FIDELITY INCOME FUND /MA/, N-30D, 1994-09-22

FIDELITY INCOME FUND /MA/
N-30D, 1994-09-22

Previous: NUVEEN TAX EXEMPT UNIT TRUST INSURED SERIES 13, 485BPOS, 1994-09-22

Next: FIDELITY SECURITIES FUND, 497J, 1994-09-22

FIDELITY

(registered trademark)
MORTGAGE SECURITIES
PORTFOLIO
ANNUAL REPORT
JULY 31, 1994
CONTENTS

PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 7 The manager's review of fund
performance, strategy and outlook.

INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.

INVESTMENTS 11 A complete list of the fund's
investments with their market
values.

FINANCIAL STATEMENTS 14 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.

NOTES 18 Notes to the financial statements.

REPORT OF INDEPENDENT 21 The auditor's opinion.
ACCOUNTANTS

THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED
FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY
AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR
GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE
FDIC, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. NEITHER THE FUND NOR FIDELITY
DISTRIBUTORS
CORPORATION IS A BANK.
PRESIDENT'S MESSAGE

DEAR SHAREHOLDER:
The first half of the year has been an unsettling time for bond investors.
The bond market declined after the Federal Reserve Board raised short-term
interest rates from February through May. These rate hikes caused bond
yields to rise and bond prices to fall. The board raised the rate again in
August, and while nobody knows whether rates will continue to go up, this
may be a good time to review the effect rising rates have on your bond fund
investment, and consider how well your current bond fund holdings match
your investment goals.
Most investors choose bond funds to generate income and to help diversify
their investment portfolios. Despite the recent market downturn, bond
mutual funds can still satisfy these needs. Where investors have felt the
negative effect of rising rates is in the market value of their investment,
which has eroded as bond prices have fallen. It's important to remember,
however, that this loss in principal is only "on paper" until you sell your
shares. That's why your investing time horizon is key.
If your time horizon is short - one year or less - you may want to consider
shifting all or part of your bond fund investment into short-term
investments.
If you don't need your money within the next year, staying in your bond
fund may be the appropriate strategy for you. The longer your investing
time frame, the better your chances of retaining your principal investment
through periods of rising AND falling rates. For example, if you plan to
use your money in one to two years, a short-term bond fund may be the right
choice. If your time frame is two to four years, a fund with an
intermediate length average maturity may be best. If you have a longer-term
goal - say a child's college education that's 10 years away - you may be
willing to ride out the bond market's peaks and valleys in exchange for the
higher potential returns of a longer-term fund.
If you have questions, please call us at 1-800-544-8888. We would be happy
to send you a Fidelity FundMatch kit, which can help you determine the mix
of investments that is right for you. You might also find it convenient to
set up
a regular investment plan using the Fidelity Automatic Account Builder.SM
Periodic investment plans do not, of course, assure a profit, nor do they
protect against a loss in a declining market.
We look forward to hearing from you.
Best regards,
Edward C. Johnson 3d
PERFORMANCE: THE BOTTOM LINE

There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Each figure
includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value). You can also look at the fund's
income.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1994 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

Mortgage Securities 3.13% 47.94% 138.10%

Salomon Brothers Mortgage Index 0.67% 51.01% n/a

Average U.S. Mortgage Fund -1.84% 42.14% 127.72%

Consumer Price Index 2.77% 19.29% 40.93%

CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on December 31, 1984. For example, if you invested $1,000 in a fund
that had a 5% return over the past year, you would end up with $1,050. To
measure how the fund stacked up against its peers, you can compare these
figures to the Salomon Brothers Mortgage Index - a broad measure of the
performance of mortgage securities. You can also look at the average U.S.
mortgage fund, which reflects the performance of 58 U.S. mortgage funds
tracked by Lipper Analytical Services. These benchmarks include reinvested
dividends and capital gains, if any. Comparing the fund's performance to
the consumer price index helps show how your fund did compared to
inflation.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1994 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

Mortgage Securities 3.13% 8.15% 9.47%

Salomon Brothers Mortgage Index 0.67% 8.59% n/a

Average U.S. Mortgage Fund -1.84% 7.28% 8.95%

Consumer Price Index 2.77% 3.59% 3.64%

AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND
Mortgage Sec.SB Mortgage Index (SB05)
12/31/84 10000.00 10000.00
01/31/85 10268.17 10239.00
02/28/85 10182.13 9998.38
03/31/85 10381.15 10262.34
04/30/85 10557.41 10500.43
05/31/85 10895.84 11110.50
06/30/85 11062.37 11307.16
07/31/85 11036.95 11272.11
08/31/85 11202.73 11475.00
09/30/85 11333.92 11603.52
10/31/85 11513.08 11894.77
11/30/85 11773.13 12227.83
12/31/85 11967.05 12566.54
01/31/86 12059.68 12615.55
02/28/86 12267.56 12963.73
03/31/86 12440.08 13154.30
04/30/86 12505.38 13258.22
05/31/86 12358.15 13006.31
06/30/86 12506.49 13194.91
07/31/86 12689.96 13454.85
08/31/86 12909.18 13719.91
09/30/86 12907.75 13740.49
10/31/86 13076.73 13927.36
11/30/86 13269.91 14215.65
12/31/86 13314.34 14255.46
01/31/87 13472.59 14465.01
02/28/87 13563.70 14598.09
03/31/87 13543.66 14576.19
04/30/87 13178.83 14147.65
05/31/87 13147.72 14102.38
06/30/87 13349.38 14340.71
07/31/87 13369.30 14395.21
08/31/87 13326.51 14330.43
09/30/87 12990.10 14000.83
10/31/87 13375.03 14460.05
11/30/87 13502.59 14663.94
12/31/87 13673.42 14834.04
01/31/88 14133.26 15409.60
02/29/88 14285.67 15594.52
03/31/88 14201.00 15479.12
04/30/88 14113.12 15383.15
05/31/88 14054.43 15349.31
06/30/88 14335.70 15734.57
07/31/88 14301.64 15685.80
08/31/88 14319.79 15718.74
09/30/88 14607.80 16092.84
10/31/88 14881.56 16459.76
11/30/88 14684.79 16224.38
12/31/88 14591.89 16140.02
01/31/89 14856.64 16443.45
02/28/89 14777.98 16318.48
03/31/89 14807.18 16323.38
04/30/89 15080.51 16610.67
05/31/89 15437.42 17155.50
06/30/89 15811.03 17591.25
07/31/89 16094.12 18008.16
08/31/89 15924.13 17743.44
09/30/89 15993.65 17867.64
10/31/89 16310.87 18285.75
11/30/89 16468.05 18483.23
12/31/89 16581.56 18586.74
01/31/90 16428.80 18452.91
02/28/90 16538.23 18528.57
03/31/90 16551.22 18604.54
04/30/90 16408.05 18431.52
05/31/90 16885.08 18991.83
06/30/90 17129.86 19305.20
07/31/90 17378.80 19633.39
08/31/90 17332.84 19472.39
09/30/90 17425.36 19630.12
10/31/90 17603.86 19836.24
11/30/90 17989.06 20278.58
12/31/90 18299.37 20613.18
01/31/91 18489.25 20914.13
02/28/91 18607.63 21047.98
03/31/91 18732.78 21201.63
04/30/91 18935.57 21422.13
05/31/91 19034.01 21606.36
06/30/91 19081.61 21630.13
07/31/91 19355.69 21995.68
08/31/91 19725.57 22398.20
09/30/91 20033.52 22828.24
10/31/91 20270.31 23179.80
11/30/91 20394.23 23339.74
12/31/91 20790.41 23836.88
01/31/92 20690.40 23593.74
02/29/92 20896.28 23815.52
03/31/92 20751.87 23710.73
04/30/92 20946.42 23926.50
05/31/92 21292.15 24371.53
06/30/92 21517.75 24668.87
07/31/92 21480.82 24866.22
08/31/92 21619.76 25201.91
09/30/92 21755.49 25395.97
10/31/92 21539.15 25182.64
11/30/92 21643.25 25285.89
12/31/92 21924.12 25594.38
01/31/93 22124.14 25947.58
02/28/93 22313.63 26186.30
03/31/93 22459.34 26343.41
04/30/93 22616.14 26522.55
05/31/93 22683.10 26644.55
06/30/93 22959.81 26903.01
07/31/93 23086.02 27013.31
08/31/93 23129.01 27124.06
09/30/93 23179.53 27148.47
10/31/93 23220.77 27238.06
11/30/93 23172.23 27189.04
12/31/93 23395.87 27392.95
01/31/94 23611.34 27669.62
02/28/94 23486.83 27498.07
03/31/94 23220.65 26818.87
04/30/94 23118.93 26649.91
05/31/94 23315.73 26740.52
06/30/94 23435.07 26673.67
07/31/94 23809.69 27193.80

$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Fidelity
Mortgage Securities Portfolio on December 31, 1984, when the fund started.
As the chart shows, by July 31, 1994, the value of your investment would
have grown to $23,810 - a 138.10% increase on your initial investment. For
comparison, look at how the Salomon Brothers Mortgage Index did over the
same period. With dividends reinvested, the same $10,000 investment would
have grown to $27,194 - a 171.94% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, move in the
opposite direction of interest
rates. In turn, the share price,
return, and yield of a fund
that invests in bonds will vary.
That means if you sell your
shares during a market
downturn, you might lose
money. But if you can ride out
the market's ups and downs,
you may have a gain.
(checkmark)
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

Dividend return 5.52% 6.73% 7.64% 8.83% 8.37%

Capital appreciation return -2.39% 0.74% 3.34% 2.55% -0.39%

Total return 3.13% 7.47% 10.98% 11.38% 7.98%

DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation return reflects both the amount paid by
the fund to shareholders as capital gain distributions and changes in the
fund's share price. Both returns assume the dividends or gains are
reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1994 PAST PAST 6 PAST 1
MONTH MONTHS YEAR

Dividends per share 4.72(cents) 28.55(cents) 58.81(cents)

Annualized dividend rate 5.30% 5.47% 5.52%

30-day annualized yield 7.13% - -

DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $10.48 over
the past month, $10.53 over the past six months and $10.66 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW

