(2_FIDELITY_LOGOS)FIDELITY
(registered trademark)
MORTGAGE SECURITIES FUND
(INITIAL CLASS OF FIDELITY ADVISOR MORTGAGE
SECURITIES FUND)
ANNUAL REPORT
JULY 31, 1997
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 23 Notes to the financial statements.
REPORT OF INDEPENDENT 31 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 32
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,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
To reduce expenses and demonstrate respect for our environment, we have
initiated a project through which we will begin eliminating duplicate
copies of most financial reports and prospectuses to most households, even
if they have more than one account in the fund. If additional copies of
financial reports, prospectuses or historical account information are
needed, please call 1-800-544-6666.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Through the first seven months of 1997, stock and bond markets experienced
the kind of short-term volatility that can affect them periodically. The
stock market rebounded strongly from its early spring correction to
continue on its record-setting pace, as seen by the roughly 30%
year-to-date gain by the Standard & Poor's 500 Index. The bond market
posted moderate returns over the past seven months, as positive news on the
inflation front helped soften the effects of a hike in short-term interest
rates by the Federal Reserve Board in late March.
While it's impossible to predict the future direction of the markets with
any degree of certainty, there are certain basic principles that can help
investors plan for their future needs.
The longer your investment time frame, the less likely it is that you will
be affected by short-term market volatility. A 10-year investment horizon
appropriate for saving for a college education, for example, enables you to
weather market cycles in a long-term fund, which may have a higher risk
potential, but also has a higher potential rate of return.
An intermediate-length fund could make sense if your investment horizon is
two to four years, while a short-term bond fund could be the right choice
if you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund. These funds seek
income and a stable share price by investing in high-quality, short-term
investments. Of course, it's important to remember that there is no
assurance that a money market fund will achieve its goal of maintaining a
stable net asset value of $1.00 per share, and that these types of funds
are neither insured nor guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it makes
good sense to follow a regular investment plan, investing a certain amount
of money in a fund at the same time each month or quarter and periodically
reviewing your overall portfolio. By doing so, you won't get caught up in
the excitement of a rapidly rising market, nor will you buy all your shares
at market highs. While this strategy - known as dollar cost averaging -
won't assure a profit or protect you from a loss in a declining market, it
should help you lower the average cost of your purchases.
If you have questions, please call us at 1-800-544-8888. We are available
24 hours a day, seven days a week to provide you the information you need
to make the investments that are right for you.
Best regards,
Edward C. Johnson 3d
FIDELITY MORTGAGE SECURITIES FUND
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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. Total return reflects
the change in the value of an investment, assuming reinvestment of the
class' dividend income and capital gains (the profits earned upon the sale
of securities that have grown in value). You can also look at the class'
income, as reflected in its yield, to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Fidelity Mortgage Securities Fund 10.34% 44.72% 132.53%
("Initial Class")
Salomon Brothers Mortgage Index 10.60% 41.23% 143.95%
U.S. Mortgage Funds Average 10.05% 33.27% 114.95%
CUMULATIVE TOTAL RETURNS show Initial Class' performance in percentage
terms over a set period - in this case, one year, five years or 10 years.
For example, if you had invested $1,000 in a fund that had a 5% return over
the past year, the value of your investment would be $1,050. You can
compare Initial Class' returns to the performance of the Salomon Brothers
Mortgage Index - a market capitalization weighted index of 15- and 30-year
fixed-rate securities backed by mortgage pools of the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA)
and Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC
balloon mortgages with fixed-rate coupons. To measure how Initial Class'
performance stacked up against its peers, you can compare it to the U.S.
mortgage funds average, which reflects the performance of mutual funds with
similar objectives tracked by Lipper Analytical Services, Inc. The past one
year average represents a peer group of 59 mutual funds. These benchmarks
reflect reinvestment of dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Fidelity Mortgage Securities Fund 10.34% 7.67% 8.80%
("Initial Class")
Salomon Brothers Mortgage Index 10.60% 7.15% 9.33%
U.S. Mortgage Funds Average 10.05% 5.90% 7.93%
AVERAGE ANNUAL TOTAL RETURNS take Initial Class' cumulative return and show
you what would have happened if Initial Class had performed at a constant
rate each year. (Note: Lipper calculates average annual total returns by
annualizing each fund's total return, then taking an arithmetic average.
This may produce a slightly different figure than that obtained by
averaging the cumulative total returns and annualizing the result.)
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19970731 19970819 100512 S00000000000001
Mortgage Secs -Initial Cl SB Mortgage
00040 SB005
1987/07/31 10000.00 10000.00
1987/08/31 9967.99 9954.81
1987/09/30 9716.36 9725.84
1987/10/31 10004.28 10044.81
1987/11/30 10099.69 10186.41
1987/12/31 10227.48 10305.04
1988/01/31 10571.43 10704.98
1988/02/29 10685.42 10833.40
1988/03/31 10622.10 10753.18
1988/04/30 10556.36 10686.15
1988/05/31 10512.46 10662.80
1988/06/30 10722.84 10930.93
1988/07/31 10697.37 10897.42
1988/08/31 10710.95 10920.39
1988/09/30 10926.37 11180.24
1988/10/31 11131.14 11434.81
1988/11/30 10983.96 11270.62
1988/12/31 10914.47 11212.25
1989/01/31 11112.51 11423.14
1989/02/28 11053.67 11336.52
1989/03/31 11075.51 11339.53
1989/04/30 11279.96 11539.50
1989/05/31 11546.92 11918.36
1989/06/30 11826.37 12221.51
1989/07/31 12038.13 12511.49
1989/08/31 11910.98 12326.96
1989/09/30 11962.98 12412.82
1989/10/31 12200.25 12702.79
1989/11/30 12317.82 12840.25
1989/12/31 12402.72 12911.80
1990/01/31 12288.46 12818.41
1990/02/28 12370.32 12870.38
1990/03/31 12380.04 12922.72
1990/04/30 12272.95 12802.59
1990/05/31 12629.75 13191.99
1990/06/30 12812.84 13410.03
1990/07/31 12999.05 13637.87
1990/08/31 12964.67 13525.65
1990/09/30 13033.88 13635.23
1990/10/31 13167.40 13778.34
1990/11/30 13455.52 14085.64
1990/12/31 13687.62 14317.99
1991/01/31 13829.66 14527.00
1991/02/28 13918.20 14619.27
1991/03/31 14011.81 14725.84
1991/04/30 14163.49 14879.49
1991/05/31 14237.12 15008.29
1991/06/30 14272.73 15024.48
1991/07/31 14477.73 15278.30
1991/08/31 14754.40 15558.48
1991/09/30 14984.74 15857.50
1991/10/31 15161.86 16102.66
1991/11/30 15254.55 16213.00
1991/12/31 15550.89 16558.71
1992/01/31 15476.08 16390.37
1992/02/29 15630.07 16544.40
1992/03/31 15522.06 16471.34
1992/04/30 15667.58 16621.98
1992/05/31 15926.18 16930.41
1992/06/30 16094.92 17137.15
1992/07/31 16067.30 17273.86
1992/08/31 16171.23 17506.59
1992/09/30 16272.75 17642.16
1992/10/31 16110.93 17493.79
1992/11/30 16188.80 17566.09
1992/12/31 16398.88 17780.00
1993/01/31 16548.50 18024.78
1993/02/28 16690.23 18191.23
1993/03/31 16799.22 18300.07
1993/04/30 16916.50 18423.59
1993/05/31 16966.59 18507.95
1993/06/30 17173.57 18687.96
1993/07/31 17267.97 18765.53
1993/08/31 17300.12 18842.74
1993/09/30 17337.91 18858.93
1993/10/31 17368.75 18922.20
1993/11/30 17332.45 18888.68
1993/12/31 17499.73 19030.65
1994/01/31 17660.89 19221.96
1994/02/28 17567.76 19101.83
1994/03/31 17368.67 18630.71
1994/04/30 17292.58 18513.22
1994/05/31 17439.79 18575.73
1994/06/30 17529.05 18529.79
1994/07/31 17809.27 18891.32
1994/08/31 17889.06 18930.10
1994/09/30 17695.16 18676.66
1994/10/31 17731.09 18671.76
1994/11/30 17713.40 18604.73
1994/12/31 17839.51 18758.76
1995/01/31 18176.79 19178.65
1995/02/28 18583.72 19667.47
1995/03/31 18662.58 19747.68
1995/04/30 18956.81 20012.43
1995/05/31 19553.27 20660.92
1995/06/30 19702.44 20770.51
1995/07/31 19747.19 20811.93
1995/08/31 19990.85 21002.86
1995/09/30 20197.51 21190.78
1995/10/31 20422.18 21385.86
1995/11/30 20648.30 21636.66
1995/12/31 20875.78 21904.42
1996/01/31 21046.69 22072.38
1996/02/29 20912.59 21897.27
1996/03/31 20836.72 21823.08
1996/04/30 20793.28 21722.15
1996/05/31 20712.78 21693.91
1996/06/30 20998.62 21970.70
1996/07/31 21073.61 22058.07
1996/08/31 21068.96 22061.84
1996/09/30 21402.40 22432.78
1996/10/31 21798.41 22868.49
1996/11/30 22135.19 23183.32
1996/12/31 22010.37 23080.89
1997/01/31 22148.12 23276.72
1997/02/28 22220.32 23301.95
1997/03/31 22011.98 23109.14
1997/04/30 22355.14 23460.50
1997/05/31 22575.67 23679.30
1997/06/30 22840.07 23951.95
1997/07/31 23253.16 24395.19
IMATRL PRASUN SHR__CHT 19970731 19970819 100515 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Mortgage Securities Fund ("Initial Class") on July 31, 1987. As
the chart shows, by July 31, 1997, the value of the investment would have
grown to $23,253 - a 132.53% increase on the initial investment. For
comparison, look at how the Salomon Brothers Mortgage Index did over the
same period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $24,395 - a 143.95% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally 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,
1997 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend return 6.77% 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return 3.57% -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 10.34% 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends paid
by the class. A capital appreciation return reflects both the amount paid
by the class to shareholders as capital gain distributions and changes in
the class' share price. Both returns assume the dividends or capital gains
paid by the class are reinvested, if any.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 5.73(cents) 34.10(cents) 68.86(cents)
Annualized dividend rate 6.13% 6.34% 6.35%
30-day annualized yield 6.41% - -
DIVIDENDS per share show the income paid by the class for a set period. If
you annualize this number, based on an average share price of $11.00 over
the past one month, $10.85 over the past six months and $10.84 over the
past one year, you can compare the class' 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
A favorable inflation backdrop
steadied fears of higher interest
rates, buoying the U.S. taxable
bond market for the 12 months that
ended July 31, 1997. The Lehman
Brothers Aggregate Bond Index -
a broad measure of the U.S.
taxable bond market - returned
10.76% over the period. For the
first eight months of the period,
bonds suffered from increasing
expectations of economic growth
and inflation. In his February
testimony before Congress,
Federal Reserve Board Chairman
Alan Greenspan indicated that the
Fed was inclined to raise the rate
banks charge each other for
overnight loans - known as the
fed funds target rate - to head off
inflation that might be caused by a
tight labor market. On March 25,
the Fed followed through by
raising the target rate by 0.25% to
5.50%. However, this move largely
had been priced into the market.
Weakening economic and inflation
signals - combined with the Fed's
shift to a more favorable stance
indicating no intention to raise
rates in the short term - helped
spark a rally in all debt markets
from April through the end of the
period. Relative interest-rate
stability provided a positive setting
for mortgage-backed securities.
For the 12 months that ended July
31, 1997, the Salomon Brothers
Mortgage Index returned 10.60%.
Sustained economic growth and
demand from yield-hungry
investors helped corporate bonds,
with the Lehman Brothers
Corporate Bond Index returning
12.55% over the same period.
NOTE TO SHAREHOLDERS: The following is an interview with Thomas Silvia, who
co-manages Fidelity Advisor Mortgage Securities Fund with Kevin Grant. On
October 1, 1997, Silvia will become the sole Portfolio Manager of the fund.
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended July 31, 1997, the fund's Initial Class
shares returned 10.34%. During the same period, the U.S. mortgage funds
average, according to Lipper Analytical Services, returned 10.05% and the
Salomon Brothers Mortgage Index returned 10.60%.
Q. WHAT HELPED THE FUND'S
PERFORMANCE DURING THE PERIOD?
A. We continued to get good performance from our small position in
commercial mortgage-backed securities - bonds issued and backed by office
buildings, shopping malls and multi-housing structures. These investments
produced stronger returns than were generated by the overall mortgage
market. In addition, the fund was overweighted relative to the index in
30-year Fannie Mae (Federal National Mortgage Association) discount bonds,
which are priced below par, and current-coupon bonds, which are mortgage
securities that pay a similar coupon - or periodic interest payment - as
those being created at the current market rate. These securities
outperformed comparable 30-year Ginnie Mae (Government National Mortgage
Association) bonds and 15-year mortgage-backed securities during the
period.
Q. WHAT FACTORS IN THE MORTGAGE MARKET AFFECTED THE FUND'S PERFORMANCE?
A. The mortgage market benefited greatly from a period of relatively stable
interest rates. For example, the yield on a 10-year Treasury has lingered
in a range of 6% to 7% for about 18 months - a small fluctuation compared
to the range we've seen over the past 10 years. A calm interest-rate
environment reduces the largest source of risk for mortgage securities -
prepayments. For instance, when interest rates decline, mortgage holders
are likely to refinance their debt at a lower rate. This hurts mortgage
investors because they are forced to reinvest at a lower interest rate. On
the other hand, when interest rates are steady, the risk of prepayments
declines. This has been the case for the past 12 months and, as a result,
the mortgage sector was one of the best-performing categories of the bond
market.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. We retained a small position in commercial mortgage-backed securities,
which was more of a selective investment in a few particular bonds than an
overall sector allocation. The fund also maintained a slightly
underweighted position relative to the index in balloon mortgages. Overall,
the strong performance of the mortgage market during the period reduced the
number of attractive investment opportunities. The reward for taking on
risk was low, so it was a time to hold more liquid securities and keep the
fund's portfolio relatively close to the allocations in the fund's
benchmark index - the Salomon Brothers Mortgage Index.
Q. DID THE FUND'S RELATIVELY SMALL POSITION IN BALLOON MORTGAGES HELP THE
FUND?
A. Balloons are mortgages that are constructed with a typical 30-year
amortization schedule, but differ from the standard mortgage in that the
homeowner agrees to pay the outstanding balance on a specified - or balloon
- - date, usually within five or seven years of issuance. The stable
interest-rate environment benefited the 30-year sector the most, the
15-year sector the second most, and the balloon sector the least.
