase of Class A or B shares and in the 1st
month following purchase of Class M shares.

       Each  of the  Open-end  Funds  has  distinct  investment  objectives  and
policies which have been developed as part of the Company's  strategy to provide
core investments to investors.
                                       5
<PAGE>
       Pilgrim America Bank and Thrift Fund seeks long-term capital appreciation
with income as a secondary objective by investing primarily in equity securities
of regional banks and the bank holding companies of such banks.  Management fees
for the Fund range from .70% to 1.00% of average annual net assets. Organized in
1986,  Assets of the Fund at September 30, 1997 were $347.9  million.  This Fund
converted from a closed-end format to an open-end format on October 20, 1997.

       Pilgrim America  MagnaCap Fund seeks growth of capital,  with income as a
secondary consideration, through investing in equity securities determined to be
of high quality based upon its "rising dividends" criteria.  Management fees for
the Fund range from .50% to 1.00% of average annual  Assets.  Organized in 1969,
Assets of the Fund at September 30, 1997 were $380.1 million.

       Pilgrim  America  High Yield  Fund seeks a high level of current  income,
with  capital  appreciation  as a secondary  objective,  through  investing in a
diversified portfolio of high-yielding debt securities.  Management fees for the
Fund are based on asset  levels and range  from .40% to .75% of  average  annual
Assets.  Organized in 1939, Assets of the Fund at September 30, 1997 were $114.1
million.

       Pilgrim  Government  Securities Income Fund seeks a high level of current
income, consistent with liquidity and preservation of capital, through investing
in a portfolio of securities  issued or guaranteed  by the U.S.  Government,  or
certain of its  agencies  and  instrumentalities.  Management  fees for the Fund
range from .40% to .50% of average annual Assets.  Organized in 1984,  Assets of
the Fund at September 30, 1997 were $29.0 million.

       Pilgrim  America  Masters   Asia-Pacific   Equity  Fund  seeks  long-term
appreciation  through  investing in the equity  securities of companies based in
the  Asia-Pacific  region.  Management  fees for the Fund are  1.25% of  average
annual Assets.  Organized in July 1995, Assets of the Fund at September 30, 1997
were $59.8 million.

       The Sub-Advisor of the Fund is HSBC Asset Management  Americas,  Inc. and
HSBC Asset Management Hong Kong Limited (collectively  "HSBC"),  subsidiaries of
HSBC  Holdings  plc,  which was  founded as the Hong Kong and  Shanghai  Banking
Corporation in 1865.  HSBC manages over $44 billion of assets  worldwide and its
clients primarily include pension funds,  institutional  investors, and high net
worth individuals.  HSBC's minimum investment  requirement for privately managed
accounts is $10 million.

       Pilgrim  America  Masters  MidCap  Value Fund seeks to provide  long-term
capital  appreciation  through  investing  in  equity  securities  of  companies
believed to be undervalued and generally having market capitalization of between
$200 million and $5 billion.  Management  fees for the Fund are 1.00% of average
annual Assets.  Organized in July 1995, Assets of the Fund at September 30, 1997
were $63.5 million.

       The Sub-Advisor of the Fund is CRM Advisors, LLC ("CRM"), an affiliate of
Cramer Rosenthal  McGlynn,  Inc. which was established in 1973. Cramer Rosenthal
McGlynn,  Inc. manages $3.6 billion of assets and its clients  primarily include
pension plans,  high net worth  individuals,  foundations,  endowment funds, and
others.  CRM's minimum investment  requirement for privately managed accounts is
$5 million.

       Pilgrim  America Masters  LargeCap Value Fund seeks to provide  long-term
capital  appreciation  through  investing  in  equity  securities  of  companies
believed to be undervalued  and generally  having market  capitalizations  of at
least $5  billion.  Management  fees for the Fund are  1.00% of  average  annual
Assets.  Organized in July 1995,  Assets of the Fund at September  30, 1997 were
$29.5  million.  As of October 31, 1997, the Fund  Sub-advisor  resigned and was
replaced  by the  Company;  which  became  the sole  manager  of the  Fund.  The
Sub-Advisor of the Fund previously was Ark Asset  Management Co., Inc.  ("Ark"),
formerly the institutional  investment  management  division of Lehman Brothers,
which was established in 1929.
                                       6
<PAGE>
       The Closed-end Fund

       Shares of  Pilgrim  America  Prime  Rate Trust are traded on the New York
Stock Exchange.  Consequently, PAS does not earn a commission on sales of shares
of this Fund.

       Pilgrim  America Prime Rate Trust seeks a high level of current income as
is consistent  with  preservation  of capital by  acquiring,  as banks and other
financial institutions do, interests in senior collateralized corporate loans.

       During May 1996, the Fund's shareholders  approved permitting the Fund to
borrow for  investment  purposes to the extent  permitted  under the  Investment
Company Act.  The Fund  entered into a credit  agreement in May 1996 and entered
into an amendment in November 1996 which provides that the Fund can borrow up to
$515  million,  or  approximately  33 1/3% of the Funds total  assets  including
assets acquired with borrowed funds.

       Management fees and  administrative  fees for the Fund range from .60% to
 .85%, and .10% to .15%, respectfully,  of Assets under management.  Organized in
1988,  Assets  of the  Fund at  September  30,  1997  were  $1.03  billion,  and
borrowings were $319.0 million.

       On  November  19,  1996,  Pilgrim  America  Prime Rate  Trust  raised net
proceeds of $157 million by issuing 18,122,963 shares of beneficial  interest in
the  Fund  pursuant  to a one for five  non-transferable  rights  offering  (the
"Offering").   After  the   Offering,   the  Fund   increased   its   borrowings
proportionately with the increase in its net assets.  Additionally,  the Company
has  agreed  to reduce  its  management  fees on  Assets in the Fund over  $1.15
billion by .05% to .60% for a period of three years following the Offering.
                                       7
<PAGE>
       The following table summarizes each Fund as of September 30, 1997:
<TABLE>
<CAPTION>
                               Assets Under   Assets Under   Assets Under   Management   Administrative  Distribution
                                Management     Management     Management    Fee (basis     Fee (basis     Fee (basis
                              (in millions)  (in millions)  (in millions)   points) (1)    points) (1)    points) (2)
                                September      September      September
                                 30, 1997       30, 1996       30, 1995
----------------------------------------------------------------------------------------------------------------------
<S>                            <C>             <C>            <C>            <C>             <C>           <C>
Open-end Funds
-------------------------------
Pilgrim America MagnaCap
    Fund                        $ 380.1        $   269.2      $  215.2        50 - 100         --          30 - 100
Pilgrim America High Yield
    Fund                          114.1             30.8          15.6        40 - 75          --          25 - 100
Pilgrim Government
   Securities Income Fund          29.0             36.0          42.8        40 - 50          --          25 - 100
Pilgrim America Masters
   Asia-Pacific Equity Fund        59.8             53.1           1.6          125            --          25 - 100
Pilgrim America Masters
    MidCap Value Fund              63.5             11.4           0.9          100            --          25 - 100
Pilgrim America Masters
    LargeCap Value Fund            29.5             12.2           1.2          100            --          25 - 100
                               ---------------------------------------------

Total Open-end Fund Assets        676.0            412.7         277.3
                               ---------------------------------------------

Closed-end Funds
-------------------------------
Pilgrim America Prime Rate
    Trust (3)                   1,354.1          1,048.2         868.0        60 - 85(4)     10 - 15         --
Pilgrim America Bank and
    Thrift Fund (5)               347.9            243.6         202.3        70 - 100         --            --
                               ---------------------------------------------

Total Closed-end Fund          
    Assets                      1,702.0          1,291.8       1,070.3
                               ---------------------------------------------

Private Account (6)               230.5            --             --
                               ---------------------------------------------
Total Assets Under
Management (including
borrowings) (3)                $2,608.5         $1,704.5      $1,347.6
                               =============================================

----------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       8

<PAGE>
       (1) Fee varies based upon levels of average  Assets.  Table  includes the
current range of fees to which each of the Fund's assets are subject.

       (2) In 1995,  each Open-end Fund began  offering  three classes of shares
(see  "Distribution of Fund Shares" above).  The  distribution  fees for Class A
Shares,  Class B Shares,  and Class M Shares are .25% (.30% for Pilgrim  America
MagnaCap Fund), 1.0% and .75%, respectively.

       (3) During the fourth quarter of Fiscal 1996,  Pilgrim America Prime Rate
Trust  began  borrowing  for  investment   purposes   pursuant  to  its  amended
fundamental  investment  policies  approved by its  shareholders on May 2, 1996.
Borrowings at September 30, 1997 and September 30, 1996 were $319.0  million and
$179.0 million, respectively.

       (4) In effect at September  30,  1997.  In  connection  with the Offering
completed on November 19, 1996 (see "The  Closed-end  Fund" above),  the Company
has agreed to reduce its management fee on Assets of Pilgrim  America Prime Rate
Trust over $1.15 billion from .65% to .60% for a period of three years following
the Offer.

       (5)  On  October  20,  1997,   Pilgrim   America  Bank  and  Thrift  Fund
shareholders  voted that the Fund become an Open-end  Fund.  PAS will  receive a
distribution  fee of .25% on Class A shares and 1.0% on Class B shares (see "The
Open-End Funds" above).

       (6) On November 13, 1997, the Company  entered into a transaction  with a
non-U.S.  issuer to  manage  approximately  $509  million  of  assets  ("Private
Account").  During  approximately  four  months  prior  to the  closing  of this
transaction,  the Company was  appointed  by the issuer to acquire  assets using
funds of an affiliate of the issuer in  anticipation  of closing the transaction
in November. As of September 30, 1997,  approximately $230 million in assets had
been  acquired  and the Company was paid a  management  fee upon the  successful
closing  of this  transaction  of .385% on the  assets  managed.  Following  the
closing,  the fee  increased  to .50%,  and the  Company  may be  entitled to an
additional performance fee.
                                       9
<PAGE>
The following table presents comparative yearly data regarding Fund activity:

<TABLE>
<CAPTION>
                                                          Pilgrim America Funds
                                                            Selected Fund Data
                                                                ($000,000)
                               --------------------------------------------------------------------------
                                   September 30,               September 30,               September 30,
                                       1997                        1996                      1995 (3)
                                -----------------           -----------------           -----------------
<S>                             <C>                         <C>                         <C>      
Open-End Funds:
     Beginning assets                     $ 412.7                     $ 277.3                     $ 265.4
     Direct sales                           249.7                       121.6                         9.0
     Direct redemptions                     (85.3)                      (39.1)                      (21.4)
     Exchanges in (out)(1)                    4.1                        (5.0)                        1.9
     Investment activities (2)               94.8                        57.9                        22.4
                                -----------------           -----------------           -----------------
     Ending assets                          676.0                       412.7                       277.3

Closed-End Funds:
     Beginning assets                     1,291.8                     1,070.3                     1,031.7
     Rights offering proceeds               157.8                         -                           -
     Investment activities (2)              252.4                       221.5                        38.6
                                -----------------           -----------------           -----------------
     Ending assets                        1,702.0                     1,291.8                     1,070.3

Private Accounts:
     Beginning assets                         -                           -                           -
     Sales                                  230.5                         -                           -
                                -----------------           -----------------           -----------------
     Ending assets                          230.5                         -                           -
     Total assets under
     management                         $ 2,608.5                   $ 1,704.5                   $ 1,347.6
                                =================           =================           =================
</TABLE>
(1)  Net Exchanges from (to) the Company's sponsored money market fund.
(2)  Investment  Activities include net invesment income,  realized gain/(loss),
     change  in  appreciation/(depreciation)   and  net  cash  distributions  to
     shareholders.  Investment  Activities for  closed-end  funds include assets
     acquired using borrowed funds.
(3)  Includes  Activity  from the  Acquisition  to the year ended  September 30,
     1995.
                                       10
<PAGE>
Regulation

       Virtually  all aspects of the  Company's  business are subject to various
federal  and state laws and  regulations.  PAI is  registered  as an  investment
adviser  with the  Commission  under the  Investment  Advisers  Act of 1940,  as
amended  (the  "Advisers   Act"),  and  is  registered  under  applicable  state
securities  laws.  The Advisers Act imposes  numerous  obligations on registered
investment  advisers  including  fiduciary,  record  keeping,   operational  and
disclosure obligations.

       PAS is registered as a broker-dealer under the Securities Exchange Act of
1934, and under all  applicable  state  securities  laws. PAS is a member of the
NASD and the Securities Investor Protection Corporation.  PAS is also subject to
the  Commission's  net  capital  rules  designed  to enforce  minimum  standards
regarding the general  financial  condition  and  liquidity of a  broker-dealer.
Under certain circumstances, this rule limits the ability of the Company to make
withdrawals  of capital and receive  dividends  from PAS.  PAS's  regulatory net
capital currently exceeds such minimum net capital requirements.

       Each of the Pilgrim  America  Funds is  registered  under the  Investment
Company Act. The shares of each Fund are registered  with the  Commission  under
the  Securities  Act of  1933,  as  amended,  and the  shares  of each  Fund are
qualified (or are exempt) for sale under applicable state securities laws in all
states and in the District of Columbia in which shares are sold.  The Funds have
also  elected  to be taxed as  regulated  investment  companies  ("RICs")  under
Subchapter M of the Internal Revenue Code of 1986, as amended,  in order to pass
investment  income and  capital  gains to their  shareholders  without the Funds
incurring federal income taxes on such amounts distributed.  In order to qualify
as a RIC,  there are  numerous  requirements  imposed  on the  Funds,  including
diversification, distribution, and income character qualifications.

       The  foregoing  federal and state laws and  regulations  generally  grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company  from  carrying on its business in the event it
fails to comply  with such laws and  regulations.  In such event,  the  possible
sanctions  which may be imposed  include  limitations on the Company's  business
activities  for  specified  periods  of  times,   revocation  or  suspension  of
investment adviser or broker-dealer  registrations,  the suspension or expulsion
from the  securities  business of the  Company,  its  subsidiaries,  officers or
employees, and other censures, sanctions or fines.

Competition and Marketing Strategy

       The  investment  management  business  and the mutual  fund  industry  in
particular is highly  competitive.  In the United  States,  there are over 6,700
mutual  funds,  many with  several  classes  of  shares,  of  varying  sizes and
investment  objectives and policies whose shares are being offered to the public
by investment management firms, broker-dealers, and insurance companies, many of
whom also offer investment  alternatives  other than mutual funds. Many of these
financial services firms have  substantially  greater resources and assets under
management,  and provide a broader  array of  investment  products and services,
than does the Company.

