DREYFUS INCOME FUNDS INC, N-30D, 1998-01-15

DREYFUS INCOME FUNDS INC
N-30D, 1998-01-15

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<PAGE>
Dreyfus
Short Term
High Yield Fund
Annual Report

October 31, 1997

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Letter to Shareholders

Dear Shareholder:

We are pleased to provide you with this report on the Dreyfus Short Term High
Yield Fund. For the 12-month period ended October 31, 1997, your Fund produced a
total return, including share price changes and dividend income, of 13.38%.*
Income dividends paid from net investment income during the period amounted to
approximately $1.285 per share, representing a distribution rate per share of
9.87%.**

Economic Review

With the level of inflation at its lowest since 1964, and unemployment still
near a 23-year low, the economy continued its solid growth over the reporting
period. Gross Domestic Product (GDP) -- the dollar total of all goods and
services produced in the United States -- has grown in excess of 3% for the past
four quarters, a level and consistency of gain unmatched since 1984. This
extraordinary economic performance has been fueled by huge business investment
in new plants and equipment as well as a renewed surge in consumer spending over
the summer. Consumers play a substantial role in determining the course of the
economy since their spending accounts for two-thirds of all economic activity.
Retail sales rose through the summer and into September, although there was some
sign of deceleration as the third quarter progressed.

The big economic story continued to be the lack of inflation in an economy in
its seventh year of expansion. This remarkable price stability, at a time in the
business cycle when inflationary pressures would usually be apparent, has
enabled the Federal Reserve Board (the "Fed") to refrain from tightening
monetary policy. The Federal Open Market Committee (FOMC), the policy-making arm
of the Fed, has raised interest rates just once in over two years, a period
roughly coinciding with the surge of growth in the economy. The last increase in
short-term interest rates came on March 25, 1997 when the FOMC increased the
Federal Funds rate by a modest one-quarter of a percentage point to 5.50%. (The
Federal Funds rate is the rate of interest that banks charge one another for
overnight loans.)

Of course, the recent financial market turbulence arising from currency
devaluations in some of the economically weaker Southeast Asian countries has
added a cautionary note to any Fed monetary actions that might further roil
investment markets. The Southeast Asian economies have been cooling or in
outright recession for some time and represent a large share of the global
economy and the U.S. import/export market. The recent crisis has boosted the
value of the U.S. dollar and could further dampen the demand for U.S. exports to
this region. This bodes well for continued low inflation in the U.S. and weakens
the argument that we are on the brink of price acceleration.

In fact, inflation remains in check. The Implicit Price Deflator, an
indicator of inflation that measures the prices of all goods and services in the
U.S., has risen at an annual rate of less than 2% for the past two quarters.
This favorable trend in prices has been mirrored by both the Consumer Price and
Producer Price Indices. The Labor Department's Employment Cost Index, a broad
measure of changes in wages and benefits, has indicated relatively modest
increases in labor costs. Still, the labor market remains tight, with the
unemployment rate at a level unmatched in 23 years.

Whether the economy will slow without further monetary restraint by the Fed
remains an open question. Industrial production has been strong and operating
rates, an indicator of possible future price pressures, have edged to their
highest level in two years. Of paramount concern to Fed Chairman Alan Greenspan
is the possibility of continuing economic growth so strong that the unemployment
rate is driven even lower, and a subsequent corresponding upsurge in wage rates
reignites inflation. The performance of the economy over the coming months
appears crucial in determining whether the Fed will actively restrain the
economy. We remain alert to changes in economic trends that would increase the
risk of rising inflation and, consequently, the prospect of higher interest
rates.

<PAGE>

Market Environment

The high yield market ended another fairly exuberant period that began in the
middle of a correction last March and April, rallied throughout the summer, and
finished with a much weaker correction late in October due to turmoil in the
emerging market sectors. Drivers for this market strength include investor
demand for high yield assets, continued strong, steady growth in the domestic
economy, and less perceived credit risk in key sectors like telecommunications
and cable. The influence of the emerging markets on high yield has grown as an
increasing number of foreign corporations have issued high yield bonds. Investor
sell-off of these issues in October briefly spilled over into domestic high
yield issues, but concerns about heavy high yield mutual fund redemptions proved
unwarranted. In fact, continued positive demand has supported the high yield
market during this recent turmoil. Until the worldwide effects of the Asian
monetary crisis are better understood, the high yield market should expect some
level of short-term volatility.

The Portfolio

The Dreyfus Short Term High Yield Fund achieved a total return of 7.47% for
the six-month period ended October 31, 1997. The shorter effective duration and
maturity of your Fund insulated it somewhat from the high yield market
correction last March and April, but caused it to lag the high yield market in
general during the subsequent rally through the summer. Remember, of course,
that your Fund is designed to minimize interest-rate risk with its shorter
maturity and duration and that it is a unique Fund in the mutual fund industry
with a peer group inavoidably composed of longer-term high yield funds.

