DREYFUS REAL ESTATE MORTGAGE FUND
LETTER TO SHAREHOLDERS
Dear Shareholder:
We are pleased to report the performance for the Dreyfus Real Estate
Mortgage Fund. Since the Fund's inception on 9/30/97 through its fiscal
period ended October 31, 1997, your Fund achieved a total return, including
share price changes and dividend income, of 1.52%.*
THE ECONOMY
With the level of inflation as low as it has been 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 plant 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.
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 low 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.
MARKET ENVIRONMENT
Fixed Income Market
The month of October was pivotal for interest rates. The 10-year rate
managed to cross the 6.00% level (generally considered a psychological
barrier), ending the month at 5.83%. This is the lowest absolute level of
rates seen since December 1995. The decline in rates occurred largely due to
pressure from international markets, October saw a 50% correction in the Hong
Kong stock market, which triggered a general flight-to-quality movement among
asset allocators, taking place worldwide. Hence many worried investors sought
the credit protection and capital protection of the U.S. Treasury market.
As U.S. Treasuries rallied to new lows in interest rates, so did
corporate bonds and mortgage-backed securities. In general, mortgages
performed strongly, with the Salomon Brothers Mortgage Index posting a 1.075%
gain for the month.
While values increased, the spread on both mortgage-backed securities and
corporate bonds did widen as compared with U.S. Treasuries. This lag
typically occurs when the market begins to demand a higher yield spread for
taking on either corporate credit or mortgage prepayment risk. In line with
this market trend, spreads on both REIT debt and commercial mortgage-backed
securities were wider by 10 to 25 basis points versus comparable-term
Treasuries. The near-record issuance of new securities by Wall Street
investment banks put pressure on both sectors, so that new supply had to be
offered at wider spreads than existing issues to clear the market, creating a
buying opportunity for new investors.
On the credit side of the mortgage-backed securities market, both
commercial and residential deals continued to show improvement. For example,
in the commercial real estate mortgage market, delinquencies reached their
lowest levels ever in the office and hotel sectors. In the REIT bond market,
investors continued to see more upgrades on corporate debt ratings, with most
REITs now having investment-grade credit ratings.
Real Estate Equity Market
The REIT equity market also saw record levels of new supply. In October,
$3.3 billion of new REIT equity was sold to investors. This is the single
largest amount of new REIT equity ever issued in a single month. It also puts
the 1997 total net new supply at $15 billion year-to-date, more than twice
the total issuance ($6.6 billion) for all of 1996. REITs were not the only
equity sector to experience large supply - almost all small cap equity
sectors posted similar issuance volume.
PORTFOLIO OVERVIEW
In the Fund's first month of operation we chose our investments
carefully, seeking to maintain a relatively conservative market position. We
looked for opportunities to invest at attractive prices. We were able to make
a 14.6% allocation to commercial mortgage-backed securities. We took
advantage of the wider spreads to make a 22.3% allocation to REIT debt
securities. In this sector we chose to focus on 10-year noncallable bonds in
both the hotel and office sectors. In particular, we invested in the office
REIT, Crescent Real Estate Equities, and the hotel REIT, FelCore Suites L.P.
For the fixed income portion of the Fund, we purchased a 20.8% position in
lower-rated mortgage-backed securities, and we also maintained a 7.8%
position in long-term Treasuries.
On the equity side of the portfolio, we allocated 17.6% of the Fund to
REIT stocks. As with our REIT debt positions, we chose to focus on the office
and hotel sectors. In the office sector, we chose to focus on urban center
office REITs. In the urban centers of America, our research has shown
continued high demand for office space and relatively static supply. We chose
both Boston Properties and SL Green Realty for their strong management and
their focus on Boston and New York City office properties. In the hotel
sector, the demand for hotel rooms has grown with the economy. We like the
full-service hotel sector in particular. As the wealth effect has increased
tourism and business travel, a shortage of hotel rooms has developed around
the country. Here we chose Patriot American Hospitality, the owner of the
Wyndham and Carnival Hotel chains, both for its unique paired-share tax
status and its upscale full-service hotel brands. We continue to have a flat
market outlook in most REIT stocks at this time, and we expect to continue to
underweight the sector.
