N-30D 1 pn30d056.txt SEMI-ANNUAL REPORT Dreyfus Yield Advantage Fund SEMIANNUAL REPORT January 31, 2002 The views expressed herein are current to the date of this report. These views and the composition of the fund's portfolio are subject to change at any time based on market and other conditions. * Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value Contents THE FUND -------------------------------------------------- 2 Letter from the Chairman 3 Discussion of Fund Performance 6 Statement of Investments 11 Statement of Financial Futures 12 Statement of Assets and Liabilities 13 Statement of Operations 14 Statement of Changes in Net Assets 15 Financial Highlights 16 Notes to Financial Statements FOR MORE INFORMATION --------------------------------------------------------------------------- Back Cover The Fund Dreyfus Yield Advantage Fund LETTER FROM THE CHAIRMAN Dear Shareholder: We present this semiannual report for Dreyfus Yield Advantage Fund, covering the period from its inception on November 15, 2001 through January 31, 2002. Inside, you' ll find valuable information about how the fund was managed during the reporting period, including a discussion with Michael Hoeh, portfolio manager and a member of the Dreyfus Taxable Fixed Income Team that manages the fund. One of America's longest periods of economic expansion came to an end during the reporting period, and bonds generally benefited from the Federal Reserve Board's efforts to reinvigorate an ailing economy. Short-term interest rates fell to their lowest levels in 40 years, helping to boost most bond prices. While corporate bonds also generally benefited from lower interest rates, their performance was constrained by credit concerns arising from the bankruptcies and accounting scandals affecting a small number of high-profile companies. The importance of diversification was underscored by the bond market's strong returns, which helped cushion the equity market's decline for investors who allocated their investments among different asset classes. Perhaps most significant, market conditions during the reporting period affirmed the value of objective advice from an experienced financial advisor who understands your current needs, long-term goals and attitude toward risk. With bond yields currently at historically low levels, a repeat of the reporting period' s bond market performance seems unlikely. Nonetheless, investment opportunities may abound. Signs of economic recovery have emerged and the equity market has recently rallied. While we can't guarantee that these encouraging trends will continue, we do believe that the straightest path to financial security in any market environment is one that includes a long-term perspective, broad diversification and professional advice from a trusted advisor. Thank you for your continued confidence and support. Sincerely, Stephen E. Canter Chairman and Chief Executive Officer The Dreyfus Corporation February 15, 2002 DISCUSSION OF FUND PERFORMANCE Michael Hoeh, Portfolio Manager Dreyfus Taxable Fixed Income Team How did Dreyfus Yield Advantage Fund perform during the period? Between its inception on November 15, 2001 and the end of its semiannual reporting period on January 31, 2002, the fund achieved a total return of 1.19% .(1) We attribute the fund's positive overall performance during the reporting period to its holdings of high quality corporate securities, which generally provided higher yields than U.S. Treasury bills and notes. What is the fund's investment approach? The fund seeks as high a level of current income as is consistent with the preservation of capital. To pursue its goal, the fund invests all of its assets in investment-grade fixed-income securities, which may include U.S. government bonds and notes, corporate bonds, asset-backed securities and mortgage-related securities. To help reduce share price fluctuations, we try to keep the fund's average effective duration -- a measure of sensitivity to changing interest rates -- at one year or less. Although we expect the fund's average effective duration and its average effective maturity -- the amount of time until the fund's holdings mature or are redeemed, on average -- to follow one another closely, we may invest in securities with effective final maturities of any length. When choosing securities for the fund, we first analyze a multitude of factors in various fixed-income