MARKET RECAP
Rising interest rates and inflation
concerns in the United States
sparked a sharp sell-off in most
worldwide bond markets from
February through July 1994.
Yields rose - and prices fell -
on virtually all types of
fixed-income investments. This
contrasted sharply with 1993's
environment of falling interest
rates and few inflation worries.
After reaching a low of 5.79% in
October 1993, the bellwether
30-year Treasury bond yielded
7.39% by July 31, 1994. The
Lehman Brothers Aggregate
Bond Index - a broad measure
of taxable bonds in the U.S.
market - had a total return of
0.09% for the 12 months ended
July 31, 1994. Even though
refinancings slowed,
mortgage-backed securities also
suffered from rising rates. The
Lehman Brothers mortgage index
returned 0.53%. High-yield bonds
fared somewhat better, thanks to
credit quality enhancements due
to the strengthening economy.
The Merrill Lynch High Yield
Master Index returned 4.42%.
Most overseas bond markets
took their cue from the sell-off in
the U.S. The Salomon Brothers
World Government Bond Index
- - a measure of bond market
performance in developed
nations - rose 5.72% for the 12
months, mainly on the strength of
1993's gains. Emerging market
bonds were hit especially hard in
1994. The J.P. Morgan Emerging
Markets Bond Index fell 3.45%
during the 12 months
ended July 31.
An interview with Kevin Grant, Portfolio Manager of Fidelity
Mortgage Securities Portfolio
Q. KEVIN, HOW DID THE FUND DO?
A. Very well, considering the severe correction that all bond markets
suffered over the past six months. The fund had a total return of 3.13% for
the 12 months ended July 31, 1994. That beat the average U.S. mortgage fund
tracked by Lipper Analytical Services, which returned -1.84% during the
same period. The fund also topped the performance of the Salomon Brothers
Mortgage Index, which rose 0.67%.
Q. HOW SEVERE WAS THE MARKET DOWNTURN, AND HOW DID YOU REACT TO
IT?(PHOTO_OF_PORTFOLIO_MANAGER)
A. When the Federal Reserve Board raised short-term interest rates from
February through May, it was hoping to curb future inflation that could
result from a strengthening economy. However, even the smallest threats of
inflation triggered bond investors to sell. Although mortgage securities
were not hit as hard as, say, Treasuries, there really was no place to
hide. The silver lining, however, was that this type of market environment
played right into the strength of the fund's investing style.
Q. WHICH IS . . .
A. A value-oriented approach. I use extensive quantitative analysis to help
me find securities that are undervalued in the marketplace - those whose
prices are very low relative to their potential for gains.
Q. CAN YOU GIVE US AN EXAMPLE?
A. Sure. Although they made up roughly 2% to 6% of the fund over the past
six months, the fund's stake in derivative instruments known as
interest-only strips (IOs) had a large positive impact on performance.
These securities are essentially pieces of mortgages whose values are tied
to mortgage interest payments. Because they tend to perform poorly when
interest rates fall, these IOs were selling at very depressed prices when I
bought them last fall. But I felt that the market would eventually have to
begin pricing these instruments more fairly. In addition, interest rates
appeared to be bottoming out. Well, when rates rose through the spring, the
IOs nearly doubled in price, when the values of many of the fund's standard
mortgage bonds were falling.
Q. DERIVATIVES HAVE BEEN IN THE NEWS A LOT LATELY. AREN'T THEY RISKY?
A. They can be. The values of the IOs I purchased were tied to the interest
streams of bonds that were highly susceptible to prepayments because they
backed mortgages that homeowners were most likely to refinance. However, I
believed their low prices last fall already reflected the market's worst
possible expectations about prepayments. In addition, I tried to offset
that IO prepayment risk by keeping a sizable stake - about 45% of the fund
on July 31 - in newer mortgage bonds with coupons below 8%, which carried
very low prepayment risk. Also, IO's were extremely sensitive to changes in
interest rates. If rates had fallen, they would have fared poorly. However,
it's important to remember that had interest rates and bond yields fallen,
the prices of the fund's standard mortgage bonds would have risen. I
recently sold this batch of IOs because their risk/reward trade-off was no
longer as compelling.
Q. HAVE YOU FOUND ANY OTHER UNDERVALUED SECTORS OF THE MORTGAGE MARKET?
A. Yes. Shareholders recently approved changes to the fund's investment
policies that allow me to invest up to 35% of its assets in securities that
are rated below investment grade. So far, I've invested about 2% of the
fund in commercial real estate bonds. These are mortgages on malls and
apartment buildings, for example. Again, these bonds appeared undervalued
and have provided the fund with very attractive yields. However, because
they are not backed by a third party, there is the risk that the issuer
will fail to make the bond's principal and interest payments. To minimize
some of that risk, I have recently invested in only those mortgages that
Fidelity's research shows are on high quality real estate. Also, I invest
in several properties, which helps limit the negative impact to the fund if
any one issuer defaults.
Q. HAS YOUR VALUE-ORIENTED STYLE CARRIED OVER INTO THE FUND'S MORE
TRADITIONAL MORTGAGE BOND INVESTMENTS?
A. It has. For example, after interest rates rose this spring, I felt that
the market had overpriced Ginnie Maes for an environment of slower
prepayments. So I reduced the fund's stake until I felt that prices had
fallen more in line with prepayment rates. I traded in and out of Ginnie
Maes, Fannie Maes and Freddie Macs during the period, pinpointing bonds
that I felt had the best potential for price gains.
Q. LET'S TALK ABOUT THE COMING SIX MONTHS. WHAT DO YOU FORESEE?
A. I'm excited about the possibilities within the mortgage market. Of
course, no one knows which direction interest rates may go from here, but I
feel that a choppy market - which we may well see going forward - will bode
well for the fund. When rates rise - and bond prices fall - opportunities
pop up to invest in undervalued securities. As long as I can successfully
target those that the market has incorrectly underpriced, the fund's
potential for above-average performance will continue.
FUND FACTS
GOAL: high current income
by investing at least 65% of
total assets in mortgage
securities
START DATE: December 31, 1984
SIZE: as of July 31, 1994,
more than $365 million
MANAGER: Kevin Grant, since
August 1993; joined Fidelity in
1993
(checkmark)
KEVIN GRANT ON INVESTING IN
DERIVATIVES:
"I have three hard and fast
rules about investing in
derivatives - financial
instruments whose value is
based on, or derived from,
another security or an index of
securities. First, the
derivative's value must be tied
to an underlying security that
the fund would own anyway. I
won't buy a derivative linked
to soybean futures because
this is not a soybean fund.
Second, the derivative has to
be a much cheaper way to
own the underlying asset than
to buy that asset outright. And
third, I have to expect that
over a reasonable period the
market environment will
change in such a way that
investors will begin to price
the derivative more fairly
relative to its underlying asset
- - causing its price to rise
more than the underlying
asset. Derivatives can carry
risk beyond that of normal
mortgage bonds. But I believe
that by following these rules, I
can add a lot of value to the
fund with limited use of
derivatives, while keeping risk
under control."
(solid bullet) The fund's duration - a
measure of its sensitivity to
interest rate changes - rose
from 2.4 years on January 31
to 3.9 years by July 31. A
longer duration could make
the fund's share price more
volatile, however the fund's
yield has increased in line with
rising interest rates.
INVESTMENT CHANGES

COUPON DISTRIBUTION AS OF JULY 31, 1994
% OF FUND'S % OF FUND'S
INVESTMENTS INVESTMENTS
6 MONTHS AGO

6 - 6.99% 4.8 23.7

7 - 7.99% 43.5 11.6

8 - 8.99% 3.7 10.9

9 - 9.99% 17.0 25.6

10 - 10.99% 9.5 3.6

11 - 11.99% 1.8 3.4

12 - 12.99% 2.6 2.4

13% and over 1.4 1.6

COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING
REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1994
6 MONTHS AGO

Years 7.2 6.5

AVERAGE YEARS TO MATURITY SHOWS THE AVERAGE TIME UNTIL THE PRINCIPAL OF THE
BONDS IN THE FUND IS EXPECTED TO BE REPAID, WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1994
6 MONTHS AGO

Years 3.9 2.4

DURATION SHOWS HOW MUCH A BOND'S PRICE FLUCTUATES WITH CHANGES IN INTEREST
RATES. IF RATES RISE 1%, FOR EXAMPLE, THE SHARE PRICE OF A FUND WITH A
FIVE-YEAR DURATION WILL FALL ABOUT 5%.
ASSET ALLOCATION
AS OF JULY 31, 1994 AS OF JANUARY 31, 1994
Row: 1, Col: 1, Value: 15.7
Row: 1, Col: 2, Value: 10.3
Row: 1, Col: 3, Value: 40.0
Row: 1, Col: 4, Value: 34.0
Row: 1, Col: 1, Value: 17.2
Row: 1, Col: 2, Value: 5.9
Row: 1, Col: 3, Value: 40.0
Row: 1, Col: 4, Value: 34.9
Mortgage-backed
securities 74.0%
CMOs and other
mortgage related
securities 10.3%
Short-term
investments 15.7%
Mortgage-backed
securities 74.9%
CMOs and other
mortgage related
securities 7.9%
Short-term
investments 17.2%
ASSET ALLOCATION IN THE PIE CHARTS ARE BASED ON TOTAL PORTFOLIO INVESTMENT,
RATHER THAN NET ASSETS.
INVESTMENTS JULY 31, 1994

Showing Percentage of Total Value of Investment in Securities

U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 74.0%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 10.0%
8%, 10/1/07 to 12/1/18 $ 1,487,051 $ 1,480,509 31340MSG
8 1/4%, 12/1/08 943,408 945,040 31341EZS
8 1/2%, 11/1/03 to 12/1/18 4,407,849 4,478,381 31340MV7
9%, 7/1/13 to 9/1/20 19,394,765 20,235,541 31340CEM
10%, 1/1/09 to 2/1/23 7,557,720 8,052,824 313401GN
10 1/2%, 2/1/16 202,564 218,198 313401GN
11 1/2%, 4/1/12 to 8/1/19 1,345,186 1,490,239 313941AL
11 3/4%, 6/1/11 108,368 119,337 313941AL
12 1/4%, 1/1/14 to 8/1/15 558,719 617,389 31341EQ4
12 1/2%, 10/1/12 to 12/1/14 2,024,790 2,310,793 313401LR
12 3/4%, 6/1/05 to 3/1/15 475,980 542,027 31340SJT
13%, 1/1/11 to 12/1/14 3,447,969 3,969,479 31340NDL
44,459,757
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 31.5%
5 1/2%, 11/1/08 to 5/1/09 49,994 43,901 31371ARA
7%, 7/1/23 to 7/1/24 15,064,015 14,301,776 313615TX
7 1/2%, 8/1/23 to 8/1/24 74,000,000 72,253,600 995009YF
8%, 1/1/07 to 7/1/08 290,113 293,050 31360CY4
8 1/4%, 1/1/13 266,713 269,210 31360RQD
8 1/2%, 11/1/01 to 8/1/12 4,240,600 4,369,128 31360AL6
8 3/4%, 11/1/08 to 7/1/09 503,332 519,482 31360EN7
9%, 1/1/08 to 6/1/09 1,761,800 1,838,832 31362DWJ
9 1/2%, 11/1/09 to 12/1/20 2,986,095 3,168,882 31360AAE
10%, 10/1/02 to 11/1/21 24,231,895 26,024,705 31360YU3
10 1/2%, 1/1/01 to 5/1/08 1,869,811 2,000,101 313605YY
11%, 12/1/02 to 8/1/10 5,636,982 6,209,579 31360JBH
12%, 4/1/15 to 3/1/17 3,579,945 4,044,617 31362TU2
12 1/4%, 2/1/13 to 3/1/16 1,240,318 1,396,383 31360CQ3
12 1/2%, 2/1/13 to 3/1/16 1,689,219 1,925,717 31360B5M
12 3/4%, 8/1/13 to 7/1/15 781,551 889,020 31360CUB
13 1/2%, 12/1/12 to 12/1/14 350,705 402,437 31360A6R
14%, 5/1/12 to 11/1/14 191,770 221,975 31360AQY
140,172,395
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 32.5%
7%, 4/15/07 to 9/15/23 $ 42,285,346 $ 40,951,935 36203DRD
7 1/2%, 12/15/16 to 8/15/24 65,238,387 63,371,580 36203BFV
8 1/2%, 8/15/16 to 8/15/22 4,005,079 4,097,280 362163H8
9%, 4/15/01 to 4/15/18 14,653,009 15,358,739 362050XW
9 1/2%, 8/15/09 to 11/15/19 6,038,078 6,429,894 362056ZG
9 1/2%, 7/15/20 to 8/15/20 (d) 2,000,000 2,123,120 36217U9L
9 1/2%, 8/15/20 (d)(e) 10,000,000 10,615,600 36217U9L
10 1/2%, 1/15/98 to 8/15/20 1,264,292 1,359,779 362091QJ
11 1/2%, 7/15/10 to 7/15/18 180,918 204,314 362071WF
13 1/2%, 10/15/14 37,400 43,572 362141CP
144,555,813
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $328,368,253) 329,187,965
COLLATERALIZED MORTGAGE OBLIGATIONS - 3.6%
U.S. GOVERNMENT AGENCY - 3.2%
Federal Home Loan Mortgage Corp.:
Z bond series 1 class 1-Z, 9.30%, 4/15/19 9,709,728 9,952,471 31340YAE
Z bond series 9 class 9-Z, 9.05%, 8/15/19 4,294,149 4,358,561 31340YCG
14,311,032
PRIVATE ISSUER - 0.4%
Maryland National Bank pass thru series 1990-1 class A,
9 1/2%, 10/25/20 1,630,912 1,626,835 574112AA
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $16,917,860) 15,937,867
COMMERCIAL MORTGAGE SECURITIES - 1.5%
CBA Mortgage Corp. commercial series 1993-C1 class E,
7.158%, 12/25/03 3,183,000 2,551,556 12478L9A
CS First Boston Mortgage Securities Corp.:
commercial series 1994-CFBI class D, 6.4769%, 1/25/28 3,731,000
3,023,276 126342AY
commercial series 1994-CFBI class F, 6.4769%,
1/25/28 (a) 1,390,393 884,637
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $6,495,560) 6,459,469
COMPLEX MORTGAGE SECURITIES - 5.2%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 5.2%
Federal National Mortgage Association:
series A class 2, 605%, 8/25/10 (c) $ 95,728 $ 1,388,063
trust 47, 10%, 10/25/18 (b) 8,612,107 2,669,753 31364HEX
trust 49, 10%, 2/25/19 (b) 5,854,459 1,814,883 31364HFB
trust 249, 6 1/2%, 10/25/23 (b) 48,767,419 17,617,230 31364HE8
TOTAL COMPLEX MORTGAGE SECURITIES
(Cost $21,759,757) 23,489,929
REPURCHASE AGREEMENTS - 15.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a
joint trading account at 4.23%
dated 7/29/94 due 8/1/94 $ 69,767,584 69,743,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $443,284,430) $ 444,818,230
LEGEND
1. 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 the period
end, the value of these securities amounted to $884,637 or 0.2% of net
assets.
2. Security represents the right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
3. Security represents right to receive monthly interest payments on an
underlying pool of mortgages and the principal amount shown. Coupon
reflects that the underlying pool of mortgages is larger than the principal
to be received.
4. Security sold on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
5. Security purchased on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At July 31, 1994, the aggregate cost of investment securities for income
tax purposes was $443,289,698. Net unrealized appreciation aggregated
$1,528,532, of which $5,886,804 related to appreciated investment
securities and $4,358,272 related to depreciated investment securities.
The fund hereby designates $40,000 as a capital gain dividend for the
purpose of the dividend paid deduction.
For the year ended July 31, 1994, the net realized loss on mortgage-backed
security paydowns treated as ordinary income for income tax purposes was
$5,175,715.
The fund intends to elect to defer to its fiscal year ending July 31, 1995
$4,447,200 of losses recognized during the period November 1, 1993 to July
31, 1994.
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1994