The investment strategy of the Fund has been three-pronged: 1) investment in
callable bonds in industries with long-term growth potential, 2) short-term
maturities in cyclical industries, and 3) well-researched special situations
where positive credit characteristics could cause early redemption. Exposure to
emerging markets is very low. We believe this strategy has served the Fund quite
well on a relative basis, and no changes in this strategy are anticipated at
this time.

Our primary task--to provide high current income from short-term high yield
securities--will guide our portfolio management decisions. We will continue to
use intensive fundamental research to achieve high current income from good
credits.

Very Truly Yours,

/s/ Roger King

Roger King
Portfolio Manager
November 18, 1997
New York, N.Y.

* Total return includes reinvestment of dividends and any capital gains paid.

** Distribution rate per share is based upon dividends per share paid from net
investment income during the period, divided by the net asset value per
share at the end of the period, adjusted for capital gain distributions.

<PAGE>
Dreyfus Short Term High Yield Fund October 31, 1997
- -------------------------------------------------------------------------------

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
DREYFUS SHORT TERM HIGH YIELD FUND
WITH THE MERRILL LYNCH HIGH YIELD MASTER II INDEX AND
THE DREYFUS CUSTOMIZED LIMITED TERM HIGH
YIELD INDEX

Dollars
$11,800
Merrill Lynch High Yield
Master II Index*

$11,745
Dreyfus Short Term
High Yield Fund

$11,411
Dreyfus Customized
Limited Term
High Yield Index*

*Source: Merrill Lynch, Pierce, Fenner and Smith Inc.

Average Annual Total Returns
- ------------------------------------------------------------------------------

One Year Ended From Inception (8/16/96)
October 31, 1997 to October 31, 1997
---------------- ------------------------
13.38% 14.22%
- ---------------
Past performance is not predictive of future performance.

The above graph compares a $10,000 investment made in Dreyfus Short Term High
Yield Fund on 8/16/96 (Inception Date) to a $10,000 investment made in the
Merrill Lynch High Yield Master II Index (the "Merrill Index") on that date, as
well as to a customized "Limited-Term High-Yield Index" which has been
constructed by The Dreyfus Corporation, each of which are described below. The
Dreyfus Customized Limited Term High Yield Index has been used by the Fund's
portfolio manager since the Fund's inception as a benchmark in managing the
Fund, because of the unique nature of the Fund and the lack of a representative
broad-based shorter-term high yield securities Index. For comparative purposes,
the value of each Index on 8/31/96 is used as the beginning value on 8/16/96.
All dividends and capital gain distributions are reinvested. Components of the
Dreyfus Customized Limited Term High Yield Index are reallocated annually.

The Fund seeks to achieve its objective by investing in high yield securities,
and by maintaining an average effective portfolio maturity and average duration
of three years or less. The Fund's performance shown in the line graph takes
into account all applicable fees and expenses. The Merrill Index is a market
capitalization weighted index including all domestic and Yankee high-yield bonds
with at least $100 million par amount outstanding and greater than or equal to
one year to maturity. Both interest and price changes are calculated daily based
on an accrued schedule and trader pricing. The Dreyfus Customized Limited Term
High Yield Index is composed of four subindices of the Merrill Index. These
subindices, blended and market weighted, are (i) BB-rated 1-3 years, (ii)
B-rated 1-3 years, (iii) BB-rated 3-5 years, and (iv) B-rated 3-5 years. Unlike
the Dreyfus Customized Limited Term High Yield Index, which is composed of bonds
rated no lower than "B," the Fund can invest in bonds with lower credit ratings
than "B" and as low as "D". The Merrill Index includes "C"-rated bonds. Neither
Index takes into account charges, fees and other expenses. Further information
relating to Fund performance, including expense reimbursements, if applicable,
is contained in the Financial Highlights section of the Prospectus and elsewhere
in this report.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments October 31, 1997