Consequently, the fund benefited from not having a significant position in
balloons during the period.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. I think the reduced number of attractive investment alternatives in the
mortgage market was the biggest disappointment. The fund has typically done
its best when the market goes through a dramatic change. That's because our
value-driven, bottom-up security selection process allows us to capitalize
on larger and more frequent misvaluations in the mortgage market. When
everything is trading in so tight a range, there aren't many changes in
values or prepayment options to affect the cash flows of bonds. Therefore,
in a relatively stable environment, we are not able to take advantage of
our research and trading skills to the same degree.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. At the end of the period, we hit a 6% yield on the 10-year Treasury,
which leaves the mortgage market on a cliff. If yields drop below 6%, it
will be an attractive environment for homeowners to refinance and prepay
their mortgages. This likely would cause the mortgage sector to
underperform other types of bonds. On the other hand, if interest rates
remain stable, the mortgage market should continue to perform well.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: high current income
by investing in mortgage
securities of all kinds
START DATE: December 31,
1984
SIZE: as of July 31, 1997,
more than $533 million
MANAGER: Thomas Silvia,
co-managed since February
1997; joined Fidelity in 1993
(checkmark)
THOMAS SILVIA ON HIS
INVESTMENT STRATEGY:
"The fund's overall market risk
will be targeted to its
benchmark, the Salomon
Brothers Mortgage Index. I
look to add incremental return
by the use of a value-driven,
bottom-up approach to finding
individual mortgage-backed
securities that offer higher
expected returns or
potentially better price
performance than securities
in the benchmark. This
approach takes advantage of
the skills offered by our
quantitative research group,
as well as our trading desk. In
addition, I will continue to look
for opportunities outside of
the fund's benchmark, such
as commercial
mortgage-backed securities."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
Less than 5% 0.1 0.1
5 - 5.99% 4.7 6.2
6 - 6.99% 25.7 29.3
7 - 7.99% 27.0 30.7
8 - 8.99% 20.2 12.2
9 - 9.99% 6.6 4.0
10 - 10.99% 3.5 4.4
11% and over 2.3 3.0
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, 1997
6 MONTHS AGO
Years 5.8 6.3
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1997
6 MONTHS AGO
Years 3.2 4.0
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION (% OF FUND'S INVESTMENTS)
AS OF JULY 31, 1997 AS OF JANUARY 31, 1997
Row: 1, Col: 1, Value: 9.800000000000001
Row: 1, Col: 2, Value: 2.9
Row: 1, Col: 3, Value: 87.3
Mortgage-backed
securities 87.6%
CMOs and
other mortgage
related securities 2.3%
Short-term
investments 10.1%
Mortgage-backed
securities 87.3%
CMOs and
other mortgage
related securities 2.8%
Short-term
investments 9.9%
Row: 1, Col: 1, Value: 10.1
Row: 1, Col: 2, Value: 2.3
Row: 1, Col: 3, Value: 87.59999999999999
INVESTMENTS JULY 31, 1997
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 87.3%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 15.7%
5%, 7/1/10 $ 4,019,563 $ 3,795,975
6 1/2%, 1/1/24 to 7/1/24 4,480,017 4,411,427
7%, 5/1/99 to 8/1/12 16,562,905 16,757,226
7 1/2%, 10/1/11 to 7/1/12 35,640,019 36,482,404
7 1/2%, 8/1/27 (e) 3,500,000 3,561,250
8%, 10/1/07 to 12/1/18 767,774 794,814
8 1/2%, 11/1/03 to 1/1/20 2,437,117 2,554,427
9%, 9/1/08 to 5/1/21 11,954,777 12,802,489
10%, 1/1/09 to 5/1/19 2,502,185 2,726,412
10 1/2%, 8/1/10 to 12/1/20 2,723,982 3,011,806
11 1/2%, 4/1/12 111,151 124,061
11 3/4%, 6/1/11 69,701 78,657
12 1/4%, 6/1/14 to 7/1/15 314,042 360,277
12 1/2%, 5/1/12 to 4/1/15 1,236,677 1,428,593
12 3/4%, 6/1/05 to 3/1/15 204,003 229,242
13%, 1/1/11 to 6/1/15 1,855,544 2,187,117
91,306,177
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 40.1%
5 1/2%, 11/1/08 to 5/1/26 24,273,187 23,420,456
6%, 4/1/00 to 5/1/26 87,078,670 84,355,052
6 1/2%, 9/1/10 to 4/1/26 56,791,751 55,821,852
7%, 2/1/24 to 5/1/27 31,698,840 31,684,095
7 1/2%, 3/1/22 to 12/1/22 3,449,394 3,527,311
8%, 1/1/07 to 8/1/27 (e) 15,806,073 16,257,924
8 1/4%, 1/1/13 132,558 137,062
8 1/2%, 11/1/03 to 11/1/18 2,059,489 2,137,174
8 3/4%, 11/1/08 to 7/1/09 296,023 307,877
9%, 1/1/08 to 2/1/13 1,034,999 1,084,078
9 1/2%, 5/1/07 to 8/1/22 8,581,420 9,131,717
11%, 12/1/02 to 8/1/10 2,741,172 3,009,758
12 1/4%, 5/1/13 to 6/1/15 542,105 616,601
12 1/2%, 10/1/13 to 3/1/16 724,646 839,914
12 3/4%, 6/1/13 to 7/1/15 379,431 436,032
13 1/2%, 9/1/13 to 12/1/14 192,548 229,229
14%, 5/1/12 to 11/1/14 64,062 76,803
233,072,935
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 31.5%
7%, 10/15/22 to 11/15/23 $ 3,665,261 $ 3,683,818
7 1/2%, 7/15/05 to 2/15/27 57,751,910 58,851,736
8%, 4/15/02 to 7/15/27 31,473,025 32,528,616
8 1/2%, 7/15/16 to 8/15/27 54,893,289 57,361,674
9%, 10/15/04 to 4/15/18 6,255,677 6,703,581
9 1/2%, 6/15/09 to 7/15/22 5,351,496 5,776,000
10%, 12/15/17 to 1/15/26 11,883,595 13,152,300
10 1/2%, 11/15/97 to 2/15/18 1,488,065 1,634,033
11%, 1/15/10 to 8/15/17 3,092,191 3,529,873
11 1/2%, 10/15/10 to 7/15/18 98,587 112,208
13%, 10/15/13 104,463 123,952
13 1/2%, 7/15/11 to 10/15/14 97,226 116,364
183,574,155
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $498,582,159) 507,953,267
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation
sequential pay Series 1353 Class A,
5 1/2%, 11/15/04 (Cost $122,226) 131,183 130,404
COMMERCIAL MORTGAGE SECURITIES - 2.7%
Merrill Lynch Mortgage Investors, Inc. Series 1994-M1
Class A, 8.1239%, 6/25/22 (d) 5,285,305 5,334,029
Structured Asset Securities Corp. commercial Series 1992-M1
Class C, 7.05%, 11/25/02 3,192,522 2,906,006
SASCO 1997-N1 LLC Series 1997-N1 Class C,
6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. commercial Series 1994-C1
Class C, 9.20%, 9/18/99 (a) 3,280,000 2,693,700
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $14,720,222) 15,933,735
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81% 9/18/99 (c) (Cost $749,264) $ 51,554,000 $ 612,204
CASH EQUIVALENTS - 9.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.77%, dated
7/31/97 due 8/1/97 $ 57,639,237 57,630,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $571,803,871) $ 582,259,610
LEGEND
1. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
SML, Inc.
commercial Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $2,132,820
2. 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 $5,000,000 or 0.9% of net
assets.
3. Security represents right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Security purchased on delayed delivery basis (See Note 2 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At July 31, 1997, the aggregate cost of investment securities for income
tax purposes was $571,956,866. Net unrealized appreciation aggregated
$10,302,744, of which $11,091,982 related to appreciated investment
securities and $789,238 related to depreciated investment securities.
The fund hereby designates approximately $544,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1997
ASSETS
Investment in securities, at value (including repurchase $ 582,259,610
agreements of $57,630,000) (cost $571,803,871) -
See accompanying schedule
Cash 115
Receivable for investments sold 251,870
Interest receivable 3,066,107
Prepaid expenses 44,595
TOTAL ASSETS 585,622,297
LIABILITIES
Payable for investments purchased $ 30,194,142
Regular Delivery
Delayed Delivery 19,626,894
Payable for fund shares redeemed 1,026,148
Distributions payable 515,582
Accrued management fee 187,169
Distribution fees payable 3,034
Other payables and accrued expenses 177,203
TOTAL LIABILITIES 51,730,172
NET ASSETS $ 533,892,125
Net Assets consist of:
Paid in capital $ 519,208,290
Undistributed net investment income 230,506
Accumulated undistributed net realized gain (loss) 3,997,590
on investments
Net unrealized appreciation (depreciation) on 10,455,739
investments
NET ASSETS $ 533,892,125
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
JULY 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.05
CLASS A:
NET ASSET VALUE and redemption price per share
($1,585,920 (divided by) 143,564 shares)
Maximum offering price per share (100/95.75 of $11.05) $11.54
CLASS T: $11.05
NET ASSET VALUE and redemption price per share
($12,192,905 (divided by) 1,103,680 shares)
Maximum offering price per share (100/96.50 of $11.05) $11.45
CLASS B: $11.04
NET ASSET VALUE and offering price per share
($823,411 (divided by) 74,578 shares) A
INITIAL CLASS: $11.05
NET ASSET VALUE, offering price and redemption price
per share ($506,112,493 (divided by) 45,796,695 shares)
INSTITUTIONAL CLASS: $11.04
NET ASSET VALUE, offering price and redemption price
per share ($13,177,396 (divided by) 1,193,472 shares)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1997
INVESTMENT INCOME $ 35,932,141
Interest
EXPENSES
Management fee $ 2,273,788
Transfer agent fees 1,034,760
Distribution fees 4,506
Accounting fees and expenses 208,321
Non-interested trustees' compensation 9,585
Custodian fees and expenses 79,667
Registration fees 75,411
Audit 83,730
Legal 17,684
Miscellaneous 4,396
Total expenses before reductions 3,791,848
Expense reductions (52,945) 3,738,903
NET INVESTMENT INCOME 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 4,296,274
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on 14,164,021
investment securities
NET GAIN (LOSS) 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 50,653,533
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 1996
INCREASE (DECREASE) IN NET ASSETS
Operations $ 32,193,238 $ 31,763,051
Net investment income
Net realized gain (loss) 4,296,274 8,694,701
Change in net unrealized appreciation (depreciation) 14,164,021 (11,251,245)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 50,653,533 29,206,507
FROM OPERATIONS
Distributions to shareholders (32,649,725) (31,178,449)
From net investment income
From net realized gain (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (37,689,258) (35,234,409)
Share transactions - net increase (decrease) 32,765,543 77,949,164
TOTAL INCREASE (DECREASE) IN NET ASSETS 45,729,818 71,921,262
NET ASSETS
Beginning of period 488,162,307 416,241,045
End of period (including undistributed net investment $ 533,892,125 $ 488,162,307
income of $230,506 and $922,675, respectively)
</TABLE>
FINANCIAL HIGHLIGHTS - CLASS A
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .268 F
Net realized and unrealized gain (loss) .224
Total from investment operations .492
Less Distributions
From net investment income (.272)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.61%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,586
Ratio of expenses to average net assets .90% A,
D
Ratio of net investment income to average net assets 6.09% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .255 F
Net realized and unrealized gain (loss) .233
Total from investment operations .488
Less Distributions
From net investment income (.268)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 12,193
Ratio of expenses to average net assets 1.00% A,
D
Ratio of net investment income to average net assets 5.99% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .234 F
Net realized and unrealized gain (loss) .214
Total from investment operations .448
Less Distributions
From net investment income (.238)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.20%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 823
Ratio of expenses to average net assets 1.65% A,
D
Ratio of net investment income to average net assets 5.34% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1997 1996 1995 1994 C 1993
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
of period
Income from Investment
Operations
Net investment income .678 D .729 .772 .570 .788
Net realized and .391 (.015) .325 (.242) (.007)
unrealized gain (loss)
Total from investment 1.069 .714 1.097 .328 .781
operations
Less Distributions
From net investment income (.689) (.724) (.737) (.588) (.701)
From net realized gain (.110) (.100) - (.040) -
In excess of net realized - - (.050) (.030) -
gain
Total distributions (.799) (.824) (.787) (.658) (.701)
Net asset value, end of period $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
TOTAL RETURN B 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 omitted)
Ratio of expenses to average .73% .74% .77% .79% .76%
net assets
Ratio of expenses to average .73% .73% .77% .79% .76%
net assets after expense A
reductions
Ratio of net investment income 6.26% 6.75% 7.37% 6.73% 7.18%
to average net assets
Portfolio turnover rate 149% 221% 329% 563% 278%
</TABLE>
A FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
C 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, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .263 F
Net realized and unrealized gain (loss) .226
Total from investment operations .489
Less Distributions
From net interest income (.279)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.59%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 13,177
Ratio of expenses to average net assets .75% A,
D
Ratio of expenses to average net assets after expense reductions .70% A,
G
Ratio of net investment income to average net assets 6.29% A
Portfolio turnover rate 149%
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL CLASS
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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. On March 14, 1996, the Board
of Trustees approved the transfer of the fund to the Fidelity Advisor
product line. The Board of Trustees also approved the creation of Class A,
Class T, Class B and Institutional Class shares. Offering of new classes
commenced on March 3, 1997. Prior to March 3, 1997, the fund offered one
class of shares, Fidelity Mortgage Securities Fund ("Initial Class")
(formerly Fidelity Mortgage Securities Fund).
The financial statements have been prepared in conformity with generally
accepted accounting principles which permit management to make certain
estimates and assumptions at the date of the financial statements. 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. Securities (including
restricted 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. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
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 substantially 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.
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears all
organizational expenses except for registering and qualifying Class A,
Class T, Class B, and Institutional Class and shares of those classes for
distribution under federal and state securities law. These expenses are
borne by those classes and amortized over one year.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 dividends and capital
gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities and losses deferred due to wash sales.
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.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments 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.
2. OPERATING POLICIES.
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 for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a delayed delivery 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 market values of
the securities purchased or sold on a delayed delivery basis are identified
as such in the fund's schedule of investments. The fund may receive
compensation for
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS - CONTINUED
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, the fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $2,693,700 or
0.5% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $790,852,390 and $747,620,591, respectively, of which U.S.
government and government agency obligations aggregated $780,486,825 and
$743,935,902 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 .1100% to .3700% for the period. The annual individual
fund fee rate is .30%. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented
the above rates, as they resulted in the same or a lower management fee.
For the period, the management fee was equivalent to an annual rate of .44%
of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the 1940
Act, the Trustees have adopted separate distribution plans with respect to
each class of shares (collectively referred to as "the Plans"). Under
certain of the Plans, the class pays Fidelity Distributors Corporation
(FDC), an affiliate of FMR, a distribution and service fee. This fee is
based on the following annual rates of the average net assets of each
applicable class:
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
CLASS A .15%
CLASS T .25%
CLASS B .90% *
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the period, each class paid FDC the following amounts, a portion of
which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares, and
providing shareholder support services:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 1,374
$ 4,506 $ 4,506
Under the Plans, FMR or FDC may use its resources to pay administrative and
promotional expenses related to the sale of each class' shares. The Plans
also authorize payments to third parties that assist in the sale of each
class' shares or render shareholder support services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.25% and 3.50%
for selling Class A and Class T shares of the fund, respectively, and the
proceeds of a contingent deferred sales charge levied on Class B share
redemptions occurring within six years of purchase. The Class B charge is
based on declining rates which range from 5% to 1% of the lesser of the
cost of shares at the initial date of purchase or the net asset value of
the redeemed shares, excluding any reinvested dividends and capital gains.
Effective August 1, 1997, Class A's maximum sales charge was increased to
4.75%.