       Competition  for  sales of  mutual  fund  shares  is  influenced  by many
factors, including general securities market conditions, government regulations,
general  economic  conditions,  portfolio  performance,  advertising  and  sales
promotional efforts,  distribution  channels, and the type and quality of dealer
and shareholder services. Many Authorized Dealers are large broker-dealer firms.
The retail distribution  systems of these firms constitute the Company's primary
access to retail purchasers of shares of the Open-end Funds. Many of these firms
sponsor  competing  proprietary  mutual  funds.  The Company  believes  that the
Authorized  Dealers value the ability to offer their customers a broad selection
of  investment  alternatives  and  will  continue  to sell the  Open-end  Funds.
However,  to the extent that these firms limit or restrict the sale of shares of
the  Open-end  Funds  through  their  retail  brokerage   systems  in  favor  of
proprietary mutual funds, assets under management by the Company may decline and
the Company's revenues may be adversely affected.
                                       11
<PAGE>
       The Company  believes  that  competition  within the mutual fund industry
will  increase  as a result of  consolidation  and  acquisition  activity.  Many
industry  analysts  believe that economies of scale must be achieved in order to
compete economically.  In order to increase assets under management, and compete
with mutual fund  management  companies with greater  resources and assets under
management,  the Company  aggressively  markets  its Funds to the  broker-dealer
community  as high  quality,  core  investments  managed by seasoned  investment
managers.

       The Company's  continued  success in marketing the Pilgrim  America Funds
will be highly  dependent on penetration of the retail  distribution  systems of
Authorized  Dealers,  which  generally offer numerous  competing  internally and
externally managed investment products, as well as investment performance of the
Company's Funds relative to the performance of other funds competing in the same
asset  classes.  The  inability  to compete  effectively  with other  investment
products could have a material adverse effect on the Company's business.

       Additionally,  the Company may increase assets under  management  through
acquisition of investment  management firms and investment advisory  agreements.
From time to time the Company  reviews  acquisition  prospects and may engage in
discussions or negotiations that could lead to an acquisition.

         Many companies have a "Year 2000 Problem".  This problem arises because
many computer programs only recognize  two-digit  years-00 to 99. Unless this is
modified, these programs will not be able to function in the year 2000.

         The  Company  does  not  believe  the Year  2000  Problem  will  have a
significant impact on its operations or financial results.  The Company has been
advised by its  primary  third  party  service  providers,  including  those who
provide custody, transfer agency, accounting and administrative services for the
Funds,  that they are  addressing  this  problem  and do not expect that it will
materially adversely affect their operations.

Employees

       At September 30, 1997, the Company had 67 full time employees,  including
24 sales and marketing  employees,  17 portfolio  management  employees,  and 26
general and administrative employees.  Fifty-nine employees were employed at the
Company's  headquarters  in Phoenix,  Arizona.  The Company's  employees are not
represented by any collective bargaining agreement, and management believes that
it maintains good relationships with its employees.

Item 2.    Properties

       The principal executive and administrative  offices of the Company occupy
approximately 19,000 square feet of commercial office space in Phoenix,  Arizona
under a lease expiring June 15, 2002.

       The Company also leases  approximately 24,000 square feet of office space
in Los Angeles, California under a lease assumed as part of the Acquisition (see
"Item 1.  Business-General").  This  space  was  sublet in  connection  with the
relocation of the  Company's  operations to Phoenix,  Arizona  during 1995.  The
lease and related sublease expire on May 31, 2000.

       The Company does not own any real estate  except for its interest in real
estate held in connection with its discontinued mortgage banking operations.

Item 3.    Legal Proceedings

         On May 23, 1997, the Company entered into an agreement with the Federal
Deposit  Insurance  Corporation  ("FDIC") to settle all claims in a civil action
filed in December 1995 by the FDIC in the United States District Court, District
of Arizona.  The FDIC action against the Company and other defendants related to
the 1991 acquisition of the Company mortgage banking  subsidiary,  and sought at
least $20 million in actual  damages and $80 million in punitive  damages.  This
settlement  covers all FDIC claims  asserted  against the Company and certain of
its officers and  directors.  
                                       12
<PAGE>
The Company settled with its Director and Officer  liability  insurance  carrier
under the policy  providing  coverage  for this  matter.  No charge to  earnings
resulted from this settlement.


Item 4.    Submission of Matters to a Vote of Security Holders

       The Company did not submit any matter to a vote of its  security  holders
during the fourth quarter of the fiscal year covered by this Report.

Executive Officers of the Registrant

       Set forth below is information  respecting the names,  ages and positions
and  offices  with the  Company  of the  executive  officers  of the  Company at
September  30, 1997 who are not  continuing  directors or nominees.  Information
respecting the executive  officers of the Company who are  continuing  directors
and nominees is set forth in Item 10 of this Report.

       James R. Reis,  40, has served as an executive  officer of the Company in
the position of Vice Chairman and Chief  Financial  Officer since December 1993,
Secretary from November 1994 to April 1995, and as President and Chief Financial
Officer from its  formation to December  1993.  Mr. Reis serves as Vice Chairman
and Director of PAS, PAI and PAG, and as Executive Vice President of each of the
Funds since April 1995.  Mr. Reis has served as EAMC's Vice Chairman since April
1993,  its Secretary  from May 1991 to April 1995, as Executive  Vice  President
from May 16, 1991 until December 1993,  and as Chief  Financial  Officer of EAMC
from  May  16,  1991  until  September  1992.  Mr.  Reis is a  certified  public
accountant.

       James M. Hennessy,  48, has served as Senior Vice President and Secretary
of the Company,  PAS and of each of the Funds,  and Senior Vice President of PAI
and PAG,  since April 1995 and as Secretary of PAI and PAG since July 1995.  Mr.
Hennessy has served as General  Counsel of the Company since  September 1995 and
also as Senior Vice  President of EAMC (June 1992 to August 1994 and since April
1995) and Secretary since April 1995. Mr. Hennessy also served from January 1990
to June 1992 as President of Beverly  Hills  Securities  Corp.,  a mortgage bank
acquired by the Company in June 1992.

       Stanley Vyner, 47, has served as President and Chief Executive Officer of
Pilgrim  America  Investments,  Inc.  since August 16, 1996.  He served as Chief
Executive  Officer of HSBC Asset  Management  Americas,  Inc.  until December of
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.

         Robert  Boulware,  41,  has  served as  President  and Chief  Executive
Officer of Pilgrim  America  Securities  since  November  1996.  Previously  Mr.
Boulware served as Executive Vice President and Chief Operating  Officer of PAS.
He has also served the Company in various  sales and marketing  positions  since
April  1995.  From  1992 to 1995,  Mr.  Boulware  served in  various  management
positions with EAMC.  Prior to joining the Company,  he served as Vice President
at Bank of America from  1990-1992 and as President and CEO in his last position
with Wesav Financial Corporation from 1987 to 1990.

         Howard  Tiffen,  49, has  served as Senior  Vice  President  of Pilgrim
America Group, Inc and President and Chief Operating  Officer of Pilgrim America
Prime Rate Trust since July, 1997. He has been the Senior  Portfolio  Manager of
the Trust since December, 1995. Previously,  Mr. Tiffen also served as a Lending
Officer fo Bank of America from April, 1982 to November, 1995.
                                       13
<PAGE>
PART II

Item 5.    Market  for the  Registrant's Common  Stock and  Related  Stockholder
           Matters

       Following the Company's  initial  public  offering on March 17, 1992, the
Company's  Common Stock has been traded on the Nasdaq NMS, under the symbol FWCO
until  September  20,  1993,  and under the symbol EXAM until April 28, 1997 and
PACC since such date.

       The following  table sets forth,  for the fiscal periods shown,  the high
and low per share sale prices of the Company's  Common Stock, as reported by the
Nasdaq NMS.

           Fiscal Year Ended September 30, 1996            High        Low
           -----------------------------------------    ---------   ---------

           First Quarter                                $ 6         $  3 1/2
           Second Quarter                                 5 1/2        3 1/4
           Third Quarter                                  4 7/8        3 7/8
           Fourth Quarter                                 5 13/16      4 3/8

           Fiscal Year Ended September 30, 1997
           -----------------------------------------

           First Quarter                                  7            5 5/8
           Second Quarter                                 10 1/2       7 3/16
           Third Quarter                                  17 3/8       9 1/4
           Fourth Quarter                                 20           14 7/8

       The number of  stockholder  accounts of record of the Common  Stock as of
September 30, 1997 was  approximately  323. The Company  believes that there are
more than 2,200 beneficial owners of its Common Stock. The Company's stock price
closed at $22.125 per share on December 11, 1997.

       The Company has not paid dividends on its Common Stock. It is the present
policy of the Company's  Board of Directors to retain future earnings to finance
the growth and development of the Company's business.  Any future dividends will
be at the  discretion of the  Company's  Board of Directors and will depend upon
the  financial  condition,  capital  requirements,  earnings,  terms  of  credit
agreements  (which prohibit  "restricted  payments" -- see Item 7.  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources),  and liquidity of the Company as well as other
factors the Company's Board of Directors may deem relevant.

Item 6.    Selected Consolidated Financial Data

       The following two tables of selected  consolidated  financial data should
be read in conjunction with  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated  Financial  Statements
of the Company and the related  notes thereto  included  elsewhere  herein.  The
first table presents  selected data from the Consolidated  Financial  Statements
and  other  data  related  to the  Company's  continuing  investment  management
business.  Operations of the mortgage banking business,  which were discontinued
as of February 28, 1995, are presented on a condensed basis therein, as they are
in the Company's consolidated financial statements, in accordance with generally
accepted accounting principles for discontinued operations.

       The  second  table  is  presented  by  management  to  provide   expanded
information as to the operations of the  discontinued  mortgage banking business
through   February  28,  1995,   at  which  time  the  Company   announced   the
discontinuance  of such operations.  The selected data from this table should be
read in  conjunction  with  "Management's  Discussion  and Analysis of Financial
Condition  and  Results  of  Operations"   with  respect  to  periods  prior  to
discontinuance of the mortgage banking operations.
                                       14
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA
                    (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                                          Year Ended September 30,
                                             --------------------------------------------------------------------------------
                                                  1997            1996             1995            1994           1993
                                             --------------------------------------------------------------------------------
<S>                                          <C>              <C>             <C>              <C>           <C>         
Consolidated Statement of
   Operations Data:
Revenues ..................................  $       21,288   $      14,485   $        6,363   $        -    $           -
Expenses ..................................          14,936          15,887            6,913            -                -
                                             --------------   -------------   --------------   ------------  --------------- 
Earnings (loss) from continuing
   operations before taxes ................           6,352          (1,402)            (550)           -                -
Income tax (benefit) ......................          (4,959)         (1,750)               -            -                -
                                             --------------   -------------   --------------   ------------  --------------- 
Earnings (loss) from  continuing
   operations .............................          11,311             348             (550)           -                -
Earnings (loss) from operations of
   discontinued mortgage business, net of tax           413             -                (14)        (8,490)          (2,057)
Loss on discontinuance of  mortgage
   operations .............................             -               -             (5,307)           -                -
                                             --------------   -------------   --------------   ------------  ---------------
Net earnings (loss) .......................  $       11,724   $         348   $       (5,871)  $     (8,490) $        (2,057)
                                             ==============   =============   ==============   ============  ===============

Per common share:
Primary:
Earnings (loss) from
   continuing operations ..................  $         2.71   $        0.07   $        (0.11)  $        -    $          -
                                             ==============   =============   ==============   ============  =============== 
   Net (earnings) loss ....................  $         2.81   $        0.07   $        (1.19)  $      (1.58) $         (0.47)
                                             ==============   =============   ==============   ============  =============== 
Shares used in per share
   calculations ...........................       4,173,866       4,866,737        4,950,044      5,377,860        4,363,015
                                             ==============   =============   ==============   ============  =============== 

Fully Diluted:
Earnings (loss) from
   continuing operations ..................  $         2.63   $        0.07   $        (0.11)  $        -    $          -
                                             ==============   =============   ==============   ============  ===============
   Net earnings (loss) ....................  $         2.72   $        0.07   $        (1.19)  $      (1.58) $         (0.47)
                                             ==============   =============   ==============   ============  ===============
Shares used in per share
   calculations ...........................       4,302,650       4,866,737        4,950,044      5,377,860        4,363,015
                                             ==============   =============   ==============   ============  =============== 

Consolidated Balance Sheet
   Data (at period end):
Total assets  (1) .........................  $       50,647   $      42,555   $       43,495   $     44,721  $       443,313
                                             ==============   =============   ==============   ============  =============== 
Net assets (liabilities) of
   discontinued operations ................  $         (230)  $      (3,392)  $       (4,138)  $     35,590  $        53,783
                                             ==============   =============   ==============   ============  =============== 
Redeemable preferred stock ................  $          -     $         -     $          338   $      1,015  $         1,692
                                             ==============   =============   ==============   ============  ===============
Total stockholders' equity ................  $       41,753   $      29,788   $       35,722   $     43,601  $        52,091
                                             ==============   =============   ==============   ============  ===============
Mutual fund assets under management .......  $    2,608,500   $   1,704,500   $    1,347,600   $        -    $          -
-------------------------------------------  ==============   =============   ==============   ============  ===============
</TABLE>
See explanation of footnotes following the tables.
                                       15
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA

                             DISCONTINUED OPERATIONS
                    (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                                       Year Ended September 30,
                                               ----------------------------------------------------------------
                                                      1997       1996         1995        1994        1993
                                               ----------------------------------------------------------------
<S>                                                 <C>         <C>         <C>         <C>         <C>     
Discontinued Operations:
Revenues:
     Loan administration .....................      $   --      $   --      $    139    $ 23,442    $ 17,577
     Loan origination ........................          --          --          (225)      3,573       8,382
     Interest income .........................          --          --         1,983      20,598      20,025
     Warehouse interest expense ..............          --          --        (1,090)    (12,906)    (10,617)
     Gain on sale of servicing rights ........          --          --         2,074      40,877      22,526
     Other income ............................          --          --           239         871         288
                                                    --------    --------    --------    --------    --------
         Total revenues ......................          --          --         3,120      76,455      58,181
Expenses:
     Personnel ...............................          --          --         3,322      26,517      19,254
     Amortization of purchased
         servicing rights ....................          --          --            66      10,640      23,283
     Write off of goodwill ...................          --          --          --         6,649        --
     Other interest expense ..................          --          --           145       5,248       3,812
     Other operating expenses ................          (693)       --         2,618      26,643      15,002
     Restructuring charges ...................          --          --          --         5,050        --
                                                    --------    --------    --------    --------    --------
            Total expenses ...................          (693)       --         6,151      80,747      61,351
                                                    --------    --------    --------    --------    --------
Earnings (loss) before
     income taxes (benefit) and
     extraordinary item ......................           693        --        (3,031)     (4,292)     (3,170)
Income taxes (benefit) .......................           280        --        (3,017)      2,942      (1,113)
                                                    --------    --------    --------    --------    --------
Earnings (loss) before
     extraordinary item ......................           413        --           (14)     (7,234)     (2,057)
Extraordinary (loss) on early
     extinguishment of debt ..................          --          --          --        (1,256)       --
                                                    --------    --------    --------    --------    --------
Earnings (loss) from operations
    of discontinued mortgage business ........      $    413    $   --      $    (14)   $ (8,490)   $ (2,057)
                                                    ========    ========    ========    ========    ========
Earnings (loss) before extraordinary
     item per share ..........................      $   0.10    $   --      $   --      $  (1.35)   $  (0.47)
                                                    ========    ========    ========    ========    ========
Earnings (loss) per share
     of common stock .........................      $   0.10    $   --      $   --      $  (1.58)   $  (0.47)
                                                    ========    ========    ========    ========    ========
------------------------------------------------------------------------------------------------------------
</TABLE>
See explanation of footnotes following the tables.
                                       16
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA

                      DISCONTINUED OPERATIONS - (Continued)
                    (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                                         Year Ended September 30,
                                               --------------------------------------------------------------------------
                                                   1997            1996           1995           1994           1993
                                               --------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>           <C>           <C>      
Consolidated Balance Sheet

Mortgage loans held for sale ..................      $ 1,128        $ 3,516        $ 2,352       $ 95,993      $ 322,648
Purchased servicing net .......................            -              -              -            763         56,741
Total assets ..................................        1,128          3,673          5,538        111,260        443,313
Notes payable .................................            -          1,320              -         49,025        333,929
Total liabilities .............................        1,358          7,065          9,676         75,670        389,530
Selected Operating Data:
Volume of loans originated ....................            -              -        199,895      3,616,990      3,966,893
Loan servicing
     portfolio (at period end) (2) ............            -              -        171,861        429,304      8,065,058
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

The following footnotes relate to the preceeding tables of Selected Consolidated
Financial Data:

(1)  Total assets prior to and  including  1994 were assets of the  discontinued
     mortgage operations.

