Edgar Filing: FIRST TRUST/FIDAC MORTGAGE INCOME FUND

INVESTMENT COMPANIES

Investment Company Act file number 811-21727
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First Trust/FIDAC Mortgage Income Fund
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(Exact name of registrant as specified in charter)

120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)

W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)

registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2010
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

[LOGO OMITTED] [LOGO OMITTED]
FIRST TRUST FIDAC
FIXED INCOME DISCOUNT ADVISORY COMPANY

FIRST TRUST/FIDAC
MORTGAGE INCOME FUND

[GRAPHIC OMITTED]

ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2010

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TABLE OF CONTENTS
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FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2010

Shareholder Letter.................................................... 1
At a Glance........................................................... 2
Portfolio Commentary.................................................. 3
Portfolio of Investments.............................................. 6
Statement of Assets and Liabilities................................... 10
Statement of Operations............................................... 11
Statements of Changes in Net Assets................................... 12
Statement of Cash Flows............................................... 13
Financial Highlights.................................................. 14
Notes to Financial Statements......................................... 15
Report of Independent Registered Public Accounting Firm............... 21
Additional Information................................................ 22
Board of Trustees and Officers........................................ 26
Privacy Policy........................................................ 28

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Fixed Income Discount Advisory Company ("FIDAC"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.

Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/FIDAC Mortgage Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.

PERFORMANCE AND RISK DISCLOSURE

There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.

Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.

HOW TO READ THIS REPORT

This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.

By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.

It is important to keep in mind that the opinions expressed by personnel of
FIDAC are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.

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SHAREHOLDER LETTER
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FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2010

Dear Shareholders:

I am pleased to present you with the annual report for your investment in First
Trust/FIDAC Mortgage Income Fund (the "Fund").

First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. While the past two years have been challenging,
successful investors understand that having a long-term investment perspective
through all kinds of markets can help them reach their investing goals. First
Trust is a long-term investor and investment manager, and we will continue to
bring investments we believe fit investors with long-term goals.

The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the twelve months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.

First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success and we remain
committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. In addition to going over your
investment plan, you may want to talk to your advisor about the investments
First Trust offers that might also fit your financial plan.

At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We value our relationship with you, and
we thank you for the opportunity to assist you in achieving your financial
goals.

Sincerely,

/s/ James A. Bowen

James A. Bowen
President of First Trust/FIDAC Mortgage Income Fund

Page 1

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2010 (UNAUDITED)

FUND STATISTICS

Symbol on New York Stock Exchange FMY
Common Share Price $20.70
Common Share Net Asset Value ("NAV") $19.59
Premium (Discount) to NAV 5.67%
Net Assets Applicable to Common Shares $79,494,520
Current Monthly Distribution per Common Share (1) $0.160
Current Annualized Distribution per Common Share $1.920
Current Distribution Rate on Closing Common Share Price (2) 9.28%
Current Distribution Rate on NAV (2) 9.80%

COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)

[PERFORMANCE GRAPH OMITTED]

Common
Share
Price NAV
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10/31/2009 17.91 19.62
11/6/2009 17.52 19.55
11/13/2009 17.51 19.43
11/16/2009 17.47 19.33
11/20/2009 17.35 19.38
11/27/2009 17.67 19.40
12/4/2009 17.57 19.58
12/11/2009 17.92 19.65
12/18/2009 18.11 19.64
12/24/2009 18.31 19.81
12/31/2009 18.24 19.69
1/8/2010 18.25 19.86
1/15/2010 18.50 19.95
1/22/2010 18.50 19.95
1/29/2010 18.62 20.12
2/5/2010 18.44 20.01
2/12/2010 18.40 19.91
2/19/2010 18.54 19.99
2/26/2010 18.50 19.92
3/5/2010 18.34 19.82
3/12/2010 18.18 19.80
3/19/2010 18.15 19.88
3/26/2010 18.42 19.95
4/1/2010 18.24 19.89
4/9/2010 18.35 19.90
4/16/2010 18.33 20.04
4/23/2010 18.44 20.21
4/30/2010 18.57 20.28
5/7/2010 18.11 20.08
5/14/2010 18.36 20.15
5/21/2010 18.27 19.92
5/28/2010 18.24 19.93
6/4/2010 18.05 19.68
6/11/2010 18.23 19.62
6/18/2010 18.27 19.60
6/25/2010 18.18 19.58
7/2/2010 18.37 19.52
7/9/2010 18.25 19.48
7/16/2010 19.21 19.47
7/23/2010 19.21 19.56
7/30/2010 19.72 19.51
8/6/2010 19.44 19.39
8/13/2010 20.55 19.31
8/20/2010 20.12 19.41
8/27/2010 20.01 19.13
9/3/2010 20.19 19.27
9/10/2010 20.86 19.52
9/17/2010 20.80 19.39
9/24/2010 21.72 19.35
10/1/2010 21.57 19.33
10/8/2010 20.00 19.24
10/15/2010 20.39 19.38
10/22/2010 19.87 19.39
10/29/2010 20.70 19.59
10/31/2010 20.70 19.59

PORTFOLIO CHARACTERISTICS

Weighted Average Duration -7.03
Weighted Average Life (Years) 3.30

PERFORMANCE (3)
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Average Annual Total Return
---------------------------------------------
1 Year Ended 5 Years Ended Inception (5/25/2005)
10/31/2010 10/31/2010 to 10/31/2010

FUND PERFORMANCE
NAV 9.01% 8.20% 7.79%
Market Value 26.18% 12.69% 7.97%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index 6.12% 6.82% 6.22%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Non-Agency Collateralized Mortgage Obligations 46.0%
U.S. Government Agency Mortgage-Backed Securities 29.9
U.S. Government Agency Collateralized
Mortgage Obligations 24.1
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Fixed Rate Securities 53.6%
Adjustable Rate Securities 33.0
Interest Only Securities 13.4
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 64.5%
AA+ 1.2
AA 6.1
AA- 4.7
A 0.3
A- 0.4
BBB+ 0.5
BBB- 1.9
BB 4.9
BB- 3.4
B+ 1.9
B- 0.4
CCC 8.6
CC 1.2
---------------------------------
Total 100.0%
======

(1) Most recent distribution paid or declared through 10/31/2010. Subject to
change in the future.