For the period, FDC received the following sales charge amounts related to
each class, a portion of which is paid to securities, dealers, banks, and
other financial institutions:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 7,090 $ 7,023
CLASS T 9,662 7,492
CLASS B 0 0 *
$ 16,752 $ 14,515
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM ITS OWN
RESOURCES TO DEALERS THROUGH WHICH THE SALES ARE MADE.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
TRANSFER AGENT FEES. Each class of the fund has entered into a separate
transfer, dividend disbursing, and shareholder servicing agent
(collectively referred to as the Transfer Agents) contract with respect to
its shares. The Transfer Agents receive account fees and asset-based fees
that vary according to the account size and type of account of the
shareholders of the respective classes of the fund. FIIOC and FSC pay for
typesetting, printing and mailing of all shareholder reports. For the
period, the following amounts were paid to each transfer agent:
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC * $ 789 .22% **
CLASS T FIIOC * 1,513 .14% **
CLASS B FIIOC * 881 .57% **
INITIAL CLASS FSC * 1,028,957 .20%
INSTITUTIONAL CLASS FIIOC * 2,620 .21% **
$ 1,034,760
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC), AND
FIDELITY SERVICE COMPANY, INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) above the
following annual rates or range of annual rates of average net assets for
each class:
FMR REIMBURSEME
EXPENSE NT
LIMITATIONS
CLASS A .90% $ 10,408
CLASS T 1.00% 10,413
CLASS B 1.65% 10,927
INSTITUTIONAL CLASS .75% 12,094
$ 43,842
5. EXPENSE REDUCTIONS - CONTINUED
In addition, the fund has entered into arrangements with its custodian and
each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses. During
the period, the fund's custodian fees were reduced by $8,474 under the
custodian arrangement, and each applicable class' expenses were reduced as
follows under the transfer agent arrangements:
TRANSFER
AGENT
INTEREST
CREDITS
INSTITUTIONAL CLASS $ 629
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 A 1996
CLASS A
From net investment income $ 21,750 $ -
CLASS T
From net investment income $ 64,445 $ -
CLASS B
From net investment income $ 8,241 $ -
INITIAL CLASS
From net investment income $ 32,474,399 $ 31,178,449
From net realized gain 5,039,533 4,055,960
Total $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
From net investment income $ 80,890 $ -
$ 37,689,258 $ 35,234,409
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARES DOLLARS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1997 A 1996 1997 A 1996
CLASS A 141,575 - $ 1,531,983 $ -
Shares sold
Reinvestment of 1,989 - 21,750 -
distributions
Net increase (decrease) 143,564 - $ 1,553,733 $ -
CLASS T 1,114,285 - $ 12,183,453 $ -
Shares sold
Reinvestment of 5,597 - 61,712 -
distributions
Shares redeemed (16,202) - (177,848) -
Net increase (decrease) 1,103,680 - $ 12,067,317 $ -
CLASS B 73,891 - $ 801,025 $ -
Shares sold
Reinvestment of 687 - 7,506 -
distributions
Net increase (decrease) 74,578 - $ 808,531 $ -
INITIAL CLASS 14,636,021 24,584,693 $ 158,564,289 $ 268,954,246
Shares sold
Reinvestment of 2,769,613 2,644,498 29,925,102 28,910,230
distributions
Shares redeemed (16,911,618) (20,139,279) (183,183,589) (219,915,312)
Net increase (decrease) 494,016 7,089,912 $ 5,305,802 $ 77,949,164
INSTITUTIONAL CLASS 1,216,421 - $ 13,282,379 $ -
Shares sold
Reinvestment of 3,516 - 38,560 -
distributions
Shares redeemed (26,465) - (290,779) -
Net increase (decrease) 1,193,472 - $ 13,030,160 $ -
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
8. REGISTRATION FEES.
For the period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 10,398
CLASS T 11,098
CLASS B 10,398
INITIAL CLASS 31,365
INSTITUTIONAL CLASS 12,152
$ 75,411
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Advisor Mortgage Securities Fund (formerly Fidelity Mortgage Securities
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
Fidelity Advisor Mortgage Securities Fund (formerly Fidelity Mortgage
Securities Fund) (a fund of Fidelity Income Fund) at July 31, 1997, the
results of its operations for the year then ended, and 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 Advisor Mortgage
Securities 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 at July 31, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 18, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
(formerly Fidelity Mortgage Securities Fund) voted to pay to shareholders
of record at the opening of business on record date, the following
distributions derived from capital gains realized from sales of portfolio
securities, and dividends derived from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Class A 9/8/97 9/5/97 - $.08
Class T 9/8/97 9/5/97 - $.08
Class B 9/8/97 9/5/97 - $.08
Initial Class 9/8/97 9/5/97 - $.08
Institutional Class 9/8/97 9/5/97 - $.08
A total of 0.01% 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 1998 of the applicable
percentage for use in preparing 1997 income tax returns.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Fred L. Henning Jr., Vice President
Dwight D. Churchill, Vice President
Kevin Grant, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Company, Inc.
Boston, MA
* INDEPENDENT TRUSTEES
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
New Markets Income
Short-Intermediate Government
Short-Term Bond
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Short-Intermediate
Government
Spartan Short-Term Bond
Target Timeline(trademark) 1999, 2001 & 2003
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Exchanges/Redemptions 1-800-544-7777
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)
TouchTone Xpress 1-800-544-5555
SM
AUTOMATED LINE FOR QUICKEST SERVICE
(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(registered trademark)
MORTGAGE SECURITIES
FUND - CLASS A, CLASS T AND CLASS B
ANNUAL REPORT
JULY 31, 1997
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 15 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 18 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 19 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 22 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 31 Notes to the financial statements.
REPORT OF INDEPENDENT 39 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 40
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,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY ADVISOR FUND, INCLUDING CHARGES AND
EXPENSES,
CONTACT YOUR INVESTMENT PROFESSIONAL FOR A FREE PROSPECTUS. READ IT
CAREFULLY BEFORE
YOU INVEST OR
SEND MONEY.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Through the first seven months of 1997, stock and bond markets experienced
the kind of short-term volatility that can affect them periodically. The
stock market rebounded strongly from its early spring correction to
continue on its record-setting pace, as seen by the roughly 30%
year-to-date gain by the Standard & Poor's 500 Index. The bond market
posted moderate returns over the past seven months, as positive news on the
inflation front helped soften the effects of a hike in short-term interest
rates by the Federal Reserve Board in late March.
While it's impossible to predict the future direction of the markets with
any degree of certainty, there are certain basic principles that can help
investors plan for their future needs.
The longer your investment time frame, the less likely it is that you will
be affected by short-term market volatility. A 10-year investment horizon
appropriate for saving for a college education, for example, enables you to
weather market cycles in a long-term fund, which may have a higher risk
potential, but also has a higher potential rate of return.
An intermediate-length fund could make sense if your investment horizon is
two to four years, while a short-term bond fund could be the right choice
if you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund. These funds seek
income and a stable share price by investing in high-quality, short-term
investments. Of course, it's important to remember that there is no
assurance that a money market fund will achieve its goal of maintaining a
stable net asset value of $1.00 per share, and that these types of funds
are neither insured nor guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it makes
good sense to follow a regular investment plan, investing a certain amount
of money in a fund at the same time each month or quarter and periodically
reviewing your overall portfolio. By doing so, you won't get caught up in
the excitement of a rapidly rising market, nor will you buy all your shares
at market highs. While this strategy - known as dollar cost averaging -
won't assure a profit or protect you from a loss in a declining market, it
should help you lower the average cost of your purchases.
Remember to contact your investment professional if you need help with your
investments.
Best regards,
Edward C. Johnson 3d
ADVISOR MORTGAGE SECURITIES FUND - CLASS A
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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. Total return reflects
the change in the value of an investment, assuming reinvestment of the
class' dividend income and capital gains (the profits earned upon the sale
of securities that have grown in value). You can also look at the class'
income, as reflected in its yield, to measure performance. The initial
offering of Class A shares took place on March 3, 1997. Class A shares bear
a 0.15% 12b-1 fee. Returns prior to March 3, 1997 are those of Initial
Class, the original class of the fund which does not bear a 12b-1 fee. Had
Class A's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. Effective August 1, 1997, the maximum 4.25% sales charge
on Class A shares was increased to 4.75%. If Fidelity had not reimbursed
certain class expenses, the total returns and dividends would have been
lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class 10.25% 44.60% 132.33%
A
Advisor Mortgage Securities Fund - Class 5.01% 37.73% 121.29%
A (incl. max. 4.75% sales charge) 1
Salomon Brothers Mortgage Index 10.60% 41.23% 143.95%
U.S. Mortgage Funds Average 10.05% 33.27% 114.95%
CUMULATIVE TOTAL RETURNS show Class A's performance in percentage terms
over a set period - in this case, one year, five years or 10 years. For
example, if you had invested $1,000 in a fund that had a 5% return over the
past year, the value of your investment would be $1,050. You can compare
Class A's returns to the performance of the Salomon Brothers Mortgage Index
- - a market capitalization weighted index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC balloon
mortgages with fixed-rate coupons. To measure how Class A's performance
stacked up against its peers, you can compare it to the U.S. mortgage funds
average, which reflects the performance of mutual funds with similar
objectives tracked by Lipper Analytical Services, Inc. The past one year
average represents a peer group of 59 mutual funds. These benchmarks
reflect reinvestment of dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class A 10.25% 7.65% 8.80%
Advisor Mortgage Securities Fund - Class A 5.01% 6.61% 8.27%
(incl. max. 4.75% sales charge) 1
Salomon Brothers Mortgage Index 10.60% 7.15% 9.33%
U.S. Mortgage Funds Average 10.05% 5.90% 7.93%
AVERAGE ANNUAL TOTAL RETURNS take Class A's cumulative return and show you
what would have happened if Class A had performed at a constant rate each
year.
1 HAD THE FORMER 4.25% SALES CHARGE BEEN REFLECTED, THE CUMULATIVE AND
AVERAGE ANNUAL RETURNS WOULD HAVE BEEN 5.56% AND 5.56% FOR THE PAST ONE
YEAR, 38.45% AND 6.72% FOR THE PAST FIVE YEARS, AND 122.45% AND 8.32% FOR
THE PAST 10 YEARS.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19970731 19970814 163119 S00000000000001
FA Mortgage Sec -CL A SB Mortgage
00237 SB005
1987/07/31 9525.00 10000.00
1987/08/31 9494.51 9954.81
1987/09/30 9254.84 9725.84
1987/10/31 9529.08 10044.81
1987/11/30 9619.96 10186.41
1987/12/31 9741.67 10305.04
1988/01/31 10069.28 10704.98
1988/02/29 10177.87 10833.40
1988/03/31 10117.55 10753.18
1988/04/30 10054.93 10686.15
1988/05/31 10013.12 10662.80
1988/06/30 10213.51 10930.93
1988/07/31 10189.24 10897.42
1988/08/31 10202.18 10920.39
1988/09/30 10407.37 11180.24
1988/10/31 10602.41 11434.81
1988/11/30 10462.22 11270.62
1988/12/31 10396.03 11212.25
1989/01/31 10584.67 11423.14
1989/02/28 10528.62 11336.52
1989/03/31 10549.42 11339.53
1989/04/30 10744.16 11539.50
1989/05/31 10998.45 11918.36
1989/06/30 11264.62 12221.51
1989/07/31 11466.32 12511.49
1989/08/31 11345.20 12326.96
1989/09/30 11394.74 12412.82
1989/10/31 11620.74 12702.79
1989/11/30 11732.72 12840.25
1989/12/31 11813.59 12911.80
1990/01/31 11704.76 12818.41
1990/02/28 11782.73 12870.38
1990/03/31 11791.98 12922.72
1990/04/30 11689.99 12802.59
1990/05/31 12029.84 13191.99
1990/06/30 12204.23 13410.03
1990/07/31 12381.60 13637.87
1990/08/31 12348.85 13525.65
1990/09/30 12414.77 13635.23
1990/10/31 12541.95 13778.34
1990/11/30 12816.39 14085.64
1990/12/31 13037.46 14317.99
1991/01/31 13172.75 14527.00
1991/02/28 13257.08 14619.27
1991/03/31 13346.25 14725.84
1991/04/30 13490.73 14879.49
1991/05/31 13560.86 15008.29
1991/06/30 13594.77 15024.48
1991/07/31 13790.04 15278.30
1991/08/31 14053.57 15558.48
1991/09/30 14272.96 15857.50
1991/10/31 14441.67 16102.66
1991/11/30 14529.96 16213.00
1991/12/31 14812.22 16558.71
1992/01/31 14740.97 16390.37
1992/02/29 14887.64 16544.40
1992/03/31 14784.76 16471.34
1992/04/30 14923.37 16621.98
1992/05/31 15169.68 16930.41
1992/06/30 15330.41 17137.15
1992/07/31 15304.10 17273.86
1992/08/31 15403.09 17506.59
1992/09/30 15499.79 17642.16
1992/10/31 15345.66 17493.79
1992/11/30 15419.83 17566.09
1992/12/31 15619.94 17780.00
1993/01/31 15762.44 18024.78
1993/02/28 15897.44 18191.23
1993/03/31 16001.26 18300.07
1993/04/30 16112.97 18423.59
1993/05/31 16160.67 18507.95
1993/06/30 16357.82 18687.96
1993/07/31 16447.74 18765.53
1993/08/31 16478.36 18842.74
1993/09/30 16514.36 18858.93
1993/10/31 16543.74 18922.20
1993/11/30 16509.16 18888.68
1993/12/31 16668.50 19030.65
1994/01/31 16822.00 19221.96
1994/02/28 16733.29 19101.83
1994/03/31 16543.66 18630.71
1994/04/30 16471.19 18513.22
1994/05/31 16611.40 18575.73
1994/06/30 16696.42 18529.79
1994/07/31 16963.33 18891.32
1994/08/31 17039.33 18930.10
1994/09/30 16854.64 18676.66
1994/10/31 16888.87 18671.76
1994/11/30 16872.02 18604.73
1994/12/31 16992.14 18758.76
1995/01/31 17313.39 19178.65
1995/02/28 17700.99 19667.47
1995/03/31 17776.11 19747.68
1995/04/30 18056.36 20012.43
1995/05/31 18624.49 20660.92
1995/06/30 18766.57 20770.51
1995/07/31 18809.19 20811.93
1995/08/31 19041.29 21002.86
1995/09/30 19238.12 21190.78
1995/10/31 19452.13 21385.86
1995/11/30 19667.50 21636.66
1995/12/31 19884.18 21904.42
1996/01/31 20046.97 22072.38
1996/02/29 19919.24 21897.27
1996/03/31 19846.97 21823.08
1996/04/30 19805.60 21722.15
1996/05/31 19728.92 21693.91
1996/06/30 20001.19 21970.70
1996/07/31 20072.61 22058.07
1996/08/31 20068.18 22061.84
1996/09/30 20385.79 22432.78
1996/10/31 20762.99 22868.49
1996/11/30 21083.77 23183.32
1996/12/31 20964.88 23080.89
1997/01/31 21096.09 23276.72
1997/02/28 21164.86 23301.95
1997/03/31 20959.15 23109.14
1997/04/30 21283.94 23460.50
1997/05/31 21491.13 23679.30
1997/06/30 21739.47 23951.95
1997/07/31 22129.21 24395.19
IMATRL PRASUN SHR__CHT 19970731 19970814 163123 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Advisor Mortgage Securities Fund - Class A on July 31, 1987,
and the current maximum 4.75% sales charge was paid. As the chart shows, by
July 31, 1997, the value of the investment would have grown to $22,129 - a
121.29% increase on the initial investment. For comparison, look at how the
Salomon Brothers Mortgage Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment would
have grown to $24,395 - a 143.95% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally 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,
1997 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend return 6.68% 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return 3.57% -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 10.25% 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends paid
by the class. A capital appreciation return reflects both the amount paid
by the class to shareholders as capital gain distributions and changes in
the class' share price. Both returns assume the dividends or capital gains
paid by the class are reinvested, if any, and exclude the effect of sales
charges.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1997 PAST 1 LIFE OF
MONTH CLASS
Dividends per share 5.56(cents) 27.20(cents)
Annualized dividend rate 5.95% 6.07%
30-day annualized yield n/a -
DIVIDENDS per share show the income paid by the class for a set period. If
you annualize this number, based on an average share price of $11.00 over
the past one month, and $10.84 over the life of the class, you can compare
the class' income over these two 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. Yield
information will be reported once Class A has a longer, more stable
operating history.