(2)  Includes  loans held for sale and loans serviced  pursuant to  subservicing
     agreements.  At September 30, 1994 and 1993, the Company  subserviced loans
     with an aggregate  principal  balance of $3.2  million,  and $1.2  billion,
     respectively,  all but $3.2 million and $45 million, respectively, of which
     represented servicing rights which were sold prior to period end, but which
     had not yet been  transferred  to the  purchaser  as of the period  end. No
     loans were  subserviced  by the Company after the year ended  September 30,
     1994.
                                       17
<PAGE>
Item 7.    Management's Discussion  and  Analysis  of  Financial  Condition  and
           Results of Operations

Results of Operations

       General  Overview.  For the fiscal year ended September 30, 1997 ("Fiscal
1997"),  the Company  recorded net earnings of $11.7 million or $2.81 per share,
of which $11.3 million or $2.71 per share was from the  continuing  operation of
its investment management business, compared to net earnings for the fiscal year
ended  September 30, 1996  ("Fiscal  1996") of $348,000 or $.07 per share all of
which was from  continuing  operations.  For the fiscal year ended September 30,
1995 ("Fiscal  1995"),  the Company recorded a net loss of $5.9 million or $1.19
per share, of which $550,000 or $.11 per share, was from the then newly acquired
investment  management  business,  $14,000 from the loss of operations  from the
discontinued mortgage business, and $5.3 million from loss on the discontinuance
of its  remaining  mortgage  banking  operations.  The net loss for Fiscal  1995
compares to the net loss of $8.5 million for the fiscal year ended September 30,
1994 ("Fiscal 1994"),  all of which was from the  discontinued  mortgage banking
operations.  The Company commenced its investment management operations on April
7, 1995, when it consummated the  Acquisition of certain  investment  management
assets.  On February 28, 1995, the Company  announced the  discontinuance of its
remaining mortgage banking operations (see "Item 1. Business-General").

         Net earnings  included a tax benefit of $5.0 million and $1.75  million
in Fiscal 1997 and Fiscal 1996,  respectively.  The Company  recorded  these tax
benefits  because the Company  believes  that it is more likely than not that it
will  generate  sufficient  taxable  income in future  periods  to allow for the
realization of the recorded benefits.  As of September 30, 1997, the Company had
net operating  loss carry  forwards of $17.1  million,  which expire between the
fiscal year ending  September 30, 1997 and the fiscal year ending  September 30,
2010.  Regulations  promulgated  under Internal Revenue Code ("IRC") section 382
substantially  restrict the ability of the Company to use its net operating loss
carry forwards to offset future income upon a "change of control." Generally,  a
change of control is deemed to occur if the  cumulative  percentage of ownership
change  of a  company's  common  shares  is  greater  than 50  percent  during a
prescribed  measurement  period.  For purposes of IRC section 382, the Company's
cumulative change of control was approximately 24% as of September 30, 1997.

       Due to the Acquisition  and the  discontinuance  of its mortgage  banking
operations  in Fiscal  1995,  the  Company  does not  believe  that  results  of
operations  for Fiscal  1997 and Fiscal  1996 are  comparable  to the results of
operations  for the same  periods in Fiscal  1995.  Accordingly,  the results of
continuing  operations are discussed  herein  separately from the results of the
Company's discontinued operations.  Furthermore, because Fiscal 1996 represented
the first full year of the Company's investment management  operations,  changes
in the  financial  results of continuing  operations  from Fiscal 1995 to Fiscal
1996 are primarily  attributable to the increased period of operations in Fiscal
1996 (one year)  compared to  approximately  six months of  operations in Fiscal
1995, except where otherwise discussed below.

Investment Management (Continuing) Operations

Year Ended September 30, 1997 compared to Year Ended September 30, 1996

       Revenues  for Fiscal  1997  totaled  $21.3  million,  an increase of $6.8
million  over  Fiscal  1996  revenues.  The major  components  of the  Company's
revenues  are  management  and   administrative   fees  and  distribution  fees.
Management and  administrative  fees for Fiscal 1997, net of subadvisory fees of
$644,000 (see "Item 1.  Business-General"),  were $17.3 million,  an increase of
$4.8 million over Fiscal 1996 management and administrative  fees which were net
of subadvisory fees of $387,000.  These fees are based on the average net assets
of the Funds  plus any  borrowings  of  Pilgrim  America  Prime  Rate  Trust (in
aggregate, "Assets") (see "Item 1. Business - Pilgrim America Funds"). Assets of
the Funds  totaled  $2.61  billion at September 30, 1997 versus $1.70 billion at
September 30, 1996, an increase of $904.0 million.  Distribution  fees were $2.5
million  for  Fiscal  1997,  an  increase  of $1.3  million  over  Fiscal  1996.
Distribution fees are based on the Assets of the Company's Open-end Funds, which
totaled  $676.0  million as of September 30, 1997 compared to $412.7  million at
September 30, 1996, an increase of $263.3 million.
                                       18
<PAGE>
       The increase of $904.0  million in Assets under  management  at September
30, 1997 resulted  primarily from a $487.8 million  increase in the market value
of managed assets and an increase in Pilgrim America Prime Rate Trust borrowings
of  $140.0  million  and  the new  Private  Account  asset  of  $230.5  million.
Additionally, direct sales of Open-end Funds accounted for $249.7 million of the
increase,  while redemptions (including net exchanges into the Company-sponsored
money market  fund)  totaled  $81.2  million and  distributions  paid in cash to
shareholders of both Open-end and Closed-end Funds totaled $122.8 million.

       The  Company's  operating  expenses of $14.9  million for Fiscal  1997, a
decrease of $1.0 million over Fiscal 1996,  include  general and  administrative
expense,  selling expense and amortization.  General and administrative expense,
which  totaled  $7.8  million and $7.4  million in Fiscal 1997 and Fiscal  1996,
respectively,  include  compensation and related  expenses,  occupancy and other
operating expenses related to the Company's investment management operations and
general corporate  operations.  Additionally,  pursuant to investment management
agreements  between the Company and certain of the Funds, the Company has agreed
to limit certain  expense  ratios of such Funds,  and  reimburses  the Funds for
amounts that exceed specified  ratios.  During Fiscal 1997 and Fiscal 1996, such
reimbursements totaled $742,000 and $606,000,  respectively, and are included in
general and administrative expense.

       Selling  expenses are related to the  distribution of the Open-end Funds,
and include  salaries of sales and  marketing  personnel,  costs  related to the
production  of marketing  materials,  and  commissions  and fees paid to various
Authorized Dealers in connection with the sale of Fund shares.  Selling expenses
were $4.9 million in Fiscal 1997  compared to $6.5  million in Fiscal 1996.  The
$1.6  million  decrease  in  expense  is due to the  Company's  streamlining  of
marketing  the Open-end  Funds in Fiscal 1997,  while in Fiscal 1996 the Company
was in the development stages of its marketing and sales strategies.

       Amortization and depreciation of $2.3 million in Fiscal 1997, an increase
of $275,000 over Fiscal 1996, was primarily due to the  amortization of deferred
acquisition  costs which consists of commissions  paid to Authorized  Dealers in
connection  with the sale of  Class B share  sales  (see  "Item  1.  Business  -
Distribution of Open-end Fund Shares").

Year Ended September 30, 1996 compared to Year Ended September 30, 1995

         Revenues for Fiscal 1996  totaled  $14.5  million,  an increase of $8.1
million over Fiscal 1995 revenues, all of which were realized after the April 7,
1995  Acquisition  date.  The major  components of the  Company's  revenues from
continuing  operations are management and  administrative  fees and distribution
fees.  Management  and  administrative  fees for Fiscal 1996, net of subadvisory
fees of $387,000  (see "Item 1. Business -- General"),  were $12.6  million,  an
increase of $6.9 million over Fiscal 1995 which were net of subadvisory  fees of
$22,000.  These fees are based on the Assets of the Funds (see "Item 1. Business
--  Pilgrim  America  Funds").  Assets of the Funds  totaled  $1.70  billion  at
September  30, 1996 versus $1.35  billion at September  30, 1995, an increase of
$356.9 million. Distribution fees were $1.1 million for Fiscal 1996, an increase
of $766,000 over Fiscal 1995.  Distribution  fees are based on the Assets of the
Company's  Open-end Funds, which totaled $412.7 million as of September 30, 1996
compared to $277.3 million at September 30, 1995, an increase of $135.4 million.

          The  increase  of $356.9  million in Assets  under  management  during
Fiscal 1996  resulted  primarily  from a $188.2  million  increase in the market
value of managed  assets and an  increase  in Pilgrim  America  Prime Rate Trust
borrowings of $179.0  million,  substantially  all of which occurred  during the
fourth  quarter of Fiscal 1996.  Additionally,  direct  sales of Open-end  Funds
accounted for $121.6 million of the increase,  while redemptions  (including net
exchanges  into a money  market  fund for which the  Company  acts as  servicing
agent) totaled $44.1 million and  distributions  paid in cash to shareholders of
both Open-end and Closed-end Funds totaled $87.8 million.
                                       19
<PAGE>
          For  Fiscal  1995,  Assets  increased  by $50.5  million  between  the
Acquisition date and September 30, 1995. This increase resulted primarily from a
$101.2 million  increase in the market value of managed assets.  Direct sales of
mutual funds were $9.0 million for the period,  while redemptions  totaled $21.4
million and  distributions  paid in cash to shareholders  totaled $40.4 million.
Additionally,  the Company  invested  $2.1  million in order to seed three funds
introduced during the period.

          The Company's  operating expenses of $15.9 million for Fiscal 1996, an
increase of $9.0 million over Fiscal 1995,  include  general and  administrative
expense,  selling expense and amortization.  General and administrative expense,
which  totaled  $7.4  million and $4.0  million in Fiscal 1996 and Fiscal  1995,
respectively,  include  compensation and related  expenses,  occupancy and other
operating expense related to the Company's investment  management operations and
general corporate operations.  Additionally,  pursuant to agreements between the
Company  and  certain  of the Funds,  the  Company  has agreed to limit  certain
expense  ratios of such Funds,  and  reimburse the Funds for amounts that exceed
specified  ratios.  During  Fiscal 1996 and 1995,  such  reimbursements  totaled
$606,000   and   $94,000   respectively,   and  are   included  in  general  and
administrative expense.

          Selling  expenses  are  related to the  distribution  of the  Open-end
Funds, and include salaries of sales and marketing  personnel,  costs related to
the production of marketing materials,  and commissions and fees paid to various
Authorized Dealers in connection with the sale of Fund shares.  Selling expenses
were $6.5 million in Fiscal 1996  compared to $2.0  million in Fiscal 1995.  The
increase  is due to a full  year  of  operations  in  Fiscal  1996  compared  to
approximately  six  months in Fiscal  1995 as well as an  increase  in sales and
marketing  efforts  during Fiscal 1996, as the Company  continued to develop its
emphasis on marketing its Open-end Funds.

          Amortization  and  depreciation  of $2.0  million in Fiscal  1996,  an
increase of $1.1 million over Fiscal 1995, was primarily due to  amortization of
costs of  management  contracts  acquired in  connection  with the  Acquisition,
depreciation of furniture,  fixtures and equipment and  amortization of deferred
acquisition  costs which consists of commissions  paid to authorized  dealers in
connection   with   the   sale  of   Class  B  share   sales   (See   "Item   1.
Business--Distribution of Open-end Fund Shares").


Mortgage Banking (Discontinued) Operations

       The  Company  announced  the   discontinuance  of  its  mortgage  banking
operations on February 28, 1995 (the "Announcement Date"). The activities of the
Company's  mortgage  banking  operations  therefore have been reflected as "Loss
from operations of discontinued mortgage business" in the Company's consolidated
statements of operations. As of the Announcement Date, the Company also recorded
a provision of $986,000 for the  estimated net loss from the  discontinuance  of
its mortgage banking operations. The provision included the anticipated mortgage
banking revenues and expenses,  including severance expense and all other costs,
that the Company  estimated  would be  incurred  to phase out these  operations.
Subsequent to the Announcement  Date,  during Fiscal 1995 the Company  increased
the provision to $5.3 million,  reflected as "Loss on discontinuance of mortgage
operations"  in the Company's  consolidated  statement of  operations,  based on
reevaluation of its allowances for Discontinued Operations.

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996

          The  Company  recorded   earnings  (net  of  tax)  from   discontinued
operations of $413,000 related to the reevaluation of certain loss allowances in
Fiscal 1997. The Company recorded no activity in Fiscal 1996.

Year Ended September 30, 1996 Compared to Year Ended September 30, 1995

       The Company recorded no activity from the  discontinued  mortgage banking
operations in Fiscal 1996 compared to a loss from such  operations of $14,000 in
Fiscal 1995.
                                       20
<PAGE>
          Total revenues from the mortgage banking operations decreased to $0 in
Fiscal 1996 from $3.1 million in Fiscal 1995.  The  decrease  resulted  from the
discontinuance  of the  Company's  mortgage  banking  operations on February 28,
1995,  resulting in the inclusion of only five months of operating  results that
were reported for the mortgage banking operations in Fiscal 1995.