As this new Fund takes shape, it is our hope to be able to continue to
take advantage of market opportunities while also seeking to maintain high
current yields and an optimal total return from a diversified portfolio of
real estate investments. As 1997 comes to a close, we anticipate many new
opportunities continuing to become available within the real estate markets.
It is our conviction that the U.S. real estate mortgage market will continue
to offer long-term value to the diversified investor.
Very truly yours,
[Michael Hoeh signature logo]
Michael Hoeh
Portfolio Manager
November 18, 1997
New York, N.Y.
* Total return includes reinvestment of dividends and any capital gains
paid.
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DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF INVESTMENTS OCTOBER 31, 1997
Principal
Bonds and Notes-85.8% Amount Value
____________ ____________
<S> <C> <C>
Commercial Mortgage-
Backed-14.6% DLJ Mortgage Acceptance,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-CF2, Cl. B3TB, 6.99%, 2009............ $ 500,000 (a) $ 484,844
GS Mortgage Securities Corp. II,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-GL, Cl. G., 7.823%, 2030.............. 1,000,000 (b) 1,030,580
____________
1,515,424
____________
Real Estate Investment
Trust-22.3% Crescent Real Estate Equities,
Notes, 7 1\8%, 2007............................. 500,000 (a) 504,350
FelCor Suites L.P.,
Sr. Notes, 7 5\8%, 2007......................... 500,000 (a) 501,838
Spieker Properties,
Medium-Term Notes, 8%, 2005..................... 750,000 811,275
Tanger Properties L.P.,
Unsecured Notes
(Gtd. by Tanger Factory Outlet Centers)
7 7\8%, 2004.................................... 500,000 503,563
____________
2,321,026
____________
Residential Mortgage-
Backed-20.8% BA Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1997-1, Cl. B4, 7 1\2%, 2026............... 671,872 (a) 481,438
Norwest Asset Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1997-10, Cl. B2, 7 5\8%, 2027.............. 499,000 511,124
Ser. 1997-17:
Cl. B4, 7 1\4%, 2027.......................... 875,000 608,440
Cl. B5, 7 1\4%, 2027.......................... 1,050,582 349,319
Ser. 1997-20, Cl. B4, 6 3\4%, 2012.............. 255,000 (a,c) 210,454
____________
2,160,775
____________
U.S. Government-7.8% U.S. Treasury Bonds,
6 3\8%, 8/15/2027............................... 300,000 (d) 308,812
U.S. Treasury Notes,
5 3\4%, 10/31/2002.............................. 500,000 (d) 500,664
____________
809,476
____________
DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF INVESTMENTS (CONTINUED) OCTOBER 31, 1997
Principal
Bonds and Notes (continued) Amount Value
____________ ____________
U.S. Government Agencies/
Mortgage-Backed-20.3% Federal Home Loan Mortgage Corp.,
Modifiable and Combinable
Real Estate Mortgage Investment Conduit,
Stripped Securities, Interest Only Class:
Ser. 1987, Cl. PI, 7%, 9/15/2012.............. $ 1,300,000 (e) $ 364,406
Ser. 1995, Cl. PY, 7%, 10/15/2027............. 875,000 (e) 389,375
Ser. 1999, Cl. PW, 7%, 8/15/2026.............. 2,500,000 (e) 684,375
Federal National Mortgage Association,
Real Estate Mortgage Investment Conduit,
Stripped Securities, Interest Only Class,
Ser. 1993-119, Cl. JA, 7%, 5/25/2019............ 2,405,776 (e) 192,679
Government National Mortgage Association I,
6 3\4%, 1/15/2034............................... 490,230 486,092
____________
2,116,927
____________
TOTAL BONDS AND NOTES
(cost $8,857,163)............................... $ 8,923,628
____________
____________
Equity-Related Securities-24.6% Shares
____________
Common Stocks-17.6%
Real Estate Investment Trust: Alexandria Real Estate Equities.................... 5,000 $ 137,188
Avalon Properties.................................. 3,000 88,125
Boston Properties.................................. 5,000 160,000
Crescent Real Estate Equities...................... 5,000 180,000
Equity Office Properties Trust..................... 6,000 183,375
Equity Residential Properties Trust................ 3,000 151,500
FelCor Suite Hotels................................ 3,000 109,875
Patriot American Hospitality....................... 6,000 198,000
SL Green Realty.................................... 7,000 175,437
Simon DeBartolo Group.............................. 7,000 216,563
Vornado Realty Trust............................... 5,000 223,125
____________
1,823,188
____________
DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF INVESTMENTS (CONTINUED) OCTOBER 31, 1997
Equity-Related Securities (continued) Shares Value
____________ ____________
Convertible Preferred Stocks-7.0%
Real Estate Investment
Trust; Federal Realty Investors Trust,
Cum., 7.95%..................................... 30,000 $ 729,375
____________
TOTAL EQUITY-RELATED SECURITIES
(cost $2,637,380)............................... $ 2,552,563
____________
____________
Short-Term Investments-.9%
U.S. Treasury Bills; 5.29%, 1/8/1998
(cost $98,053)................................... $ 99,000 (d) $ 98,053
____________
____________
TOTAL INVESTMENTS (cost $11,592,596)................................................... 111.3% $11,574,244
_______ ____________
_______ ____________
LIABILITIES, LESS CASH AND RECEIVABLES................................................. (11.3%) $ (1,178,123)
_______ ____________
_______ ____________
NET ASSETS............................................................................. 100.0% $10,396,121
_______ ____________
_______ ____________
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 $1,972,470 or 19.0% of net assets.