ADVISOR MORTGAGE SECURITIES FUND - CLASS T
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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. Total return reflects
the change in the value of an investment, assuming reinvestment of the
class' dividend income and capital gains (the profits earned upon the sale
of securities that have grown in value). You can also look at the class'
income, as reflected in its yield, to measure performance. The initial
offering of Class T shares took place on March 3, 1997. Class T shares bear
a 0.25% 12b-1 fee. Returns prior to March 3, 1997 are those of Initial
Class, the original class of the fund which does not bear a 12b-1 fee. Had
Class T's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. If Fidelity had not reimbursed certain class expenses, the
total returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class 10.20% 44.54% 132.24%
T
Advisor Mortgage Securities Fund - Class 6.35% 39.48% 124.11%
T (incl. max. 3.50% sales charge)
Salomon Brothers Mortgage Index 10.60% 41.23% 143.95%
U.S. Mortgage Funds Average 10.05% 33.27% 114.95%
CUMULATIVE TOTAL RETURNS show Class T's performance in percentage terms
over a set period - in this case, one year, five years or 10 years. For
example, if you had invested $1,000 in a fund that had a 5% return over the
past year, the value of your investment would be $1,050. You can compare
Class T's returns to the performance of the Salomon Brothers Mortgage Index
- - a market capitalization weighted index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC balloon
mortgages with fixed-rate coupons. To measure how Class T's performance
stacked up against its peers, you can compare it to the U.S. mortgage funds
average, which reflects the performance of mutual funds with similar
objectives tracked by Lipper Analytical Services, Inc. The past one year
average represents a peer group of 59 mutual funds. These benchmarks
reflect reinvestment of dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class T 10.20% 7.65% 8.79%
Advisor Mortgage Securities Fund - Class T 6.35% 6.88% 8.40%
(incl. max. 3.50% sales charge)
Salomon Brothers Mortgage Index 10.60% 7.15% 9.33%
U.S. Mortgage Funds Average 10.05% 5.90% 7.93%
AVERAGE ANNUAL TOTAL RETURNS take Class T's cumulative return and show you
what would have happened if Class T had performed at a constant rate each
year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19970731 19970814 163147 S00000000000001
FA Mortgage Sec -CL T SB Mortgage
00239 SB005
1987/07/31 9650.00 10000.00
1987/08/31 9619.11 9954.81
1987/09/30 9376.29 9725.84
1987/10/31 9654.13 10044.81
1987/11/30 9746.20 10186.41
1987/12/31 9869.51 10305.04
1988/01/31 10201.43 10704.98
1988/02/29 10311.43 10833.40
1988/03/31 10250.32 10753.18
1988/04/30 10186.89 10686.15
1988/05/31 10144.52 10662.80
1988/06/30 10347.54 10930.93
1988/07/31 10322.96 10897.42
1988/08/31 10336.07 10920.39
1988/09/30 10543.94 11180.24
1988/10/31 10741.55 11434.81
1988/11/30 10599.52 11270.62
1988/12/31 10532.47 11212.25
1989/01/31 10723.57 11423.14
1989/02/28 10666.79 11336.52
1989/03/31 10687.87 11339.53
1989/04/30 10885.16 11539.50
1989/05/31 11142.78 11918.36
1989/06/30 11412.45 12221.51
1989/07/31 11616.79 12511.49
1989/08/31 11494.09 12326.96
1989/09/30 11544.27 12412.82
1989/10/31 11773.25 12702.79
1989/11/30 11886.70 12840.25
1989/12/31 11968.63 12911.80
1990/01/31 11858.36 12818.41
1990/02/28 11937.36 12870.38
1990/03/31 11946.73 12922.72
1990/04/30 11843.40 12802.59
1990/05/31 12187.71 13191.99
1990/06/30 12364.39 13410.03
1990/07/31 12544.09 13637.87
1990/08/31 12510.91 13525.65
1990/09/30 12577.69 13635.23
1990/10/31 12706.54 13778.34
1990/11/30 12984.58 14085.64
1990/12/31 13208.56 14317.99
1991/01/31 13345.62 14527.00
1991/02/28 13431.06 14619.27
1991/03/31 13521.40 14725.84
1991/04/30 13667.77 14879.49
1991/05/31 13738.82 15008.29
1991/06/30 13773.18 15024.48
1991/07/31 13971.01 15278.30
1991/08/31 14238.00 15558.48
1991/09/30 14460.27 15857.50
1991/10/31 14631.20 16102.66
1991/11/30 14720.65 16213.00
1991/12/31 15006.61 16558.71
1992/01/31 14934.42 16390.37
1992/02/29 15083.02 16544.40
1992/03/31 14978.79 16471.34
1992/04/30 15119.21 16621.98
1992/05/31 15368.76 16930.41
1992/06/30 15531.60 17137.15
1992/07/31 15504.94 17273.86
1992/08/31 15605.23 17506.59
1992/09/30 15703.20 17642.16
1992/10/31 15547.05 17493.79
1992/11/30 15622.19 17566.09
1992/12/31 15824.92 17780.00
1993/01/31 15969.30 18024.78
1993/02/28 16106.07 18191.23
1993/03/31 16211.25 18300.07
1993/04/30 16324.42 18423.59
1993/05/31 16372.76 18507.95
1993/06/30 16572.49 18687.96
1993/07/31 16663.59 18765.53
1993/08/31 16694.62 18842.74
1993/09/30 16731.08 18858.93
1993/10/31 16760.85 18922.20
1993/11/30 16725.81 18888.68
1993/12/31 16887.24 19030.65
1994/01/31 17042.76 19221.96
1994/02/28 16952.89 19101.83
1994/03/31 16760.76 18630.71
1994/04/30 16687.34 18513.22
1994/05/31 16829.40 18575.73
1994/06/30 16915.54 18529.79
1994/07/31 17185.94 18891.32
1994/08/31 17262.94 18930.10
1994/09/30 17075.83 18676.66
1994/10/31 17110.50 18671.76
1994/11/30 17093.43 18604.73
1994/12/31 17215.13 18758.76
1995/01/31 17540.60 19178.65
1995/02/28 17933.29 19667.47
1995/03/31 18009.39 19747.68
1995/04/30 18293.32 20012.43
1995/05/31 18868.91 20660.92
1995/06/30 19012.85 20770.51
1995/07/31 19056.03 20811.93
1995/08/31 19291.17 21002.86
1995/09/30 19490.59 21190.78
1995/10/31 19707.41 21385.86
1995/11/30 19925.61 21636.66
1995/12/31 20145.13 21904.42
1996/01/31 20310.06 22072.38
1996/02/29 20180.65 21897.27
1996/03/31 20107.43 21823.08
1996/04/30 20065.52 21722.15
1996/05/31 19987.83 21693.91
1996/06/30 20263.67 21970.70
1996/07/31 20336.03 22058.07
1996/08/31 20331.54 22061.84
1996/09/30 20653.32 22432.78
1996/10/31 21035.47 22868.49
1996/11/30 21360.46 23183.32
1996/12/31 21240.01 23080.89
1997/01/31 21372.94 23276.72
1997/02/28 21442.61 23301.95
1997/03/31 21232.61 23109.14
1997/04/30 21559.32 23460.50
1997/05/31 21767.26 23679.30
1997/06/30 22017.44 23951.95
1997/07/31 22411.07 24395.19
IMATRL PRASUN SHR__CHT 19970731 19970814 163151 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Advisor Mortgage Securities Fund - Class T on July 31, 1987,
and the current maximum 3.50% sales charge was paid. As the chart shows, by
July 31, 1997, the value of the investment would have grown to $22,411 - a
124.11% increase on the initial investment. For comparison, look at how the
Salomon Brothers Mortgage Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment would
have grown to $24,395 - a 143.95% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally 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,
1997 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend return 6.63% 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return 3.57% -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 10.20% 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends paid
by the class. A capital appreciation return reflects both the amount paid
by the class to shareholders as capital gain distributions and changes in
the class' share price. Both returns assume the dividends or capital gains
paid by the class are reinvested, if any, and exclude the effect of sales
charges.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1997 PAST 1 LIFE OF
MONTH CLASS
Dividends per share 5.51(cents) 26.78(cents)
Annualized dividend rate 5.90% 5.97%
30-day annualized yield n/a -
DIVIDENDS per share show the income paid by the class for a set period. If
you annualize this number, based on an average share price of $11.00 over
the past one month, and $10.84 over the life of the class, you can compare
the class' income over these two 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. Yield
information will be reported once Class T has a longer, more stable
operating history.
ADVISOR MORTGAGE SECURITIES FUND - CLASS B
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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. Total return reflects
the change in the value of an investment, assuming reinvestment of the
class' dividend income and capital gains (the profits earned upon the sale
of securities that have grown in value). You can also look at the class'
income, as reflected in its yield, to measure performance. The initial
offering of Class B shares took place on March 3, 1997. Class B shares bear
a .90% 12b-1 fee. Returns prior to March 3, 1997 are those of Initial
Class, the original class of the fund, which does not bear a 12b-1 fee. Had
Class B's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. Class B's contingent deferred sales charges included in
the past one year, past five years and past 10 years total return figures
are 5%, 2% and 0%, respectively. If Fidelity had not reimbursed certain
class expenses, the total returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class 9.81% 44.02% 131.40%
B
Advisor Mortgage Securities Fund - Class 4.81% 42.02% 131.40%
B (incl. contingent deferred sales charge)
Salomon Brothers Mortgage Index 10.60% 41.23% 143.95%
U.S. Mortgage Funds Average 10.05% 33.27% 114.95%
CUMULATIVE TOTAL RETURNS show Class B's performance in percentage terms
over a set period - in this case, one year, five years or 10 years. For
example, if you had invested $1,000 in a fund that had a 5% return over the
past year, the value of your investment would be $1,050. You can compare
Class B's returns to the performance of the Salomon Brothers Mortgage Index
- - a market capitalization weighted index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC balloon
mortgages with fixed-rate coupons. To measure how Class B's performance
stacked up against its peers, you can compare it to the U.S. mortgage funds
average, which reflects the performance of mutual funds with similar
objectives tracked by Lipper Analytical Services, Inc. The past one year
average represents a peer group of 59 mutual funds. These benchmarks
reflect reinvestment of dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - Class B 9.81% 7.57% 8.75%
Advisor Mortgage Securities Fund - Class B 4.81% 7.27% 8.75%
(incl. contingent deferred sales charge)
Salomon Brothers Mortgage Index 10.60% 7.15% 9.33%
U.S. Mortgage Funds Average 10.05% 5.90% 7.93%
AVERAGE ANNUAL TOTAL RETURNS take the Class B's cumulative return and show
you what would have happened if Class B had performed at a constant rate
each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19970731 19970814 163127 S00000000000001
FA Mortgage Sec -CL B SB Mortgage
00238 SB005
1987/07/31 10000.00 10000.00
1987/08/31 9967.99 9954.81
1987/09/30 9716.36 9725.84
1987/10/31 10004.28 10044.81
1987/11/30 10099.69 10186.41
1987/12/31 10227.48 10305.04
1988/01/31 10571.43 10704.98
1988/02/29 10685.42 10833.40
1988/03/31 10622.10 10753.18
1988/04/30 10556.36 10686.15
1988/05/31 10512.46 10662.80
1988/06/30 10722.84 10930.93
1988/07/31 10697.37 10897.42
1988/08/31 10710.95 10920.39
1988/09/30 10926.37 11180.24
1988/10/31 11131.14 11434.81
1988/11/30 10983.96 11270.62
1988/12/31 10914.47 11212.25
1989/01/31 11112.51 11423.14
1989/02/28 11053.67 11336.52
1989/03/31 11075.51 11339.53
1989/04/30 11279.96 11539.50
1989/05/31 11546.92 11918.36
1989/06/30 11826.37 12221.51
1989/07/31 12038.13 12511.49
1989/08/31 11910.98 12326.96
1989/09/30 11962.98 12412.82
1989/10/31 12200.25 12702.79
1989/11/30 12317.82 12840.25
1989/12/31 12402.72 12911.80
1990/01/31 12288.46 12818.41
1990/02/28 12370.32 12870.38
1990/03/31 12380.04 12922.72
1990/04/30 12272.95 12802.59
1990/05/31 12629.75 13191.99
1990/06/30 12812.84 13410.03
1990/07/31 12999.05 13637.87
1990/08/31 12964.67 13525.65
1990/09/30 13033.88 13635.23
1990/10/31 13167.40 13778.34
1990/11/30 13455.52 14085.64
1990/12/31 13687.62 14317.99
1991/01/31 13829.66 14527.00
1991/02/28 13918.20 14619.27
1991/03/31 14011.81 14725.84
1991/04/30 14163.49 14879.49
1991/05/31 14237.12 15008.29
1991/06/30 14272.73 15024.48
1991/07/31 14477.73 15278.30
1991/08/31 14754.40 15558.48
1991/09/30 14984.74 15857.50
1991/10/31 15161.86 16102.66
1991/11/30 15254.55 16213.00
1991/12/31 15550.89 16558.71
1992/01/31 15476.08 16390.37
1992/02/29 15630.07 16544.40
1992/03/31 15522.06 16471.34
1992/04/30 15667.58 16621.98
1992/05/31 15926.18 16930.41
1992/06/30 16094.92 17137.15
1992/07/31 16067.30 17273.86
1992/08/31 16171.23 17506.59
1992/09/30 16272.75 17642.16
1992/10/31 16110.93 17493.79
1992/11/30 16188.80 17566.09
1992/12/31 16398.88 17780.00
1993/01/31 16548.50 18024.78
1993/02/28 16690.23 18191.23
1993/03/31 16799.22 18300.07
1993/04/30 16916.50 18423.59
1993/05/31 16966.59 18507.95
1993/06/30 17173.57 18687.96
1993/07/31 17267.97 18765.53
1993/08/31 17300.12 18842.74
1993/09/30 17337.91 18858.93
1993/10/31 17368.75 18922.20
1993/11/30 17332.45 18888.68
1993/12/31 17499.73 19030.65
1994/01/31 17660.89 19221.96
1994/02/28 17567.76 19101.83
1994/03/31 17368.67 18630.71
1994/04/30 17292.58 18513.22
1994/05/31 17439.79 18575.73
1994/06/30 17529.05 18529.79
1994/07/31 17809.27 18891.32
1994/08/31 17889.06 18930.10
1994/09/30 17695.16 18676.66
1994/10/31 17731.09 18671.76
1994/11/30 17713.40 18604.73
1994/12/31 17839.51 18758.76
1995/01/31 18176.79 19178.65
1995/02/28 18583.72 19667.47
1995/03/31 18662.58 19747.68
1995/04/30 18956.81 20012.43
1995/05/31 19553.27 20660.92
1995/06/30 19702.44 20770.51
1995/07/31 19747.19 20811.93
1995/08/31 19990.85 21002.86
1995/09/30 20197.51 21190.78
1995/10/31 20422.18 21385.86
1995/11/30 20648.30 21636.66
1995/12/31 20875.78 21904.42
1996/01/31 21046.69 22072.38
1996/02/29 20912.59 21897.27
1996/03/31 20836.72 21823.08
1996/04/30 20793.28 21722.15
1996/05/31 20712.78 21693.91
1996/06/30 20998.62 21970.70
1996/07/31 21073.61 22058.07
1996/08/31 21068.96 22061.84
1996/09/30 21402.40 22432.78
1996/10/31 21798.41 22868.49
1996/11/30 22135.19 23183.32
1996/12/31 22010.37 23080.89
1997/01/31 22148.12 23276.72
1997/02/28 22220.32 23301.95
1997/03/31 21990.91 23109.14
1997/04/30 22319.38 23460.50
1997/05/31 22500.12 23679.30
1997/06/30 22767.11 23951.95
1997/07/31 23139.91 24395.19
IMATRL PRASUN SHR__CHT 19970731 19970814 163131 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Advisor Mortgage Securities Fund - Class B on July 31, 1987. As
the chart shows, by July 31, 1997, the value of the investment would have
grown to $23,140 - a 131.40% increase on the initial investment. For
comparison, look at how the Salomon Brothers Mortgage Index did over the
same period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $24,395 - a 143.95% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally 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,
1997 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend return 6.33% 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return 3.48% -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 9.81% 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends paid
by the class. A capital appreciation return reflects both the amount paid
by the class to shareholders as capital gain distributions and changes in
the class' share price. Both returns assume the dividends or capital gains
paid by the class are reinvested, if any, and exclude the effect of sales
charges.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1997 PAST 1 LIFE OF
MONTH CLASS
Dividends per share 4.86(cents) 23.81(cents)
Annualized dividend rate 5.21% 5.31%
30-day annualized yield n/a -
DIVIDENDS per share show the income paid by the class for a set period. If
you annualize this number, based on an average share price of $10.99 over
the past one month, and $10.84 over the life of the class, you can compare
the class' income over these two 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. Yield
information will be reported once Class B has a longer, more stable
operating history.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
A favorable inflation backdrop
steadied fears of higher interest
rates, buoying the U.S. taxable
bond market for the 12 months that
ended July 31, 1997. The Lehman
Brothers Aggregate Bond Index -
a broad measure of the U.S.
taxable bond market - returned
10.76% over the period. For the
first eight months of the period,
bonds suffered from increasing
expectations of economic growth
and inflation. In his February
testimony before Congress,
Federal Reserve Board Chairman
Alan Greenspan indicated that the
Fed was inclined to raise the rate
banks charge each other for
overnight loans - known as the
fed funds target rate - to head off
inflation that might be caused by a
tight labor market. On March 25,
the Fed followed through by
raising the target rate by 0.25% to
5.50%. However, this move largely
had been priced into the market.