          Total  expenses  of the  Company  discontinued  operations  were $0 in
Fiscal 1996 compared to $6.2 million in Fiscal 1995.  The decline was the result
of the Company's discontinuance of its mortgage banking business on February 28,
1995.  Therefore,  the Company  recorded no expenses  from the  operation of the
mortgage  operations in Fiscal 1996 compared to five months of mortgage  banking
activity in Fiscal 1995.

          The  Company  also  recorded  an income  tax  benefit,  related to its
mortgage banking  operations of $3.0 million in Fiscal 1995 which is included in
the loss from discontinued operations.

Liquidity and Capital Resources

       The  Company's  principal  liquidity and capital  resources  include cash
flows from  operations and borrowings  available  under a credit  agreement.  In
Fiscal 1997 the Company had net cash flows  provided by  operations of $822,000,
net cash flows provided by financing activities of $1.9 million and cash used in
investment  activities  of $2.8  million  of  which  $2.6  million  was used for
discontinuing operations.

       As of  September  30, 1997 and  September  30,  1996,  the Company  owned
mortgage loans and foreclosed  real estate with principal  balances  aggregating
approximately  $1.1  million  and  $3.5  million,  respectively.  The  Company's
investments  in these  loans and  foreclosed  real  estate are  funded  with the
Company's working capital and with borrowings. The Company also had an allowance
of $725,000 and $1.9 million to provide, at September 30, 1997 and September 30,
1996,  respectively,  for estimated  losses to be incurred upon  repurchase  and
resale of loans  originated  and  indemnified  by the  Company.  An  increase in
repurchase  activity  beyond that  forecasted by the Company may have an adverse
effect on the Company's liquidity.

       On July 31,  1997,  the Company and its lender  amended and  restated the
Pilgrim America Credit Agreement and  subsequently  completed a second amendment
on September  18,  1997.  The  restated  Agreement  allows the Company or PAG to
borrow up to $25 million to be used for various purposes including:  (i) general
corporate working capital;  (ii) acquisition of investment management contracts;
(iii)  financing of commissions  paid by the Company in connection with sales of
Fund shares subject to a contingent  deferred sales charge and (iv) repurchasing
Company stock. The Agreement  contains  restrictive  covenants which require PAG
and the Company to maintain certain  financial ratios and prohibits  "restricted
payments"  (including  dividends  and other  payments)  from PAG to the Company.
Borrowings under the Agreement are collateralized by assets of PAG, PAS and PAI,
and guaranteed by the Company.  The Company's  guarantee is  collateralized by a
pledge to the lender of PAG's capital stock.  Loans may be drawn down until July
30, 1998 and are repayable  quarterly beginning on September 30, 1998 and ending
on June 30,  2000.  Additionally,  the  Company  is  obligated  to pay a monthly
commitment  fee of 0.18%,  annualized,  on the  amount of any  unused  borrowing
availability.

       As of September 30, 1997, the Company had borrowed $5.5 million under the
Agreement.  There  were  $3.6  million  of  borrowings  under the  Agreement  at
September 30, 1996.

       Between November 1994 and January 1995, the Company  repurchased  500,000
shares of its common  stock at a total  purchase  price of $2.0  million.  These
purchases  were  made in  open  market  transactions  pursuant  to a  previously
announced  authorization by the Company's board of directors to repurchase up to
500,000 shares of common stock based upon market conditions.
                                       21
<PAGE>
       On September 27, 1996, the Company  repurchased  1,017,730  shares of its
common stock from two institutional  stockholders at a price of $6.50 per share,
or a total of $6.6 million.  These purchases were funded with  borrowings  under
the Agreement,  $3.0 million of which was borrowed on September 27, 1996 and the
balance, $3.6 million, borrowed on October 2, 1996.

       On August 5, 1997, the Company's Board of Directors approved repurchasing
up to an additional 500,000 shares of its common stock from time to time in open
market  transactions.  As of September 30, 1997, the Company had not repurchased
any of these shares.

       During Fiscal 1996 and 1995, the Company redeemed 3,384 and 6,768 shares,
respectively,  of its Series A Preferred Stock at the liquidation  value of $100
per  share,  for  an  aggregate  redemption  price  of  $338,000  and  $677,000,
respectively.  As of September  30, 1995 there were 3,384 such shares issued and
outstanding, which were redeemed at their liquidation value on March 31, 1996.

Economic Factors

       Economic  changes,  including  changes in inflation,  interest rates, and
financial market conditions,  may cause investors to decide against  purchasing,
or to redeem  investments  in,  certain types of mutual funds,  including  those
offered by the Company.  To the extent  investors  refrain from  purchasing  the
shares of the Company's Funds, or redeem significant amounts from the Funds, the
Company's  revenues,  and growth in such revenues  which are derived from assets
under management, may be adversely affected.

       Additionally,  the Company relies on borrowings to finance the payment of
commissions on sales of shares sold with a contingent  deferred sales charge ("B
shares"). To the extent interest rates increase  substantially or the Company is
not able to  secure  adequate  financing  for  commission  payments,  sales of B
shares, and related revenues therefrom, may be adversely affected.

       The investment  management  business is not generally capital  intensive.
Except for the effect on revenues as described above,  the financial  results of
continuing operations would not be significantly affected by inflation and price
changes.

Newly Adopted Accounting Standards

         In March 1997, the Financial  Accounting Standard Board ("FASB") issued
Statement of Financial  Accounting  Standards  No. 128,  ("SFAS")  "Earnings Per
Share," replacing APB Opinion 15, "Earnings Per Share." This Statement  provides
accounting and reporting standards for earnings per share (EPS),  simplifies the
requirement  for  calculating   EPS,  and  its  compatible  with   international
standards.  This  Statement  replaces  the  presentation  of primary  EPS with a
presentation of basic EPS. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital  structures.  Basic EPS includes no
dilution and is computed by dividing income available to common  stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS  reflects  the  potential  dilution  of  securities  that could share in the
earnings of any entity, similar to fully diluted EPS.

         Statement  No. 128 applies to entities  with publicly held common stock
or potential common stock and is effective for financial  statements  issued for
periods  ending after  December 15, 1997.  The adoption of the  Statement is not
expected to have a material effect on the reporting of earnings per share by the
Company.

         In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital  Structure."  This Statement  listed  required  disclosures  about
capital  structure  that had been  included in a number of  previously  existing
separate  statements  and  opinions.  It  applies  to all  entities,  public and
private.
                                       22
<PAGE>
         Statement  No. 129 is effective for  financial  statements  for periods
ending after  December 15, 1997.  The adoption of this Statement is not expected
to have a material adverse effect on the disclosure of capital  structure by the
Company.

         In June of 1997 the FASB issued SFAS No. 130  "Reporting  Comprehensive
Income."  Comprehensive  income is defined as the change in equity of a business
enterprise  during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The SFAS
requires  that all items that are  required to be  recognized  under  accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The SFAS requires that an  enterprise  (1) classify  items of other
comprehensive  income by their nature in a financial  statements and (2) display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial  condition.  No  earnings  per  share  disclosure  of  the  effect  of
comprehensive  income is  required  under the SFAS.  The SFAS is  effective  for
fiscal years beginning after December 15, 1997,  although earlier application is
permitted  and  reclassification  of  financial  statements  for earlier  period
provided for comparative  purposes is required.  The adoption of the SFAS is not
expected to have a material adverse effect on the reporting  requirements of the
Company.

         SFAS No. 131,  "Disclosure  about  Segments of a Enterprise and Related
Information,"  issued in June, 1997,  requires that a public business enterprise
report  financial and  descriptive  information  about its reportable  operating
segments.  Operating  segments  are  components  of an  enterprise  about  which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decision  maker in deciding how to allocate  resources  and in
assessing performance. The SFAS also requires that all public enterprises report
information about the revenues derived from the enterprise  products or services
(or groups of similar  products or  services),  about the countries in which the
enterprise earns revenues and holds assets, and about major customers regardless
of whether the information is used in making operating  decisions.  However, the
SFAS does not require an enterprise to report  information  that is not prepared
for internal use if reporting it would be  impracticable.  The SFAS is effective
for financial  statements for periods  beginning after December 15, 1997. In the
initial year of application,  comparative information for earlier years is to be
restated.  The adoption of the SFAS is not expected to have a material effect on
the reporting requirements of the Company.


Item 8.    Financial Statements and Supplementary Data

       Consolidated Financial Statements of the Company as of September 30, 1997
and for each of the years in the  three-year  period ended  September  30, 1997,
together  with the  related  notes  and the  Report of KPMG  Peat  Marwick  LLP,
independent certified public accountants,  are set forth on the following pages.
Other required financial information and schedules are set forth herein, as more
fully described in Item 14.
                                       23
<PAGE>
                          Independent Auditors' Report
                          ----------------------------






The Board of Directors and Shareholders
Pilgrim America Capital Corporation:



We have audited the accompanying  consolidated balance sheets of Pilgrim America
Capital  Corporation and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the years in the three-year  period ended  September 30, 1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Pilgrim  America
Capital  Corporation and  subsidiaries as of September 30, 1997 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period  ended  September  30, 1997,  in  conformity  with  generally
accepted accounting principles.


                                               /s/ KPMG Peat Marwick LLP
                                               KPMG Peat Marwick LLP


October 17, 1997
Los Angeles, California
                                       24
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
                                                                               September 30,
------------------------------------------------------------------------------------------------
                                                                             1997        1996
------------------------------------------------------------------------------------------------
<S>                                                                        <C>         <C>     
Assets
   Cash and cash equivalents                                               $    219    $    238
   Investments                                                                3,127       2,462
   Accounts receivable                                                          458         216
   Note receivable                                                            3,976       3,587
   Costs assigned to management contracts acquired, less
        accumulated amortization of $3,233 and $1,943                        29,030      30,320
   Furniture, fixtures and equipment, less accumulated
        depreciation of $370 and $1,378                                         532       1,144
   Deferred tax assets, net                                                   6,420       1,750
   Deferred acquisition costs, less accumulated amortization
         of $772 and $131                                                     5,891       1,939
   Other assets                                                                 994         899
                                                                           --------    --------
Total assets                                                               $ 50,647    $ 42,555
                                                                           ========    ========
------------------------------------------------------------------------------------------------

Liabilities and stockholders' equity
Liabilities:
   Net liabilities of discontinued operations                              $    230    $  3,392
   Notes payable                                                              5,475       3,600
   Accrued compensation                                                       1,285         778
   Accounts payable and accrued expenses                                      1,904       4,997
                                                                           --------    --------
               Total liabilities                                              8,894      12,767
                                                                           --------    --------

Commitment and contingencies


Stockholders' equity:
   Preferred stock, $100 par value, 100,000 shares
        authorized, none issued
   Common stock, $.01 par value, 10,000,000 shares authorized, 
        5,384,060 and 5,377,860 shares issued, with 3,866,330 and
        3,860,130 shares outstanding at September 30, 1997 and                   
        September 30, 1996                                                       54          54
   Less:  Treasury stock at cost, 1,517,730 shares at                            
         September 30, 1997 and September 30, 1996                           (8,623)     (8,623)
   Additional paid-in capital                                                48,795      48,759
   Unrealized gain on investments                                               538         333
   Retained earnings (accumulated deficit)                                      989     (10,735)
                                                                           --------    --------
                Total stockholders' equity                                   41,753      29,788
                                                                           --------    --------
Total liabilities and stockholders' equity                                 $ 50,647    $ 42,555
                                                                           ========    ========
-------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
                                       25
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                              For the Years Ended September 30,
---------------------------------------------------------------------------------------------------
                                                              1997           1996          1995
---------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>        
Revenues
   Management and administrative fees                     $    17,341    $    12,556    $     5,668
   Distribution fees                                            2,483          1,143            377
   Investment and other income                                  1,464            786            318
                                                          -----------    -----------    -----------
               Total revenues                                  21,288         14,485          6,363
                                                          -----------    -----------    -----------
---------------------------------------------------------------------------------------------------

Expenses
   General and administrative                                   7,783          7,367          4,004
   Selling                                                      4,888          6,530          2,012
   Amortization and depreciation                                2,265          1,990            897
                                                          -----------    -----------    -----------
               Total expenses                                  14,936         15,887          6,913
                                                          -----------    -----------    -----------
Earnings (loss) from continuing operations before taxes         6,352         (1,402)          (550)
                                                          -----------    -----------    -----------

   Income tax (benefit)                                        (4,959)        (1,750)          --
                                                          -----------    -----------    -----------

Earnings (loss) from continuing operations                     11,311            348           (550)
                                                          -----------    -----------    -----------
Discontinued operations
   Earnings (loss) from operations of discontinued
   mortgage business, net of tax                                  413           --              (14)
   Loss on discontinuance of mortgage operations,
   including $5,307 for operating losses during
   the phase out period                                          --             --           (5,307)
                                                          -----------    -----------    -----------
Earnings (loss) from discontinued operations                      413           --           (5,321)
                                                          -----------    -----------    -----------
Net earnings (loss)                                       $    11,724    $       348    $    (5,871)
                                                          ===========    ===========    ===========
---------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share:
Primary:
Earnings (loss) from continuing operations                $      2.71    $      0.07    $     (0.11)
                                                          ===========    ===========    ===========
Net earnings (loss)                                       $      2.81    $      0.07    $     (1.19)
                                                          ===========    ===========    ===========
Shares used in per share calculation                        4,173,866      4,866,737      4,950,044
                                                          ===========    ===========    ===========

Fully diluted:
Earnings (loss) from continuing operations                $      2.63    $      0.07    $     (0.11)
                                                          ===========    ===========    ===========
Net earnings (loss)                                       $      2.72    $      0.07    $     (1.19)
                                                          ===========    ===========    ===========
Shares used in per share calculation                        4,302,650      4,866,737      4,950,044
                                                          ===========    ===========    ===========

---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
                                       26
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                              Retained
                                                                 Additional    Unrealized     Earnings       Total
                                      Common         Treasury     Paid-in       Gain on     (Accumulated  Stockholders'
                                      Stock            Stock      Capital     Investments     Deficit)       Equity
-------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>            <C>           <C>          <C>          <C>             <C>     
Balances, September 30, 1994         $     54       $   --        $ 48,759     $   --       $ (5,212)       $ 43,601
    Repurchase of treasury stock         --           (2,008)         --           --           --            (2,008)
    Net loss                             --             --            --           --         (5,871)         (5,871)
-------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995               54         (2,008)       48,759         --        (11,083)         35,722
    Repurchase of treasury stock         --           (6,615)         --           --           --            (6,615)
    Unrealized gain on investments       --             --            --            333         --               333
    Net earnings                         --             --            --           --            348             348
-------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996               54         (8,623)       48,759          333      (10,735)         29,788
    Stock option purchases               --             --              36         --           --                36
    Unrealized gain on investments       --             --            --            205         --               205
    Net earnings                         --             --            --           --         11,724          11,724
-------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997         $     54       $ (8,623)     $ 48,795     $    538     $    989        $ 41,753
                                     ========       ========      ========     ========     ========        ========
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
                                       27
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                      For the Years Ended September 30,
--------------------------------------------------------------------------------------------------------
                                                                         1997        1996        1995
--------------------------------------------------------------------------------------------------------
<S>                                                                    <C>         <C>         <C>      