ASSETS

Investment in securities, at value (including repurchase $ 444,818,230
agreements of $69,743,000) (cost $443,284,430)
(Notes 1 and 2) - See accompanying schedule

Commitment to sell securities on a delayed delivery $ (12,738,720)
basis

Receivable for securities sold on a delayed delivery 12,576,132 (162,588)
basis

Receivable for investments sold, regular delivery 28,195,923

Cash 2,858,378

Interest receivable 2,553,358

TOTAL ASSETS 478,263,301

LIABILITIES

Payable for investments purchased 101,231,844
Regular delivery

Delayed delivery 10,645,556

Payable for fund shares redeemed 31,994

Dividends payable 273,571

Accrued management fee 135,017

Other payables and accrued expenses 144,569

TOTAL LIABILITIES 112,462,551

NET ASSETS $ 365,800,750

Net Assets consist of (Note 1):

Paid in capital $ 368,098,599

Distribution in excess of net investment income (675,692)

Accumulated undistributed net realized gain (loss) on (2,993,369)
investments

Net unrealized appreciation (depreciation) on 1,371,212
investments

NET ASSETS, for 34,559,840 shares outstanding $ 365,800,750

NET ASSET VALUE, offering price and redemption price per $10.58
share ($365,800,750 (divided by) 34,559,840 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1994

INVESTMENT INCOME $ 28,262,567
Interest

EXPENSES

Management fee (Note 4) $ 1,735,467

Transfer agent fees (Note 4) 821,593

Accounting fees and expenses (Note 4) 158,558

Non-interested trustees' compensation 2,291

Custodian fees and expenses 95,017

Registration fees 27,721

Audit 66,280

Legal 3,053

Interest (Note 5) 640

Reports to shareholders 47,098

Miscellaneous 5,403

TOTAL EXPENSES 2,963,121

NET INVESTMENT INCOME 25,299,446

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (6,701,766)
(NOTES 1, 2 AND 3)
Net realized gain (loss) on investment securities

Change in net unrealized appreciation (depreciation) on:

Investment securities (6,690,979)

Delayed delivery commitments (162,588) (6,853,567)

NET GAIN (LOSS) (13,555,333)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM $ 11,744,113
OPERATIONS

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1994 1993

INCREASE (DECREASE) IN NET ASSETS

Operations $ 25,299,446 $ 30,772,023
Net investment income

Net realized gain (loss) (6,701,766) 1,875,336

Change in net unrealized appreciation (depreciation) (6,853,567) (1,885,193)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING 11,744,113 30,762,166
FROM OPERATIONS

Distributions to shareholders: (20,745,350) (27,846,286)
From net investment income

From net realized gain (1,532,937) -

In excess of net realized gain (1,074,645) -

TOTAL DISTRIBUTIONS (23,352,932) (27,846,286)

Share transactions 75,437,490 73,434,694
Net proceeds from sales of shares

Reinvestment of distributions 19,136,884 22,774,553

Cost of shares redeemed (136,632,161) (120,772,663)

Net increase (decrease) in net assets resulting from (42,057,787) (24,563,416)
share transactions

TOTAL INCREASE (DECREASE) IN NET ASSETS (53,666,606) (21,647,536)

NET ASSETS

Beginning of period 419,467,356 441,114,892

End of period (including under (over) distribution of net $ 365,800,750 $ 419,467,356
investment income of $(675,692) and $10,956,070,
respectively)

OTHER INFORMATION
Shares

Sold 7,107,385 6,802,713

Issued in reinvestment of distributions 1,793,385 2,109,625

Redeemed (12,806,427) (11,183,805)

Net increase (decrease) (3,905,657) (2,271,467)

</TABLE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

SELECTED PER-SHARE DATA

Net asset value, $ 10.910 $ 10.830 $ 10.480 $ 10.220 $ 10.260
beginning of period

Income from Investment .570A .788 .808 .861 .896
Operations
Net investment income

Net realized and (.242) (.007) .313 .255 (.119)
unrealized gain (loss)

Total from investment .328 .781 1.121 1.116 .777
operations

Less Distributions (.588) (.701) (.771) (.856) (.817)
From net investment
income

From net realized gain (.040) - - - -
on investments

In excess of net (.030) - - - -
realized gain on
investments

Total distributions (.658) (.701) (.771) (.856) (.817)

Net asset value, end of $ 10.580 $ 10.910 $ 10.830 $ 10.480 $ 10.220
period

TOTAL RETURN 3.13% 7.47% 10.98% 11.38% 7.98%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of $ 366 $ 419 $ 441 $ 410 $ 387
period (in millions)

Ratio of expenses to .79% .76% .80% .82% .82%
average net assets

Ratio of net investment 6.73% 7.18% 7.57% 8.39% 8.78%
income to average net
assets

Portfolio turnover rate 563% 278% 146% 209% 110%

</TABLE>

A THE AMOUNT SHOWN REFLECTS CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1994

1. SIGNIFICANT ACCOUNTING
POLICIES.
Fidelity Mortgage Securities Portfolio (the fund) is a fund of Fidelity
Income Fund (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days are valued either at amortized cost or original
cost plus accrued interest, both of which approximate current value.
Securities for which market quotations are not readily available are valued
at their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes all of its taxable income for its fiscal
year. The schedule of investments includes information regarding income
taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
paydown gains/losses on certain securities and losses deferred due to
futures and options and excise tax regulations. The fund also utilized
earnings and profits distributed to shareholders on redemption of shares as
a part of the dividends paid deduction for income tax purposes. Permanent
book and tax basis differences relating to shareholder distributions will
result in reclassifications to paid in capital and may affect net
investment income per share disclosed. Distributions in excess of net
investment income may include temporary book and tax basis differences
which will reverse in a subsequent period. Any taxable income or gain
remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS. Effective August 1,
1993, the fund adopted Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain,
and Return of Capital Distributions by Investment Companies. As a result,
the fund changed the classification of distributions to shareholders to
better disclose the differences between financial statement amounts and
distributions determined in accordance with income tax regulations.
Accordingly, amounts as of July 31, 1993 have been reclassified to reflect
a decrease in paid in capital of $356,945, a decrease in undistributed net
investment income of $11,010,141 and a decrease in accumulated net realized
loss on investments of $11,367,086.
2. OPERATING POLICIES.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying securities, whose market value is required to be at least
102% of the resale price at the time of purchase. The fund's investment
adviser, Fidelity Management & Research Company (FMR), is responsible for
determining that the value of these underlying securities remains at least
equal to the resale price.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of FMR, may transfer uninvested cash balances into one or more
joint trading accounts. These balances are invested in one or more
repurchase agreements that mature in 60 days or less from the date of
purchase, and are collateralized by U.S. Treasury or Federal Agency
obligations.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The fund
may receive compensation for interest forgone in a delayed delivery
transaction. The fund identifies securities as segregated in its custodial
records with a value at least equal to the amount of the purchase
commitment.
3. PURCHASES AND SALES OF
INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $2,078,941,863 and $2,113,870,227, respectively, of which U.S.
government and government agency obligations aggregated $2,055,149 and
$2,078,358,338, respectively.
4. FEES AND OTHER
TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the
4. FEES AND OTHER
TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .14% to .37% for the period from August 1, 1993 to
October 31, 1993 and .1325% to .3700% for the period from November 1, 1993
to July 31, 1994. In the event that these rates were lower than the
contractual rates in effect during those periods, FMR voluntarily
implemented the above rates for those periods as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .46% of
average net assets.
The Board of Trustees has approved a new group fee rate schedule with rates
ranging from .12% to .37%. Effective August 1, 1994, FMR voluntarily agreed
to implement this new group fee rate schedule as it resulted in the same or
a lower management fee.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder
support services. FMR or FDC has informed the fund that payments made to
third parties under the Plan amounted to $11,828 for the period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the fund's transfer, dividend disbursing and shareholder servicing agent.
FSC receives fees based on the type, size, number of accounts and the
number of transactions made by shareholders. FSC pays for typesetting,
printing and mailing of all shareholder reports, except proxy statements.
ACCOUNTING FEES. FSC maintains the funds' accounting records. The fee is
based on the level of average net assets for the month plus out-of-pocket
expenses.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time. The
maximum loan and the average daily loan balances during the periods for
which loans were outstanding amounted to $6,700,000. The weighted average
interest rate was 3.4%.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Mortgage Securities Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operation and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Fidelity
Mortgage Securities Portfolio (a fund of Fidelity Income Fund) at July 31,
1994, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the periods indicated in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fidelity Mortgage Securities
Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities owned at July 31, 1994 by correspondence with
the custodian and brokers, and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 6, 1994
DISTRIBUTIONS

The Board of Trustees of Fidelity Income Fund: Fidelity Mortgage Securities
Portfolio voted to pay on September 6, 1994, to shareholders of record at
the opening of business on September 2, 1994 a distribution of $.05 derived
from capital gains realized from sales of portfolio securities.
.67% of the dividends distributed during the fiscal year was derived from
interest on U.S. government securities which is generally exempt from state
income tax.
The fund will notify shareholders in January 1995 of the applicable
percentage for use in preparing 1994 income tax returns.
TO CALL FIDELITY

FOR FUND INFORMATION AND QUOTES
The Fidelity Telephone Connection offers you special automated telephone
services for quotes and balances. The services are easy to use,
confidential and quick. All you need is a Touch Tone telephone.
YOUR PERSONAL IDENTIFICATION NUMBER
(PIN)
The first time you call one of our automated telephone services, we'll ask
you
to set up your Personal Identification
Number (PIN). The PIN assures that
only you have automated telephone
access to your account information.
Please have your Customer Number
(T-account #) handy when you call --
you'll need it to establish your PIN. If
you would ever like to change your PIN, just choose the "Change your
Personal
Identification Number" option when
you call. If you forget your PIN, please
call a Fidelity representative at 1-800-
544-6666 for assistance.