<TABLE>
<CAPTION>
Principal
Bonds and Notes--100.7% Amount Value
- ---------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Aircraft & Aerospace--6.7% AM General,
Sr. Notes, Ser. B, 12 7/8%, 2002.............. $ 1,000,000 $ 1,075,000
Aircraft Lease Portfolio Securitisation 96-1,
Pass Through Trust, Ctfs.,
Cl. D, 12 3/4%, 2006.......................... 598,351 646,220
America West Airlines Pass Through Trust,
Pass Through Ctfs., Ser. 1996-1,
Cl. D, 8.16%, 2002............................ 749,297 743,678
Fairchild,
Sub. Deb., 12%, 2001.......................... 4,319,000 4,362,190
NWA Trust,
Sub. Notes, Ser. D, 13 7/8%, 2008............. 510,000 612,633
RHI Holdings,
Sr. Sub. Deb., 11 7/8%, 1999.................. 862,000 859,845
Rocal, Ltd.,
Collateralized Global Medium Term Notes
(Gtd. by Embraer-Empresa Brasileira de Aeronautica,
S.A.), 10 1/4%, 1998.......................... 1,500,000(a) 1,492,500
------------ ------------
9,792,066
------------

Broadcasting--4.8% Azteca Holdings, S.A. de C.V.,
Sr. Secured Notes, 11%, 2002.................. 500,000(a) 492,500
Paxson Communications,
Sr. Sub. Notes, 11 5/8%, 2002................. 1,000,000 1,090,000
Pegasus Media & Communications,
Sr. Sub. Notes, Ser. B, 12 1/2%, 2005......... 2,500,000 2,850,000
Scandinavian Broadcasting System SA,
Conv. Sub. Deb., 7 1/4%, 2005................. 1,000,000 1,047,500
Univision Network Holding, L.P.,
Sub. Notes, 7%, 2002.......................... 2,550,575 1,601,250
------------ ------------
7,081,250
------------
Cable Television--9.8% Adelphia Communications,
Deb., 11 7/8%, 2004........................... 1,000,000 1,090,000
CCA Holdings,
Sr. Sub. Notes, Zero Coupon, 1999............. 3,731,362 2,765,000
Echostar Satellite Broadcast:
Gtd. Notes, 12 1/2%, 2002..................... 1,500,000(a) 1,601,250
Sr. Discount Notes, Zero Coupon, 2000......... 1,000,000(b) 795,000
Galaxy Telecom, L.P.,
Sr. Sub. Notes, 12 3/8%, 2005................. 1,000,000 1,085,000
Marcus Cable, L.P.:
Sr. Deb., 11 7/8%, 2005....................... 1,000,000 1,085,000
Sr. Discount Notes, Zero Coupon, 2000......... 3,000,000(c) 2,535,000
Marcus Cable Operating, L.P.,
Gtd. Sr. Sub. Discount Notes,
Zero Coupon, 1999............................. 1,000,000(d) 905,000
</TABLE>

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments (continued) October 31, 1997

<TABLE>
<CAPTION>
Principal
Bonds and Notes (continued) Amount Value
- ---------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Cable Television (continued) United International Holdings,
Sr. Discount Notes, Ser. B, Zero Coupon, 1999 $ 3,000,000 $ 2,475,000
------------
14,336,250
------------
Casinos/Gaming--5.3% Coast Hotels and Casinos,
First Mortgage Notes, 13%, 2002............... 2,500,000 2,800,000
Griffin Gaming and Entertainment,
First Mortgage Notes, 9.27%, 2000............. 1,500,000 1,461,402
Majestic Star Casino, LLC,
Sr. Exchange Secured Notes, 12 3/4%, 2003..... 1,625,000 1,771,250
Waterford Gaming, L.L.C./Finance,
Sr. Notes, 12 3/4%, 2003...................... 1,500,000 1,663,125
------------
7,695,777
------------
Construction/Engineering--3.3% Emcor Group,
Notes, Ser. C, 11%, 2001...................... 4,585,050 4,837,228
------------
Consumer--5.4% Coleman Holdings,
Sr. Secured First Priority Discount Notes,
Zero Coupon, 2001............................. 2,000,000(a) 1,290,000
Health o meter,
Sr. Sub. Notes, 13%, 2002 (Units)............. 750,000(e) 797,813
Hosiery Corp. of America,
Sr. Sub. Exchange Notes, 13 3/4%, 2002........ 1,000,000 1,075,000
MacAndrews & Forbes,
Sr. Sub. Notes, 11 7/8%, 2002................. 1,250,000 1,330,462
Revlon Worldwide,
Sr. Secured Discount Notes,
Zero Coupon, 2001............................. 5,000,000 3,425,000
------------
7,918,275
------------
Energy--9.9% Clark R & M Holdings,
Sr. Notes, Ser. A, Zero Coupon, 2000.......... 1,500,000 1,162,500
Clark USA,
Sr. Notes, Ser. B, 10 7/8%, 2005.............. 1,000,000 1,092,500
DeepTech International,
Sr. Secured Notes:
11%, 2000.................................. 4,500,000(a) 4,522,500
12%, 2000.................................. 2,650,000 2,795,750
Gerrity Oil & Gas,
Sr. Sub. Notes, 11 3/4%, 2004................. 544,000 590,240
Kelly Oil & Gas:
Conv. Deb., 8 1/2%, 2000...................... 2,271,000 2,248,290
Conv. Sub. Notes, 7 7/8%, 1999................ 1,699,000 1,650,154
</TABLE>