market sectors. We then decide how to allocate the fund's assets across these sectors and in which securities to invest. The Fund DISCUSSION OF FUND PERFORMANCE (CONTINUED) What other factors influenced the fund's performance? Although the fund began operations on November 15, 2001, its performance was affected by economic trends that began to develop about one year earlier. Responding to signs of an economic slowdown in the closing months of 2000, the Federal Reserve Board (the "Fed" ) began to take steps to stimulate renewed economic growth. All told, the Fed reduced short-term interest rates by 4.75 percentage points in 11 separate moves during 2001. As a result, yields of short-term bonds were near historical lows when the fund began operations. U.S. Treasury securities ranked among the lowest yielding, primarily because of heightened investor demand for ultra-safe investments. While yields of corporate, mortgage-backed and asset-backed securities had also declined, they had not fallen as much as Treasury yields. In fact, the difference between the yields of Treasuries and corporate bonds -- known as the spread -- had widened beyond its average level. Because of their relatively attractive yields, we established a substantial position in investment-grade corporate securities. Some of these were hard-hit in the wake of the high-profile bankruptcies of a small number of major corporations. In our view, securities issued by good companies were punished along with the bad, making high quality corporate bonds available at prices we considered compelling. We also found good values in mortgage-backed securities, which had been hurt by a surge of refinancing activity among homeowners. However, as mortgage rates bottomed, we believed that refinancing activity would abate and securities prices would rise. In the meantime, their relatively high yields made them attractive income-oriented investments, in our view. What is the fund's current strategy? Although we expect the economy to recover, the process is likely to be long and slow. Nonetheless, recent scrutiny of accounting practices has caused many corporations to take steps toward improving their balance sheets. In our opinion, stronger balance sheets should be good for short-term corporate bonds. Accordingly, we have continued to focus on high quality corporate bonds, which comprised 57% of the fund as of January 31, 2002. Mortgage-related securities accounted for 7% of the fund. Asset-backed securities comprised 20% of the fund. U.S. Treasury and agency securities represented 16% of the fund. The fund's average effective duration ended the reporting period at 0.75 years, its average effective maturity ended the reporting period at 0.99 years, and its average credit quality was AA-, well within the investment-grade range. Of course, we are prepared to change our strategies and the fund's composition as market conditions evolve. Finally, we would like to remind you that Dreyfus Yield Advantage Fund is not a money market fund. Rather, it is a very short-term bond fund that seeks to produce higher yields than money market funds while preserving capital. Unlike a money market fund, which tries to maintain a stable $1 share price, fund shares are likely to gain or lose value over time. February 15, 2002 (1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURN FIGURES PROVIDED REFLECT THE ABSORPTION OF FUND EXPENSES BY THE DREYFUS CORPORATION PURSUANT TO AN AGREEMENT IN EFFECT THROUGH JULY 31, 2002, AT WHICH TIME IT MAY BE EXTENDED, TERMINATED OR MODIFIED. HAD THESE EXPENSES NOT BEEN ABSORBED, THE FUND'S RETURN WOULD HAVE BEEN LOWER. The Fund STATEMENT OF INVESTMENTS January 31, 2002 (Unaudited)
STATEMENT OF INVESTMENTS Principal BONDS AND NOTES--84.0% Amount ($) Value ($) ------------------------------------------------------------------------------------------------------------------------------ AIRCRAFT AND AEROSPACE--2.6% Lockheed Martin, Notes, 6.75%, 2003 575,000 595,964 Raytheon, Sr. Notes, 7.9%, 2003 500,000 518,974 1,114,938 ASSET-BACKED CTFS.