(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios.(registered trademark)
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. FOR MORE
INFORMATION ON ANY
FIDELITY FUND INCLUDING MANAGEMENT FEES AND CHARGES, CALL 1-800-544-8888
FOR A FREE
PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
U.K. Inc. (FMR U.K.)
London, England
Fidelity Management & Research
Far East Inc. (FMR Far East)
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Thomas J. Steffanci, Vice President
Gary L. French, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Arthur S. Loring, Secretary
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox*
Phyllis Burke Davis*
Richard J. Flynn*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Edward H. Malone*
Marvin L. Mann*
Gerald C. McDonough*
Thomas R. Williams*
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan Ginnie Mae
(registered trademark)
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY
TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE

FIDELITY

(registered trademark)
GINNIE MAE
PORTFOLIO
ANNUAL REPORT
JULY 31, 1994
CONTENTS

PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 7 The manager's review of fund
performance, strategy and outlook.

INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.

INVESTMENTS 11 A complete list of the fund's
investments with their market
values.

FINANCIAL STATEMENTS 13 Statements of assets and liabilities,
operations, and changes in net
assets, as well as financial
highlights.

NOTES 17 Notes to the financial statements.

REPORT OF INDEPENDENT 20 The auditor's opinion.
ACCOUNTANTS

Ginnie Mae Portfolio -0.63% 44.43% 107.17%

Salomon Brothers GNMA
Mortgage Pass-Through Index 0.28% 51.15% n/a

Average GNMA Fund -0.80% 44.20% n/a

Consumer Price Index 2.77% 19.29% 36.52%

CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on November 8, 1985. For example, if you invested $1,000 in a fund
that had a 5% return over the past year, you would end up with $1,050. You
can compare these figures to the Salomon Brothers GNMA Mortgage
Pass-Through Index - a broad measure of GNMA performance. To measure how
the fund stacked up against its peers you can compare it to the average
GNMA fund, which reflects the performance of 48 GNMA funds tracked by
Lipper Analytical Services. This benchmark includes reinvested dividends
and capital gains, if any. Comparing the fund's performance to the consumer
price index helps show how your fund did compared to inflation. (The CPI
returns begin on the month end closest to the fund's start date.)
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1994 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

Ginnie Mae Portfolio -0.63% 7.63% 8.70%

Salomon Brothers GNMA Mortgage
Pass-Through Index 0.28% 8.61% n/a

Average GNMA Fund -0.80% 7.59% n/a

Consumer Price Index 2.77% 3.59% 3.62%

AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND
GNMA Portfolio SB GNMA Index
11/30/85 10000.00 10000.00
12/31/85 10380.25 10296.00
01/31/86 10428.54 10327.92
02/28/86 10673.66 10604.71
03/31/86 10889.17 10752.11
04/30/86 10969.85 10844.58
05/31/86 10753.34 10638.53
06/30/86 10917.30 10805.56
07/31/86 11081.37 11002.22
08/31/86 11328.10 11204.66
09/30/86 11300.82 11224.83
10/31/86 11473.85 11369.63
11/30/86 11688.87 11581.10
12/31/86 11724.24 11637.85
01/31/87 11879.82 11785.65
02/28/87 11976.44 11903.51
03/31/87 11934.24 11902.32
04/30/87 11528.78 11538.11
05/31/87 11466.03 11498.88
06/30/87 11637.75 11700.11
07/31/87 11642.10 11727.02
08/31/87 11568.43 11660.17
09/30/87 11242.34 11362.84
10/31/87 11616.99 11742.36
11/30/87 11708.79 11912.62
12/31/87 11859.79 12049.62
01/31/88 12261.98 12543.65
02/29/88 12380.62 12692.92
03/31/88 12355.56 12579.95
04/30/88 12247.30 12488.12
05/31/88 12203.07 12475.63
06/30/88 12464.18 12801.25
07/31/88 12420.30 12751.32
08/31/88 12437.96 12764.07
09/30/88 12686.02 13080.62
10/31/88 12907.75 13385.40
11/30/88 12776.77 13189.97
12/31/88 12709.49 13118.75
01/31/89 12911.67 13360.13
02/28/89 12844.78 13257.26
03/31/89 12859.90 13262.56
04/30/89 13110.92 13501.29
05/31/89 13444.49 13960.33
06/30/89 13805.76 14355.41
07/31/89 14034.96 14678.41
08/31/89 13902.68 14465.57
09/30/89 13935.61 14556.70
10/31/89 14233.25 14895.87
11/30/89 14370.26 15068.67
12/31/89 14469.39 15163.60
01/31/90 14310.83 15030.16
02/28/90 14393.97 15087.27
03/31/90 14422.17 15149.13
04/30/90 14260.03 14977.95
05/31/90 14715.41 15461.73
06/30/90 14922.21 15718.40
07/31/90 15159.50 15993.47
08/31/90 15120.64 15833.54
09/30/90 15214.38 15964.95
10/31/90 15382.64 16140.57
11/30/90 15728.61 16537.63
12/31/90 15988.72 16813.80
01/31/91 16190.01 17050.88
02/28/91 16255.35 17151.48
03/31/91 16368.63 17283.55
04/30/91 16489.89 17465.02
05/31/91 16615.06 17603.00
06/30/91 16635.10 17639.96
07/31/91 16881.74 17939.84

08/31/91 17182.79 18264.55
09/30/91 17436.15 18606.10
10/31/91 17673.45 18885.19
11/30/91 17768.26 19007.95
12/31/91 18157.93 19483.14
01/31/92 18007.33 19264.93
02/29/92 18199.79 19442.17
03/31/92 18092.65 19374.12
04/30/92 18247.34 19540.74
05/31/92 18550.06 19884.66
06/30/92 18757.68 20157.08
07/31/92 18848.72 20310.27
08/31/92 19057.14 20590.55
09/30/92 19194.15 20755.28
10/31/92 19039.00 20612.07
11/30/92 19136.58 20723.37
12/31/92 19374.43 20961.69
01/31/93 19630.15 21255.15
02/28/93 19804.60 21442.20
03/31/93 19913.03 21581.57
04/30/93 19981.19 21691.64
05/31/93 20095.79 21813.11
06/30/93 20292.70 22033.43
07/31/93 20399.31 22121.56
08/31/93 20450.04 22165.80
09/30/93 20451.21 22181.32
10/31/93 20521.13 22232.34
11/30/93 20402.67 22201.21
12/31/93 20558.65 22369.94
01/31/94 20790.03 22562.32
02/28/94 20594.31 22454.02
03/31/94 20077.15 21885.93
04/30/94 19916.58 21754.62
05/31/94 19934.34 21826.41
06/30/94 19866.94 21782.76
07/31/94 20270.17 22185.74

$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Fidelity
Ginnie Mae Portfolio on November 30, 1985, soon after the fund started. As
the chart shows, by July 31, 1994, the value of your investment would have
grown to $20,270 - a 102.70% increase on your initial investment. For
comparison, look at how the Salomon Brothers GNMA Mortgage Pass-Through
Index did over the same period. With dividends reinvested the same $10,000
investment would have grown to $22,186 - a 121.86% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, move in the
opposite direction of interest
rates. In turn, the share price,
return, and yield of a fund
that invests in bonds will vary.
That means if you sell your
shares during a market
downturn, you might lose
money. But if you can ride out
the market's ups and downs,
you may have a gain.
(checkmark)
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

Dividend return 5.24% 6.42% 7.80% 8.66% 8.49%

Capital appreciation return -5.87% 1.81% 3.85% 2.70% -0.48%

Total return -0.63% 8.23% 11.65% 11.36% 8.01%

Dividends per share 5.72(cents) 30.39(cents) 58.16(cents)

Annualized dividend rate 6.58% 5.86% 5.42%

30-day annualized yield 6.63% - -

DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $10.23 over
the past month, $10.45 over the past six months and $10.73 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW

An interview with Robert Ives,
Portfolio Manager of Fidelity Ginnie Mae Portfolio
Q. BOB, HOW DID THE FUND DO?
A. The fund had a total return of -0.63% for the 12 months ended July 31,
1994. That topped the total return for the average GNMA fund tracked by
Lipper Analytical Services, which was -0.80%. The Salomon Brothers Mortgage
Pass-Through GNMA index rose 0.28% during the same period.
Q. WHAT'S THE LATEST ON THE MORTGAGE BOND MARKET?
A. After a bond market rally that lasted nearly three years, interest
rates rose sharply from February through May of this year, which sent bond
prices falling. The Federal Reserve Board raised short-term rates in an
attempt to hold the line on future inflation that might result from a
strengthening economy. But the mere threat of inflation led to a sharp
sell-off in the bond markets. Although mortgage bond prices fell too, there
was a silver lining in the rate rise. It served to slow the rate of
prepayments, which had caused mortgage bonds to generally under-perform
Treasuries when rates were falling.
Q. HOW DOES THE SLOWDOWN IN PREPAYMENTS HELP THE FUND?
A. Let me take a quick step back; a prepayment happens when the principal
on a mortgage bond is paid to its holder before the bond matures. That
happens when a homeowner refinances an existing mortgage or moves. The
problem is, once a bond is prepaid, the investor has to reinvest that money
in a newer mortgage bond, usually at a lower interest rate. When a mortgage
bond is sold in the marketplace, its price usually reflects an expected
likelihood of prepayment. Over the past year, the fund avoided some of the
detrimental effects of prepayments by investing in seasoned bonds. Their
prices were low because investors felt that they were highly susceptible to
prepayments, however these bonds experienced slow prepayments, which
benefited the fund.
Q. WHAT DO YOU MEAN BY "SEASONED" BONDS?
A. Seasoning simply means the bonds have aged several years. Examples
include Ginnie Maes with coupons in the 8% and 9% range, issued in the late
1980s. There may be many reasons why these homeowners never refinanced, but
often they have low balances on their loans.
Q. DO PREPAYMENTS EVER HELP THE FUND?
A. Sometimes. Let's say I bought a discounted bond for $900.00. If the bond
is prepaid soon after, I'll get its par value of $1000.00, and the fund has
made $100.00. I've already mentioned that some homeowners with seasoned
mortgages might not be apt to refinance, but they are more likely to move
than homeowners with newer mortgages. Now that refinancings have slowed, a
larger percentage of prepayments occur because of moves. To that end,
Fidelity's analysts help me by keeping close track of expected housing
turnover rates nationwide. We search out discount bonds which we expect to
have high prepayments.
Q. WHAT OTHER FACTORS AFFECTED THE FUND'S PERFORMANCE?
A. The fund had a small stake - 3.4% on January 31 - in collateralized
mortgage obligations or CMOs, which did well. These are essentially pieces
of mortgages. Investors divide the mortgage's principal and interest
payments. I felt these instruments were undervalued in the marketplace due
to investor confusion about expected prepayment rates. Eventually that
prepayment risk became clearer and the value of the CMOs rose. While
technically they may be considered derivatives because their value is tied
to an underlying mortgage security, the CMOs that I bought carried a
relatively low amount of risk. Lower, in fact, than their underlying
mortgage bonds. I've since sold most of that investment, but the fund
still had a 1.3% stake in CMOs at the end of July.
Q. WHICH INVESTMENTS DIDN'T WORK OUT AS PLANNED?
A. The fund had an 8.6% stake in 30-year Treasury bonds at the end of
January. I made the investment because I felt that long-term interest rates
had further room to fall. However, when the Fed raised short-term rates in
February, long rates shot upward, causing the prices of these bonds to
fall. I sold them pretty quickly, but they did dampen the fund's total
return.
Q. WHAT'S ON THE HORIZON FOR THE FUND?
A. I think the bond market could go either way from here. Lately, we've
been getting some mixed signals on economic growth and inflation, which has
resulted in increased market volatility. Despite this uncertainty, the
mortgage market looks better than it has in some time. If rates stabilize
or even rise slowly, I think mortgage bonds are well-positioned to
outperform comparable Treasuries.
FUND FACTS
GOAL: to provide high current
income by investing primarily
in GNMA securities
START DATE: November 8, 1985
SIZE: as of July 31, 1994,
more than $768 million
MANAGER: Robert Ives, since
January 1993; manager,
Spartan Ginnie Mae Fund,
since January 1993; Fidelity
Mortgage Securities
Portfolio, January 1993 -
August 1993; institutional
mortgage-backed funds,
since May 1991; joined
Fidelity in 1991
(checkmark)
BOB IVES ON DURATION:
"The fund's duration- a
measure of its sensitivity to
changes in interest rates -
rose from 3.7 years to 4.9
years over the past six
months. This was mostly due
to the lengthening duration of
the overall mortgage market.
The high volume of
refinancings that occurred as
interest rates fell flooded the
market with low coupon
bonds which have longer
durations. Also, as rates have
risen and refinancings have
slowed, the average
mortgage bond has a longer
life, and therefore, a longer
duration.
"A longer duration could make
the fund's share price more
volatile in the months ahead.
But it's important to keep two
things in mind. First, the
fund's duration was
historically low over the past
couple of years, and now
we're returning to more typical
levels. In addition, as rates
have risen, so has the fund's
yield, which may help offset
future share price drops."
(solid bullet) The fund's stake in Ginnie
Mae bonds has increased
from 72.1% six months ago to
86.6% on July 31. When the
fund sold its stake in Treasury
bonds and some of its CMOs,
the proceeds were reinvested
in Ginnie Maes.
INVESTMENT CHANGES