(b) Variable rate security- the interest rate is subject to change
periodically.
(c) Purchased on a forward commitment basis.
(d) Held by the custodian in a segregated account as collateral for
securities purchased on a forward commitment basis.
(e) Reflects notional face.
SEE NOTES TO FINANCIAL STATEMENTS.
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DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997
Cost Value
____________ ____________
<S> <C> <C> <C>
ASSETS: Investments in securities-See Statement of Investments $11,592,596 $11,574,244
Receivable for investment securities sold.. 2,173,469
Interest and dividends receivable.......... 106,460
Receivable for shares of Beneficial Interest subscribed 20,000
Prepaid expenses........................... 83,479
Due from The Dreyfus Corporation and affiliates 18,271
____________
13,975,923
____________
LIABILITIES: Due to Distributor......................... 2,156
Cash overdraft due to Custodian............ 483,355
Payable for investment securities purchased 2,986,939
Accrued expenses and other liabilities..... 107,352
____________
3,579,802
____________
NET ASSETS.................................................................. $10,396,121
============
REPRESENTED BY: Paid-in capital............................ $10,242,097
Accumulated undistributed investment income-net 47,994
Accumulated net realized gain (loss) on investments 124,382
Accumulated net unrealized appreciation (depreciation)
....................... on investments-Note 4 (18,352)
____________
NET ASSETS.................................................................. $10,396,121
============
SHARES OUTSTANDING
(UNLIMITED NUMBER OF $.001 PAR VALUE SHARES OF BENEFICIAL INTEREST AUTHORIZED) 819,377
NET ASSET VALUE, offering and redemption price per share-Note 2(d).......... $12.69
=======
SEE NOTES TO FINANCIAL STATEMENTS.
DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF OPERATIONS
FROM SEPTEMBER 30, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1997
INVESTMENT INCOME
INCOME: Interest................................... $ 48,792
Cash dividends............................. 7,211
__________
Total Income......................... $ 56,003
EXPENSES: Management fee-Note 3(a)................... 5,784
Auditing fees.............................. 13,600
Registration fees.......................... 2,905
Shareholder servicing costs-Note 3(b)...... 2,358
Trustees' fees and expenses-Note 3(c)...... 2,305
Legal fees................................. 2,000
Prospectus and shareholders' reports....... 1,000
Custodian fees-Note 3(b)................... 767
Miscellaneous.............................. 1,948
__________
Total Expenses....................... 32,667
Less-expense reimbursement from the Manager due to
undertakings-Note 3(a)................. (24,658)
__________
Net Expenses......................... 8,009
___________
INVESTMENT INCOME-NET....................................................... 47,994
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS-Note 4:
Net realized gain (loss) on investments.... $124,382
Net unrealized appreciation (depreciation) on investments (18,352)
__________
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS...................... 106,030
___________
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $154,024
===========
SEE NOTES TO FINANCIAL STATEMENTS.