--20.5% Advanta Mortgage Loan Trust: Ser. 1996-1, Cl. A6, 6.73%, 2023 194,157 198,315 Ser. 2000-2, Cl. A2, 7.61%, 2015 256,000 264,452 BMW Vehicle Owner Trust, Ser. 2001-A, Cl. A2, 4.26%, 2003 199,901 201,541 Centex Home Equity, Ser. 2001-B, Cl. A2, 5.35%, 2022 180,000 183,206 Chase Funding Mortgage Loan, Ser. 1999-2, Cl. IA2, 6.86%, 2024 472,521 485,464 Conseco Finance Securitizations: Ser. 2000-1, Cl. A3, 7.3%, 2031 1,800,000 1,854,756 Ser. 2000-D, Cl. A3, 7.89%, 2018 450,000 467,541 EQCC Home Equity Loan Trust, Ser. 1998-1, Cl. A4F, 6.459%, 2021 590,000 604,088 Fingerhut Master Trust, Ser. 1998-2, Cl. A, 6.23%, 2007 1,000,000 1,016,880 GMAC Mortgage Loan Trust, Ser. 2000-HE3, Cl. A2, 7.17%, 2015 450,000 460,200 Green Tree Home Improvement Loan, Ser. 1997-A, Cl. HEA6, 7.16%, 2028 872,332 893,165 IMC Home Equity Loan Trust, Ser. 1997-7, Cl. A5, 6.76%, 2020 168,409 171,491 Navistar Financial Owner Trust, Ser. 2001-A, Cl. B, 5.59%, 2008 791,683 814,728 NYCTL, Tax Lien Collateralized Bonds, Ser. 1999-1A, Cl. B, 6.45%, 2007 227,416 (a) 229,406 Xerox Equipment Lease Owner Trust, Ser. 2001-1, Cl. A, 3.82%, 2008 1,082,771 (a,b) 1,085,478 8,930,711 Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) ------------------------------------------------------------------------------------------------------------------------------- AUTOMOTIVE--9.7% DaimlerChrysler N. A. Holding, Medium-Term Notes, Ser. B, 6.84%, 2002 1,000,000 1,023,473 Ford Motor Credit Co., Notes, 5.375%, 2002 1,125,000 1,138,158 GMAC, Notes, 7.125%, 2003 1,026,000 1,058,411 TRW, Sr. Notes, 6.5%, 2002 1,000,000 1,006,828 4,226,870 BANKING--2.1% Capital One Financial, Sr. Notes, 6.375%, 2003 500,000 505,534 MBNA, Sr. Notes, Ser. F, 3.645%, 2002 400,000 (b) 399,500 905,034 CABLE/MEDIA--2.9% Fox/Liberty Networks, Sr. Notes, 8.875%, 2007 865,000 910,413 News America Holdings, Sr. Notes, 8.625%, 2003 350,000 364,165 1,274,578 COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--6.9% Morgan Stanley Dean Witter Capital I, Ser. 2001-XLF, Cl. F, 3.807%, 2013 600,000 (a,b) 594,000 Nationslink Funding, Ser. 1999-SL, Cl. A2, 6.096%, 2030 208,268 210,761 Nomura Depositor Trust, Ser. 1998-ST1, Cl. A5, 3.07%, 2034 375,000 (a,b) 369,727 Sasco Floating Rate Commercial Mortgage, Ser. 2000-C2, Cl. K, 3.489%, 2003 1,519,371 (a,b) 1,516,261 Ventas Specialty I, Ser. 2001-VENA, Cl. D, 3.79%, 2012 300,000 (a,b) 299,918 2,990,667 The Fund STATEMENT OF INVESTMENTS (Unaudited) (CONTINUED) Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) ------------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES--1.8% General Electric Capital, Medium-Term Notes, Ser. A, 6.75%, 2003 125,000 132,779 Textron Financial, Medium-Term Notes, Ser. E, 3.35%, 2003 667,000 (b) 650,407 783,186 FOOD AND BEVERAGES--1.4% Heinz (H.J.), Notes, 6.875%, 2003 600,000 621,712 HEALTH CARE--1.4% American Home Products, Notes, 5.875%, 2004 575,000 597,727 INDUSTRIAL--.7% Tyco International, Notes, 4.95%, 2003 300,000 294,601 OIL AND GAS--1.8% Petroleum-Geo Services, Notes, 2.56%, 2002 160,000 (b) 159,765 Tosco, First Mortgage, 8.25%, 2003 600,000 635,194 794,959 PAPER PRODUCTS--2.4% International Paper, Notes, 8%, 2003 1,000,000 1,055,280 REAL ESTATE INVESTMENT TRUST--2.6% Developers Diversified Realty, Medium-Term Notes, 6.8%, 2002 600,000 611,518 Spieker Properties, Notes, 6.9%, 2004 500,000 520,226 1,131,744 RETAIL--2.4% Sears Roebuck Acceptance, Medium-Term Notes, Ser. III, 7.26%, 2003 1,000,000 1,045,848 TELECOMMUNICATION--5.4% TCI Communications, Sr. Notes, 6.375%, 2003 1,000,000 1,031,358 Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) ------------------------------------------------------------------------------------------------------------------------------ TELECOMMUNICATION (CONTINUED) U.S. West Communciations, Notes, 6.375%, 2002 400,000 405,136 WorldCom, Sr. Notes, 6.25%, 2003 902,000 911,552 2,348,046 U.S. GOVERNMENT AGENCIES--5.3% Federal Home Loan Banks, Notes, 5.125%, 9/15/2003 750,000 775,523 Federal Home Loan Mortgage Corp., Notes, 3.5%, 9/15/2003 750,000 756,143 Federal National Mortgage Association, Notes, 3.125%, 11/15/2003 750,000 750,239 2,281,905 U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED--11.5% Federal Home Loan Mortgage Corp., REMIC Trust, Gtd. Multiclass Mortgage Participation Ctfs.: Ser. 1492, Cl. H, 6.65%, 9/15/2021 212,305 214,180 Ser. 1798, Cl. G, 6.5%, 11/15/2023 2,000,000 2,030,368 Ser. 2301, Cl. G, 6%, 12/15/2012 275,960 281,603 Federal National Mortgage Association, REMIC Trust, Gtd. Pass-Through Ctfs.: Ser. 1994-29, Cl. G, 6.5%, 2/25/2024 1,117,808 1,125,699 Ser. 2001-12, Cl. CS, 6.5%, 6/25/2027 1,303,741 1,323,819 4,975,669 UTILITIES/GAS AND ELECTRIC--2.6% Dominion Resources, Notes, 3.875%, 2004 600,000 594,982 TXU Gas, Notes, 