COUPON DISTRIBUTION AS OF JULY 31, 1994
% OF FUND'S INVESTMENTS % OF FUND'S INVESTMENTS
6 MONTHS AGO

6 - 6.99% 6.6 10.3

7 - 7.99% 36.4 24.2

8 - 8.99% 20.4 24.8

9 - 9.99% 20.9 17.7

10 - 10.99% 5.1 7.2

11 - 11.99% 1.9 5.8

12 - 12.99% 2.3 2.2

13% and over 0.4 0.3

COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1994
6 MONTHS AGO

Years 8.4 7.3

AVERAGE YEARS TO MATURITY SHOWS THE AVERAGE TIME UNTIL THE PRINCIPAL ON THE
FUND'S BONDS IS EXPECTED
TO BE REPAID, WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1994
6 MONTHS AGO

Years 4.9 3.7

Mortgage-related
securities 92.7%
U.S. government
and agency
obligations 1.3%
Other 6.0%

Row: 1, Col: 1, Value: 7.5
Row: 1, Col: 2, Value: 8.6
Row: 1, Col: 3, Value: 40.0
Row: 1, Col: 4, Value: 43.9

INVESTMENTS JULY 31, 1994

Showing Percentage of Total Value of Investment in Securities

U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 92.7%
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 4.7%
8 1/2%, 2/1/04 to 5/1/17 $ 2,161 $ 2,203 313401GE
9%, 6/1/10 to 4/1/21 7,620 8,019 31340TYU
10%, 10/1/04 to 12/1/19 10,397 11,028 313401GG
10 1/4%, 2/1/09 to 11/1/16 7,323 7,759 313401GK
10 1/2%, 11/1/17 1,082 1,166 313401GK
11 1/4%, 2/1/10 to 5/1/11 953 1,042 313401FZ
11 1/2%, 2/1/12 to 8/1/19 3,636 4,037 313401FZ
11 3/4%, 11/1/11 231 255 31290HGA
12%, 6/1/15 to 11/1/15 758 839 31290JPH
12 1/2%, 11/1/12 to 9/1/13 1,637 1,868 31290HGA
38,216
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.4%
8 1/2%, 6/1/08 to 4/1/16 2,312 2,376 31360SYA
9%, 12/1/97 to 10/1/11 579 607 31360TTF
10%, 7/1/04 1,004 1,065
10 1/4%, 12/1/15 to 10/1/18 1,205 1,292 31360UXB
10 1/2%, 11/1/05 3,370 3,605 31360WQ2
11 1/2%, 1/1/01 to 9/1/15 1,357 1,514 31360U7K
12 1/2%, 10/1/15 562 641 31360VDB
14%, 11/1/12 to 10/1/14 160 185 31360VJ3
11,285
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 86.6%
6 1/2%, 9/15/23 to 12/15/23 43,714 39,602 36203QPF
6 1/2%, 8/15/24 (a) 15,000 13,594 36203QHA
7%, 11/15/07 to 2/15/24 143,912 136,696 36203QXH
7%, 8/15/24 (a) 8,000 7,518 36203QSS
7 1/2%, 5/15/17 to 11/15/23 144,699 140,540 36203Q2M
8%, 5/15/16 to 12/15/23 128,407 128,151 36203RE6
8%, 8/15/24 9,000 8,975 36203Q7G
8 1/2%, 12/15/05 to 7/15/17 8,772 8,996 36203RF3
8 1/2%, 8/15/22 13,950 14,251 36203RGJ
9%, 6/15/01 to 6/15/24 97,581 102,211 36203RK7
9 1/2%, 4/15/01 to 8/15/20 54,674 58,210 36203RNZ
10%, 10/15/00 to 12/15/18 12,509 13,488 36203RP3
10 1/2%, 5/15/98 to 1/15/16 1,962 2,109 36203RP7
11%, 2/15/10 to 12/15/15 1,365 1,516 36203RQF
11 1/4%, 7/15/13 to 1/15/16 1,019 1,124 36203RRF
11 1/2%, 3/15/10 to 9/15/18 4,745 5,362 36203RRF
11 3/4%, 1/15/16 198 220 36203QGV
12%, 12/15/99 to 5/15/15 2,726 3,083 36203RYL
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
12 1/4%, 3/15/14 $ 82 $ 93
12 1/2%, 3/15/10 to 12/15/14 10,665 12,260 36203R3H
13%, 1/15/11 to 5/15/15 1,452 1,685 36203R4H
13 1/2%, 5/15/10 to 11/15/14 681 793 36203SG4
700,477
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS
(Cost $759,154) 749,978
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.3%
U.S. GOVERNMENT AGENCY - 1.3%
U.S. Dept. Veterans Affairs Vendee Mortgage Trust sequential pay
series1992-1 class 2- B, 7.75%, 9/15/10
(Cost $10,227) 10,000 10,125 911760AG
REPURCHASE AGREEMENTS - 6.0%
MATURITY
AMOUNT
(000S)
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 4.23% dated
7/29/94 due 8/1/94 $ 48,770 48,753
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $818,134) $ 808,856
LEGEND
(a) Security purchased on a delayed delivery basis. Interest rate to be
determined at settlement date (see Note 2 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At July 31, 1994, the aggregate cost of investment securities for income
tax purposes was $833,803,000. Net unrealized depreciation aggregated
$24,947,000, all of which related to depreciated investment securities.
The fund hereby designates $2,590,000 as a capital gain dividend for the
purpose of the dividend paid deduction.
The fund has elected to defer to its fiscal year ending July 31,1995,
$20,171,000 of losses recognized during the period November 1, 1993 to July
31, 1994.
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS (EXCEPT FOR PER-SHARE AMOUNTS) JULY 31, 1994

ASSETS

Investment in securities, at value (including repurchase $ 808,856
agreements of $48,753) (cost $818,134)
(Notes 1 and 2) - See accompanying schedule

Receivable for investments sold 3,696

Interest receivable 5,197

TOTAL ASSETS 817,749

LIABILITIES

Payable to custodian bank $ 1,192

Payable for investments purchased: 25,200
Regular delivery

Delayed delivery 20,842

Payable for fund shares redeemed 532

Dividends payable 609

Accrued management fee 292

Other payables and accrued expenses 317

TOTAL LIABILITIES 48,984

NET ASSETS $ 768,765

Net Assets consist of (Note 1):

Paid in capital $ 812,991

Distributions in excess of net investment income (608)

Accumulated undistributed net realized gain (loss) (34,340)
on investments

Net unrealized appreciation (depreciation) on (9,278)
investments

NET ASSETS, for 74,226 shares outstanding $ 768,765

NET ASSET VALUE, offering price and redemption price $10.36
per share ($768,765 (divided by) 74,226 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1994

INVESTMENT INCOME $ 67,851
Interest

EXPENSES

Management fee (Note 4) $ 3,992

Transfer agent fees (Note 4) 2,349

Accounting fees and expenses (Note 4) 303

Non-interested trustees' compensation 5

Custodian fees and expenses 240

Registration fees 34

Audit 51

Legal 7

Reports to shareholders 101

Miscellaneous 12

TOTAL EXPENSES 7,094

NET INVESTMENT INCOME 60,757

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (42,174)
(Notes 1 and 3)
Net realized gain (loss) on investment securities

Change in net unrealized appreciation (depreciation) (24,038)
on investment securities

NET GAIN (LOSS) (66,212)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ (5,455)
FROM OPERATIONS

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEARS ENDED JULY 31,

1994 1993

INCREASE (DECREASE) IN NET ASSETS

Operations $ 60,757 $ 69,222
Net investment income

Net realized gain (loss) (42,174) 16,513

Change in net unrealized appreciation (depreciation) (24,038) (10,388)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING (5,455) 75,347
FROM OPERATIONS

Distributions to shareholders (46,661) (58,428)
From net investment income

From net realized gain (16,166) -

In excess of net realized gain (5,195) -

TOTAL DISTRIBUTIONS (68,022) (58,428)

Share transactions 219,226 307,342
Net proceeds from sales of shares

Reinvestment of distributions 58,534 48,972

Cost of shares redeemed (411,083) (311,855)

Net increase (decrease) in net assets resulting (133,323) 44,459
from share transactions

TOTAL INCREASE (DECREASE) IN NET ASSETS (206,800) 61,378

NET ASSETS

Beginning of period 975,565 914,187

End of period (including under (over) distributions $ 768,765 $ 975,565
of net investment income of $(608) and $23,765,
respectively)

OTHER INFORMATION
Shares

Sold 20,365 27,604

Issued in reinvestment of distributions 5,427 4,395

Redeemed (38,221) (28,022)

Net increase (decrease) (12,429) 3,977

</TABLE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

SELECTED PER-SHARE DATA

Net asset value, $ 11.260 $ 11.060 $ 10.650 $ 10.370 $ 10.420
beginning of period

Income from .582A .800 .833 .845 .891
Investment
Operations
Net investment
income

Net realized and (.650) .083 .373 .288 (.099)
unrealized gain
(loss)

Total from (.068) .883 1.206 1.133 .792
investment
operations

Less Distributions (.582) (.683) (.796) (.853) (.842)
From net investment
income

From net realized (.190) - - - -
gain on
investments

In excess of net (.060) - - - -
realized gain on
investments

Total distributions (.832) (.683) (.796) (.853) (.842)