Weakening economic and inflation
signals - combined with the Fed's
shift to a more favorable stance
indicating no intention to raise
rates in the short term - helped
spark a rally in all debt markets
from April through the end of the
period. Relative interest-rate
stability provided a positive setting
for mortgage-backed securities.
For the 12 months that ended July
31, 1997, the Salomon Brothers
Mortgage Index returned 10.60%.
Sustained economic growth and
demand from yield-hungry
investors helped corporate bonds,
with the Lehman Brothers
Corporate Bond Index returning
12.55% over the same period.
NOTE TO SHAREHOLDERS: The following is an interview with Thomas Silvia, who
co-manages Fidelity Advisor Mortgage Securities Fund with Kevin Grant. On
October 1, 1997, Silvia will become the sole Portfolio Manager of the fund.
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended July 31, 1997, the fund's Class A, Class T
and Class B shares returned 10.25%, 10.20% and 9.81%, respectively. During
the same period, the U.S. mortgage funds average, according to Lipper
Analytical Services, returned 10.05% and the Salomon Brothers Mortgage
Index returned 10.60%.
Q. WHAT HELPED THE FUND'S
PERFORMANCE DURING THE PERIOD?
A. We continued to get good performance from our small position in
commercial mortgage-backed securities - bonds issued and backed by office
buildings, shopping malls and multi-housing structures. These investments
produced stronger returns than were generated by the overall mortgage
market. In addition, the fund was overweighted relative to the index in
30-year Fannie Mae (Federal National Mortgage Association) discount bonds,
which are priced below par, and current-coupon bonds, which are mortgage
securities that pay a similar coupon - or periodic interest payment - as
those being created at the current market rate. These securities
outperformed comparable 30-year Ginnie Mae (Government National Mortgage
Association) bonds and 15-year mortgage-backed securities during the
period.
Q. WHAT FACTORS IN THE MORTGAGE MARKET AFFECTED THE FUND'S PERFORMANCE?
A. The mortgage market benefited greatly from a period of relatively stable
interest rates. For example, the yield on a 10-year Treasury has lingered
in a range of 6% to 7% for about 18 months - a small fluctuation compared
to the range we've seen over the past 10 years. A calm interest-rate
environment reduces the largest source of risk for mortgage securities -
prepayments. For instance, when interest rates decline, mortgage holders
are likely to refinance their debt at a lower rate. This hurts mortgage
investors because they are forced to reinvest at a lower interest rate. On
the other hand, when interest rates are steady, the risk of prepayments
declines. This has been the case for the past 12 months and, as a result,
the mortgage sector was one of the best-performing categories of the bond
market.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. We retained a small position in commercial mortgage-backed securities,
which was more of a selective investment in a few particular bonds than an
overall sector allocation. The fund also maintained a slightly
underweighted position relative to the index in balloon mortgages. Overall,
the strong performance of the mortgage market during the period reduced the
number of attractive investment opportunities. The reward for taking on
risk was low, so it was a time to hold more liquid securities and keep the
fund's portfolio relatively close to the allocations in the fund's
benchmark index - the Salomon Brothers Mortgage Index.
Q. DID THE FUND'S RELATIVELY SMALL POSITION IN BALLOON MORTGAGES HELP THE
FUND?
A. Balloons are mortgages that are constructed with a typical 30-year
amortization schedule, but differ from the standard mortgage in that the
homeowner agrees to pay the outstanding balance on a specified - or balloon
- - date, usually within five or seven years of issuance. The stable
interest-rate environment benefited the 30-year sector the most, the
15-year sector the second most, and the balloon sector the least.
Consequently, the fund benefited from not having a significant position in
balloons during the period.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. I think the reduced number of attractive investment alternatives in the
mortgage market was the biggest disappointment. The fund has typically done
its best when the market goes through a dramatic change. That's because our
value-driven, bottom-up security selection process allows us to capitalize
on larger and more frequent misvaluations in the mortgage market. When
everything is trading in so tight a range, there aren't many changes in
values or prepayment options to affect the cash flows of bonds. Therefore,
in a relatively stable environment, we are not able to take advantage of
our research and trading skills to the same degree.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. At the end of the period, we hit a 6% yield on the 10-year Treasury,
which leaves the mortgage market on a cliff. If yields drop below 6%, it
will be an attractive environment for homeowners to refinance and prepay
their mortgages. This likely would cause the mortgage sector to
underperform other types of bonds. On the other hand, if interest rates
remain stable, the mortgage market should continue to perform well.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: high current income
by investing in mortgage
securities of all kinds
START DATE: December 31,
1984
SIZE: as of July 31, 1997,
more than $533 million
MANAGER: Thomas Silvia,
co-managed since February
1997; joined Fidelity in 1993
(checkmark)
THOMAS SILVIA ON HIS
INVESTMENT STRATEGY:
"The fund's overall market risk
will be targeted to its
benchmark, the Salomon
Brothers Mortgage Index. I
look to add incremental return
by the use of a value-driven,
bottom-up approach to finding
individual mortgage-backed
securities that offer higher
expected returns or
potentially better price
performance than securities
in the benchmark. This
approach takes advantage of
the skills offered by our
quantitative research group,
as well as our trading desk. In
addition, I will continue to look
for opportunities outside of
the fund's benchmark, such
as commercial
mortgage-backed securities."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
Less than 5% 0.1 0.1
5 - 5.99% 4.7 6.2
6 - 6.99% 25.7 29.3
7 - 7.99% 27.0 30.7
8 - 8.99% 20.2 12.2
9 - 9.99% 6.6 4.0
10 - 10.99% 3.5 4.4
11% and over 2.3 3.0
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, 1997
6 MONTHS AGO
Years 5.8 6.3
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1997
6 MONTHS AGO
Years 3.2 4.0
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION (% OF FUND'S INVESTMENTS)
AS OF JULY 31, 1997 AS OF JANUARY 31, 1997
Row: 1, Col: 1, Value: 9.800000000000001
Row: 1, Col: 2, Value: 2.9
Row: 1, Col: 3, Value: 87.3
Mortgage-backed
securities 87.6%
CMOs and
other mortgage
related securities 2.3%
Short-term
investments 10.1%
Mortgage-backed
securities 87.3%
CMOs and
other mortgage
related securities 2.8%
Short-term
investments 9.9%
Row: 1, Col: 1, Value: 10.1
Row: 1, Col: 2, Value: 2.3
Row: 1, Col: 3, Value: 87.59999999999999
INVESTMENTS JULY 31, 1997
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 87.3%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 15.7%
5%, 7/1/10 $ 4,019,563 $ 3,795,975
6 1/2%, 1/1/24 to 7/1/24 4,480,017 4,411,427
7%, 5/1/99 to 8/1/12 16,562,905 16,757,226
7 1/2%, 10/1/11 to 7/1/12 35,640,019 36,482,404
7 1/2%, 8/1/27 (e) 3,500,000 3,561,250
8%, 10/1/07 to 12/1/18 767,774 794,814
8 1/2%, 11/1/03 to 1/1/20 2,437,117 2,554,427
9%, 9/1/08 to 5/1/21 11,954,777 12,802,489
10%, 1/1/09 to 5/1/19 2,502,185 2,726,412
10 1/2%, 8/1/10 to 12/1/20 2,723,982 3,011,806
11 1/2%, 4/1/12 111,151 124,061
11 3/4%, 6/1/11 69,701 78,657
12 1/4%, 6/1/14 to 7/1/15 314,042 360,277
12 1/2%, 5/1/12 to 4/1/15 1,236,677 1,428,593
12 3/4%, 6/1/05 to 3/1/15 204,003 229,242
13%, 1/1/11 to 6/1/15 1,855,544 2,187,117
91,306,177
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 40.1%
5 1/2%, 11/1/08 to 5/1/26 24,273,187 23,420,456
6%, 4/1/00 to 5/1/26 87,078,670 84,355,052
6 1/2%, 9/1/10 to 4/1/26 56,791,751 55,821,852
7%, 2/1/24 to 5/1/27 31,698,840 31,684,095
7 1/2%, 3/1/22 to 12/1/22 3,449,394 3,527,311
8%, 1/1/07 to 8/1/27 (e) 15,806,073 16,257,924
8 1/4%, 1/1/13 132,558 137,062
8 1/2%, 11/1/03 to 11/1/18 2,059,489 2,137,174
8 3/4%, 11/1/08 to 7/1/09 296,023 307,877
9%, 1/1/08 to 2/1/13 1,034,999 1,084,078
9 1/2%, 5/1/07 to 8/1/22 8,581,420 9,131,717
11%, 12/1/02 to 8/1/10 2,741,172 3,009,758
12 1/4%, 5/1/13 to 6/1/15 542,105 616,601
12 1/2%, 10/1/13 to 3/1/16 724,646 839,914
12 3/4%, 6/1/13 to 7/1/15 379,431 436,032
13 1/2%, 9/1/13 to 12/1/14 192,548 229,229
14%, 5/1/12 to 11/1/14 64,062 76,803
233,072,935
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 31.5%
7%, 10/15/22 to 11/15/23 $ 3,665,261 $ 3,683,818
7 1/2%, 7/15/05 to 2/15/27 57,751,910 58,851,736
8%, 4/15/02 to 7/15/27 31,473,025 32,528,616
8 1/2%, 7/15/16 to 8/15/27 54,893,289 57,361,674
9%, 10/15/04 to 4/15/18 6,255,677 6,703,581
9 1/2%, 6/15/09 to 7/15/22 5,351,496 5,776,000
10%, 12/15/17 to 1/15/26 11,883,595 13,152,300
10 1/2%, 11/15/97 to 2/15/18 1,488,065 1,634,033
11%, 1/15/10 to 8/15/17 3,092,191 3,529,873
11 1/2%, 10/15/10 to 7/15/18 98,587 112,208
13%, 10/15/13 104,463 123,952
13 1/2%, 7/15/11 to 10/15/14 97,226 116,364
183,574,155
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $498,582,159) 507,953,267
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation
sequential pay Series 1353 Class A,
5 1/2%, 11/15/04 (Cost $122,226) 131,183 130,404
COMMERCIAL MORTGAGE SECURITIES - 2.7%
Merrill Lynch Mortgage Investors, Inc. Series 1994-M1
Class A, 8.1239%, 6/25/22 (d) 5,285,305 5,334,029
Structured Asset Securities Corp. commercial Series 1992-M1
Class C, 7.05%, 11/25/02 3,192,522 2,906,006
SASCO 1997-N1 LLC Series 1997-N1 Class C,
6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. commercial Series 1994-C1
Class C, 9.20%, 9/18/99 (a) 3,280,000 2,693,700
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $14,720,222) 15,933,735
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81% 9/18/99 (c) (Cost $749,264) $ 51,554,000 $ 612,204
CASH EQUIVALENTS - 9.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.77%, dated
7/31/97 due 8/1/97 $ 57,639,237 57,630,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $571,803,871) $ 582,259,610
LEGEND
1. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
SML, Inc.
commercial Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $2,132,820
2. 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 $5,000,000 or 0.9% of net
assets.
3. Security represents right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Security purchased on delayed delivery basis (See Note 2 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At July 31, 1997, the aggregate cost of investment securities for income
tax purposes was $571,956,866. Net unrealized appreciation aggregated
$10,302,744, of which $11,091,982 related to appreciated investment
securities and $789,238 related to depreciated investment securities.
The fund hereby designates approximately $544,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1997
ASSETS
Investment in securities, at value (including repurchase $ 582,259,610
agreements of $57,630,000) (cost $571,803,871) -
See accompanying schedule
Cash 115
Receivable for investments sold 251,870
Interest receivable 3,066,107
Prepaid expenses 44,595
TOTAL ASSETS 585,622,297
LIABILITIES
Payable for investments purchased $ 30,194,142
Regular Delivery
Delayed Delivery 19,626,894
Payable for fund shares redeemed 1,026,148
Distributions payable 515,582
Accrued management fee 187,169
Distribution fees payable 3,034
Other payables and accrued expenses 177,203
TOTAL LIABILITIES 51,730,172
NET ASSETS $ 533,892,125
Net Assets consist of:
Paid in capital $ 519,208,290
Undistributed net investment income 230,506
Accumulated undistributed net realized gain (loss) 3,997,590
on investments
Net unrealized appreciation (depreciation) on 10,455,739
investments
NET ASSETS $ 533,892,125
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
JULY 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.05
CLASS A:
NET ASSET VALUE and redemption price per share
($1,585,920 (divided by) 143,564 shares)
Maximum offering price per share (100/95.75 of $11.05) $11.54
CLASS T: $11.05
NET ASSET VALUE and redemption price per share
($12,192,905 (divided by) 1,103,680 shares)
Maximum offering price per share (100/96.50 of $11.05) $11.45
CLASS B: $11.04
NET ASSET VALUE and offering price per share
($823,411 (divided by) 74,578 shares) A
INITIAL CLASS: $11.05
NET ASSET VALUE, offering price and redemption price
per share ($506,112,493 (divided by) 45,796,695 shares)
INSTITUTIONAL CLASS: $11.04
NET ASSET VALUE, offering price and redemption price
per share ($13,177,396 (divided by) 1,193,472 shares)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1997
INVESTMENT INCOME $ 35,932,141
Interest
EXPENSES
Management fee $ 2,273,788
Transfer agent fees 1,034,760
Distribution fees 4,506
Accounting fees and expenses 208,321
Non-interested trustees' compensation 9,585
Custodian fees and expenses 79,667
Registration fees 75,411
Audit 83,730
Legal 17,684
Miscellaneous 4,396
Total expenses before reductions 3,791,848
Expense reductions (52,945) 3,738,903
NET INVESTMENT INCOME 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 4,296,274
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on 14,164,021
investment securities
NET GAIN (LOSS) 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 50,653,533
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 1996
INCREASE (DECREASE) IN NET ASSETS
Operations $ 32,193,238 $ 31,763,051
Net investment income
Net realized gain (loss) 4,296,274 8,694,701
Change in net unrealized appreciation (depreciation) 14,164,021 (11,251,245)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 50,653,533 29,206,507
FROM OPERATIONS
Distributions to shareholders (32,649,725) (31,178,449)
From net investment income
From net realized gain (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (37,689,258) (35,234,409)
Share transactions - net increase (decrease) 32,765,543 77,949,164
TOTAL INCREASE (DECREASE) IN NET ASSETS 45,729,818 71,921,262
NET ASSETS
Beginning of period 488,162,307 416,241,045
End of period (including undistributed net investment $ 533,892,125 $ 488,162,307
income of $230,506 and $922,675, respectively)
</TABLE>
FINANCIAL HIGHLIGHTS - CLASS A
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .268 F
Net realized and unrealized gain (loss) .224
Total from investment operations .492
Less Distributions
From net investment income (.272)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.61%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,586
Ratio of expenses to average net assets .90% A,
D
Ratio of net investment income to average net assets 6.09% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .255 F
Net realized and unrealized gain (loss) .233
Total from investment operations .488
Less Distributions
From net investment income (.268)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 12,193
Ratio of expenses to average net assets 1.00% A,
D
Ratio of net investment income to average net assets 5.99% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .234 F
Net realized and unrealized gain (loss) .214
Total from investment operations .448
Less Distributions
From net investment income (.238)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.20%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 823
Ratio of expenses to average net assets 1.65% A,
D
Ratio of net investment income to average net assets 5.34% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1997 1996 1995 1994 C 1993
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
of period
Income from Investment
Operations
Net investment income .678 D .729 .772 .570 .788
Net realized and .391 (.015) .325 (.242) (.007)
unrealized gain (loss)
Total from investment 1.069 .714 1.097 .328 .781
operations
Less Distributions
From net investment income (.689) (.724) (.737) (.588) (.701)
From net realized gain (.110) (.100) - (.040) -
In excess of net realized - - (.050) (.030) -
gain
Total distributions (.799) (.824) (.787) (.658) (.701)
Net asset value, end of period $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
TOTAL RETURN B 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 omitted)
Ratio of expenses to average .73% .74% .77% .79% .76%
net assets
Ratio of expenses to average .73% .73% .77% .79% .76%
net assets after expense A
reductions
Ratio of net investment income 6.26% 6.75% 7.37% 6.73% 7.18%
to average net assets
Portfolio turnover rate 149% 221% 329% 563% 278%
</TABLE>
A FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
C 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, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .263 F
Net realized and unrealized gain (loss) .226
Total from investment operations .489
Less Distributions
From net interest income (.279)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.59%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 13,177
Ratio of expenses to average net assets .75% A,
D
Ratio of expenses to average net assets after expense reductions .70% A,
G
Ratio of net investment income to average net assets 6.29% A
Portfolio turnover rate 149%
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL CLASS
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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. On March 14, 1996, the Board
of Trustees approved the transfer of the fund to the Fidelity Advisor
product line. The Board of Trustees also approved the creation of Class A,
Class T, Class B and Institutional Class shares. Offering of new classes
commenced on March 3, 1997. Prior to March 3, 1997, the fund offered one
class of shares, Fidelity Mortgage Securities Fund ("Initial Class")
(formerly Fidelity Mortgage Securities Fund).