7.625%, 2002 500,000 (c) 513,669 1,108,651 TOTAL BONDS AND NOTES (cost $36,426,082) 36,482,126 The Fund STATEMENT OF INVESTMENTS (Unaudited) (CONTINUED) Principal SHORT-TERM INVESTMENTS--18.1% Amount ($) Value ($) ------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER--18.0% Becton Dickinson, 1.9%, 2/1/2002 1,950,000 1,950,000 Dow Chemical, 1.93%, 2/1/2002 1,935,000 1,935,000 Morgan (J.P.) Chase & Co., 1.9%, 2/1/2002 1,950,000 1,950,000 UBS Finance Delaware, 1.9%, 2/1/2002 2,000,000 2,000,000 7,835,000 U.S. GOVERNMENT--.1% U.S. Treasury Bills: 1.63%, 2/14/2002 10,000 (d) 9,994 1.53%, 4/11/2002 20,000 (d) 19,936 29,930 TOTAL SHORT-TERM INVESTMENTS (cost $7,864,935) 7,864,930 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (cost $44,291,017) 102.1% 44,347,056 LIABILITIES, LESS CASH AND RECEIVABLES (2.1%) (926,257) NET ASSETS 100.0% 43,420,799 (A) SECURITIES 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 JANUARY 31, 2002, THESE SECURITIES AMOUNTED TO $4,094,790 OR 9.4% OF NET ASSETS. (B) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE. (C) REFLECTS DATE SECURITY CAN BE REDEEMED AT HOLDER'S OPTION; THE STATED MATURITY IS 10/15/2012. (D) PARTIALLY HELD BY A BROKER AS COLLATERAL FOR OPEN FINANCIAL FUTURES POSITIONS. SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF FINANCIAL FUTURES January 31, 2002 (Unaudited) Market Value Unrealized Covered by (Depreciation) Contracts Contracts ($) Expiration at 1/31/2002 ($) ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL FUTURES SHORT U.S. Treasury 2 Year Notes 4 837,500 March 2002 (875) SEE NOTES TO FINANCIAL STATEMENTS.
The Fund STATEMENT OF ASSETS AND LIABILITIES January 31, 2002 (Unaudited) Cost Value -------------------------------------------------------------------------------- ASSETS ($): Investments in securities--See Statement of Investments 44,291,017 44,347,056 Cash 2,681,743 Interest receivable 374,523 Receivable for futures variation margin--Note 4 1,687 Prepaid expenses 20,287 47,425,296 -------------------------------------------------------------------------------- LIABILITIES ($): Due to The Dreyfus Corporation and affiliates 758 Payable for investment securities purchased 3,982,819 Accrued expenses 20,920 4,004,497 -------------------------------------------------------------------------------- NET ASSETS ($) 43,420,799 -------------------------------------------------------------------------------- COMPOSITION OF NET ASSETS ($): Paid-in capital 43,387,231 Accumulated distributions in excess of investment income--net (18,401) Accumulated net realized gain (loss) on investments (3,195) Accumulated net unrealized appreciation (depreciation) on investments [including ($875) net unrealized (depreciation) on financial futures] 55,164 -------------------------------------------------------------------------------- NET ASSETS ($) 43,420,799 -------------------------------------------------------------------------------- SHARES OUTSTANDING (500 million shares of $.001 par value Common Stock authorized) 21,601,849 NET ASSET VALUE, offering and redemption price per share ($) 2.01 SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS From November 15, 2001 (commencement of operations) to January 31, 2002 (Unaudited) -------------------------------------------------------------------------------- INVESTMENT INCOME ($): INTEREST INCOME 82,220 EXPENSES: Management fee--Note 3(a) 12,059 Auditing fees 6,667 Directors' fees and expenses--Note 3(c) 6,194 Shareholder servicing costs--Note 3(b) 6,192 Registration fees 4,625 Prospectus and shareholders' reports 2,333 Legal fees 2,000 Custodian fees--Note 3(b) 90 Miscellaneous 370 TOTAL EXPENSES 40,530 Less--expense reimbursement from The Dreyfus Corporation due to undertaking--Note 3(a) (21,981) NET EXPENSES 18,549 INVESTMENT INCOME--NET 63,671 -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($): Net realized gain (loss) on investments 5,442 Net realized gain (loss) on financial futures (8,637) NET REALIZED GAIN (LOSS) (3,195) Net unrealized appreciation (depreciation) on investments [including ($875) net unrealized (depreciation) on financial futures] 55,164 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 51,969 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 115,640 SEE NOTES TO FINANCIAL STATEMENTS. The Fund STATEMENT OF CHANGES IN NET ASSETS From November 15, 2001 (commencement of operations) to January 