Net asset value, end $ 10.360 $ 11.260 $ 11.060 $ 10.650 $ 10.370
of period

TOTAL RETURN (.63)% 8.23% 11.65% 11.36% 8.01%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of $ 769 $ 976 $ 914 $ 797 $ 658
period (in millions)

Ratio of expenses to .82% .80% .80% .83% .83%
average net assets

Ratio of net 7.03% 7.26% 7.73% 8.24% 8.71%
investment income
to average net
assets

Portfolio turnover rate 303% 259% 114% 125% 96%

</TABLE>

1. SIGNIFICANT ACCOUNTING
POLICIES.
Fidelity Ginnie Mae Portfolio (the fund) is a fund of Fidelity Income Fund
(the trust) and is authorized to issue an unlimited number of shares. The
trust is registered under the Investment Company Act of 1940, as amended
(the 1940 Act), as an open-end management investment company organized as a
Massachusetts business trust. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days are valued either at amortized cost or original
cost plus accrued interest, both of which approximate current value.
Securities for which quotations are not readily available through the
pricing service are valued at their fair value as determined in good faith
under consistently applied procedures under the general supervision of the
Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes all of its taxable income for its fiscal
year. The schedule of investments includes information regarding income
taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
mortgagebacked securities, futures transactions, and losses deferred due to
wash sales and excise tax regulations. The fund also utilized earnings and
profits distributed to shareholders on redemption of shares as a part of
the dividends paid deduction for income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect net investment income per share disclosed. Distributions in excess
of net investment income may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable gain
remaining at fiscal year
end is distributed in the following year.
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS. Effective August 1,
1993, the fund adopted Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain,
and Return of Capital Distributions by Investment Companies. As a result,
the fund changed the classification of distributions to shareholders to
better disclose the differences between financial statement amounts and
distributions determined in accordance with income tax regulations.
Accordingly, amounts as of July 31, 1993 have been reclassified to reflect
an increase in paid in capital of $10,000, a decrease in undistributed net
investment income of $24,476,000 and a decrease in accumulated net realized
loss on investments of $24,466,000.
2. OPERATING POLICIES.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying securities, whose market value is required to be at least
102% of the resale price at the time of purchase. The fund's investment
adviser, Fidelity Management & Research Company (FMR), is responsible for
determining that the value of these underlying securities remains at least
equal to the resale price.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other registered
investment companies having management contracts with FMR, may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase, and are collateralized by U.S.
Treasury or Federal Agency obligations.
DELAYED DELIVERY TRANSACTIONS.
The fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more after
the date of the transaction. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The fund may receive compensation for
interest forgone in a delayed delivery transaction. The fund identifies
securities as segregated in its custodial records with a value at least
equal to the amount of the purchase commitment.
3. PURCHASES AND SALES OF
INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $2,603,015,000 and $2,719,129,000, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .14% to .37% for the period from August 1, 1993 to
October 31, 1993 and .1325% to .3700% for the period from November 1, 1993
to July 31, 1994. In the event that these rates were lower than the
contractual rates in effect during those periods, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee rate is .30%. For the
period, the management fee was equivalent to an annual rate of .46% of
average net assets.
The Board of Trustees has approved a new group fee rate schedule with rates
ranging from .12% to .37%. Effective August 1, 1994, FMR has voluntarily
agreed to implement this new group fee rate schedule as it results in the
same or a lower management fee.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services. FMR or FDC has informed the fund that
payments made to third parties under the Plan amounted to $85,000 for the
period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the transfer, dividend disbursing and shareholder servicing agent. FSC
receives fees based on the type, size, number of accounts and the number of
transactions made by shareholders. FSC pays for typesetting, printing and
mailing of all shareholder reports, except proxy statements.
ACCOUNTING FEES. FSC maintains
the fund's accounting records. The fee
is based on the level of average net assets for the month plus
out-of-pocket expenses.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Ginnie Mae Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Ginnie Mae Portfolio, a fund of Fidelity Income Fund, at July
31, 1994, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fidelity Ginnie
Mae Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities owned at July 31, 1994 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 2, 1994
DISTRIBUTIONS

The Board of Trustees of Fidelity Ginnie Mae Portfolio voted to pay on
September 6, 1994, to shareholders of record at the opening of business on
September 2, 1994 a distribution of $.02 derived from capital gains
realized from sales of portfolio securities. A total of 1.72% of the
dividends distributed during the fiscal year were derived from interest on
U.S. Government securities which is generally exempt from state income tax.
TO WRITE FIDELITY

If more than one address is listed, please locate the address that is
closest to you. We'll give your correspondence immediate attention and send
you written confirmation upon completion of your request.
(LETTER_GRAPHIC)MAKING CHANGES
TO YOUR ACCOUNT
(such as changing name, address, bank, etc.)
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0002
(LETTER_GRAPHIC)FOR NON-RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
OVERNIGHT EXPRESS
Fidelity Investments
100 Crosby Parkway - KP2C
Covington, KY 41015-4399
SELLING SHARES
Fidelity Investments
P.O. Box 193
Boston, MA 02210-0193
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
Fidelity Investments
P.O. Box 30281
Salt Lake City, UT 84130-0281
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions
World Trade Center
164 Northern Avenue
Boston, MA 02210
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 193
Boston, MA 02210-0193
(LETTER_GRAPHIC)FOR RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
TO CALL FIDELITY

(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios.(registered trademark)
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. FOR MORE
INFORMATION ON ANY
FIDELITY FUND INCLUDING MANAGEMENT FEES AND CHARGES, CALL 1-800-544-8888
FOR A FREE
PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
U.K. Inc. (FMR U.K.)
London, England
Fidelity Management & Research
Far East Inc., (FMR Far East)
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Thomas J. Steffanci, Vice President
Gary L. French, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Arthur S. Loring, Secretary
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox*
Phyllis Burke Davis*
Richard J. Flynn*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Edward H. Malone*
Marvin L. Mann*
Gerald C. McDonough*
Thomas R. Williams*
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY
TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE

SPARTAN(registered trademark)

(registered trademark)
LIMITED MATURITY GOVERNMENT
FUND
ANNUAL REPORT
JULY 31, 1994
CONTENTS

PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 7 The manager's review of fund
performance, strategy and outlook.

INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.

INVESTMENTS 11 A complete list of the fund's
investments with their market
values.

FINANCIAL STATEMENTS 15 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.

NOTES 19 Notes to the financial statements.

REPORT OF INDEPENDENT 22 The auditor's opinion.
ACCOUNTANTS

There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Each figure
includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value), and the effect of the $5 account
closeout fee. If Fidelity had not reimbursed certain fund expenses, the
fund's five year and life of fund returns would have been lower. You can
also look at the fund's income.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1994 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

Spartan Limited Maturity Government 0.56% 40.18% 55.68%

Lehman Brothers 1-3 Year
Government Bond Index 2.21% 41.80% n/a

Average Short U.S. Government Fund 0.18% 38.69% n/a

Consumer Price Index 2.77% 19.29% 26.73%

CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on May 2, 1988. For example, if you invested $1,000 in a fund that
had a 5% return over the past year, you would end up with $1,050. You can
compare these figures to the Lehman Brothers 1-3 Year Government Bond Index
- - a broad measure of the performance of short-term government bonds. To
measure how the fund stacked up against its peers, you can also look at the
average short U.S. government fund, which reflects the performance of 117
funds tracked by Lipper Analytical Services. These benchmarks include
reinvested dividends and capital gains, if any. Comparing the fund's
performance to the consumer price index helps show how your fund did
compared to inflation. (The CPI returns begin on the month end closest to
the fund's start date.)
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1994 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

Spartan Limited Maturity Government 0.56% 6.99% 7.34%

Lehman Brothers 1-3 Year
Government Bond Index 2.21% 7.23% n/a

Average Short U.S. Government 0.18% 6.74% n/a
Fund

Consumer Price Index 2.77% 3.59% 3.86%

AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND

$15,820
$15,585
$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Spartan
Limited Maturity Government Fund on May 31, 1988, shortly after the fund
started. As the chart shows, by July 31, 1994, the value of your investment
would have grown to $15,585 - a 55.85% increase on your initial investment.
This assumes you still own the fund on July 31, 1994, and therefore does
not include the effect of the $5 account closeout fee. For comparison, look
at how the Lehman Brothers 1-3 Year Government Bond Index did over the same
period. With dividends reinvested, the same $10,000 investment would have
grown to $15,820 - a 58.20% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, move in the
opposite direction of interest
rates. In turn, the share price,
return, and yield of a fund
that invests in bonds will vary.
That means if you sell your
shares during a market
downturn, you might lose
money. But if you can ride out
the market's ups and downs,
you may have a gain.
(checkmark)
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

Dividend return 5.22% 6.18% 6.98% 8.91% 8.48%

Capital appreciation return -4.66% 1.77% 1.79% 1.50% -1.01%

Total return .56% 7.95% 8.77% 10.41% 7.47%

DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation return reflects both the amount paid by
the fund to shareholders as capital gain distributions and changes in the
fund's share price. Both returns assume the dividends or gains are
reinvested. Capital appreciation and total returns include the effect of
the $5 account closeout fee.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1994 PAST PAST 6 PAST 1
MONTH MONTHS YEAR

Dividends per share 4.66(cents) 26.40(cents) 53.04(cents)

Annualized dividend rate 5.73% 5.48% 5.35%

30-day annualized yield 5.84% n/a n/a

DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $9.57 over
the past month, $9.71 over the past six months and $9.92 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW