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments (continued) October 31, 1997

Financial/Asset-Backed--4.3% Commercial Loan Funding Trust I,
Floating Rate Sub. Notes, Cl. D1, 10%, 2005... 1,500,000(f) 1,500,000
Imperial Credit Capital Trust I,
Remarketed Par Securities, Ser. A, 10 1/4%, 2002 2,000,000(a) 2,092,162
Prime Finance, Equipment Lease Receivables
Backed Pay-Through Notes,
Ser. 1997-A, Cl. B, 7.295%, 2005.............. 2,874,322(a) 2,709,498
------------
6,301,660
------------

Foods and Beverages--4.2% American Rice,
First Mortgage, 13%, 2002..................... 2,000,000 2,010,000
Envirodyne Industries,
Sr. Notes, 10 1/4%, 2001...................... 1,000,000 995,000
PM Holdings,
Sub. Discount Deb., Ser. B, Zero Coupon, 2000. 1,500,000(g) 1,192,500
RC/Arbys,
Gtd. Sr. Notes, 9 3/4%, 2000.................. 2,000,000 2,030,000
------------
6,227,500
------------

Foreign--.3% Net Sat Servicos, Ltda.,
Sr. Secured Notes, 12 3/4%, 2001.............. 500,000(h) 512,500
------------
Forest Products--1.0% Maxxam Group Holdings,
Sr. Secured Notes, 12%, 2003.................. 1,400,000 1,501,500
------------

Homebuilding--2.0% KHE Finance,
Sub. Notes (Gtd. by Hovnanian Enterprises),
11 1/4%, 2002................................. 1,000,000 1,047,500
Oriole Homes,
Sr. Notes, 12 1/2%, 2003...................... 1,995,000 1,845,375
------------
2,892,875
------------
</TABLE>

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments (continued) October 31, 1997

Paper and Paper Related--1.3% Repap New Brunswick,
Sr. Notes, 9 1/16%, 2000...................... 1,500,000(f) 1,477,500
Stone Container,
Sr. Sub. Notes, 11%, 1999..................... 350,000 362,250
------------
1,839,750
------------

Real Estate--1.0% Rockefeller Center Properties,
Conv. Deb., Zero Coupon, 2000................. 2,000,000 1,407,500
------------
Retail--5.9% CompUSA,
Sr. Sub. Notes, 9 1/2%, 2000.................. 1,401,000 1,439,527
Discovery Zone,
Sr. Secured Notes, 13 1/2%, 2002 (Units)...... 1,500,000(a,e) 1,590,000
Duane Reade Holding:
Sr. Notes, 12%, 2002.......................... 1,000,000 1,035,000
Sub. Notes, Zero Coupon, 1999................. 2,500,000(i) 2,125,000
Finlay Jewelry,
Sr. Notes, 10 5/8%, 2003...................... 2,400,000 2,532,000
------------
8,721,527
------------
Shipping--2.3% Moran Transportation,
First Preferred Ship Mortgage Notes,
11 3/4%, 2004................................. 3,000,000 3,360,000
------------

Steel--4.1% Earle M. Jorgensen,
Sr. Notes, 10 3/4%, 2000...................... 1,000,000 1,005,000
Republic Engineered Steels,
First Mortgage Notes, 9 7/8%, 2001............ 3,000,000 2,910,000

</TABLE>

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments (continued) October 31, 1997