Cash flows from operating activities
Net earnings (loss)                                                    $ 11,724    $    348    $ (5,871)
Adjustments to reconcile net earnings (loss) to net cash provided by
    (used in) operating activities:
    Loss from discontinued operations                                      --          --         5,321
    Amortization and depreciation                                         2,265       1,990         891
    (Increase) decrease  in accounts and notes receivable                  (631)        954      (1,437)
    Increase in deferred acquisition costs due to subscriptions          (4,912)     (2,023)        (66)
    Decrease in deferred acquisition cost due to redemptions                281          18        --
    Increase in deferred tax asset                                       (5,029)     (1,750)       --
    Increase (decrease) in operating liabilities                         (2,586)      2,478        (344)
    (Increase) decrease  in other operating assets                         (290)        607      (1,111)
                                                                       --------    --------    --------
Net cash provided by  (used in) operating activities                        822       2,622      (2,617)
                                                                       --------    --------    --------
--------------------------------------------------------------------------------------------------------

Cash flows from investing activities
    Acquisition of business                                                --          --       (29,271)
    Investment in Pilgrim America Funds                                    (641)        (29)     (2,100)
    Sale of Pilgrim America Funds                                           540        --          --
    Sales of furniture, fixtures and equipment                             --           130          68
    Purchases of furniture, fixtures and equipment                          (72)       (244)       (135)
    Cash provided by (used in) discontinued operations                   (2,579)       (746)     34,669
                                                                       --------    --------    --------
     Net cash provided by (used in) financing activities                 (2,752)       (889)      3,231
                                                                       --------    --------    --------
--------------------------------------------------------------------------------------------------------

Cash flows from financing activities
    Term debt borrowing                                                   1,875       3,600        --
    Redemption of preferred stock                                          --          (338)       (677)
    Proceeds from purchase of stock options                                  36        --          --
    Purchase of treasury stock                                             --        (6,615)     (2,008)
                                                                       --------    --------    --------
    Net cash provided by (used in) financing activities                   1,911      (3,353)     (2,685)
                                                                       --------    --------    --------
    Net decrease  in cash and cash equivalents                              (19)     (1,620)     (2,071)
    Cash and cash equivalents, beginning of period                          238       1,858       3,929
                                                                       --------    --------    --------
Cash and cash equivalents, end of period                               $    219    $    238    $  1,858
                                                                       ========    ========    ========
--------------------------------------------------------------------------------------------------------

Supplemental disclosures
    Interest paid                                                      $    549    $    186    $  1,343
    Income taxes paid                                                        98           2          98
    Income tax refunds received                                            --            12         269
    Liabilities assumed relating to acquisition of business                --          --         3,536

--------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
                                       28
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    Corporate Background and Summary of Significant Accounting Policies

       (a) Corporate  Background.  On April 7, 1995,  Express  America  Holdings
Corporation and certain newly formed subsidiaries acquired investment management
assets and became  engaged  principally in the mutual fund  management  business
(see Note 2). On April 28, 1997 Express America Holdings Corporation changed its
name to Pilgrim America Capital Corporation.

       (b)  Consolidation.  The consolidated  financial  statements  include the
accounts  of  Pilgrim  America  Capital   Corporation's   ("PACC")  wholly-owned
subsidiary, Pilgrim America Group, Inc. ("PAG") and PAG's subsidiaries,  Pilgrim
America Investments,  Inc. ("PAI"), a registered  investment advisor and Pilgrim
America  Securities,  Inc.  ("PAS"),  a registered  broker-dealer  (collectively
"Pilgrim America"). PAG commenced operations upon the Company's acquisition (the
"Acquisition") of certain assets of Atlas Holdings,  formerly the Pilgrim Group,
Inc.,  and its  subsidiaries  on  April  7,  1995.  The  consolidated  financial
statements also include the accounts of Pilgrim  America's wholly owned mortgage
banking  subsidiaries,  Express America T.C., Inc., EAMC Liquidation  Corp., the
Successor  (as of December 27,  1996) to Express  America  Mortgage  Corporation
("EAMC"), and EAMC's wholly owned subsidiaries, Wesav Investment Corporation and
Wesav  Investment,  Inc., -2  (collectively,  the  "Company"  unless the context
otherwise requires).  All significant intercompany accounts and transactions are
eliminated in consolidation.

       Prior to April 7, 1995,  the Company's  principal  business  consisted of
mortgage banking activities,  including the origination,  sale, and servicing of
loans  collateralized by first mortgages on residential real estate. On February
28, 1995 the Company  announced the  discontinuance  of its  remaining  mortgage
banking operations (see Note 14).  Consequently,  the Company's mortgage banking
activities are reported as discontinued operations.

       Subsequent to the Acquisition on April 7, 1995, the continuing  operating
activities  of  the  Company  consisted   principally  of  providing  investment
management and related  services to various  open-end and closed-end  investment
companies  currently  operating under the Pilgrim and Pilgrim America names (the
"Funds").  Accordingly,  the results of  continuing  operations  reported in the
consolidated financial statements reflect only such activities.

       (c) Cash and Cash Equivalents. Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three months
or less, including money market funds which are readily convertible into cash.

       (d)  Fair  Value  of  Financial  Instruments.  Substantially  all  of the
Company's   financial   instruments   are  carried  at  fair  value  or  amounts
approximating  fair  value.  Assets  including  cash and cash  equivalents,  and
certain  receivables  are  carried at fair value or  contracted  amounts,  which
approximate  fair  value.  The fair  value of all  investments  held is based on
quoted market prices.  Similarly,  liabilities including notes payable,  certain
payables and accrued expenses are carried at amounts approximating fair value.

       (e) Marketable Securities.  Upon acquisition,  the Company classifies its
securities into one of three categories:  held to maturity  securities,  trading
securities or available for sale  securities.  Held to maturity  securities  are
those  securities  the  Company has the  positive  intent and ability to hold to
maturity  and are  carried  at  amortized  cost.  Trading  securities  are those
securities that are bought and held  principally for the purpose of selling them
in the near term and are  reported  at fair  value,  with  unrealized  gains and
losses  included  in  operations.   Available  for  sale  securities  are  those
securities  that do not fall into the other two  categories  and are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in a separate  component of stockholders'  equity,  net of related income taxes.
The Company currently  classifies all of its marketable  securities as available
for sale securities.
                                       29
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


       PAS  values  all  of  its   investments  at  market  in  accordance  with
broker-dealer  industry  practice.  Unrealized  gains and losses are included in
income.

       All realized  gains and losses on security  transactions  are recorded on
the average cost method.

       (f) Furniture, Fixtures and Equipment.  Furniture, fixtures and equipment
are stated at cost,  less  accumulated  depreciation.  The Company  provides for
depreciation  over the assets  estimated  useful lives of 3 to 5 years using the
straight line method.

       (g) Costs Assigned to Management  Contracts  Acquired.  Costs assigned to
management  contracts  acquired  represent  the  fair  value  of the  investment
management rights acquired in connection with the Acquisition and also represent
the excess of the purchase price (including  liabilities  assumed) over the fair
value of net  assets  acquired  and  resulting  costs of the  Acquisition.  Such
amounts are being amortized on a straight-line  basis over 25 years. The Company
analyzes  Costs  Assigned  to  Management  Contracts  Acquired  periodically  to
determine  whether  any  impairment  has  occurred  in  its  value.  Based  upon
anticipated future income from operations, in the opinion of Company management,
there has been no impairment.

       (h) Deferred  Acquisition  Costs.  The Company pays  commissions of up to
4.00% to authorized  broker-dealers at the time that Fund shares with contingent
deferred sales charges (Class B shares) are sold. These payments are capitalized
and  amortized  over a six-year  period,  which is the period  during  which the
contingent deferred sales charge is effective.

       The Company  periodically  analyzes  the  recoverability  of its Deferred
Acquisition  Costs by a comparison of the carrying amount to the net future cash
flows to be received. If necessary, a valuation allowance is recorded to reflect
the difference between the carrying amount and the estimated future cash flows.

       (i) Management Fees and  Administrative  Fees. The Company  receives fees
from the Funds for investment  management and administrative  services performed
as set forth in the related  agreements  between the Company and each Fund. Such
fees, net of sub-advisor fees, are recorded as income when earned.

       (j)  Distribution  Fee Income and  Expenses.  Distribution  plan payments
received by the Company from the Funds are recorded as income when earned. Costs
associated with the marketing and sale  (distribution)  of the Funds' shares are
expensed as incurred.

       (k)   Distribution   Costs  -  Managed  Funds.   Certain  of  the  Funds'
distribution  plans  (the  "reimbursement  plans")  reimburse  the  Company  for
distribution  costs, but limit the reimbursement to between .25% and .30% of the
respective  Fund's  average  daily net  assets  determined  on an annual  basis.
Unreimbursed  costs may be carried over for a three-year  period  subject to the
same annual percentage limitations. Distribution costs are currently expected to
exceed reimbursements for the next three-year period.  Therefore,  no receivable
is currently recorded for any unreimbursed amounts.
                                       30
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



       (l) Debt Issuance  Costs.  Costs incurred in obtaining debt financing for
acquisitions,  operations  and payment of sales  commissions  on  back-end  load
mutual funds managed and  distributed  by the Company are deferred and amortized
using the interest method over the term of the related loan agreement.

       (m) Income Taxes.  Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the consolidated
financial  statement  carrying  amounts of existing  assets and  liabilities and
their  respective tax bases.  Deferred tax assets and  liabilities  are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary  differences are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in income in the period that includes the enactment date.

       (n) Net Earnings (Loss) Per Common Share.  Net earnings (loss) per common
share is  computed  using the  weighted  average  number of  common  shares  and
dilutive common stock equivalents  outstanding,  including stock options, during
the period. No effect was given to stock options outstanding for the years ended
September  30, 1996 and 1995,  as such options  would have had an  anti-dilutive
effect.

         In March 1997, the Financial  Accounting Standard Board ("FASB") issued
Statement of  Financial  Accounting  Standards  No. 128,  "Earnings  Per Share,"
replacing  APB  Opinion  15,  "Earnings  Per  Share."  This  Statement  provides
accounting and reporting standards for earnings per share (EPS),  simplifies the
requirement  for  calculating   EPS,  and  its  compatible  with   international
standards.  This  Statement  replaces  the  presentation  of primary  EPS with a
presentation of basic EPS. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital  structures.  Basic EPS includes no
dilution and is computed by dividing income available to common  stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS  reflects  the  potential  dilution  of  securities  that could share in the
earnings of any entity, similar to fully diluted EPS.

         Statement  No. 128 applies to entities  with publicly held common stock
or potential common stock and is effective for financial  statements  issued for
periods  ending after  December 15, 1997.  The adoption of the  Statement is not
expected to have a material effect on the reporting of earnings per share by the
Company.

       (o) Stock Option Plan. The Company  accounts for its stock option plan in
accordance  with the provisions of Accounting  Principles  Board ("APB") Opinion
No. 25 Accounting for Stock Issued to Employees, and related interpretations. As
such,  compensation  expense  would be recorded on the date of grant only if the
current market price of the underlying  stock  exceeded the exercise  price.  In
October,  1995,  the  Financial  Accounting  Standard  Board issued SFAS No. 123
Accounting for Stock-Based Compensation,  which permits entities to recognize as
expense over the vesting period, the fair value of all stock-based awards on the
date of grant.  Alternatively,  SFAS No. 123 also allows entities to continue to
apply the  provisions  of APB Opinion No. 25 and provide pro forma net  earnings
and pro forma  earnings per share  disclosure  for employee  stock option grants
made in 1995 and future years as if the fair-value-based  method defined in SFAS
No. 123 had been  applied.  The  Company  has  elected to  continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

       (p) Reclassifications. Certain prior year balances have been reclassified
to conform to current presentation.

       (q)  Use  of  Estimates.   Management  has  made  certain  estimates  and
assumptions relating to the reporting of assets and liabilities to prepare these
consolidated   financial   statements  in  conformity  with  generally  accepted
accounting principles. Actual results could differ from these estimates.
                                       31
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(2)    Acquisition

       On April 7, 1995, the Company  acquired  certain assets of Pilgrim Group,
Inc. for $28.1 million in cash and assumed certain  operating  liabilities.  The
Acquisition was accounted for under the purchase  method.  The Company  recorded
costs  assigned  to  management   contracts  acquired  in  connection  with  the
Acquisition of $32.3 million,  which included  provisions for transaction  costs
and  the  cost of  moving  the  acquired  operations  to  Phoenix,  Arizona.  In
connection with the  Acquisition,  the Company entered into investment  advisory
and other  contracts  with five mutual  funds with  combined  net assets of $1.3
billion.  The Company also acquired the right to the name  "Pilgrim" and certain
other  operating  assets.  The Funds included two  closed-end  funds with shares
traded  on the New  York  Stock  Exchange:  Pilgrim  America  Prime  Rate  Trust
(NYSE:PPR) and Pilgrim America Bank and Thrift Fund, Inc. (NYSE:PBS);  and three
open-end funds:  Pilgrim America MagnaCap Fund,  Pilgrim America High Yield Fund
and Pilgrim Government Securities Income Fund.

       Pilgrim  America's  results of operations  from April 7, 1995,  have been
included in the Company's consolidated statements of operations.

(3)    Note Receivable

       On September  30, 1994,  the Company  sold its  mortgage  loan  servicing
operations,  including the rights to service $6.3 billion in mortgage  loans, to
NationsBanc Mortgage Corporation. The Company received $88.2 million at closing,
comprised of $84.0  million in cash and a promissory  note in the amount of $4.2
million.  The principal on this note is due on September  30, 1999.  The note is
subject to the right of offset with respect to certain  indemnifications made by
the  Company in  connection  with the sale.  The  Company  had an  allowance  of
$230,000  and  $618,000  at  September   30,  1997  and   September   30,  1996,
respectively,   to  cover   potential   claims  made  in  connection   with  the
indemnification provisions.

(4)    Investments

       Investments  in  marketable  securities  are carried at market  value and
consist of investments  in certain Funds managed by the Company.  The cost basis
of the Company's  investments  was $2.2 million and $2.1 million as of September
30, 1997 and 1996,  respectively.  Gross  unrealized  gains and (losses) thereon
were  $901,000  and  ($3,000)  at  September  30,  1997 and  $333,000  and $0 at
September  30, 1996.  During the year ended  September 30, 1997 the Company sold
$540,000 in marketable  securities  which  resulted in gross  realized  gains of
$38,000.