MARKET RECAP
Rising interest rates and inflation
concerns in the United States
sparked a sharp sell-off in most
worldwide bond markets from
February through July 1994.
Yields rose - and prices fell -
on virtually all types of
fixed-income investments. This
contrasted sharply with 1993's
environment of falling interest
rates and few inflation worries.
After reaching a low of 5.79% in
October 1993, the bellwether
30-year Treasury bond yielded
7.39% by July 31, 1994. The
Lehman Brothers Aggregate
Bond Index - a broad measure
of taxable bonds in the U.S.
market - had a total return of
0.09% for the 12 months ended
July 31. Even though
refinancings slowed,
mortgage-backed securities also
suffered from rising rates. The
Lehman Brothers mortgage index
returned 0.53%. High-yield bonds
fared somewhat better, thanks to
credit quality enhancements due
to the strengthening economy.
The Merrill Lynch High Yield
Master Index returned 4.42%.
Most overseas bond markets
took their cue from the sell-off in
the U.S. The Salomon Brothers
World Government Bond Index
- - a measure of bond market
performance in developed
nations - rose 5.72% for the 12
months, mainly on the strength of
1993's gains. Emerging market
bonds were hit especially hard in
1994. The J.P. Morgan Emerging
Markets Bond Index fell 3.45%
during the 12 months
ended July 31.
An interview with
Curt Hollingsworth, Portfolio
Manager of Spartan Limited
Maturity Government Fund
Q. CURT, HOW DID THE FUND PERFORM?
A. Slightly above average. I think the best way to measure the fund's
performance is by its total return. This reflects interest payments, plus
capital gains - which occur when the fund profits from selling bonds that
have grown in value - and changes in share price. For the year ended July
31, 1994, the fund had a total return of 0.56%. According to Lipper
Analytical Services, the average short-term government bond fund had a
return of 0.18%.
Q. IT SOUNDS LIKE THE BOND MARKET HAD A TOUGH YEAR.
A. That's true. And it had an especially difficult past six months. Bond
prices fell during this time for several reasons. First, the economy
started growing more quickly and commodity prices began rising. This
situation was bad news for bond investors because the improving economy
increased concerns about inflation - which eats away at a bond's fixed
interest payment. Another reason bond prices dropped was that worries about
future inflation led the Federal Reserve Bank to raise short-term interest
rates in February, March, April and May of 1994. In response, yields on
short, intermediate and long-term Treasuries rose. During the past year,
the yield on the five-year Treasury note increased from 5.15% to 6.73%.
Keep in mind, bond yields and prices move in opposite directions. So the
rise in yields meant a drop in bond prices.
Q. AND THE FUND'S PERFORMANCE
PRETTY CLOSELY MIRRORED THAT OF ITS
COMPETITORS . . .
A. It did, but the fund experienced ups and downs in performance. Because
it was using a duration averaging strategy, the fund's duration was
somewhat longer than that of its competitors. Duration is a way to measure
how sensitive a bond is to changes in interest rates. The longer the
average duration of the fund, the more its share price will move up as
rates fall or down as rates rise. Since the fund's duration was longer than
other funds, it slightly underperformed the average fund for part of the
period. Another reason the fund stumbled a bit was that it had a large
stake in mortgage securities during the period. When interest rates rose,
the durations of these mortgages lengthened, which made the fund's share
price more volatile. However, the fund's performance improved later in the
period because of good sector bets and security selection.
Q. WHAT'S YOUR STRATEGY NOW?
A. I'll continue to concentrate on sector weights and security selection.
By sectors, I mean Treasuries; federal agency bonds; and mortgage
securities, such as those issued by the Government National Mortgage
Association (Ginnie Mae) and the Federal National Mortgage Association
(Fannie Mae). My job is to determine the right mix of these sectors and
adjust the mix as market conditions change. Security selection refers to
our attempt to purchase the most attractively valued securities in each of
these sectors.
Q. ON ANOTHER NOTE, IT LOOKS LIKE YOU SHIFTED MORE OF THE FUND INTO
TREASURIES OVER THE PAST SIX MONTHS. WHY?
A. There were two reasons. First, yields on Treasuries were up more than
yields on mortgage securities. The second reason was that short-term
Treasuries offered much more attractive yields at the end of this period
then they did six months ago thanks to the rise in interest rates.
Q. THINKING BACK OVER THE PAST SIX MONTHS, WOULD YOU CHANGE SOME OF YOUR
INVESTMENT DECISIONS?
A. Yes. I wish the fund had maintained a shorter duration during the fourth
quarter of 1993 and during the early part of 1994.
Q. LET'S SWITCH DIRECTION A BIT AND TALK ABOUT DERIVATIVES . . .
A. While the fund has the authority to use futures contracts or other
derivatives, I haven't used them much because I've been able to implement
my strategies without them. However, on July 31, the fund did have a 0.8%
stake in collateralized mortgage obligations or CMOs and commercial
mortgage securities, which are technically considered derivatives. These
are more complicated types of mortgage-backed bonds that funds sometimes
use instead of conventional mortgage securities. I should note that the
effect of the fund's small investment in these securities on its
performance was negligible.
Q. HOW DOES THE FUND LOOK GOING
FORWARD?
A. Forecasting interest rates is extraordinarily difficult. However, I'm
feeling fairly optimistic because I think that inflation will remain under
control. Over the long haul, inflation is the single most important
variable affecting bond market performance.
FUND FACTS
GOAL: to provide a high level
of current income while
preserving capital by
investing primarily in U.S.
government securities
START DATE: May 2, 1988
SIZE: as of July 31, 1994,
more than $1 billion
MANAGER: Curt Hollingsworth,
since May 1988; manager,
Spartan Long-Term
Government Bond Fund,
since October 1993; Fidelity
Advisor Government
Investment Portfolio, since
January 1992; Spartan
Short-Intermediate
Government Fund, since
December 1992; Fidelity
Short-Intermediate
Government Fund, since
October 1991; Fidelity
Government Securities Fund,
since February 1990; joined
Fidelity in 1983
(checkmark)
CURT HOLLINGSWORTH ON YIELD
SPREAD:
"The fund can invest in U.S.
Treasuries and mortgage
securities. My job is to find a mix
of these two types of bonds that
will produce the best results. I try
to do this by looking at yield
spread - the difference
between the yield on Treasuries,
which usually pay the lowest
yields, and other types of bonds.
Usually I sell Treasuries and buy
mortgages when the yield
spread is wide, that is, when
mortgage securities yield much
more than Treasuries. On the
other hand, I generally sell
mortgages and buy Treasuries
when the yield spread is narrow,
that is, when mortgages yield
only a little more than
Treasuries. That's because the
small amount of extra yield isn't
worth the added risk inherent in
mortgage
securities.
"During the fourth quarter of
1993, yield spreads got very
wide. At that time the fund went
to 100% mortgages. More
recently, yield spreads have
tightened. So now the fund has
taken profits and sold many of
the mortgages."
DISTRIBUTIONS
13.5% of the dividends
distributed during the fiscal
year was derived from
interest on U.S. Government
securities, which is generally
exempt from state income
tax. The fund will notify
shareholders in January 1995
of the applicable percentage
for use in preparing 1994
income tax returns.
INVESTMENT CHANGES

COUPON DISTRIBUTION AS OF JULY 31, 1994
% OF FUND'S INVESTMENTS % OF FUND'S INVESTMENTS
6 MONTHS AGO

4 - 4.99% 0.3 -

5 - 5.99% 14.8 1.4

6 - 6.99% 1.9 3.2

7 - 7.99% 25.9 27.6

8 - 8.99% 8.3 21.0

9 - 9.99% 17.3 5.0

10 - 10.99% 4.5 2.5

11 - 11.99% 5.3 15.6

12 - 12.99% 15.6 12.9

13% and over 1.7 1.4

COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1994
6 MONTHS AGO

Years 4.5 3.1

AVERAGE YEARS TO MATURITY SHOWS THE AVERAGE TIME UNTIL THE PRINCIPAL ON THE
FUND'S BONDS IS EXPECTED TO BE REPAID, WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1994
6 MONTHS AGO

Years 2.7 2.6

DURATION SHOWS HOW MUCH A BOND'S PRICE FLUCTUATES WITH CHANGES IN INTEREST
RATES. IF RATES RISE 1%, FOR EXAMPLE, A BOND WITH A FIVE-YEAR DURATION WILL
LOSE ABOUT 5% OF ITS VALUE.
ASSET ALLOCATION
AS OF JULY 31, 1994 AS OF JANUARY 31, 1994
Row: 1, Col: 1, Value: 4.4
Row: 1, Col: 2, Value: 1.5
Row: 1, Col: 3, Value: 46.0
Row: 1, Col: 4, Value: 48.8
Mortgage-backed
securities 74.3%
U.S. government
and government
agency obligations 16.2%
CMOs and other
mortgage related
securities 0.1%
Other 9.4%
Mortgage-backed
securities 48.8%
U.S. government
and government
agency obligations 46.0%
CMOs and other
mortgage related
securities 0.8%
Short-term
investments 4.4%
Row: 1, Col: 1, Value: 9.4
Row: 1, Col: 2, Value: 1.0
Row: 1, Col: 3, Value: 16.2
Row: 1, Col: 4, Value: 74.3
INVESTMENTS JULY 31, 1994

Showing Percentage of Total Value of Investment in Securities

U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 46.0%
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
U.S. TREASURY OBLIGATIONS - 41.7%
7 3/8%, 5/15/96 $ 41,500 $ 42,518 912827TQ
7 1/4%, 11/15/96 89,700 91,858 912827UF
7 7/8%, 2/15/96 113,000 116,443 912827ZQ
5 1/8%, 3/31/98 144,700 138,325 912827K3
9 1/4%, 8/15/98 34,350 37,565 912827WN
426,709
U.S. GOVERNMENT AGENCY OBLIGATIONS - 4.3%
Agency for International Development
(guaranteed by U.S.government):
6%, 2/15/99 18,905 18,261 465139DS
5 3/4%, 3/15/00 6,750 6,356 465139AC
5 1/4%, 9/15/00 3,005 2,734 465139BY
Government Trust Ctfs.:
Class 1-C 9 1/4%, 11/15/01 14,080 15,365 383752CF
9.40%, 5/15/02 1,160 1,270 383752DP
43,986
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $471,136) 470,695
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 48.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 9.1%
7 1/2%, 10/1/96 to 1/1/98 1,415 1,437 36215FGM
8%, 2/1/96 to 12/1/96 1,063 1,086 36215FJU
8 1/2%, 2/1/96 to 10/1/18 3,406 3,487 36215FJX
9%, 1/1/10 to 7/1/21 5,504 5,783 36215FLS
9 1/2%, 7/1/16 to 6/1/21 15,462 16,215 36215FNH
10%, 12/1/00 to 7/1/09 2,481 2,630 36215FNR
10 1/2%, 10/1/10 to 1/1/21 2,792 3,028 36215FN5
10 3/4%, 7/1/13 213 233 36215FPC
11%, 8/1/00 to 9/1/20 2,502 2,738 36215FR6
11 1/4%, 2/1/10 to 10/1/14 2,694 2,944 36215FZK
11 1/2%, 3/1/07 to 8/1/19 14,134 15,627 36215F4N
11 3/4%, 1/1/10 to 10/1/15 432 476 36215GCR
12%, 10/1/09 to 12/1/15 5,137 5,693 36215GDT
12 1/4%, 9/1/08 to 8/1/15 2,632 2,912 36215GEP
12 1/2%, 10/1/09 to 4/1/19 20,969 23,930 36215GMQ
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
FEDERAL HOME LOAN MORTGAGE CORPORATION - CONTINUED
12 3/4%, 2/1/10 to 8/1/11 $ 342 $ 390 36215GTG
13%, 9/1/10 to 5/1/17 2,334 2,687 36215GYK
13 1/4%, 11/1/10 to 12/1/14 382 438 36215G3K
13 1/2%, 11/1/10 to 10/1/14 676 782 36215G4L
13 3/4%, 10/1/14 44 50 36215G6K
14%, 11/1/12 to 4/1/16 286 331 36215G7J
14 1/2%, 12/1/10 to 9/1/12 184 213 36215HED
14 3/4%, 3/1/10 67 78 36215HX6
16 1/4%, 7/1/11 17 20 36215HYE
93,208
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 12.2%
7%, 1/1/99 to 7/1/00 4,851 4,831 36215HYZ
7 1/2%, 2/1/99 to 5/1/00 2,885 2,917 36215HYZ
8%, 8/1/99 to 7/1/22 17,209 17,481 36215HYZ
8 1/2%, 1/1/98 to 12/1/22 11,751 12,102 36215HYZ
9%, 11/1/97 to 8/1/07 19,623 20,474 36215HYZ
10%, 7/1/04 to 10/1/04 3,827 4,061 36215HYZ
10 1/4%, 10/1/09 to 10/1/18 922 989 36215HYZ
10 1/2%, 4/1/01 to 11/1/05 9,507 10,170 36215HYZ
11%, 8/1/10 to 9/1/15 4,695 5,218 36215HYZ
11 1/4%, 11/1/10 to 1/1/16 3,557 3,943 36215HYZ
11 1/2%, 9/1/11 to 12/1/15 3,387 3,789 36215HYZ
11 3/4%, 7/1/13 to 4/1/14 456 510 36215HYZ
12%, 7/1/09 to 3/1/17 13,457 15,187 36215HYZ
12 1/4%, 4/1/09 to 6/1/15 3,216 3,622 36215HYZ
12 1/2%, 9/1/07 to 5/1/21 8,876 10,118 36215HYZ
12 3/4%, 10/1/11 to 6/1/15 2,652 3,017 36215HYZ
13%, 6/1/11 to 7/1/15 3,721 4,261 36215HYZ
13 1/4%, 9/1/11 to 9/1/13 1,286 1,469 36215HYZ
13 1/2%, 5/1/11 to 1/1/15 178 204 36215HYZ
14%, 9/1/10 to 12/1/14 320 370 36215HYZ
14 1/2%, 7/1/14 20 23 36215HYZ
15%, 4/1/12 35 40 36215HYZ
124,796
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 27.5%
6 1/2%, 12/15/23 4 3 36215HYZ
6 1/2%, 8/15/24 TBA (a) 1,400 1,269 36215HYZ
7 1/2%, 11/15/23 5,185 5,036 36215HYZ
8%, 9/15/06 to 9/15/23 50,990 50,962 36215HYZ
8 1/2%, 6/15/16 to 4/15/17 175 179 36215HYZ
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
9%, 1/15/05 to 9/15/17 $ 42,385 $ 44,525 36215HYZ
9 1/2%, 6/15/09 to 8/15/24 33,455 35,577 36215HYZ
10%, 11/15/09 to 11/15/17 17,859 19,240 36215HYZ
10 1/2%, 10/15/11 to 7/15/17 5,314 5,808 36215HYZ
11%, 8/15/98 to 1/15/16 1,447 1,596 36215HYZ
11 1/2%, 3/15/10 to 5/15/19 14,684 16,591 36215HYZ
11 3/4%, 1/15/14 133 149 36215HYZ
12%, 1/15/13 to 6/15/15 1,345 1,533 36215HYZ
12 1/4%, 1/15/14 171 193 36215HYZ
12 1/2%, 4/15/10 to 4/15/19 79,950 91,918 36215HYZ
13%, 1/15/11 to 5/15/15 2,110 2,463 36215HYZ
13 1/4%, 9/15/13 to 10/15/14 661 750 36215HYZ
13 1/2%, 5/15/10 to 12/15/14 1,210 1,399 36215HYZ
13 3/4%, 8/15/14 to 9/15/14 74 85 36215HYZ
14%, 6/15/11 to 12/15/14 418 489 36215HYZ
15%, 7/15/11 to 9/15/12 684 812 36215HYZ
16%, 9/15/11 to 4/15/13 184 219 36215HYZ
17%, 12/15/11 17 21 36215HZL
280,817
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $504,369) 498,821
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.1%
U.S. GOVERNMENT AGENCY - 0.1%
Resolution Trust Corp. pass thru series 1991-11
class 6-A, 12.64%, 10/25/21 1,247 1,303 76116NHF
PRIVATE ISSUER - 0.0%
DLJ Acceptance Trust planned amortization class series 1989-1
Class F, 11%, 8/1/19 383 390 23321MAL
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $1,759) 1,693
COMMERCIAL MORTGAGE SECURITIES - 0.7%
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
CS First Boston Mortgage Securities Corp. commercial series
1994-CFB1 class A-1 4.9875%, 1/25/28 $ 2,984 $ 2,989 126342AU
Resolution Trust Corp. commercial floater series 1992-C2
class A-2, 5.4375%, 10/25/21 (b) 4,161 4,232
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $7,189) 7,221
REPURCHASE AGREEMENTS - 4.4%
MATURITY
AMOUNT
(000S)
Investment in repurchase agreements,
(U.S. Treasury obligations), in a
joint trading account at 4.23%
dated 7/29/94 due 8/1/94 $ 44,913 $ 44,897
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,029,350) $ 1,023,327
LEGEND
(a) Security sold on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
(b) Coupon is inversely indexed to a floating interest rate multiplied by a
specified factor. The price may be considerably more volatile than the
price of a comparable fixed rate security. The rate shown is the rate at
period end.
INCOME TAX INFORMATION
At July 31, 1994, the aggregate cost of investment securities for income
tax purposes was $1,030,438,000. Net unrealized depreciation aggregated
$7,111,000, of which $3,614,000 related to appreciated investment
securities and $10,725,000 related to depreciated investment securities.
The fund hereby designates $29,000 as a capital gain dividend for the
purpose of the dividend paid deduction.
The fund has elected to defer to its fiscal year ending July 31,1995
$47,440,000 of losses recognized during the period November 1, 1993 to July
31, 1994.
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS (EXCEPT PER SHARE AMOUNTS) JULY 31, 1994