<TABLE>
<CAPTION>
Principal
Bonds and Notes (continued) Amount Value
- ---------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Steel (continued) Russel Metals,
Sr. Notes, 10 1/4%, 2000...................... $ 2,000,000 $ 2,095,000
------------
6,010,000
------------
Supermarkets--2.4% Pathmark Stores,
Sub. Notes, 11 5/8%, 2002..................... 1,263,000 1,256,685
Ralphs Grocery,
Sr. Notes, 10.45%, 2004....................... 2,000,000 2,200,000
------------
3,456,685
------------
Technology--1.2% Unisys, Sr. Notes:
10 5/8%, 1999................................. 500,000 511,250
12%, 2003..................................... 1,150,000 1,293,750
------------
1,805,000
------------
Telecommunications--8.2% Call-Net Enterprises,
Sr. Discount Notes, Zero Coupon, 1999......... 3,000,000(j) 2,715,000
Dial Call Communications:
Sr. Discount Notes, Zero Coupon, 1998......... 2,000,000(k) 1,755,000
Sr. Redeemable Discount Notes,
Zero Coupon, 1999 (Units).................. 3,500,000(e,l) 3,281,250
Microcell Telecommunications,
Sr. Discount Notes, Zero Coupon, 2001......... 5,000,000(m) 3,350,000
Nextel Communications,
Sr. Redeemable Discount Notes, Zero Coupon, 1998 1,000,000(n) 976,250
------------
12,077,500
------------
Textiles--4.4% Sassco Fashion,
Notes, 12 3/4%, 2004.......................... 3,317,519 3,499,983
Texfi Industries,
Sr. Sub. Deb., 8 3/4%, 1999................... 2,500,000 2,475,000
Willcox & Gibbs,
Sr. Notes, Ser. B., 12 1/4%, 2003............. 500,000 490,000
------------
6,464,983
------------
Transportation--5.9% Aerovias de Mexico S.A.:
Deb., 9 3/4%, 2000............................ 1,000,000 1,001,250
Deb., 9 3/4%, 2000............................ 1,000,000(a) 1,001,250
CHC Helicopter,
Sr. Sub. Notes, 11 1/2%, 2002 (Units)......... 1,000,000(e) 1,070,000
OMI,
Sr. Notes, 10 1/4%, 2003...................... 2,000,000 1,910,000
ValuJet,
Sr. Notes, 10 1/4%, 2001...................... 3,950,000 3,683,375
------------
8,665,875
------------
TOTAL BONDS AND NOTES
(cost $147,709,479)........................... $147,854,716
------------
------------
</TABLE>

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Investments (continued) October 31, 1997

Equity-Related Securities--1.7% Shares Value
- --------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Common Stock--0.0%
Consumer; Sun International Hotels........................ 198(o) $ 7,128
------------
Preferred Stock--1.7%

Cable Television; Time Warner,
Cum., Ser. K, $102.50........................ 2,103 2,423,708
------------
TOTAL EQUITY-RELATED SECURITIES
(cost $2,319,054)............................ $ 2,430,836
------------
------------
TOTAL INVESTMENTS (cost $150,028,533)............................................ 102.4% $150,285,552
------ ------------
------ ------------
LIABILITIES, LESS CASH AND RECEIVABLES........................................... (2.4%) $ (3,558,469)
------ ------------
------ ------------
NET ASSETS....................................................................... 100.0% $146,727,083
------ ------------
------ ------------
<FN>
Notes to Statement of Investments:
- -------------------------------------------------------------------------------
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31,
1997, these securities amounted to $18,299,160 or 12.5% of net assets.
(b) Zero coupon until 3/15/2000, date on which a stated coupon rate of 13 1/8%
becomes effective; the stated maturity date is 3/15/2004.
(c) Zero coupon until 6/15/2000, date on which a stated coupon rate of 14 1/4%
becomes effective; the stated maturity date is 12/15/2005.
(d) Zero coupon until 8/1/1999, date on which a stated coupon rate of 13 1/2%
becomes effective; the stated maturity date is 8/1/2004.
(e) With warrants to purchase common stock.
(f) Variable rate security-interest rate subject to periodic change.
(g) Zero coupon until 9/1/2000, date on which a stated coupon rate of 11 1/2%
becomes effective; the stated maturity date is 9/1/2005.
(h) Reflects date security can be redeemed at holders' option; the stated
maturity is 8/5/2004.
(i) Zero coupon until 9/15/1999, date on which a stated coupon rate of 15%
becomes effective; the stated maturity date is 9/15/2004.
(j) Zero coupon until 12/1/1999, date on which a stated coupon rate of 13 1/4%
becomes effective; the stated maturity date is 12/1/2004.
(k) Zero coupon until 12/15/1998, date on which a stated coupon rate of 10 1/4%
becomes effective; the stated maturity date is 12/15/2005.
(l) Zero coupon until 4/15/1999, date on which a stated coupon rate of 12 1/4%
becomes effective; the stated maturity date is 4/15/2004.
(m) Zero coupon until 12/1/2001, date on which a stated coupon rate of 14%
becomes effective; the stated maturity date is 6/1/2006.
(n) Zero coupon until 9/1/1998, date on which a stated coupon rate of 11 1/2%
becomes effective; the stated maturity date is 9/1/2003.
(o) Non-income producing.

</TABLE>

See notes to financial statements.