The financial statements have been prepared in conformity with generally
accepted accounting principles which permit management to make certain
estimates and assumptions at the date of the financial statements. 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. Securities (including
restricted 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. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
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 substantially 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.
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears all
organizational expenses except for registering and qualifying Class A,
Class T, Class B, and Institutional Class and shares of those classes for
distribution under federal and state securities law. These expenses are
borne by those classes and amortized over one year.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 dividends and capital
gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities and losses deferred due to wash sales.
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.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments 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.
2. OPERATING POLICIES.
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 for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a delayed delivery 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 market values of
the securities purchased or sold on a delayed delivery basis are identified
as such in the fund's schedule of investments. The fund may receive
compensation for
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS - CONTINUED
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, the fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $2,693,700 or
0.5% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $790,852,390 and $747,620,591, respectively, of which U.S.
government and government agency obligations aggregated $780,486,825 and
$743,935,902 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 .1100% to .3700% for the period. The annual individual
fund fee rate is .30%. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented
the above rates, as they resulted in the same or a lower management fee.
For the period, the management fee was equivalent to an annual rate of .44%
of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the 1940
Act, the Trustees have adopted separate distribution plans with respect to
each class of shares (collectively referred to as "the Plans"). Under
certain of the Plans, the class pays Fidelity Distributors Corporation
(FDC), an affiliate of FMR, a distribution and service fee. This fee is
based on the following annual rates of the average net assets of each
applicable class:
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
CLASS A .15%
CLASS T .25%
CLASS B .90% *
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the period, each class paid FDC the following amounts, a portion of
which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares, and
providing shareholder support services:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 1,374
$ 4,506 $ 4,506
Under the Plans, FMR or FDC may use its resources to pay administrative and
promotional expenses related to the sale of each class' shares. The Plans
also authorize payments to third parties that assist in the sale of each
class' shares or render shareholder support services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.25% and 3.50%
for selling Class A and Class T shares of the fund, respectively, and the
proceeds of a contingent deferred sales charge levied on Class B share
redemptions occurring within six years of purchase. The Class B charge is
based on declining rates which range from 5% to 1% of the lesser of the
cost of shares at the initial date of purchase or the net asset value of
the redeemed shares, excluding any reinvested dividends and capital gains.
Effective August 1, 1997, Class A's maximum sales charge was increased to
4.75%.
For the period, FDC received the following sales charge amounts related to
each class, a portion of which is paid to securities, dealers, banks, and
other financial institutions:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 7,090 $ 7,023
CLASS T 9,662 7,492
CLASS B 0 0 *
$ 16,752 $ 14,515
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM ITS OWN
RESOURCES TO DEALERS THROUGH WHICH THE SALES ARE MADE.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
TRANSFER AGENT FEES. Each class of the fund has entered into a separate
transfer, dividend disbursing, and shareholder servicing agent
(collectively referred to as the Transfer Agents) contract with respect to
its shares. The Transfer Agents receive account fees and asset-based fees
that vary according to the account size and type of account of the
shareholders of the respective classes of the fund. FIIOC and FSC pay for
typesetting, printing and mailing of all shareholder reports. For the
period, the following amounts were paid to each transfer agent:
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC * $ 789 .22% **
CLASS T FIIOC * 1,513 .14% **
CLASS B FIIOC * 881 .57% **
INITIAL CLASS FSC * 1,028,957 .20%
INSTITUTIONAL CLASS FIIOC * 2,620 .21% **
$ 1,034,760
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC), AND
FIDELITY SERVICE COMPANY, INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) above the
following annual rates or range of annual rates of average net assets for
each class:
FMR REIMBURSEME
EXPENSE NT
LIMITATIONS
CLASS A .90% $ 10,408
CLASS T 1.00% 10,413
CLASS B 1.65% 10,927
INSTITUTIONAL CLASS .75% 12,094
$ 43,842
5. EXPENSE REDUCTIONS - CONTINUED
In addition, the fund has entered into arrangements with its custodian and
each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses. During
the period, the fund's custodian fees were reduced by $8,474 under the
custodian arrangement, and each applicable class' expenses were reduced as
follows under the transfer agent arrangements:
TRANSFER
AGENT
INTEREST
CREDITS
INSTITUTIONAL CLASS $ 629
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 A 1996
CLASS A
From net investment income $ 21,750 $ -
CLASS T
From net investment income $ 64,445 $ -
CLASS B
From net investment income $ 8,241 $ -
INITIAL CLASS
From net investment income $ 32,474,399 $ 31,178,449
From net realized gain 5,039,533 4,055,960
Total $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
From net investment income $ 80,890 $ -
$ 37,689,258 $ 35,234,409
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARES DOLLARS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1997 A 1996 1997 A 1996
CLASS A 141,575 - $ 1,531,983 $ -
Shares sold
Reinvestment of 1,989 - 21,750 -
distributions
Net increase (decrease) 143,564 - $ 1,553,733 $ -
CLASS T 1,114,285 - $ 12,183,453 $ -
Shares sold
Reinvestment of 5,597 - 61,712 -
distributions
Shares redeemed (16,202) - (177,848) -
Net increase (decrease) 1,103,680 - $ 12,067,317 $ -
CLASS B 73,891 - $ 801,025 $ -
Shares sold
Reinvestment of 687 - 7,506 -
distributions
Net increase (decrease) 74,578 - $ 808,531 $ -
INITIAL CLASS 14,636,021 24,584,693 $ 158,564,289 $ 268,954,246
Shares sold
Reinvestment of 2,769,613 2,644,498 29,925,102 28,910,230
distributions
Shares redeemed (16,911,618) (20,139,279) (183,183,589) (219,915,312)
Net increase (decrease) 494,016 7,089,912 $ 5,305,802 $ 77,949,164
INSTITUTIONAL CLASS 1,216,421 - $ 13,282,379 $ -
Shares sold
Reinvestment of 3,516 - 38,560 -
distributions
Shares redeemed (26,465) - (290,779) -
Net increase (decrease) 1,193,472 - $ 13,030,160 $ -
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
8. REGISTRATION FEES.
For the period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 10,398
CLASS T 11,098
CLASS B 10,398
INITIAL CLASS 31,365
INSTITUTIONAL CLASS 12,152
$ 75,411
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Advisor Mortgage Securities Fund (formerly Fidelity Mortgage Securities
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
Fidelity Advisor Mortgage Securities Fund (formerly Fidelity Mortgage
Securities Fund) (a fund of Fidelity Income Fund) at July 31, 1997, the
results of its operations for the year then ended, and 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 Advisor Mortgage
Securities 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 at July 31, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 18, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
(formerly Fidelity Mortgage Securities Fund) voted to pay to shareholders
of record at the opening of business on record date, the following
distributions derived from capital gains realized from sales of portfolio
securities, and dividends derived from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Class A 9/8/97 9/5/97 - $.08
Class T 9/8/97 9/5/97 - $.08
Class B 9/8/97 9/5/97 - $.08
Initial Class 9/8/97 9/5/97 - $.08
Institutional Class 9/8/97 9/5/97 - $.08
A total of 0.01% 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 1998 of the applicable
percentage for use in preparing 1997 income tax returns.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Fred L. Henning, Jr., Vice President
Dwight D. Churchill, Vice President
Kevin Grant, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FOCUS FUNDS
Fidelity Advisor Consumer
Industries Fund
Fidelity Advisor Cyclical
Industries Fund
Fidelity Advisor Financial
Services Fund
Fidelity Advisor Health Care Fund
Fidelity Advisor Natural
Resources Fund
Fidelity Advisor Technology Fund
Fidelity Advisor Utilities Growth Fund
GROWTH FUNDS
Fidelity Advisor Overseas Fund
Fidelity Advisor TechnoQuant(trademark)
Growth Fund
Fidelity Advisor Mid Cap Fund
Fidelity Advisor Equity Growth Fund
Fidelity Advisor Growth
Opportunities Fund
Fidelity Advisor Strategic
Opportunities Fund
Fidelity Advisor Large Cap Fund
GROWTH AND INCOME FUNDS
Fidelity Advisor Growth & Income Fund
Fidelity Advisor Equity Income Fund
Fidelity Advisor Balanced Fund
TAXABLE INCOME FUNDS
Fidelity Advisor Emerging Markets Income Fund
Fidelity Advisor High Yield Fund
Fidelity Advisor Strategic Income Fund
Fidelity Advisor Mortgage
Securities Fund
Fidelity Advisor Government Investment Fund
Fidelity Advisor Intermediate Bond Fund
Fidelity Advisor Short Fixed-Income Fund
MUNICIPAL FUNDS
Fidelity Advisor High Income
Municipal Fund
Fidelity Advisor Municipal Bond Fund
Fidelity Advisor Intermediate Municipal Income Fund
Fidelity Advisor Short-Intermediate Municipal Income Fund
STATE MUNICIPAL FUNDS
Fidelity Advisor California Municipal Income Fund
Fidelity Advisor New York Municipal Income Fund
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(registered trademark)
MORTGAGE SECURITIES
FUND - INSTITUTIONAL CLASS
ANNUAL REPORT
JULY 31, 1997
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 23 Notes to financial statements.
REPORT OF INDEPENDENT 31 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 32
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,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY ADVISOR FUND, INCLUDING CHARGES AND
EXPENSES,
CONTACT YOUR INVESTMENT PROFESSIONAL FOR A FREE PROSPECTUS. READ IT
CAREFULLY BEFORE YOU
INVEST OR SEND MONEY.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Through the first seven months of 1997, stock and bond markets experienced
the kind of short-term volatility that can affect them periodically. The
stock market rebounded strongly from its early spring correction to
continue on its record-setting pace, as seen by the roughly 30%
year-to-date gain by the Standard & Poor's 500 Index. The bond market
posted moderate returns over the past seven months, as positive news on the
inflation front helped soften the effects of a hike in short-term interest
rates by the Federal Reserve Board in late March.
While it's impossible to predict the future direction of the markets with
any degree of certainty, there are certain basic principles that can help
investors plan for their future needs.
The longer your investment time frame, the less likely it is that you will
be affected by short-term market volatility. A 10-year investment horizon
appropriate for saving for a college education, for example, enables you to
weather market cycles in a long-term fund, which may have a higher risk
potential, but also has a higher potential rate of return.
An intermediate-length fund could make sense if your investment horizon is
two to four years, while a short-term bond fund could be the right choice
if you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund. These funds seek
income and a stable share price by investing in high-quality, short-term
investments. Of course, it's important to remember that there is no
assurance that a money market fund will achieve its goal of maintaining a
stable net asset value of $1.00 per share, and that these types of funds
are neither insured nor guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it makes
good sense to follow a regular investment plan, investing a certain amount
of money in a fund at the same time each month or quarter and periodically
reviewing your overall portfolio. By doing so, you won't get caught up in
the excitement of a rapidly rising market, nor will you buy all your shares
at market highs. While this strategy - known as dollar cost averaging -
won't assure a profit or protect you from a loss in a declining market, it
should help you lower the average cost of your purchases.
Remember to contact your investment professional if you need help with your
investments.
Best regards,
Edward C. Johnson 3d
ADVISOR MORTGAGE SECURITIES FUND - INSTITUTIONAL CLASS
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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. Total return reflects
the change in the value of an investment, assuming reinvestment of the
class' dividend income and capital gains (the profits earned upon the sale
of securities that have grown in value). You can also look at the class'
income, as reflected in its yield, to measure performance. The initial
offering of Institutional Class shares took place on March 3, 1997. Returns
prior to March 3, 1997 are those of Initial Class, the original class of
the fund. If Fidelity had not reimbursed certain class expenses, the total
returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - 10.22% 44.56% 132.27%
Institutional Class
Salomon Brothers Mortgage Index 10.60% 41.23% 143.95%
U.S. Mortgage Funds Average 10.05% 33.27% 114.95%
CUMULATIVE TOTAL RETURNS show Institutional Class' performance in
percentage terms over a set period - in this case, one year, five years or
10 years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be $1,050.