(5)    Term Loan Commitment

On July 31,  1997,  the Company and its lender  amended and restated an existing
credit agreement dated April 28, 1995, used to finance the Company's  operations
(the "Pilgrim America Credit Agreement" or "Agreement").  The restated Agreement
was subsequently amended on September 18, 1997 and allows the Company and PAG to
borrow up to $25 million to be used for various  purposes  including (i) general
corporate  working capital,  (ii) acquisition of investment  management  rights,
(iii) financing of commissions paid by the Company on certain mutual fund shares
and (iv)  repurchasing the Company's  stock.  Borrowings are  collateralized  by
assets of Pilgrim America Group,  Pilgrim America Securities and Pilgrim America
Investment  and  guaranteed by the Company.  Borrowings  may be drawn down until
July 30, 1998 and are  repayable  beginning on September  30, 1998 and ending on
June 30, 2000.
                                       32
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



         The Agreement contains restrictive convenants which require PAG and the
Company to maintain certain financial ratios and prohibits "restricted payments"
(including dividends and other payments) from PAG to the Company.

         As of  September  30,  1997 and  September  30,  1996 the  Company  had
borrowed $5.5 million and $3.6 million,  respectively,  under the Agreement. The
weighted average interest rate on borrowings  outstanding during Fiscal 1997 and
Fiscal  1996 were 7.07% and 7.14%,  respectively.  Additionally,  the Company is
obligated to pay a commitment fee of 0.18% of any unused borrowing availability.

       The repayment schedule based on the September 30, 1997 loan balance is as
follows (in thousands):


              September 30,                     Repayment Amount
              -------------                     ----------------

                    1998                              $   684
                    1999                                2,737
                    2000                                2,054
                                                      -------
                                                      $ 5,475
                                                      =======


(6)    Redeemable Preferred Stock

         During  Fiscal  1996 and 1995 the  Company  redeemed  3,384  and  6,768
shares,  respectively,  of its Series A Preferred Stock at the liquidation value
of $100 per share,  for an aggregate  redemption price of $338,000 and $677,000,
respectively.  As of  September  30,  1997 and 1996 all issued  and  outstanding
shares of its Series A Preferred Stock had been redeemed.

(7)    Income Taxes

         Deferred tax assets are initially recognized for temporary  differences
between the consolidated  financial  statement carrying amount and the tax bases
of assets and  liabilities  which will result in future  deductible  amounts and
operating  loss and tax credit  carry  forwards.  A valuation  allowance is then
established  to reduce that deferred tax asset to the level at which it is "more
likely than not" that the tax  benefits  will be  realized.  Realization  of tax
benefits of deductible temporary  differences and operating loss or credit carry
forwards depends on having sufficient taxable income of an appropriate character
within the carry back and carry forward periods.  Sources of taxable income that
may allow for the realization of tax benefits  include (i) taxable income in the
current year or prior years that is  available  through  carryback,  (ii) future
taxable income that will result from the reversal of existing taxable  temporary
differences,  and (iii) future  taxable income  generated by future  operations.
Based on an evaluation  of the  realizability  of the deferred tax asset,  as of
September 30, 1997  management  has  determined  that it is more likely than not
that the Company will generate  sufficient  taxable  income in future periods to
allow for the realization of its deferred tax asset of $8.0 million.  Therefore,
no valuation  allowance has been  established  as of September 30, 1997. The net
change in the  valuation  allowance  for  deferred  tax  assets in 1997 was $7.8
million.
                                       33
<PAGE>
       As of  September  30,  1997 and  September  30,  1996,  the Company had a
deferred tax asset before valuation  allowance of $8.0 million and $10.7 million
(as adjusted for filed tax returns),  respectively. The tax effects of temporary
differences  that give rise to  significant  portions of the deferred tax assets
and deferred tax  liabilities at September 30, 1997 and 1996 are presented below
(in thousands):



                                                          September 30,
                                                       --------------------
                                                         1997        1996
                                                       --------    --------
Deferred tax assets:
     Net operating loss carryforward                   $  6,840    $  7,802
     Allowance for contingency                              163       1,022
     Repurchase allowance                                   290         772
     Deferred compensation                                  500         355
     Allowance for discontinued operations                   82         290
     Allowance for receivables                               92         247
     Allowance for foreclosure losses                      --            95
     Other                                                   66          83
                                                       --------    --------
Total gross deferred tax assets                           8,033      10,666
Less valuation allowance                                   --        (7,765)
                                                       --------    --------
     Total deferred tax assets                            8,033       2,901
                                                       --------    --------

Deferred tax liabilities:
     Costs assigned to management contracts acquired     (1,199)       (878)
     Depreciation                                           (54)       (145)
     Unrealized gain on investments                        (360)       (128)
                                                       --------    --------

Total deferred tax liabilities                           (1,613)     (1,151)
                                                       --------    --------

     Net deferred tax assets                           $  6,420    $  1,750
                                                       ========    ========

       At September 30, 1997, the Company had net operating  loss  carryforwards
for federal  income tax purposes of $17.1  million which are available to offset
future federal taxable income through the fiscal year ending September 30, 2010.
                                       34
<PAGE>
Income tax (benefit)  attributable to income from continuing operations consists
of (in thousands):





                                          ----------------------------------
                                          Current     Deferred       Total
                                          ----------------------------------
Year Ended September 30, 1997                                     
-----------------------------                                     
                                                                  
Federal                                   $   223      $(4,167)     $(3,944)
State                                        --           (735)        (735)
                                          -------      -------      -------
                                                                  
Total income tax (benefit)                    223       (4,902)      (4,679)
                                          -------      -------      -------
                                                                  
Less discontinued operations                  (72)        (208)        (280)
                                          -------      -------      -------
                                                                  
Income tax  (benefit)                                             
  attributable to continuing operations   $   151      $(5,110)     $(4,959)
                                          =======      =======      =======
                                                                  
                                                                  
Year Ended September 30, 1996                                     
-----------------------------                                     
                                                                  
Federal                                   $  --        $(1,488)     $(1,488)
State                                        --           (262)        (262)
                                          -------      -------      -------
Total income tax (benefit)                $  --        $(1,750)     $(1,750)
                                          =======      =======      =======
                                                                  
                                                                  
                                                                
The total income tax  provision  (benefit)  differs from the amount  computed by
applying the statutory  federal  income tax rate of 34% to earnings  (loss) from
continuing operations for the following reasons (in thousands):
<TABLE>
<CAPTION>
                                                                        Year Ended September 30,
                                                                ---------------------------------------
Description                                                        1997           1996          1995
---------------------------                                     ---------------------------------------
<S>                                                              <C>            <C>         <C>       
Expected tax (benefit) on earnings                 
   (loss) from continuing operations                             $  2,160       $   (477)   $    (187)
Increase in income taxes resulting from                    
    deductable meals and entertainment                     
    expense                                                            54             45           20
State income tax, net of federal benefit                              381            (76)           -
Other                                                                 211              -            -
Change in valuation allowance                                      (7,765)        (1,242)         167 
                                                                ----------     ----------  -----------
                                                           
Total                                                            $ (4,959)      $ (1,750)           -
                                                                ==========     ==========  ===========
</TABLE>
                                       35        
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(8)   Stockholders' Equity

         On September 27, 1996, the Company repurchased  1,017,730 shares of its
common stock from two  institutional  stockholders at a price of $6.50 per share
for a total of $6.6 million.  The Company used funds  borrowed under the Pilgrim
America Credit Agreement to finance the repurchase (see Note 5).

         Between November 1994 and January 1995, the Company repurchased 500,000
shares of its common  stock at a total  purchase  price of $2.0  million.  These
purchases  were  made in  open  market  transactions  pursuant  to a  previously
announced  authorization by the Company's board of directors to repurchase up to
500,000 shares of common stock based upon market conditions.

         On  August  5,  1997  the   Company's   Board  of  Directors   approved
repurchasing  up to 500,000 shares of its common stock from time to time in open
market  transactions.  As of September 30, 1997 the Company has not  repurchased
any of these shares.

         During  fiscal 1997 the Company  issued 6,200  shares of Company  stock
from the  result  of stock  options  being  exercised.  No  stock  options  were
exercised in Fiscal 1996.

(9)   Stock Option Plan

         Pursuant to the Company's  Stock Option Plan ( "Plan 1"), the Company's
Board of Directors has granted to certain officers and employees incentive stock
options to purchase 516,000 shares of the Company's common stock as of September
30, 1997.  Under Plan 1, total options of up to 537,786  shares are available to
be granted.  Additionally,  as of  September  30, 1997 the Company had issued to
non-employee directors  non-statutory stock options to purchase 50,000 shares of
common  stock.  All  options are fully  vested  after 3 years and have an 8 year
term. All stock options are granted with an exercise price equal to or exceeding
the stock's fair market value at the date of grant.

         On August 30, 1996, the Company adopted the 1996 Performance Share Plan
("Plan 2"),  approved and  administered by the Company's board of directors,  in
which certain  officers and employees were granted  interests that entitled them
to compensation  amounts  directly  related to the market price of the Company's
common stock  ("Performance  Shares").  On February 11, 1997 the Company amended
Plan 2 to provide that awards under Plan 2 will be paid by the Company solely in
shares of common stock and to limit  participation  in Plan 2 to persons who are
not  Executive  Officers of the  Company.  As of  September  30, 1997 Plan 2 had
197,500  options granted and  outstanding.  Under Plan 2, total options of up to
243,800 are  available  to be granted.  The options are fully  vested after five
years and the life of the stock options is established by the Plan Committee but
shall not exceed 10 years from the initial date of grant.

         The  weighted  average  fair  value at the date of grant  was $8.32 and
$2.97 for stock  options  granted under Plan 1 and Plan 2 during the years ended
September 30, 1997 and September  30, 1996,  respectively.  The Company used the
Black Scholes  options-pricing model with the following assumptions to calculate
the weighted average fair value at the date of grant: no expected dividend yield
for Fiscal 1997 and Fiscal  1996;  risk free  interest  rate of 6.22% for Fiscal
1997 and Fiscal 1996;  an expected  life of eight years,  and a volatility  rate
calculated  using the monthly stock price for the three years preceding the date
of grant.
                                       36
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




         The Company  applies APB  Opinion 25 in  accounting  for the Plans and,
accordingly,  no compensation  cost has been recognized for its stock options in
the consolidated financial statements.  Had the Company determined  compensation
cost based on the fair value at the grant date for its stock  options for Plan 1
and amended Plan 2 under SFAS No.123,  the  Company's net earnings for the years
ending  September  30, 1997 and 1996,  would have been  reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):

                                                         1997            1996
                                                         ----            ----
Net earnings (loss):                As reported        $11,724        $    348
                                    Pro forma           11,182            (233)


Per share net earnings (loss)
   from continuing operations:

       Primary:                     As reported        $  2.71        $    .07
                                    Pro forma          $  2.58        $   (.05)



       Fully Diluted:               As reported        $  2.63        $    .07
                                    Pro forma          $  2.50        $   (.05)

Per share net earnings (loss):

       Primary:                     As reported        $  2.81        $    .07
                                    Pro forma          $  2.68        $   (.05)



       Fully Diluted:               As reported        $  2.72        $    .07
                                    Pro forma          $  2.59        $   (.05)


         Pro forma net earnings  (loss)  reflects only options granted under the
Plans in Fiscal 1997 and only Plan 1 for Fiscal 1996.  Therefore the full impact
of  calculated  compensation  costs for stock  options under SFAS No. 123 is not
reflected  in the  pro  forma  net  earnings  amounts  presented  above  because
compensation  costs for options  issued in periods  prior to Fiscal 1996 are not
considered.
                                       37
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Stock option  activity  during the periods  indicated  is as follows  (shares in
thousands):




                                                 -------------------------------
                                                   Number of      Range of
                                                    Shares     Exercise Prices
                                                 -------------------------------

 Options outstanding at September 30, 1995                      
                                                      581       $5.75 - $12.75
 Options granted                                                              
                                                      574           $5.75     
 Options cancelled                                                            
                                                     (386)      $5.75 - $12.75
                                                 -------------                
 Options outstanding at September 30, 1996                                    
                                                      769           $5.75     
 Options granted                                                              
                                                      109       $9.50 - $15.50
 Options exercised                                                            
                                                       (6)          $5.75     
 Options cancelled (1)                                                        
                                                     (108)          $5.75     
                                                 -------------                
 Options outstanding at September 30, 1997                                    
                                                      764       $5.75 - $15.50
                                                 =============  


(1)      On February 11, 1997, a Senior Vice President of the Company, agreed to
         have 30,000  options,  previously  granted  under Plan 2,  cancelled in
         exchange for the issuance of options under Plan 1 which entitled him to
         acquire 30,000 shares.  The exercise price of the cancelled options was
         $5.75 with a five year vesting period, 20% each year beginning April 7,
         1996.  The exercise price of the new options was $9.50 with three years
         vesting, 40% vested as of the grant date with 20% additional vesting on
         each annual anniversary date.

         The Company also agreed to pay an amount in cash which  represented the
         difference  between  the new options  granted at an  exercise  price of
         $9.50 and the options  cancelled  which had an exercise price of $5.75,
         based upon the vesting  schedule of the cancelled  Plan 2 options.  The
         Company charged these payments to compensation expense in fiscal 1997.



         As of September 30, 1997, there were 299,042 shares  exercisable  under
Plan 1 and  Plan 2 with a  weighted  average  exercise  price  of  $5.75.  As of
September 30, 1996, there were 86,000 shares  exercisable under Plan 1, all with
an exercise price of $5.75.
                                       38
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(10)   Employee Benefits

       In July 1991,  Pilgrim  America  Capital  Corporation  established  a tax
deferred  savings plan under Section  401(k) of the Internal  Revenue Code.  The
plan,  which was amended May 1, 1995,  covers all full time employees and allows
for a maximum contribution of $9,500 (the "Maximum") by each employee.  Prior to
May 1, 1995,  employees  were  allowed to  contribute  up to 20 percent of their
salary,  subject to the  Maximum.  Employees  were  immediately  vested in their
contributions. Matching contributions made by the Company were voluntary and any
matching contributions made through May 1, 1995 are fully vested.

       Subsequent to May 1, 1995,  pursuant to the amended  plan,  employees may
contribute  up to 10% of their salary,  subject to the Maximum,  and the Company
automatically matches the employee's  contributions,  up to 7% of the employee's
salary. Employees become vested in the Company's contributions over a three-year
period.

       During the year ended  September  30, 1997 and  September  30, 1996,  the
Company contributed $265,000 and $273,000, respectively, to the plan.

(11)   Commitments and Contingencies

       The Company is involved in various legal  proceedings  which arose in the
course of its  discontinued  mortgage  operations.  Management is of the opinion
that such  proceedings  are not  material in nature and will not have a material
adverse effect on the Company.