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Assets and Liabilities October 31, 1997

Cost Value
-------------- -------------
<S> <C> <C> <C>
ASSETS: Investments in securities--See Statement of Investments $150,028,533 $150,285,552
Cash............................................. 123,375
Interest receivable.............................. 3,164,755
Receivable for shares of Beneficial Interest subscribed 1,310,114
Prepaid expenses and other assets................ 14,045
------------
154,897,841
------------

LIABILITIES: Due to The Dreyfus Corporation and affiliates.... 112,942
Bank loan payable--Note 2........................ 6,710,000
Payable for shares of Beneficial Interest redeemed 1,242,730
Interest payable--Note 2......................... 25,553
Payable for investment securities purchased...... 15,475
Accrued expenses ................................ 64,058
------------
8,170,758
------------
NET ASSETS..................................................................... $146,727,083
------------
------------

REPRESENTED BY: Paid-in capital.................................. $144,964,813
Accumulated undistributed investment income--net. 105,820
Accumulated net realized gain (loss) on investments 1,399,431
Accumulated net unrealized appreciation (depreciation)
on investments--Note 4(b)...................... 257,019
------------
NET ASSETS..................................................................... $146,727,083
------------
------------
SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest authorized). 11,306,665

NET ASSET VALUE, offering and redemption price per share....................... $12.98
------
------
</TABLE>

See notes to financial statements.

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Operations Year Ended October 31, 1997

<TABLE>

INVESTMENT INCOME

<S> <C> <C> <C>
INCOME Interest .................................. $9,042,541
Cash dividends............................. 161,225
----------

Total Income............................. $9,203,766

EXPENSES: Management fee--Note 3(a).................. 527,739
Shareholder servicing costs--Note 3(b)..... 250,696
Interest expense--Note 2................... 182,381
Registration fees.......................... 51,692
Professional fees.......................... 24,334
Prospectus and shareholders' reports....... 19,072
Custodian fees--Note 3(b).................. 10,991
Trustees' fees and expenses--Note 3(c)..... 7,311
Miscellaneous.............................. 7,895
----------
Total Expenses........................... 1,082,111
Less--reduction in management fee
due to undertakings--Note 3(a)........... (15,853)
----------

Net Expenses............................. 1,066,258
-----------

INVESTMENT INCOME--NET................................................... 8,137,508
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 4:
Net realized gain (loss) on investments.... $1,401,444
Net realized gain (loss) on financial futures (3,728)
----------

Net Realized Gain (Loss)................. 1,397,716
Net unrealized appreciation (depreciation)
on investments [including $4,062 unrealized
appreciation on financial futures]....... 133,680
----------

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS................... 1,531,396
----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $9,668,904
----------
----------

</TABLE>

See notes to financial statements.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets

Year Ended Year Ended
October 31, 1997 October 31, 1996*
---------------- -----------------
<S> <C> <C>
OPERATIONS:

Investment income--net................................................. $ 8,137,508 $ 278,638
Net realized gain (loss) on investments................................ 1,397,716 106,987
Net unrealized appreciation (depreciation) on investments.............. 133,680 123,339
------------ -----------
Net Increase (Decrease) in Net Assets Resulting from Operations.... 9,668,904 508,964
------------ -----------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income--net................................................. (8,031,688) (278,638)
Net realized gain on investments....................................... (105,272) --
------------ -----------
Total Dividends..................................................... (8,136,960) (278,638)
------------ -----------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold.......................................... 297,929,536 25,885,033
Dividends reinvested................................................... 5,823,917 258,303
Cost of shares redeemed................................................ (177,337,269) (7,594,707)
------------ -----------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions 126,416,184 18,548,629
------------ -----------
Total Increase (Decrease) in Net Assets.......................... 127,948,128 18,778,955

NET ASSETS:
Beginning of Period.................................................... 18,778,955 --
------------ -----------
End of Period.......................................................... $146,727,083 $18,778,955
------------ -----------
------------ -----------
Undistributed investment income--net...................................... $ 105,820 --
------------ -----------

Shares Shares
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold............................................................ 23,168,626 2,058,351
Shares issued for dividends reinvested................................. 450,821 20,416
Shares redeemed........................................................ (13,792,318) (599,231)
------------ -----------
Net Increase (Decrease) in Shares Outstanding....................... 9,827,129 1,479,536
------------ -----------
------------ -----------
<FN>
- -------------------
* From August 16, 1996 (commencement of operations) to October 31, 1996.

</TABLE>

See notes to financial statements.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Financial Highlights

Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. This information
has been derived from the Fund's financial statements.