31, 2002 (Unaudited) -------------------------------------------------------------------------------- OPERATIONS ($): Investment income--net 63,671 Net realized gain (loss) on investments (3,195) Net unrealized appreciation (depreciation) on investments 55,164 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 115,640 -------------------------------------------------------------------------------- DIVIDENDS TO SHAREHOLDERS FROM ($): INVESTMENT INCOME--NET (82,072) -------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS ($): Net proceeds from shares sold 43,342,557 Dividends reinvested 72,045 Cost of shares redeemed (27,371) INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL STOCK TRANSACTIONS 43,387,231 TOTAL INCREASE (DECREASE) IN NET ASSETS 43,420,799 -------------------------------------------------------------------------------- NET ASSETS ($): Beginning of Period -- END OF PERIOD 43,420,799 -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (SHARES): Shares sold 21,579,617 Shares issued for dividends reinvested 35,850 Shares redeemed (13,618) NET INCREASE (DECREASE) IN SHARES OUTSTANDING 21,601,849 SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS (Unaudited) The following table describes the performance for the period from November 15, 2001 (commencement of operations) to January 31, 2002. Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions. These figures have been derived from the fund's financial statements. -------------------------------------------------------------------------------- PER SHARE DATA ($): Net asset value, beginning of period 2.00 Investment Operations: Investment income--net .01(a) Net realized and unrealized gain (loss) on investments .01 Total from Investment Operations .02 Distributions: Dividends from investment income--net (.01) Net asset value, end of period 2.01 -------------------------------------------------------------------------------- TOTAL RETURN (%) 1.19(b) -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA (%): Ratio of expenses to average net assets .77(c) Ratio of net investment income to average net assets 2.64(c) Decrease reflected in above expense ratio due to undertakings by The Dreyfus Corporation .91(c) Portfolio Turnover Rate 27.54(b) -------------------------------------------------------------------------------- Net Assets, end of period ($ x 1,000) 43,421 (A) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END. (B) NOT ANNUALIZED. (C) ANNUALIZED. SEE NOTES TO FINANCIAL STATEMENTS. The Fund NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1--Significant Accounting Policies: Dreyfus Yield Advantage Fund (the "fund") is a separate non-diversified series of Dreyfus Investment Grade Bond Funds, Inc. (the "Company") which is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company and operates as a series company currently offering four series, including the fund, which commenced operations on November 15, 2001. The fund's investment objective is to provide investors with as high a level of current income as is consistent with the preservation of capital with minimal changes in share price. The Dreyfus Corporation (the "Manager") serves as the fund's investment adviser. The Manager is a direct subsidiary of Mellon Bank, N.A. (" Mellon" ), which is a direct subsidiary of Mellon Financial Corporation. Dreyfus Service Corporation (the "Distributor"), a wholly-owned subsidiary of the Manager, is the distributor of the fund's shares which are sold to the public without a sales charge. The fund's fiscal year end is July 31. The Company accounts separately for the assets, liabilities and operations of each series. Expenses directly attributable to each series are charged to that series' operations; expenses which are applicable to all series are allocated among them on a pro rata basis. The fund' s financial statements are prepared in accordance with accounting principles generally accepted in the United States, 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, other than U.S. Treasury Bills, financial futures and options) are valued each business day by an independent pricing service ("Service") approved by the Board of Directors. 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 secu- rities) 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 Directors. 