       The Company is obligated under certain  non-cancelable  operating  leases
for  equipment  and office  facilities.  In  addition,  during  the years  ended
September 30, 1997 and  September 30, 1996 the Company has provided  $96,000 and
$196,000,  respectively,  for  net  discounted  future  minimum  lease  payments
relating to lease  obligations  acquired from Pilgrim Group,  Inc. The Company's
operations have been relocated and the facilities subleased.
                                       39
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


       Future minimum lease payments  under the Company's  operating  leases for
its offices in Phoenix,  Arizona and for the offices in Los Angeles,  California
(which lease was acquired from Pilgrim Group, Inc. pursuant to the Acquisition),
as  well as the  sublease  income  related  to the Los  Angeles  office,  are as
follows:

            September         Lease             Sublease           Net
            30,              Payments            Income          Payments
            -----------     ----------        -----------        ---------

                  1998      $      889        $       525        $     364
                  1999             899                525              374
                  2000             719                350              369
                  2001             353                --               353
                  2002             276                --               276
                            ----------        -----------        ---------
                                                                    
                            $    3,136        $     1,400        $   1,736
                            ==========        ===========        =========
                                                                  
       Rent  expense  included  in  continuing  operations  for the years  ended
September  30,  1997,  1996 and 1995,  were  $341,000,  $333,000  and  $292,000,
respectively.

(12)   Related Party Transactions

       Investment  Advisory  Agreements.   Pursuant  to  investment   management
agreements  (the  "Agreements"),  the  Company  provides  investment  management
services to the Funds.  Following an initial  two-year  term, the Agreements are
renewable  annually based upon approval by a majority of the  respective  Fund's
disinterested directors.

       Additionally,  each  Agreement may be terminated  prior to its expiration
upon 60 days notice by either the Company or the Fund.

       As  provided in the  Agreements,  the Company  receives  management  fees
ranging from .50% to 1.25% on an annual basis of the  respective  Fund's average
daily net assets.  Management fees received from the Funds,  net of sub-advisory
fees,  amounted to $15.7 million during Fiscal 1997, $11.2 million during Fiscal
1996 and $5.1 million for the period from April 7, 1995 to  September  30, 1995.
The Agreements also contain expense  limitation  provisions  whereby the Company
has agreed to reimburse each Fund annually, under certain conditions,  an amount
equal  to all or a  portion  of  its  investment  advisory  fees.  Fund  expense
reimbursements under these provisions were $742,000 during Fiscal 1997, $606,000
during  Fiscal 1996,  and $94,000 for the period from April 7, 1995 to September
30, 1995. Amounts payable to the Funds under such provisions as of September 30,
1997 and September 30, 1996 were $95,000 and $56,000, respectively.

       In addition the Company acts as  administrator  for Pilgrim America Prime
Rate Trust (the "Trust").  Under the terms of the related Agreement, the Company
receives  annual  administrative  fees  ranging from .10% to .15% of the average
daily net assets plus any  borrowings of the Trust.  The fees are computed daily
and payable monthly.

       Administrative  fees  received  from the Trust  amounted to $1.7  million
during Fiscal 1997, $1.3 million during Fiscal 1996, and $608,000 for the period
from April 7, 1995 to September 30, 1995.
                                       40
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       The Company also serves as the principal  distributor for Pilgrim America
MagnaCap Fund, Pilgrim America High Yield Fund,  Pilgrim  Government  Securities
Income Fund, Pilgrim America Masters  Asia-Pacific  Equity Fund, Pilgrim America
Masters  MidCap Value Fund,  Pilgrim  America  Masters  LargeCap  Value Fund and
Pilgrim America Bank and Thrift Fund, open-end management  investment  companies
(collectively,  the "Open-end  Funds")  managed by the Company (see Notes 13 and
16).  Distribution  fees earned from the Open-end Funds amounted to $2.5 million
in Fiscal  1997,  $1.1  million for Fiscal 1996 and $377,000 for the period from
April 7, 1995 to September 30, 1995.


(13)   Distribution Plans

       Pursuant  to  Rule  12b-1  of the  Investment  Company  Act of  1940,  as
principal  distributor for the Open-end Funds, the Company receives distribution
fees ranging from .25% to 1.00% on an annual  basis of the  respective  Open-end
Fund's  average  daily net  assets.  Also under Rule 12b-1,  the  Company  makes
ongoing payments on a quarterly basis to authorized dealers for distribution and
shareholder  servicing at annual  rates  ranging from .25% to .65% of the Fund's
average daily net assets.

       The Company is entitled to  contingent  deferred  sales charges which are
imposed upon the redemption of certain  classes of shares of the Open-end Funds.
Such charges are paid by the redeeming  shareholder  and are imposed at the rate
of 5% for redemptions in the first year after purchase, declining to 4%, 3%, 3%,
2% and 1% in the second, third, fourth, fifth and sixth years, respectively.

(14)   Discontinued Operations

       Historically,  the  Company  had been  engaged  in the  mortgage  banking
business. On June 9, 1994, the Company sold its rights to service $305.5 million
of Government  National  Mortgage  Association  ("GNMA") loans. On September 30,
1994, the Company's mortgage  servicing  portfolio and operations were sold (see
Note 3). On February 28, 1995,  the Company  discontinued  the  remainder of its
mortgage banking  operations and recorded a provision for loss on discontinuance
of  mortgage  banking  operations  of  $986,000.  This  provision  included  the
anticipated mortgage banking related revenues and expenses,  including severance
expense and all other costs that will be incurred to phase out these operations.
Subsequent to February 28, 1995,  during  Fiscal 1995 the Company  increased the
loss  provision to $5.3 million,  based on  reevaluation  of its  allowances for
discontinued operations,  including legal fees and other costs relating to legal
proceedings  (see Note 15).  During Fiscal 1997, no additional  provisions  were
made for  discontinued  operations  and the Company  adjusted the  allowance for
discontinued  operations  by including  $413,000 (net of tax) of income from the
reversal of certain allowances for discontinued operations.  As of September 30,
1997 the Company believes that the remaining allowances are adequate to complete
the  discontinuance of the remaining  mortgage banking  operations.  The Company
believes that it has substantially  wound down its mortgage banking  operations,
but anticipates that mortgage loan related issues will continue to arise through
at least Fiscal 1998.

       Balance   Sheet.   The  balance  sheet   presentation   included  in  the
accompanying consolidated financial statements as of September 30, 1997 and 1996
has been  adjusted  to  reflect  the  assets  and  liabilities  relating  to the
Company's  mortgage  banking  operations  as  net  liabilities  of  discontinued
operations.
                                       41
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


       The following table sets forth certain balance sheet information  related
to these operations as of September 30, 1997 and 1996:

      Net Liabilities of Discontinued Operations
      (in thousands)
                                                             1997       1996
                                                           -------    -------
      
      Assets
      Other receivables                                    $    --    $   157
      Mortgage loans held for sale                           1,128      3,516
                                                           -------    -------
           Total assets                                      1,128      3,673
                                                           -------    -------
      
      Liabilities
      Accounts payable and accrued expenses                  1,358      3,191
      Allowances for contingencies (see Notes 11 and 15)      --        2,554
      Notes payable                                           --        1,320
                                                           -------    -------
      
           Total liabilities                                 1,358      7,065
                                                           -------    -------
      
      Net liabilities of discontinued operations           $  (230)   $(3,392)
                                                           =======    =======


       Operations.  The  statements of operations  presentation  included in the
accompanying  consolidated  financial  statements  for the  fiscal  years  ended
September 30, 1997,  1996, and 1995 have been adjusted to reflect the results of
the mortgage  banking  operations as discontinued  operations.  Primary earnings
(loss) per share  attributable to discontinued  operations were $0.10, $0.00 and
($1.08) in 1997, 1996 and 1995, respectively.

       Restructuring  Charges.  As of  September  30,  1997,  the Company had no
outstanding  leases on office or equipment related to the discontinued  mortgage
business.  Usage of the allowance for losses on office and equipment  leases was
$127,000 during Fiscal 1997 and the remaining  balance at September 30, 1996 was
$201,000.

       The  Company  has loss  allowances,  included  in  accrued  expenses  (of
discontinued operations), in the amount of $0 and $237,000 at September 30, 1997
and 1996,  respectively,  to provide for  estimated  losses to be incurred  upon
foreclosure of loans in the servicing  portfolio and for VA no-bids.  As of June
30, 1997 the Company's obligation to indemnify VA no-bids expired. Additionally,
as of  September  30,  1997 and 1996,  the Company  had  established  repurchase
allowances of $725,000 and $1.9 million, respectively, also in accrued expenses,
to provide for  estimated  losses to be incurred upon  repurchase  and resale of
loans originated by the Company.

(15)   Legal Proceedings

                  On May 23, 1997 the Company entered into an agreement with the
Federal Deposit Insurance  Corporation  ("FDIC") to settle all claims in a civil
action filed in December 1995 by the FDIC in the United States  District  Court,
District of Arizona.  The FDIC action  against the Company and other  defendants
sought at least $20  million  in actual  damages  and $80  million  in  punitive
damages. This settlement covers all FDIC claims asserted against the Company and
certain of its officers and directors. The Company settled with its Director and
Officer liability insurance carrier under the policy providing coverage for this
matter and had no charge to earnings.
                                       42
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(16)   Subsequent Event

       On October 20, 1997, the  shareholders of Pilgrim America Bank and Thrift
Fund voted to change the Fund from a Closed-end  Fund to an Open-end  Fund. As a
result of this change,  the Fund has entered into a distribution  agreement with
PAS to  distribute  the  Funds'  shares.  The Fund will pay PAS a .25% and 1.00%
12B-1  fee  based  on  average  annual  assets  of Class A and  Class B  shares,
respectively.


Item 9.       Changes in and  Disagreements with  Accountants on  Accounting and
              Financial Disclosures

       None.

Part III

Item 10.      Directors and Executive Officers of the Registrant

       Information  respecting  (a)  continuing  directors  and  nominees of the
Company is set forth under the caption  "Information  Concerning  Directors  and
Nominees"  and (b)  disclosure  of  delinquent  filers  pursuant  to Item 405 of
Regulation  S-K is set forth under the caption  "Compliance  with Section  16(a)
under The Exchange Act," in the Company's Proxy  Statement  relating to its 1998
Annual  Meeting of  Stockholders  incorporated  by reference into this Form 10-K
Report,  which will be filed with the  Securities  and  Exchange  Commission  in
accordance with Rule 14a-6(c)  promulgated under the Securities  Exchange Act of
1934  (the  "1998  Proxy  Statement").  With  the  exception  of  the  foregoing
information and other  information  specifically  incorporated by reference into
this Form 10-K Report,  the Company's 1998 Proxy Statement is not being filed as
a part hereof.  Information respecting executive officers of the Company who are
not  continuing  directors or nominees is set forth at the end of Part I of this
Report.

Item 11.      Executive Compensation

       Information  respecting  executive  compensation  is set forth  under the
caption "Executive Compensation" in the 1998 Proxy Statement,  which information
is incorporated herein by reference.

Item 12.      Security Ownership of Certain Beneficial Owners and Management

       Information  respecting  security  ownership of certain beneficial owners
and  management  is  included  under the  caption  "Principal  Stockholders  and
Stockholdings of Management" in the 1998 Proxy Statement,  which  information is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

       Information   respecting   certain   relationships  and  transactions  of
management  is set forth under the caption  "Certain  Transactions"  in the 1998
Proxy Statement, which information is incorporated herein by reference.
                                       43
<PAGE>
PART IV

Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<TABLE>
<CAPTION>
                                                                                                   Page or
       (a)       Financial Statements.                                                        Method of Filing
                                                                                        ------------------------------
<S>                  <C>                                                                <C>
            (1)      Report of KPMG Peat Marwick LLP                                               Page 24
            (2)      Consolidated Financial Statements and Notes thereto of                        Page 25
                     the Company,  including  Consolidated  Balance Sheets as of
                     September  30,  1997  and  1996  and  related  Consolidated
                     Statements  of  Operations,  Cash  Flows and  Stockholders'
                     Equity for the years ended  September  30,  1997,  1996 and
                     1995.

       (b)       Financial Statement Schedules.

            (1)      Report of KPMG Peat Marwick LLP                                               Page 50
            (2)      Schedule I-- Condensed Financial Information                                  Page 51
            (3)      Schedule II-- Valuation and Qualifying Accounts                               Page 52

       (c) Exhibits. The following exhibits are filed as part of this Report.

            3.1          Restated Certificate of Incorporation of Registrant            Incorporated by reference
                                                                                        to Exhibit 3.1 of the
                                                                                        Registrant's Annual Report
                                                                                        on Form 10-K for the Fiscal
                                                                                        Year Ended September 30,
                                                                                        1993 (the "1993 Form 10-K")

            3.2          Amended and Restated Bylaws of Registrant                      Incorporated by reference to
                                                                                        Exhibit 3.2 of the 1993 Form
                                                                                        10-K

            4.1          Form of Certificate for Common Stock                           Incorporated by reference to
                                                                                        Exhibit 4.1 of the 1993 Form
                                                                                        10-K

          4.2.1          Stock Option Plan of the Registrant (as amended through        Incorporated by reference to
                         November 1993)                                                 Exhibit 4.2.1 of the 1993
                                                                                        Form 10-K

          4.2.2          Form of Incentive Stock Option Agreement for the Stock         Incorporated by reference to
                         Option Plan                                                    Exhibit 4.2 of Form S-8
                                                                                        Registration Statement No.
                                                                                        33-61274 ("S-8 No. 33-61274")
</TABLE>
                                       44
<PAGE>
<TABLE>
<S>                      <C>                                                            <C>
          4.2.3          Form of Nonstatutory Stock Option Agreement for the            Incorporated by reference to
                         Stock Option Plan                                              Exhibit 4.3 of S-8 No.
                                                                                        33-61274

            4.3          Form of Stock Option Agreement for Non-Employee                Incorporated by reference to
                         Directors                                                      Exhibit 4 of Form S-8  No.
                                                                                        33-64738

          4.5.1          Performance Share Plan                                         Incorporated by reference to
                                                                                        Exhibit 4.5.1 of the 1996
                                                                                        Form 10K.

          4.5.2          Form of Performance Share Agreement                            Incorporated by reference to
                                                                                        Exhibit 4.5.2 of the 1996
                                                                                        Form 10K.

         10.1.1          Employment Agreement between Registrant and Robert             Incorporated by Reference to
                         W. Stallings dated August 16, 1995                             Exhibit 10.1.1 of the Report
                                                                                        on Form 10-K for the Fiscal
                                                                                        Year Ended September 30,
                                                                                        1995 (the "1995 Form 10-K")

         10.1.2          Employment Agreement between Registrant and James R.           Incorporated by Reference to
                         Reis dated August 16, 1995                                     Exhibit 10.1.2 of the 1995
                                                                                        Form 10-K

         10.2.3          Form of Indemnity Agreement between the Registrant             Incorporated by reference to
                         and each member of its Board of Directors                      Exhibit 10.9.3 of the 1992
                                                                                        Form 10-K

           10.3          Asset Purchase Agreement dated August 27, 1994                 Incorporated by reference to
                         between Registrant and NationsBanc Mortgage                    Exhibit 2 to Form 8-K
                         Corporation                                                    relating to an event of
                                                                                        August 27, 1994

                         Acquisition Agreement among the Registrant, Pilgrim            Incorporated by reference to
           10.4          Group, Inc., Pilgrim Management Corporation, Pilgrim           Exhibit 2 to Form 8-K
                         Distributors Corporation and Palomba Weingarten                relating to an event of
                                                                                        December 7,
                                                                                        1994

         10.5.1          Second Amended an Restated Credit Agreement dated as           Incorporated by reference to
                         of  July 31, 1997 by and between Pilgrim America Group,        exhibit 10.1 to the June 30,
                         Inc and First Bank National Association                        1997 Form 10Q.