You can compare Institutional Class' returns to the performance of the
Salomon Brothers Mortgage Index - a market capitalization weighted index of
15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), and
FNMA and FHLMC balloon mortgages with fixed-rate coupons. To measure how
Institutional Class' performance stacked up against its peers, you can
compare it to the U.S. mortgage funds average, which reflects the
performance of mutual funds with similar objectives tracked by Lipper
Analytical Services, Inc. The past one year average represents a peer group
of 59 mutual funds. These benchmarks reflect reinvestment of dividends and
capital gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Advisor Mortgage Securities Fund - 10.22% 7.65% 8.79%
Institutional Class
Salomon Brothers Mortgage Index 10.60% 7.15% 9.33%
U.S. Mortgage Funds Average 10.05% 5.90% 7.93%
AVERAGE ANNUAL TOTAL RETURNS take Institutional Class' cumulative return
and show you what would have happened if Institutional Class had performed
at a constant rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19970731 19970814 163138 S00000000000001
FA Mortgage Sec -CL I SB Mortgage
00240 SB005
1987/07/31 10000.00 10000.00
1987/08/31 9967.99 9954.81
1987/09/30 9716.36 9725.84
1987/10/31 10004.28 10044.81
1987/11/30 10099.69 10186.41
1987/12/31 10227.48 10305.04
1988/01/31 10571.43 10704.98
1988/02/29 10685.42 10833.40
1988/03/31 10622.10 10753.18
1988/04/30 10556.36 10686.15
1988/05/31 10512.46 10662.80
1988/06/30 10722.84 10930.93
1988/07/31 10697.37 10897.42
1988/08/31 10710.95 10920.39
1988/09/30 10926.37 11180.24
1988/10/31 11131.14 11434.81
1988/11/30 10983.96 11270.62
1988/12/31 10914.47 11212.25
1989/01/31 11112.51 11423.14
1989/02/28 11053.67 11336.52
1989/03/31 11075.51 11339.53
1989/04/30 11279.96 11539.50
1989/05/31 11546.92 11918.36
1989/06/30 11826.37 12221.51
1989/07/31 12038.13 12511.49
1989/08/31 11910.98 12326.96
1989/09/30 11962.98 12412.82
1989/10/31 12200.25 12702.79
1989/11/30 12317.82 12840.25
1989/12/31 12402.72 12911.80
1990/01/31 12288.46 12818.41
1990/02/28 12370.32 12870.38
1990/03/31 12380.04 12922.72
1990/04/30 12272.95 12802.59
1990/05/31 12629.75 13191.99
1990/06/30 12812.84 13410.03
1990/07/31 12999.05 13637.87
1990/08/31 12964.67 13525.65
1990/09/30 13033.88 13635.23
1990/10/31 13167.40 13778.34
1990/11/30 13455.52 14085.64
1990/12/31 13687.62 14317.99
1991/01/31 13829.66 14527.00
1991/02/28 13918.20 14619.27
1991/03/31 14011.81 14725.84
1991/04/30 14163.49 14879.49
1991/05/31 14237.12 15008.29
1991/06/30 14272.73 15024.48
1991/07/31 14477.73 15278.30
1991/08/31 14754.40 15558.48
1991/09/30 14984.74 15857.50
1991/10/31 15161.86 16102.66
1991/11/30 15254.55 16213.00
1991/12/31 15550.89 16558.71
1992/01/31 15476.08 16390.37
1992/02/29 15630.07 16544.40
1992/03/31 15522.06 16471.34
1992/04/30 15667.58 16621.98
1992/05/31 15926.18 16930.41
1992/06/30 16094.92 17137.15
1992/07/31 16067.30 17273.86
1992/08/31 16171.23 17506.59
1992/09/30 16272.75 17642.16
1992/10/31 16110.93 17493.79
1992/11/30 16188.80 17566.09
1992/12/31 16398.88 17780.00
1993/01/31 16548.50 18024.78
1993/02/28 16690.23 18191.23
1993/03/31 16799.22 18300.07
1993/04/30 16916.50 18423.59
1993/05/31 16966.59 18507.95
1993/06/30 17173.57 18687.96
1993/07/31 17267.97 18765.53
1993/08/31 17300.12 18842.74
1993/09/30 17337.91 18858.93
1993/10/31 17368.75 18922.20
1993/11/30 17332.45 18888.68
1993/12/31 17499.73 19030.65
1994/01/31 17660.89 19221.96
1994/02/28 17567.76 19101.83
1994/03/31 17368.67 18630.71
1994/04/30 17292.58 18513.22
1994/05/31 17439.79 18575.73
1994/06/30 17529.05 18529.79
1994/07/31 17809.27 18891.32
1994/08/31 17889.06 18930.10
1994/09/30 17695.16 18676.66
1994/10/31 17731.09 18671.76
1994/11/30 17713.40 18604.73
1994/12/31 17839.51 18758.76
1995/01/31 18176.79 19178.65
1995/02/28 18583.72 19667.47
1995/03/31 18662.58 19747.68
1995/04/30 18956.81 20012.43
1995/05/31 19553.27 20660.92
1995/06/30 19702.44 20770.51
1995/07/31 19747.19 20811.93
1995/08/31 19990.85 21002.86
1995/09/30 20197.51 21190.78
1995/10/31 20422.18 21385.86
1995/11/30 20648.30 21636.66
1995/12/31 20875.78 21904.42
1996/01/31 21046.69 22072.38
1996/02/29 20912.59 21897.27
1996/03/31 20836.72 21823.08
1996/04/30 20793.28 21722.15
1996/05/31 20712.78 21693.91
1996/06/30 20998.62 21970.70
1996/07/31 21073.61 22058.07
1996/08/31 21068.96 22061.84
1996/09/30 21402.40 22432.78
1996/10/31 21798.41 22868.49
1996/11/30 22135.19 23183.32
1996/12/31 22010.37 23080.89
1997/01/31 22148.12 23276.72
1997/02/28 22220.32 23301.95
1997/03/31 22007.12 23109.14
1997/04/30 22351.75 23460.50
1997/05/31 22571.61 23679.30
1997/06/30 22835.51 23951.95
1997/07/31 23226.99 24395.19
IMATRL PRASUN SHR__CHT 19970731 19970814 163141 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Advisor Mortgage Securities Fund - Institutional Class on July
31, 1987. As the chart shows, by July 31, 1997, the value of the investment
would have grown to $23,227 - a 132.27% increase on the initial investment.
For comparison, look at how the Salomon Brothers Mortgage Index did over
the same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $24,395 - a 143.95% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally 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,
1997 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend return 6.74% 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return 3.48% -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 10.22% 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends paid
by the class. A capital appreciation return reflects both the amount paid
by the class to shareholders as capital gain distributions and changes in
the class' share price. Both returns assume the dividends or capital gains
paid by the class are reinvested, if any.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1997 PAST 1 LIFE OF
MONTH CLASS
Dividends per share 5.70(cents) 27.91(cents)
Annualized dividend rate 6.11% 6.22%
30-day annualized yield n/a -
DIVIDENDS per share show the income paid by the class for a set period. If
you annualize this number, based on an average share price of $10.99 over
the past one month, and $10.84 over the life of the class, you can compare
the class' income over these two 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. Yield
information will be reported once Institutional Class has a longer, more
stable operating history.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
A favorable inflation backdrop
steadied fears of higher interest
rates, buoying the U.S. taxable
bond market for the 12 months that
ended July 31, 1997. The Lehman
Brothers Aggregate Bond Index -
a broad measure of the U.S.
taxable bond market - returned
10.76% over the period. For the
first eight months of the period,
bonds suffered from increasing
expectations of economic growth
and inflation. In his February
testimony before Congress,
Federal Reserve Board Chairman
Alan Greenspan indicated that the
Fed was inclined to raise the rate
banks charge each other for
overnight loans - known as the
fed funds target rate - to head off
inflation that might be caused by a
tight labor market. On March 25,
the Fed followed through by
raising the target rate by 0.25% to
5.50%. However, this move largely
had been priced into the market.
Weakening economic and inflation
signals - combined with the Fed's
shift to a more favorable stance
indicating no intention to raise
rates in the short term - helped
spark a rally in all debt markets
from April through the end of the
period. Relative interest-rate
stability provided a positive setting
for mortgage-backed securities.
For the 12 months that ended July
31, 1997, the Salomon Brothers
Mortgage Index returned 10.60%.
Sustained economic growth and
demand from yield-hungry
investors helped corporate bonds,
with the Lehman Brothers
Corporate Bond Index returning
12.55% over the same period.
NOTE TO SHAREHOLDERS: The following is an interview with Thomas Silvia, who
co-manages Fidelity Advisor Mortgage Securities Fund with Kevin Grant. On
October 1, 1997, Silvia will become the sole Portfolio Manager of the fund.
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended July 31, 1997, the fund's Institutional
Class shares returned 10.22%. During the same period, the U.S. mortgage
funds average, according to Lipper Analytical Services, returned 10.05% and
the Salomon Brothers Mortgage Index returned 10.60%.
Q. WHAT HELPED THE FUND'S
PERFORMANCE DURING THE PERIOD?
A. We continued to get good performance from our small position in
commercial mortgage-backed securities - bonds issued and backed by office
buildings, shopping malls and multi-housing structures. These investments
produced stronger returns than were generated by the overall mortgage
market. In addition, the fund was overweighted relative to the index in
30-year Fannie Mae (Federal National Mortgage Association) discount bonds,
which are priced below par, and current-coupon bonds, which are mortgage
securities that pay a similar coupon - or periodic interest payment - as
those being created at the current market rate. These securities
outperformed comparable 30-year Ginnie Mae (Government National Mortgage
Association) bonds and 15-year mortgage-backed securities during the
period.
Q. WHAT FACTORS IN THE MORTGAGE MARKET AFFECTED THE FUND'S PERFORMANCE?
A. The mortgage market benefited greatly from a period of relatively stable
interest rates. For example, the yield on a 10-year Treasury has lingered
in a range of 6% to 7% for about 18 months - a small fluctuation compared
to the range we've seen over the past 10 years. A calm interest-rate
environment reduces the largest source of risk for mortgage securities -
prepayments. For instance, when interest rates decline, mortgage holders
are likely to refinance their debt at a lower rate. This hurts mortgage
investors because they are forced to reinvest at a lower interest rate. On
the other hand, when interest rates are steady, the risk of prepayments
declines. This has been the case for the past 12 months and, as a result,
the mortgage sector was one of the best-performing categories of the bond
market.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. We retained a small position in commercial mortgage-backed securities,
which was more of a selective investment in a few particular bonds than an
overall sector allocation. The fund also maintained a slightly
underweighted position relative to the index in balloon mortgages. Overall,
the strong performance of the mortgage market during the period reduced the
number of attractive investment opportunities. The reward for taking on
risk was low, so it was a time to hold more liquid securities and keep the
fund's portfolio relatively close to the allocations in the fund's
benchmark index - the Salomon Brothers Mortgage Index.
Q. DID THE FUND'S RELATIVELY SMALL POSITION IN BALLOON MORTGAGES HELP THE
FUND?
A. Balloons are mortgages that are constructed with a typical 30-year
amortization schedule, but differ from the standard mortgage in that the
homeowner agrees to pay the outstanding balance on a specified - or balloon
- - date, usually within five or seven years of issuance. The stable
interest-rate environment benefited the 30-year sector the most, the
15-year sector the second most, and the balloon sector the least.
Consequently, the fund benefited from not having a significant position in
balloons during the period.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. I think the reduced number of attractive investment alternatives in the
mortgage market was the biggest disappointment. The fund has typically done
its best when the market goes through a dramatic change. That's because our
value-driven, bottom-up security selection process allows us to capitalize
on larger and more frequent misvaluations in the mortgage market. When
everything is trading in so tight a range, there aren't many changes in
values or prepayment options to affect the cash flows of bonds. Therefore,
in a relatively stable environment, we are not able to take advantage of
our research and trading skills to the same degree.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. At the end of the period, we hit a 6% yield on the 10-year Treasury,
which leaves the mortgage market on a cliff. If yields drop below 6%, it
will be an attractive environment for homeowners to refinance and prepay
their mortgages. This likely would cause the mortgage sector to
underperform other types of bonds. On the other hand, if interest rates
remain stable, the mortgage market should continue to perform well.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: high current income
by investing in mortgage
securities of all kinds
START DATE: December 31,
1984
SIZE: as of July 31, 1997,
more than $533 million
MANAGER: Thomas Silvia,
co-managed since February
1997; joined Fidelity in 1993
(checkmark)
THOMAS SILVIA ON HIS
INVESTMENT STRATEGY:
"The fund's overall market risk
will be targeted to its
benchmark, the Salomon
Brothers Mortgage Index. I
look to add incremental return
by the use of a value-driven,
bottom-up approach to finding
individual mortgage-backed
securities that offer higher
expected returns or
potentially better price
performance than securities
in the benchmark. This
approach takes advantage of
the skills offered by our
quantitative research group,
as well as our trading desk. In
addition, I will continue to look
for opportunities outside of
the fund's benchmark, such
as commercial
mortgage-backed securities."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
Less than 5% 0.1 0.1
5 - 5.99% 4.7 6.2
6 - 6.99% 25.7 29.3
7 - 7.99% 27.0 30.7
8 - 8.99% 20.2 12.2
9 - 9.99% 6.6 4.0
10 - 10.99% 3.5 4.4
11% and over 2.3 3.0
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, 1997
6 MONTHS AGO
Years 5.8 6.3
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1997
6 MONTHS AGO
Years 3.2 4.0
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION (% OF FUND'S INVESTMENTS)
AS OF JULY 31, 1997 AS OF JANUARY 31, 1997
Row: 1, Col: 1, Value: 9.800000000000001
Row: 1, Col: 2, Value: 2.9
Row: 1, Col: 3, Value: 87.3
Mortgage-backed
securities 87.6%
CMOs and
other mortgage
related securities 2.3%
Short-term
investments 10.1%
Mortgage-backed
securities 87.3%
CMOs and
other mortgage
related securities 2.8%
Short-term
investments 9.9%
Row: 1, Col: 1, Value: 10.1
Row: 1, Col: 2, Value: 2.3
Row: 1, Col: 3, Value: 87.59999999999999
INVESTMENTS JULY 31, 1997
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 87.3%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 15.7%
5%, 7/1/10 $ 4,019,563 $ 3,795,975
6 1/2%, 1/1/24 to 7/1/24 4,480,017 4,411,427
7%, 5/1/99 to 8/1/12 16,562,905 16,757,226
7 1/2%, 10/1/11 to 7/1/12 35,640,019 36,482,404
7 1/2%, 8/1/27 (e) 3,500,000 3,561,250
8%, 10/1/07 to 12/1/18 767,774 794,814
8 1/2%, 11/1/03 to 1/1/20 2,437,117 2,554,427
9%, 9/1/08 to 5/1/21 11,954,777 12,802,489
10%, 1/1/09 to 5/1/19 2,502,185 2,726,412
10 1/2%, 8/1/10 to 12/1/20 2,723,982 3,011,806
11 1/2%, 4/1/12 111,151 124,061
11 3/4%, 6/1/11 69,701 78,657
12 1/4%, 6/1/14 to 7/1/15 314,042 360,277
12 1/2%, 5/1/12 to 4/1/15 1,236,677 1,428,593
12 3/4%, 6/1/05 to 3/1/15 204,003 229,242
13%, 1/1/11 to 6/1/15 1,855,544 2,187,117
91,306,177
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 40.1%
5 1/2%, 11/1/08 to 5/1/26 24,273,187 23,420,456
6%, 4/1/00 to 5/1/26 87,078,670 84,355,052
6 1/2%, 9/1/10 to 4/1/26 56,791,751 55,821,852
7%, 2/1/24 to 5/1/27 31,698,840 31,684,095
7 1/2%, 3/1/22 to 12/1/22 3,449,394 3,527,311
8%, 1/1/07 to 8/1/27 (e) 15,806,073 16,257,924
8 1/4%, 1/1/13 132,558 137,062
8 1/2%, 11/1/03 to 11/1/18 2,059,489 2,137,174
8 3/4%, 11/1/08 to 7/1/09 296,023 307,877
9%, 1/1/08 to 2/1/13 1,034,999 1,084,078
9 1/2%, 5/1/07 to 8/1/22 8,581,420 9,131,717
11%, 12/1/02 to 8/1/10 2,741,172 3,009,758
12 1/4%, 5/1/13 to 6/1/15 542,105 616,601
12 1/2%, 10/1/13 to 3/1/16 724,646 839,914
12 3/4%, 6/1/13 to 7/1/15 379,431 436,032
13 1/2%, 9/1/13 to 12/1/14 192,548 229,229
14%, 5/1/12 to 11/1/14 64,062 76,803
233,072,935
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 31.5%
7%, 10/15/22 to 11/15/23 $ 3,665,261 $ 3,683,818
7 1/2%, 7/15/05 to 2/15/27 57,751,910 58,851,736
8%, 4/15/02 to 7/15/27 31,473,025 32,528,616
8 1/2%, 7/15/16 to 8/15/27 54,893,289 57,361,674
9%, 10/15/04 to 4/15/18 6,255,677 6,703,581
9 1/2%, 6/15/09 to 7/15/22 5,351,496 5,776,000
10%, 12/15/17 to 1/15/26 11,883,595 13,152,300
10 1/2%, 11/15/97 to 2/15/18 1,488,065 1,634,033
11%, 1/15/10 to 8/15/17 3,092,191 3,529,873
11 1/2%, 10/15/10 to 7/15/18 98,587 112,208
13%, 10/15/13 104,463 123,952
13 1/2%, 7/15/11 to 10/15/14 97,226 116,364
183,574,155
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $498,582,159) 507,953,267
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation
sequential pay Series 1353 Class A,
5 1/2%, 11/15/04 (Cost $122,226) 131,183 130,404
COMMERCIAL MORTGAGE SECURITIES - 2.7%
Merrill Lynch Mortgage Investors, Inc. Series 1994-M1
Class A, 8.1239%, 6/25/22 (d) 5,285,305 5,334,029
Structured Asset Securities Corp. commercial Series 1992-M1
Class C, 7.05%, 11/25/02 3,192,522 2,906,006
SASCO 1997-N1 LLC Series 1997-N1 Class C,
6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. commercial Series 1994-C1
Class C, 9.20%, 9/18/99 (a) 3,280,000 2,693,700
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $14,720,222) 15,933,735
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81% 9/18/99 (c) (Cost $749,264) $ 51,554,000 $ 612,204
CASH EQUIVALENTS - 9.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.77%, dated
7/31/97 due 8/1/97 $ 57,639,237 57,630,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $571,803,871) $ 582,259,610
LEGEND
1. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
SML, Inc.
commercial Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $2,132,820
2. 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 $5,000,000 or 0.9% of net
assets.