Year Ended
October 31,
-------------------
PER SHARE DATA: 1997 1996(1)
------ --------
<S> <C> <C>
Net asset value, beginning of period................................................. $12.69 $12.50

Investment Operations:
Investment income--net................................................................ 1.29 .26
Net realized and unrealized gain (loss) on investments............................... .34 .19

Total from Investment Operations..................................................... 1.63 .45

Distributions:
Dividends from investment income--net................................................ (1.29) (.26)
Dividends from net realized gain on investments...................................... (.05) --

Total Distributions.................................................................. (1.34) (.26)

Net asset value, end of period....................................................... $12.98 $12.69

TOTAL INVESTMENT RETURN................................................................. 13.38% 17.02%(2)

RATIOS/SUPPLEMENTAL DATA:
Ratio of operating expenses to average net assets.................................... 1.09% .92%(2)
Ratio of interest expense to average net assets...................................... .22% --
Ratio of net investment income to average net assets................................. 10.02% 9.76%(2)
Decrease reflected in above expense ratios due to undertakings by the Manager........ .02% 1.62%(2)
Porfolio Turnover Rate............................................................... 102.59% 77.79%(3)
Net Assets, end of period (000's Omitted)............................................ $146,727 $18,779

<FN>
- ---------------
(1) From August 16, 1996 (commencement of operations) to October 31, 1996.
(2) Annualized.
(3) Not annualized.

</TABLE>

See notes to financial statements.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

NOTE 1--Significant Accounting Policies:

Dreyfus Short Term High Yield Fund (the "Fund") is a series of Dreyfus Income
Funds (the "Company") which is registered under the Investment Company Act of
1940 ("Act") as a diversified open-end management investment company and
operates as a series company currently offering five series, including the Fund.
The Fund's investment objective is to provide high current income. The Dreyfus
Corporation ("Manager") serves as the Fund's investment adviser. The Manager is
a direct subsidiary of Mellon Bank, N.A. ("Mellon"). Premier Mutual Fund
Services, Inc. (the "Distributor") is the distributor of the Fund's shares,
which are sold to the public without a sales charge.

The Company accounts separately for the assets, liabilities and operations of
each fund. Expenses directly attributable to each fund are charged to that
fund's operations; expenses which are applicable to all funds are allocated
among them on a pro rata basis.

The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management estimates
and assumptions. Actual results could differ from those estimates.

(a) Portfolio valuation: Investments in securities (excluding short-term
investments, financial futures and U.S. Government obligations) are valued each
business day by an independent pricing service ("Service") approved by the Board
of Trustees. Investments for which quoted bid prices are readily available and
are representative of the bid side of the market in the judgment of the Service
are valued at the mean between the quoted bid prices (as obtained by the Service
from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Other investments
(which constitute a majority of the portfolio securities) are carried at fair
value as determined by the Service, based on methods which include consideration
of: yields or prices of securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions.
Securities for which there are no such valuations are valued at fair value as
determined in good faith under the direction of the Board of Trustees.
Investments in U.S. Government obligations, including U.S. Treasury Bills, are
valued at the mean between quoted bid and asked prices. Short-term investments,
excluding U.S. Treasury Bills, are carried at amortized cost, which approximates
value. Financial futures are valued at the last sales price on the securities
exchange on which such securities are primarily traded or at the last sales
price on the national securities market on each business day. Investments
denominated in foreign currencies are translated into U.S. dollars at the
prevailing rates of exchange.

(b) Securities transactions and investment income: Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount on investments, is recognized on the
accrual basis.

(c) Dividends to shareholders: It is the policy of the Fund to declare
dividends daily from investment income-net. Such dividends are paid monthly.
Dividends from net realized capital gain are normally declared and paid
annually, but the Fund may make distributions on a more frequent basis to comply
with the distribution requirements of the Internal Revenue Code. To the extent
that net realized capital gain can be offset by capital loss carryovers, if any,
it is the policy of the Fund not to distribute such gain.

(d) Federal income taxes: It is the policy of the Fund to continue to qualify
as a regulated investment company, if such qualification is in the best
interests of its shareholders, by complying with the applicable provisions of
the Internal Revenue Code, and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2--Bank Lines of Credit:

The Fund may borrow up to $10 million for leveraging purposes under a
short-term unsecured line of credit and participates with other Dreyfus-managed
funds in a $100 million unsecured line of credit primarily to be utilized for
temporary or emergency purposes, including the financing of redemptions.
Interest is charged to the Fund at rates which are related to the Federal Funds
rate in effect at the time of borrowings. Outstanding borrowings on October 31,
1997, amounted to $6,710,000.

The average daily amount of borrowings outstanding under both arrangements
during the period ended October 31, 1997 was approximately $3.0 million, with a
related weighted average annualized interest rate of 5.99%. The maximum amount
borrowed at any time during the period ended October 31, 1997 was approximately
$9.7 million.