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. Options traded over-the-counter are priced at the mean between the bid prices and the asked prices. (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 and premium on investments, is recognized on the accrual basis. Under the terms of the custody agreement, the fund receives net earnings credits based on available cash balances left on deposit. (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, if any, 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 of 1986, as amended (the " 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 Code, and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. The Fund NOTES TO FINANCIAL STATEMENTS (Unaudited) (CONTINUED) NOTE 2--Bank Lines of Credit: The fund 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 based on prevailing market rates in effect at the time of borrowings. During the period ended January 31, 2002, the fund did not borrow under the line of credit. NOTE 3--Management Fee and Other Transactions With Affiliates: (a) Pursuant to a management agreement ("Agreement") with the Manager, the management fee is computed at the annual rate of .50% of the value of the fund's average daily net assets and is payable monthly. The Manager has undertaken from November 15, 2001 through July 31, 2002 to reduce the management fee and/or assume expenses of the fund so that if fund expenses, excluding taxes, brokerage fees, interest on borrowings and extraordinary expenses, exceed an annual rate of .75 of 1% of the value of the fund's average daily net assets, the fund may deduct from the payments to be made to the Manager under the Agreement, or the Manager will bear such excess expense. The expense reimbursement, pursuant to the undertaking, amounted to $21,981 during the period ended January 31, 2002. (b) Under the Shareholder Services Plan, the fund pays the Distributor at the 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 January 31, 2002, the fund was charged $6,030 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 January 31, 2002, the fund was charged $105 pursuant to the transfer agency agreement. The fund compensates Mellon under a custody agreement for providing custodial services for the fund. During the period ended January 31, 2002, the fund was charged $90 pursuant to the custody agreement. (c) Each Board member also serves as a Board member of other funds within the Dreyfus complex (collectively, the "Fund Group"). Each Board member who is not an "affiliated person" as defined in the Act receives an annual fee of $45,000 and an attendance fee of $5,000 for each in person meeting and $500 for telephone meetings. These fees are allocated among the funds in the Fund Group. The Chairman of the Board receives an additional 25% of such compensation. Subject to the Company's Emeritus Program Guidelines, Emeritus Board members, if any, receive 50% of the annual retainer fee and per meeting fee paid at the time the Board member achieves emeritus status. NOTE 4--Securities Transactions: The aggregate amount of purchases and sales (including paydowns) of investment securities, excluding short-term securities and financial futures, during the period ended January 31, 2002, amounted to $39,119,210 and $3,076,216, respectively. 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 and losses. When the contracts are closed, the The Fund NOTES TO FINANCIAL STATEMENTS (Unaudited) (CONTINUED) fund recognizes a realized gain or loss. These investments require initial margin deposits with a broker, 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. Contracts open at January 31, 2002, are set forth in the Statement of Financial Futures. At January 31, 2002, accumulated net unrealized appreciation on investments was $56,039, consisting of $102,188 gross unrealized appreciation and $46,149 gross unrealized depreciation. At January 31, 2002, 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). For More Information Dreyfus Yield Advantage 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 9263 Boston, MA 02205-8501 Distributor Dreyfus Service Corporation 200 Park Avenue New York, NY 10166 To obtain information: BY TELEPHONE Call 1-800-645-6561 BY MAIL Write to: The Dreyfus Family of Funds 144 Glenn Curtiss Boulevard Uniondale, NY 11556-0144 BY E-MAIL Send your request to info@dreyfus.com ON THE INTERNET Information can be viewed online or downloaded from: http://www.dreyfus.com (c) 2002 Dreyfus Service Corporation 056SA0102