3. Security represents right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Security purchased on delayed delivery basis (See Note 2 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At July 31, 1997, the aggregate cost of investment securities for income
tax purposes was $571,956,866. Net unrealized appreciation aggregated
$10,302,744, of which $11,091,982 related to appreciated investment
securities and $789,238 related to depreciated investment securities.
The fund hereby designates approximately $544,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1997
ASSETS
Investment in securities, at value (including repurchase $ 582,259,610
agreements of $57,630,000) (cost $571,803,871) -
See accompanying schedule
Cash 115
Receivable for investments sold 251,870
Interest receivable 3,066,107
Prepaid expenses 44,595
TOTAL ASSETS 585,622,297
LIABILITIES
Payable for investments purchased $ 30,194,142
Regular Delivery
Delayed Delivery 19,626,894
Payable for fund shares redeemed 1,026,148
Distributions payable 515,582
Accrued management fee 187,169
Distribution fees payable 3,034
Other payables and accrued expenses 177,203
TOTAL LIABILITIES 51,730,172
NET ASSETS $ 533,892,125
Net Assets consist of:
Paid in capital $ 519,208,290
Undistributed net investment income 230,506
Accumulated undistributed net realized gain (loss) 3,997,590
on investments
Net unrealized appreciation (depreciation) on 10,455,739
investments
NET ASSETS $ 533,892,125
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
JULY 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.05
CLASS A:
NET ASSET VALUE and redemption price per share
($1,585,920 (divided by) 143,564 shares)
Maximum offering price per share (100/95.75 of $11.05) $11.54
CLASS T: $11.05
NET ASSET VALUE and redemption price per share
($12,192,905 (divided by) 1,103,680 shares)
Maximum offering price per share (100/96.50 of $11.05) $11.45
CLASS B: $11.04
NET ASSET VALUE and offering price per share
($823,411 (divided by) 74,578 shares) A
INITIAL CLASS: $11.05
NET ASSET VALUE, offering price and redemption price
per share ($506,112,493 (divided by) 45,796,695 shares)
INSTITUTIONAL CLASS: $11.04
NET ASSET VALUE, offering price and redemption price
per share ($13,177,396 (divided by) 1,193,472 shares)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1997
INVESTMENT INCOME $ 35,932,141
Interest
EXPENSES
Management fee $ 2,273,788
Transfer agent fees 1,034,760
Distribution fees 4,506
Accounting fees and expenses 208,321
Non-interested trustees' compensation 9,585
Custodian fees and expenses 79,667
Registration fees 75,411
Audit 83,730
Legal 17,684
Miscellaneous 4,396
Total expenses before reductions 3,791,848
Expense reductions (52,945) 3,738,903
NET INVESTMENT INCOME 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 4,296,274
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on 14,164,021
investment securities
NET GAIN (LOSS) 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 50,653,533
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 1996
INCREASE (DECREASE) IN NET ASSETS
Operations $ 32,193,238 $ 31,763,051
Net investment income
Net realized gain (loss) 4,296,274 8,694,701
Change in net unrealized appreciation (depreciation) 14,164,021 (11,251,245)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 50,653,533 29,206,507
FROM OPERATIONS
Distributions to shareholders (32,649,725) (31,178,449)
From net investment income
From net realized gain (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (37,689,258) (35,234,409)
Share transactions - net increase (decrease) 32,765,543 77,949,164
TOTAL INCREASE (DECREASE) IN NET ASSETS 45,729,818 71,921,262
NET ASSETS
Beginning of period 488,162,307 416,241,045
End of period (including undistributed net investment $ 533,892,125 $ 488,162,307
income of $230,506 and $922,675, respectively)
</TABLE>
FINANCIAL HIGHLIGHTS - CLASS A
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .268 F
Net realized and unrealized gain (loss) .224
Total from investment operations .492
Less Distributions
From net investment income (.272)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.61%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,586
Ratio of expenses to average net assets .90% A,
D
Ratio of net investment income to average net assets 6.09% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .255 F
Net realized and unrealized gain (loss) .233
Total from investment operations .488
Less Distributions
From net investment income (.268)
Net asset value, end of period $ 11.050
TOTAL RETURN B, C 4.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 12,193
Ratio of expenses to average net assets 1.00% A,
D
Ratio of net investment income to average net assets 5.99% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF
LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .234 F
Net realized and unrealized gain (loss) .214
Total from investment operations .448
Less Distributions
From net investment income (.238)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.20%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 823
Ratio of expenses to average net assets 1.65% A,
D
Ratio of net investment income to average net assets 5.34% A
Portfolio turnover rate 149%
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B SHARES) TO
JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1997 1996 1995 1994 C 1993
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
of period
Income from Investment
Operations
Net investment income .678 D .729 .772 .570 .788
Net realized and .391 (.015) .325 (.242) (.007)
unrealized gain (loss)
Total from investment 1.069 .714 1.097 .328 .781
operations
Less Distributions
From net investment income (.689) (.724) (.737) (.588) (.701)
From net realized gain (.110) (.100) - (.040) -
In excess of net realized - - (.050) (.030) -
gain
Total distributions (.799) (.824) (.787) (.658) (.701)
Net asset value, end of period $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
TOTAL RETURN B 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 omitted)
Ratio of expenses to average .73% .74% .77% .79% .76%
net assets
Ratio of expenses to average .73% .73% .77% .79% .76%
net assets after expense A
reductions
Ratio of net investment income 6.26% 6.75% 7.37% 6.73% 7.18%
to average net assets
Portfolio turnover rate 149% 221% 329% 563% 278%
</TABLE>
A FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
C 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, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
YEAR ENDED
JULY 31,
1997 E
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.830
Income from Investment Operations
Net investment income .263 F
Net realized and unrealized gain (loss) .226
Total from investment operations .489
Less Distributions
From net interest income (.279)
Net asset value, end of period $ 11.040
TOTAL RETURN B, C 4.59%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 13,177
Ratio of expenses to average net assets .75% A,
D
Ratio of expenses to average net assets after expense reductions .70% A,
G
Ratio of net investment income to average net assets 6.29% A
Portfolio turnover rate 149%
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL CLASS
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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. On March 14, 1996, the Board
of Trustees approved the transfer of the fund to the Fidelity Advisor
product line. The Board of Trustees also approved the creation of Class A,
Class T, Class B and Institutional Class shares. Offering of new classes
commenced on March 3, 1997. Prior to March 3, 1997, the fund offered one
class of shares, Fidelity Mortgage Securities Fund ("Initial Class")
(formerly Fidelity Mortgage Securities Fund).
The financial statements have been prepared in conformity with generally
accepted accounting principles which permit management to make certain
estimates and assumptions at the date of the financial statements. 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. Securities (including
restricted 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. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
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 substantially 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.
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears all
organizational expenses except for registering and qualifying Class A,
Class T, Class B, and Institutional Class and shares of those classes for
distribution under federal and state securities law. These expenses are
borne by those classes and amortized over one year.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 dividends and capital
gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities and losses deferred due to wash sales.
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.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments 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.
2. OPERATING POLICIES.
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 for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a delayed delivery 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 market values of
the securities purchased or sold on a delayed delivery basis are identified
as such in the fund's schedule of investments. The fund may receive
compensation for
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS - CONTINUED
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, the fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $2,693,700 or
0.5% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $790,852,390 and $747,620,591, respectively, of which U.S.
government and government agency obligations aggregated $780,486,825 and
$743,935,902 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 .1100% to .3700% for the period. The annual individual
fund fee rate is .30%. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented
the above rates, as they resulted in the same or a lower management fee.
For the period, the management fee was equivalent to an annual rate of .44%
of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the 1940
Act, the Trustees have adopted separate distribution plans with respect to
each class of shares (collectively referred to as "the Plans"). Under
certain of the Plans, the class pays Fidelity Distributors Corporation
(FDC), an affiliate of FMR, a distribution and service fee. This fee is
based on the following annual rates of the average net assets of each
applicable class:
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
CLASS A .15%
CLASS T .25%
CLASS B .90% *
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the period, each class paid FDC the following amounts, a portion of
which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares, and
providing shareholder support services:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 1,374
$ 4,506 $ 4,506
Under the Plans, FMR or FDC may use its resources to pay administrative and
promotional expenses related to the sale of each class' shares. The Plans
also authorize payments to third parties that assist in the sale of each
class' shares or render shareholder support services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.25% and 3.50%
for selling Class A and Class T shares of the fund, respectively, and the
proceeds of a contingent deferred sales charge levied on Class B share
redemptions occurring within six years of purchase. The Class B charge is
based on declining rates which range from 5% to 1% of the lesser of the
cost of shares at the initial date of purchase or the net asset value of
the redeemed shares, excluding any reinvested dividends and capital gains.
Effective August 1, 1997, Class A's maximum sales charge was increased to
4.75%.
For the period, FDC received the following sales charge amounts related to
each class, a portion of which is paid to securities, dealers, banks, and
other financial institutions:
PAID TO DEALERS'
FDC PORTION
CLASS A $ 7,090 $ 7,023
CLASS T 9,662 7,492
CLASS B 0 0 *
$ 16,752 $ 14,515
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM ITS OWN
RESOURCES TO DEALERS THROUGH WHICH THE SALES ARE MADE.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
TRANSFER AGENT FEES. Each class of the fund has entered into a separate
transfer, dividend disbursing, and shareholder servicing agent
(collectively referred to as the Transfer Agents) contract with respect to
its shares. The Transfer Agents receive account fees and asset-based fees
that vary according to the account size and type of account of the
shareholders of the respective classes of the fund. FIIOC and FSC pay for
typesetting, printing and mailing of all shareholder reports. For the
period, the following amounts were paid to each transfer agent:
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC * $ 789 .22% **
CLASS T FIIOC * 1,513 .14% **
CLASS B FIIOC * 881 .57% **
INITIAL CLASS FSC * 1,028,957 .20%
INSTITUTIONAL CLASS FIIOC * 2,620 .21% **
$ 1,034,760
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC), AND
FIDELITY SERVICE COMPANY, INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) above the
following annual rates or range of annual rates of average net assets for
each class:
FMR REIMBURSEME
EXPENSE NT
LIMITATIONS
CLASS A .90% $ 10,408
CLASS T 1.00% 10,413
CLASS B 1.65% 10,927
INSTITUTIONAL CLASS .75% 12,094
$ 43,842
5. EXPENSE REDUCTIONS - CONTINUED
In addition, the fund has entered into arrangements with its custodian and
each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses. During
the period, the fund's custodian fees were reduced by $8,474 under the
custodian arrangement, and each applicable class' expenses were reduced as
follows under the transfer agent arrangements:
TRANSFER
AGENT
INTEREST
CREDITS
INSTITUTIONAL CLASS $ 629
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1997 A 1996
CLASS A
From net investment income $ 21,750 $ -
CLASS T
From net investment income $ 64,445 $ -
CLASS B
From net investment income $ 8,241 $ -
INITIAL CLASS
From net investment income $ 32,474,399 $ 31,178,449
From net realized gain 5,039,533 4,055,960
Total $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
From net investment income $ 80,890 $ -
$ 37,689,258 $ 35,234,409
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARES DOLLARS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1997 A 1996 1997 A 1996
CLASS A 141,575 - $ 1,531,983 $ -
Shares sold
Reinvestment of 1,989 - 21,750 -
distributions
Net increase (decrease) 143,564 - $ 1,553,733 $ -
CLASS T 1,114,285 - $ 12,183,453 $ -
Shares sold
Reinvestment of 5,597 - 61,712 -
distributions
Shares redeemed (16,202) - (177,848) -
Net increase (decrease) 1,103,680 - $ 12,067,317 $ -
CLASS B 73,891 - $ 801,025 $ -
Shares sold
Reinvestment of 687 - 7,506 -
distributions
Net increase (decrease) 74,578 - $ 808,531 $ -
INITIAL CLASS 14,636,021 24,584,693 $ 158,564,289 $ 268,954,246
Shares sold
Reinvestment of 2,769,613 2,644,498 29,925,102 28,910,230
distributions
Shares redeemed (16,911,618) (20,139,279) (183,183,589) (219,915,312)
Net increase (decrease) 494,016 7,089,912 $ 5,305,802 $ 77,949,164
INSTITUTIONAL CLASS 1,216,421 - $ 13,282,379 $ -
Shares sold
Reinvestment of 3,516 - 38,560 -
distributions
Shares redeemed (26,465) - (290,779) -
Net increase (decrease) 1,193,472 - $ 13,030,160 $ -
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31, 1997.
8. REGISTRATION FEES.
For the period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 10,398
CLASS T 11,098
CLASS B 10,398
INITIAL CLASS 31,365
INSTITUTIONAL CLASS 12,152
$ 75,411
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Advisor Mortgage Securities Fund (formerly Fidelity Mortgage Securities
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
Fidelity Advisor Mortgage Securities Fund (formerly Fidelity Mortgage
Securities Fund) (a fund of Fidelity Income Fund) at July 31, 1997, the
results of its operations for the year then ended, and 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 Advisor Mortgage
Securities 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 at July 31, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 18, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
(formerly Fidelity Mortgage Securities Fund) voted to pay to shareholders
of record at the opening of business on record date, the following
distributions derived from capital gains realized from sales of portfolio
securities, and dividends derived from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Class A 9/8/97 9/5/97 - $.08
Class T 9/8/97 9/5/97 - $.08
Class B 9/8/97 9/5/97 - $.08
Initial Class 9/8/97 9/5/97 - $.08
Institutional Class 9/8/97 9/5/97 - $.08
A total of 0.01% 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 1998 of the applicable
percentage for use in preparing 1997 income tax returns.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Fred L. Henning, Jr., Vice President
Dwight D. Churchill, Vice President
Kevin Grant, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FOCUS FUNDS
Fidelity Advisor Consumer
Industries Fund
Fidelity Advisor Cyclical
Industries Fund
Fidelity Advisor Financial
Services Fund
Fidelity Advisor Health Care Fund
Fidelity Advisor Natural
Resources Fund
Fidelity Advisor Technology Fund
Fidelity Advisor Utilities Growth Fund
GROWTH FUNDS
Fidelity Advisor Overseas Fund
Fidelity Advisor TechnoQuant(trademark)
Growth Fund
Fidelity Advisor Mid Cap Fund
Fidelity Advisor Equity Growth Fund
Fidelity Advisor Growth
Opportunities Fund
Fidelity Advisor Strategic
Opportunities Fund
Fidelity Advisor Large Cap Fund
GROWTH AND INCOME FUNDS
Fidelity Advisor Growth & Income Fund
Fidelity Advisor Equity Income Fund
Fidelity Advisor Balanced Fund
TAXABLE INCOME FUNDS
Fidelity Advisor Emerging Markets Income Fund
Fidelity Advisor High Yield Fund
Fidelity Advisor Strategic Income Fund
Fidelity Advisor Mortgage
Securities Fund
Fidelity Advisor Government Investment Fund
Fidelity Advisor Intermediate Bond Fund
Fidelity Advisor Short Fixed-Income Fund
MUNICIPAL FUNDS
Fidelity Advisor High Income
Municipal Fund
Fidelity Advisor Municipal Bond Fund
Fidelity Advisor Intermediate Municipal Income Fund
Fidelity Advisor Short-Intermediate Municipal Income Fund
STATE MUNICIPAL FUNDS
Fidelity Advisor California Municipal Income Fund
Fidelity Advisor New York Municipal Income Fund
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