NOTE 3--Management Fee and Other Transactions With Affiliates:

(a) Pursuant to a management agreement with the Manager, the management fee
is computed at the annual rate of .65 of 1% of the value of the Fund's average
daily net assets and is payable monthly. The Manager had undertaken from
November 1, 1996 through January 1, 1997 to reduce the management fee paid by
the Fund, to the extent that the Fund's aggregate annual expenses, exclusive of
taxes, brokerage, interest on borrowings and extraordinary expenses, exceeded an
annual rate of 1% of the value of the Fund's average daily net assets. The
Manager had undertaken from January 2, 1997 to January 8, 1997 to reduce the
management fee paid by the Fund, to the extent that the Fund's aggregate
expenses exceeded specified annual percentages of the Fund's daily net assets.
The reduction in management fee, pursuant to the undertaking, amounted to
$15,853 during the period ended October 31, 1997.

(b) Under the Shareholder Services Plan, the Fund pays the Distributor at an
annual rate of .25 of 1% of the value of the Fund's average daily net assets for
the provision of certain services. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services related to the maintenance of shareholder accounts. The Distributor may
make payments to Service Agents (a securities dealer, financial institution or
other industry professional) in respect of these services. The Distributor
determines the amounts to be paid to Service Agents. During the period ended
October 31, 1997, the Fund was charged $202,976 pursuant to the Shareholder
Services Plan.

The Fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Fund. During the period
ended October 31, 1997, the Fund was charged $33,512 pursuant to the transfer
agency agreement.

The Fund compensates Mellon under a custody agreement to provide custodial
services for the Fund. During the period ended October 31, 1997, the Fund was
charged $10,991 pursuant to the custody agreement.

(c) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Company an annual fee of $2,500 and an attendance fee of $500
per meeting. The Chairman of the Board receives an additional 25% of such
compensation.

NOTE 4--Securities Transactions:

(a) The aggregate amount of purchases and sales (including paydowns) of
investment securities, excluding short-term securities and financial futures,
during the period ended October 31, 1997 amounted to $213,231,026 and
$84,803,413, respectively.

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)

The Fund may invest in financial futures contracts in order to gain exposure
to or protect against changes in the market. The Fund is exposed to market risk
as a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the Fund to "mark to market" on a daily
basis, which reflects the change in market value of the contracts at the close
of each day's trading. Accordingly, variation margin payments are received or
made to reflect daily unrealized gains or losses. When the contracts are closed,
the Fund recognizes a realized gain or loss. These investments require initial
margin deposits with a custodian, which consist of cash or cash equivalents, up
to approximately 10% of the contract amount. The amount of these deposits is
determined by the exchange or Board of Trade on which the contract is traded and
is subject to change. At October 31, 1997, there were no financial futures
contracts outstanding.

(b) At October 31, 1997, accumulated net unrealized appreciation on
investments was $257,019, consisting of $1,722,444 gross unrealized
appreciation and $1,465,425 gross unrealized depreciation.

At October 31, 1997, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the
Statement of Investments).

<PAGE>
Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Report of Ernst & Young, LLP, Independent Auditors

Shareholders and Board of Trustees
Dreyfus Short Term High Yield Fund

We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Dreyfus Short Term High Yield Fund,
one of the Funds constituting Dreyfus Income Funds, as of October 31, 1997, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
financial highlights for each of the years indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included verification by
examination of securities held by the custodian as of October 31, 1997 and
confirmation of securities not held by the custodian by correspondence with
others. 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 financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Short Term High Yield Fund at October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated years, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

New York, New York
December 17, 1997

<PAGE>

Dreyfus Short Term High Yield Fund
- -------------------------------------------------------------------------------
Important Tax Information (Unaudited)

In accordance with Federal tax law, the Fund hereby designates 1.62% of the
ordinary dividends paid during the fiscal year ended October 31, 1997 as
qualifying for the corporate dividends received deduction. Shareholders will
receive notification in January 1998 of the percentage applicable to the
preparation of their 1997 income tax returns.

<PAGE>
Dreyfus Short Term High Yield Fund
200 Park Avenue
New York, NY 10166

Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166

Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &

Dividend Disbursing Agent
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940

Printed in U.S.A. 044AR9710

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN DREYFUS SHORT TERM HIGH YIELD FUND WITH THE MERRILL
LYNCH HIGH YIELD MASTER II INDEX AND THE DREYFUS
CUSTOMIZED INDEX

EXHIBIT A:
MERRILL
DREYFUS LYNCH
SHORT TERM HIGH YIELD DREYFUS
PERIOD HIGH YIELD MASTER II CUSTOMIZED
FUND INDEX * INDEX *

8/16/96 10,000 10,000 10,000
10/31/96 10,359 10,322 10,270
1/31/97 10,795 10,696 10,568
4/30/97 10,929 10,848 10,713
7/31/97 11,557 11,546 11,182
10/31/97 11,745 11,800 11,411

* Source: Merrill Lynch, Pierce, Fenner and Smith Inc.