DREYFUS REAL ESTATE MORTGAGE FUND
STATEMENT OF CHANGES IN NET ASSETS
FROM SEPTEMBER 30, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1997
OPERATIONS:
Investment income-net.................................................... $ 47,994
Net realized gain (loss) on investments.................................. 124,382
Net unrealized appreciation (depreciation) on investments................ (18,352)
_____________
Net Increase (Decrease) in Net Assets Resulting from Operations........ 154,024
_____________
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold............................................ 10,243,097
Cost of shares redeemed.................................................. (1,000)
_____________
Increase (Decrease) in Net Assets from Beneficial Interest Transactions 10,242,097
_____________
Total Increase (Decrease) in Net Assets.............................. 10,396,121
NET ASSETS:
Beginning of Period...................................................... ----
_____________
End of Period............................................................ $10,396,121
=============
UNDISTRIBUTED INVESTMENT INCOME-NET........................................ $ 47,994
_____________
CAPITAL SHARE TRANSACTIONS: Shares
_____________
Shares sold.............................................................. 819,457
Shares redeemed.......................................................... (80)
_____________
Net Increase (Decrease) in Shares Outstanding.......................... 819,377
=============
SEE NOTES TO FINANCIAL STATEMENTS.
DREYFUS REAL ESTATE MORTGAGE 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 the period from September 30, 1997
(commencement of operations) to October 31, 1997. This information has been
derived from the Fund's financial statements.
PER SHARE DATA:
Net asset value, beginning of period.................................... $12.50
______
Investment Operations:
Investment income-net................................................... .06
Net realized and unrealized gain (loss)
on investments........................................................ .13
______
Total from Investment Operations........................................ .19
______
Net asset value, end of period.......................................... $12.69
======
TOTAL INVESTMENT RETURN..................................................... 17.34%(1,2)
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets................................. .90%(1)
Ratio of net investment income to average net assets.................... 5.39%(1)
Decrease reflected in above expense ratio
due to undertaking by the Manager..................................... 2.77%(1)
Portfolio Turnover Rate................................................. 244.61%(3)
Net Assets, end of period (000's Omitted)............................... $10,396
(1) Annualized.
(2) Exclusive of redemption fee.
(3) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
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DREYFUS REAL ESTATE MORTGAGE FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Real Estate Mortgage 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 non-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 maximize total
return, consisting of capital appreciation and 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"), which is a
wholly-owned subsidiary of Mellon Bank Corporation. 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.
As of October 31, 1997, MBIC Investment Corp., an indirect subsidiary of
Mellon Bank Corporation, held 800,000 shares of the Fund.
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 to 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
and pay dividends quarterly from investment income-net. 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 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.
DREYFUS REAL ESTATE MORTGAGE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-BANK LINE 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. For the period
ended October 31, 1997, the Fund did not borrow under either line of credit.
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 September 30, 1997 through October
31, 1997, to reduce the management fee paid by, or reimburse such excess
expenses of 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 .90 of 1% of the value of the Fund's
average daily net assets. The expense reimbursement, pursuant to the
undertaking, amounted to $24,658 for 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 $2,225
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 $14 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 $767 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.
(d) A 1% redemption fee is charged and retained by the Fund on certain
redemptions of Fund shares (including redemptions through the use of the Fund
Exchanges service) where the redemption or exchange occurs within a six-month
period following the date of issuance.
NOTE 4-SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of
investment securities, excluding short-term securities, during the period
ended October 31, 1997, amounted to $39,449,530 and $28,072,242,
respectively.
At October 31, 1997, accumulated net unrealized depreciation on
investments was $18,352, consisting of $84,346 gross unrealized appreciation
and $102,698 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).
DREYFUS REAL ESTATE MORTGAGE FUND
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Dreyfus Real Estate Mortgage Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Dreyfus Real Estate Mortgage Fund
(one of the Funds constituting Dreyfus Income Funds) as of October 31, 1997,
and the related statements of operations and changes in net assets and
financial highlights for the period from September 30, 1997 (commencement of
operations) to October 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Dreyfus Real Estate Mortgage Fund at October 31, 1997, and the
results of its operations, the changes in its net assets and the financial
highlights for the period from September 30, 1997 to October 31, 1997, in
conformity with generally accepted accounting principles.
[ERNST & YOUNG LLP signature logo]
New York, New York
December 17, 1997
Registration Mark
[Dreyfus lion "d" logo]
DREYFUS REAL ESTATE MORTGAGE 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. 045AR9710
Real Estate
Mortgage Fund
Annual Report
October 31, 1997
Registration Mark
[Dreyfus logo]