ASSETS

Investment in securities, at value (including repurchase $ 1,023,327
agreements of $44,897) (cost $1,029,350) (Notes 1
and 2) - See accompanying schedule

Commitment to sell securities on a delayed delivery $ (1,269)
basis

Receivable for securities sold on a delayed delivery 1,278 9
basis (Note 2)

Receivable for investments sold, regular delivery 1,669

Cash 28

Interest receivable 15,547

TOTAL ASSETS 1,040,580

LIABILITIES

Payable for investments purchased 19,076

Payable for fund shares redeemed 2,089

Dividends payable 743

Accrued management fee 556

TOTAL LIABILITIES 22,464

NET ASSETS $ 1,018,116

Net Assets consist of (Note 1):

Paid in capital $ 1,076,105

Distributions in excess of net investment income (3,544)

Accumulated undistributed net realized gain (loss) on (48,431)
investments

Net unrealized appreciation (depreciation) on (6,014)
investments

NET ASSETS, for 105,939 shares outstanding $ 1,018,116

NET ASSET VALUE, offering price and redemption price per $9.61
share ($1,018,116 (divided by) 105,939 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1994

INVESTMENT INCOME $ 104,661
Interest (Note 1)

EXPENSES

Management fee (Note 4) $ 8,474

Non-interested trustees' compensation 8

Interest (Note 5) 19

TOTAL EXPENSES 8,501

NET INVESTMENT INCOME 96,160

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (68,416)
(NOTES 1 AND 3)
Net realized gain (loss) on investment securities

Change in net unrealized appreciation (depreciation) on:

Investment securities (19,494)

Delayed delivery commitments 9 (19,485)

NET GAIN (LOSS) (87,901)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM $ 8,259
OPERATIONS

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1994 1993

INCREASE (DECREASE) IN NET ASSETS

Operations $ 96,160 $ 133,147
Net investment income

Net realized gain (loss) (68,416) (8,178)

Change in net unrealized appreciation (depreciation) (19,485) 1,723

NET INCREASE (DECREASE) IN NET ASSETS RESULTING 8,259 126,692
FROM OPERATIONS

Distributions to shareholders: (71,409) (97,834)
From net investment income

From net realized gain - (8,578)

In excess of net realized gain (31,339) -

TOTAL DISTRIBUTIONS (102,748) (106,412)

Share transactions 379,642 772,524
Net proceeds from sales of shares

Reinvestment of distributions 89,915 93,230

Cost of shares redeemed (886,133) (1,126,871)

Net increase (decrease) in net assets resulting from (416,576) (261,117)
share transactions

TOTAL INCREASE (DECREASE) IN NET ASSETS (511,065) (240,837)

NET ASSETS

Beginning of period 1,529,181 1,770,018

End of period (including under (over) distributed net $ 1,018,116 $ 1,529,181
investment income of $(3,544) and $64,376,
respectively)

OTHER INFORMATION
Shares

Sold 37,868 75,607

Issued in reinvestment of distributions 8,997 9,112

Redeemed (89,181) (110,358)

Net increase (decrease) (42,316) (25,639)

</TABLE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,

1994 1993 1992 1991 1990

SELECTED PER-SHARE DATA

Net asset value, $ 10.310 $ 10.180 $ 10.060 $ 9.930 $ 10.030
beginning of period

Income from Investment .470C .872 .836 .853 .816
Operations
Net investment
income

Net realized and (.410) (.087) .021 .142 (.100)
unrealized gain (loss)

Total from investment .060 .785 .857 .995 .716
operations

Less Distributions (.540)C (.605) (.677) (.845) (.816)
From net investment
income

From net realized gain - (.050) (.060) (.020) -
on investments

In excess of net (.220) - - - -
realized gain on
investment

Total distributions (.760) (.655) (.737) (.865) (.816)

Net asset value, end of $ 9.610 $ 10.310 $ 10.180 $ 10.060 $ 9.930
period

TOTAL RETURN A, B .57% 7.96% 8.78% 10.43% 7.49%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of $ 1,018 $ 1,529 $ 1,770 $ 880 $ 132
period (in millions)

Ratio of expenses to .65% .65% .61% .50% .83%
average net assets

Ratio of expenses to .65% .65% .65% .69% .83%
average net assets
before expense
reductions

Ratio of net investment 7.37% 8.05% 8.24% 8.63% 8.28%
income to average net
assets

Portfolio turnover rate 391% 324% 330% 288% 270%

</TABLE>

A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
B TOTAL RETURNS DO NOT INCLUDE THE ACCOUNT CLOSEOUT FEE.
C THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1994

1. SIGNIFICANT ACCOUNTING
POLICIES.
Spartan Limited Maturity Government Fund (the fund) is a fund of Fidelity
Income Fund (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days are valued either at amortized cost or original
cost plus accrued interest, both of which approximate current value.
Securities for which market quotations are not readily available are valued
at their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes all of its taxable income for its fiscal
year. The schedule of investments includes information regarding income
taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
mortgage-backed securities and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect net investment income per share disclosed. Undistributed net
investment income may include temporary book and tax income basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security
transactions are accounted for as of trade date. Gains and losses on
securities sold are determined on the basis of identified cost.
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS. Effective August
1,1993, the fund adopted Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain,
and Return of Capital Distributions by Investment Companies. As a result,
the fund changed the classification of distributions to shareholders to
better disclose the differences between financial statement amounts and
distributions determined in accordance with income tax regulations.
Accordingly, amounts as of August 1, 1993 have been reclassified to reflect
a decrease in paid in capital of $6,430,000, a decrease in undistributed
net investment income of $58,983,000 and a decrease in accumulated net
realized (loss) on investments of $65,413,000.
2. OPERATING POLICIES.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying securities, whose market value is required to be at least
102% of the resale price at the time of purchase. The fund's investment
adviser, Fidelity Management & Research Company (FMR), is responsible for
determining that the value of these underlying securities remains at least
equal to the resale price.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (SEC), the fund, along with other
affiliated entities of FMR, may transfer uninvested cash balances into one
or more joint trading accounts. These balances are invested in one or more
repurchase agreements that mature in 60 days or less from the date of
purchase, and are collateralized by U.S. Treasury or Federal Agency
obligations.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The fund
may receive compensation for interest forgone in a delayed delivery
transaction. The fund identifies securities as segregated in its custodial
records with a value at least equal to the amount of the purchase
commitment.
3. PURCHASES AND SALES OF
INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $4,933,820,000 and $5,398,001,000, respectively.
4. FEES AND OTHER
TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, Fidelity Management &
Research Company (FMR) pays all expenses except the compensation of the
non-interested Trustees and certain exceptions such as interest, taxes,
brokerage commissions and extraordinary
4. FEES AND OTHER
TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
expenses. FMR receives a fee that is computed daily at an annual rate of
.65% of the fund's average net assets.
FMR also bears the cost of providing shareholder services to the fund. For
the period, FMR or its affiliates collected certain transaction fees from
shareholders which aggregated $75,000.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time. The
maximum loan and the average daily loan balances during the periods for
which loans were outstanding amounted to $23,526,000 and $15,047,000,
respectively. The weighted average interest rate was 3.54%.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Fidelity Income Fund and the Shareholders of Spartan
Limited Maturity Government Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments , and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Spartan
Limited Maturity Government Fund (a fund of Fidelity Income Fund) at July
31, 1994, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Spartan Limited
Maturity Government Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities owned at July 31, 1994 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 7, 1994
TO CALL FIDELITY

(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios.(registered trademark)
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. FOR MORE
INFORMATION ON ANY
FIDELITY FUND INCLUDING MANAGEMENT FEES AND CHARGES, CALL 1-800-544-8888
FOR A FREE
PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Thomas J. Steffanci, Vice President
Curt Hollingsworth, Vice President
Gary L. French, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Arthur S. Loring, Secretary
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox*
Phyllis Burke Davis*
Richard J. Flynn*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Edward H. Malone*
Marvin L. Mann*
Gerald C. McDonough*
Thomas R. Williams*
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY
TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)