          10.16          Reaffirmation of Security Agreement dated July 31, 1996,       Incorporated by reference to
                         PAI to First Bank                                              Exhibit 10.16 of the 1996
                                                                                        Form 10K.

          10.17          Reaffirmation of Security Agreement dated July 31, 1996,       Incorporated by reference to
                         by PAS to First Bank                                           Exhibit 10.17 of the 1996
                                                                                        Form 10K.

          10.18          Reaffirmation of Guaranty and Pledge Agreement dated           Incorporated by reference to
                         July 31, 1996, by the Registrant in favor of First Bank        Exhibit 10.18 of the 1996
                                                                                        Form 10K.
</TABLE>
                                       45
<PAGE>
<TABLE>
<S>                      <C>                                                            <C>
          10.19          Reaffirmation of Guaranty dated July 31, 1996, by PAI in       Incorporated by reference to
                         favor of First Bank                                            Exhibit 10.19 of the 1996
                                                                                        Form 10K.

          10.20          Reaffirmation of Pledge Agreement dated as of July 31,         Incorporated by reference to
                         1996, by PAG to First Bank                                     Exhibit 10.20 of the 1996
                                                                                        Form 10K.

          10.21          Portfolio Management Agreement among PAI, HSBC                 Incorporated by reference to
                         Asset Management Americas Inc. and HSBC Asset                  Exhibit 10.22 of the 1995
                         Management Hong Kong Limited, dated April 27, 1995             Form 10-K

          10.22          Portfolio Management Agreement dated May 1, 1995,              Incorporated by reference to
                         between PAI and CRM Advisors, LLC                              Exhibit 10.23 of the 1995
                                                                                        Form 10-K
          10.24          Investment Management Agreement dated June 6, 1995,            Incorporated by reference to
                         between PAI and Pilgrim America Masters Series, Inc.           Exhibit 10.25 of the 1995
                                                                                        Form 10-K

          10.25          Investment Management Agreement dated April 7, 1995,           Incorporated by reference to
                         between PAI and Pilgrim America Investment Funds, Inc.         Exhibit 99.5 of Form 8-K/A
                         on behalf of its Pilgrim America High Yield Fund series        Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.26          Investment Management Agreement dated April 7, 1995,           Incorporated by reference to
                         between PAI and Pilgrim Government Securities Income           Exhibit 99.4 of Form 8-K/A
                         Fund                                                           Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.27          Investment Management Agreement dated April 7, 1995,           Incorporated by reference to
                         between PAI and Pilgrim Prime Rate Trust                       Exhibit 99.1 of Form 8-K/A,
                                                                                        Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.28          Investment Management Agreement dated April 7, 1995,           Incorporated by reference to
                         between PAI and Pilgrim Regional BankShares Inc.               Exhibit 99.3 of Form 8-K/A,
                                                                                        Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.29          Investment Management Agreement dated April 7, 1995,           Incorporated by reference to
                         between PAI and Pilgrim America Investment Funds, Inc.         Exhibit 99.2 of Form 8-K/A,
                         on behalf of Pilgrim America MagnaCap Fund series              Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.30          Administration Agreement amended and restated as of            Incorporated by reference to
                         April 7, 1995, between PAG and Pilgrim Prime Rate Trust        Exhibit 99.6 of Form 8-K/A,
                                                                                        Amendment No. 2, Event dated
                                                                                        December 7, 1994
</TABLE>
                                       46
<PAGE>
<TABLE>
<S>                      <C>                                                            <C>
          10.31          Distribution Plan dated April 7, 1995, between PAI and         Incorporated by reference to
                         Pilgrim America Investment Funds, Inc. on behalf of its        Exhibit 99.7 of Form 8-K/A
                         Pilgrim America MagnaCap Fund series and PAS                   Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.32          Distribution Plan dated April 7, 1995, between PAI and         Incorporated by reference to
                         Pilgrim America Investment Funds, Inc. on behalf of its        Exhibit 99.8 of Form 8-K/A,
                         Pilgrim America High Yield Fund series and PAS                 Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.33          Distribution Plan dated April 7, 1995, between Pilgrim         Incorporated by reference to
                         Government Securities Income Fund, Inc. and PAS                Exhibit 99.9 of Form 8-K/A,
                                                                                        Amendment No. 2, Event dated
                                                                                        December 7, 1994

          10.34          Agreement dated July 23, 1997 between Merrill Lynch Pierce,    Page 53
                         Fenner and  Smith, Inc. and Pilgrim America Investments, Inc.

          10.35          Collateral Management Agreement dated November 13, 1997        Page 61
                         between ML CLO XII Pilgrim America Ltd. and Pilgrim America
                         Investments, Inc.

           11.1          Computation of Earnings per Share.                             Page 80

             21          Subsidiaries of Registrant                                     Incorporated by reference to
                                                                                        Exhibit 21 of the 1995 Form
                                                                                        10k.

             23          Consent of KPMG Peat Marwick LLP                               Included in Report at
                                                                                        Financial Statement Schedules

             24          Powers of Attorney                                             See Signature Page

</TABLE>
       (d)             Reports on Form 8-K.

                        None

                                       47
<PAGE>
                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report of Form 10-K to
be signed on its behalf by the undersigned, thereunto  duly authorized,  this 19
day of December, 1997.

                PILGRIM AMERICA CAPITAL CORPORATION,
                a Delaware corporation


                By: /s/ Robert W. Stallings 
                    ---------------------------------------
                    Robert W. Stallings
                    Chairman of the Board, Chief Executive Officer and President
                                       48
<PAGE>
                                POWER OF ATTORNEY

       KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature appears
below  constitutes  and appoints Robert W. Stallings and James R. Reis, and each
of them, his true and lawful  attorneys-in-fact  and agents,  with full power of
substitution  and  resubstitution,  for him and in his name, place and stead, in
any and all capacities,  to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto,  and other documents in
connection therewith with the Securities and Exchange Commission,  granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing  requisite  and necessary to be done
in and about the premises,  as fully and to all intents and purposes as he might
or  could  do  in  person  hereby   ratifying  and   confirming  all  that  said
attorneys-in-fact and agents, or his substitute or substitutes,  may lawfully do
or cause to be done by virtue hereof.

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following  persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

Signature                                Title                                        Date

<S>                                      <C>                                          <C> 
/s/   Robert W. Stallings                Chairman of the Board, Chief                 December 19, 1997
---------------------------------------- Executive Officer and President (Principal
Robert W. Stallings                      Executive Officer)                        
                                         

/s/   James R. Reis                      Vice Chairman and Chief Financial            December 19, 1997
---------------------------------------- Officer (Principal Accounting
James R. Reis                            Officer                      
                                         

/s/   John C. Cotton                     Director                                     December 19, 1997
----------------------------------------
John C. Cotton

/a/ Roy A. Herberger, Jr.                Director                                     December 19, 1997
----------------------------------------
Roy A. Herberger, Jr.

/s/   John M. Holliman, III              Director                                     December 19, 1997
----------------------------------------
John M. Holliman, III

/s/   Stephen A McConnell                Director                                     December 19, 1997
----------------------------------------
Stephen A McConnell

/s/   Paul J. Renze                      Director                                     December 19, 1997
----------------------------------------
Paul J. Renze
</TABLE>
                                       49
<PAGE>
              Independent Auditors' Consent and Report on Schedules
              -----------------------------------------------------


The Board of Directors
Pilgrim America Capital Corporation:

The audits  referred to in our report  dated  October  17,  1997,  included  the
related financial statement schedules as of September 30, 1997 and 1996, and for
each of the years in the  three-year  period ended  September  30,  1997.  These
financial   statement   schedules  are  the   responsibility  of  the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statement  schedules  based  on our  audits.  In  our  opinion,  such  financial
statement  schedules,  when  considered  in relation  to the basic  consolidated
financial  statements taken as a whole,  present fairly in all material respects
the information set forth therein.

We consent to the incorporation by reference in the registration  statements No.
333-23051,  No. 333-06597,  No. 33-61274 and No. 33-64738 on Form S-8 of Pilgrim
America Capital Corporation of our report dated October 17, 1997 relating to the
consolidated   balance  sheets  of  Pilgrim  America  Capital   Corporation  and
subsidiaries  as of  September  30, 1997 and 1996 and the  related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
years in the  three-year  period ended  September  30, 1997 and our report dated
December  22,  1997  relating  to the  schedules  set  forth  in  the  preceding
paragraph, which reports appear in the September 30, 1997, annual report of Form
10-K of Pilgrim America Capital Corporation.


                                              /s/ KPMG Peat Marwick LLP
                                              KPMG Peat Marwick LLP



December 22, 1997
Los Angeles, California
                                       50
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PILGRIM AMERICA CAPITAL CORPORATION


in thousands
-----------------------------------------------------------------------------------------------------------------------------------

Condensed Balance Sheets
                               September 30, September 30,                                              September 30, September 30,
                                   1997          1996                                                       1997          1996
                               ------------- -------------                                              ------------- ------------
<S>                              <C>           <C>          <C>                                           <C>           <C>     
Assets:                                                     Liabilities and Stockholders' Equity:       
Cash and cash equivalents .....  $     -       $      3     Notes payable .............................   $  5,475      $      -
Investments ...................     2,990         2,346     Due from subsidiaries .....................        252             -
Investments in subsidiaries ...    39,352        32,552     Other liabilities .........................      1,668         6,592
Note receivable ...............     3,976             -                                                   --------      --------
Receivables ...................       225             -     Total liabilities .........................      7,395         6,592
Due from subsidiaries .........        -            942                                                   --------      --------
Deferred tax asset ............     1,990             -     Common stock ..............................         54            54
Other assets ..................       615           537        Less: Treasury stock ...................     (8,623)       (8,623)
                                                            Additional paid in capital ................     48,795        48,759 
                                                            Unrealized gain on investments ............        538           333 
                                                            Retained earnings (accumulated deficit)....        989       (10,735)
                                                                                                          --------      -------- 
                                                                  Total stockholders' equity ..........     41,753        29,788  
                                 --------      --------                                                   --------      --------
                                                            Total liabilities and stockholders'                         
Total assets ..................  $ 49,148      $ 36,380           equity ..............................   $ 49,148      $ 36,380
                                 ========      ========                                                   ========      ========
                                                                                                                 
                                                                                                      

Condensed Statement of Operations
                                                                                               For the Years Ended September 30,
                                                                                                  1997        1996       1995
                                                                                               ----------  ---------- ----------
Equity in  earnings (loss) of subsidiaries ...................................................  $  8,289    $    588   $ (5,811)
Other gain (loss) ............................................................................     1,091        (240)       (60)
Income tax benefit ...........................................................................     2,344           -          -
                                                                                               ----------  ---------- ----------
Net earnings (loss) ..........................................................................  $ 11,724    $    348   $ (5,871)
                                                                                               ==========  ========== ==========
                                                                                              
                                                                                              
                                                                                            
Condensed Statements of Cash Flows

                                                                                               For the Years Ended September 30,
                                                                                                  1997         1996      1995
                                                                                               ----------  ---------- ----------
  Net cash provided by operating activities ..................................................  $    400    $  6,940   $  4,714 
                                                                                               ----------  ---------- ----------
  Net cash used in investing activities ......................................................      (439)        (13)    (2,000)
                                                                                               ----------  ---------- ----------
  Redemption of preferred stock ..............................................................         -        (338)      (677)
  Purchase of treasury stock .................................................................         -      (6,615)    (2,008)
  Purchase of stock options ..................................................................        36           -          -
                                                                                               ----------  ---------- ----------
  Net cash provided by (used in) financing activities ........................................        36      (6,953)    (2,685)
                                                                                               ----------  ---------- ----------
  Increase(decrease) in cash and cash equivalents ............................................        (3)        (26)        29
  Cash and cash equivalents, beginning of period .............................................         3          29          -
                                                                                               ----------  ---------- ----------
  Cash and cash equivalents, end of period ...................................................  $      -    $      3   $     29
                                                                                               ==========  ========== ==========
</TABLE>
                                       51
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE I I - VALUATION AND QUALIFYING ACCOUNTS
PILGRIM AMERICA CAPITAL CORPORATION


in thousands
----------------------------------------------------------------------------------------------------------------------------------

              Column A                    Column B                    Column C                     Column D           Column E
--------------------------------------    -------------   ---------------------------------    -----------------   ---------------
                                                                      Additions
                                                          ---------------------------------
                                           Balance at      Charged to         Charged from                             Balance
                                           beginning       costs and          (to) other                               at end
             Description                   of period        expenses            accounts         Deductions (1)       of period
--------------------------------------    -------------   -------------     ---------------    -----------------   ---------------
<S>                                        <C>            <C>               <C>                  <C>                  <C>     
Year ended September 30, 1997                                                                                        
Allowance for restructuring                $     201      $      -          $     (103)          $     (98)           $      -
Allowance for repurchases                      1,930             -                (709)               (496)                725
Allowance for losses                             893          (696) (3)          1,086                (670)                613
Allowance for contingencies (2)                2,554             -                (407)             (2,147)                  -
                                                                                                                     
Year ended September 30, 1996                                                                                        
Allowance for restructuring                      328             -                   -                (127)                201
Allowance for repurchases                      3,171             -                   -              (1,241)              1,930
Allowance for losses                           1,003             -                  58                (168)                893
Allowance for contingencies (2)                3,000             -                 528                (974)              2,554
                                                                                                                     
Year ended September 30, 1995                                                                                        
Allowance for restructuring                    4,661             -                (469)             (3,864)                328
Allowance for repurchases                      1,747         2,826                 271              (1,673)              3,171
Allowance for losses                           1,738           334                (271)               (798)              1,003
Allowance for contingencies (2)                    -         3,000                   -                                   3,000
</TABLE>

(1)  Actual  losses   charged   against   allowance,   net  of  recoveries   and
     reclassifications

(2)  For estimated costs related to RTC action (see "Item 3. Legal  Proceedings"
     and "Item 8. Financial Statements and Supplementary Data - Notes 11, 15").

(3)  The Company  determined that the allowance for discontinued  operations was
     overstated  and  recorded  income  from  discontinued  operations  (see the
     Statement  of  Operations  "Earnings  (loss)  from  discontinued   mortgage
     business, net of tax").
                                       52