(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2010. Subject to
change in the future.

(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.

(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs). For situations in which a security is rated by more than one
NRSRO and ratings are not equivalent, the ratings are averaged.

Page 2

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PORTFOLIO COMMENTARY
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SUB-ADVISOR

Fixed Income Discount Advisory Company ("FIDAC") is the Sub-Advisor to First
Trust/FIDAC Mortgage Income Fund (the "Fund"). FIDAC is the wholly-owned
registered investment advisor of Annaly Capital Management Inc. ("Annaly"), a
publicly-traded real estate investment trust that trades under the New York
Stock Exchange ("NYSE") symbol of NLY. The Fund trades under the ticker symbol
FMY on the NYSE. Formed in 1994, FIDAC has become one of the leading
fixed-income management companies in the world specializing in mortgage-backed
securities and interest rate sensitive strategies. As of September 30, 2010,
FIDAC and Annaly had approximately $99.3 billion in gross assets under
management.

FIDAC manages multiple investment vehicles that are marketed globally through
distributor relationships. Overall, FIDAC's principal business objective is to
generate net income for distribution to investors from the spread between
interest income on mortgage-backed securities and the costs of borrowing to
finance their acquisition. FIDAC's team of investment professionals has built a
successful long-term track record through some of the most challenging
fixed-income markets in memory.

PORTFOLIO MANAGEMENT TEAM

WELLINGTON J. DENAHAN-NORRIS
VICE CHAIRMAN, CHIEF INVESTMENT OFFICER AND CHIEF OPERATING OFFICER

Ms. Denahan-Norris is the Vice-Chairman of Annaly, Chief Investment Officer and
Chief Operating Officer of Annaly. Ms. Denahan-Norris has been with FIDAC since
its inception and was one of the original founders of Annaly. She is also
responsible for the development of in-house portfolio systems. Prior to joining
Annaly and FIDAC, Ms. Denahan-Norris was Vice President at Citadel Funding
Corporation and a trader in the mortgage-backed securities desk at Wertheim
Schroder and Co., Inc. She has a Bachelor's Degree in Business from Florida
State University and attended the New York Institute of Finance for intense
mortgage-backed securities studies.

JAMES P. FORTESCUE
MANAGING DIRECTOR, HEAD OF LIABILITIES

Mr. Fortescue started with FIDAC in June of 1995 where he was in charge of
finding financing on mortgage-backed and corporate bonds for regional dealers,
as well as maintaining a pricing service for a major broker-dealer. Mr.
Fortescue has been in charge of liability management for Annaly since its
inception, and continues to oversee all financing activities for FIDAC. Mr.
Fortescue has a Bachelor's Degree in Finance from Siena College.

ROSE-MARIE LYGHT
MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER

Mrs. Lyght is a Managing Director and Chief Operating Officer of FIDAC. She
joined FIDAC and Annaly in April 1999. Since that time she has been involved in
the asset selection and financing for FIDAC funds and high net worth separate
accounts. She has been a portfolio manager on FIDAC's offshore funds since
December 2000. Mrs. Lyght has a Bachelor of Science in Finance and a Master's
Degree in Business Administration from Villanova University.

ERIC SZABO, CFA, PRM
MANAGING DIRECTOR, CHIEF RISK OFFICER

Mr. Szabo is a Managing Director and the Chief Risk Officer for Annaly and
FIDAC. Prior to joining the companies in April 2004, he worked for TimesSquare
Capital Management as a Mortgage Analyst and Trader. Mr. Szabo has a Bachelor's
degree from The College of New Jersey and a Master's Degree in Finance from
Boston College. Mr. Szabo is a certified Professional Risk Manager as designated
by the Professional Risk Managers' International Association, and a CFA
charterholder.

MOHIT MARRIA
SENIOR VICE PRESIDENT

Mr. Marria is a Senior Vice President and Portfolio Manager for Annaly and
FIDAC. Prior to joining the companies in August 2005, Mr. Marria worked at both
AIG and MetLife trading mortgage-backed securities for their general account
portfolios. Mr. Marria has a Bachelor's Degree and a Master's in Business
Administration from Rutgers University.

NANCY MURTHA
SENIOR VICE PRESIDENT

Mrs. Murtha is a Senior Vice President and Portfolio Manager for Annaly and
FIDAC. She joined both companies in October of 2002. From 2000 to 2002, she was
a Senior Accountant at Deloitte & Touche where she worked within the Banking and
Securities Group. Mrs. Murtha has a Bachelor's Degree in Accounting and
Management Information Systems from Manhattan College.

Page 3

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PORTFOLIO COMMENTARY - (Continued)
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COMMENTARY

FIRST TRUST/FIDAC MORTGAGE INCOME FUND

The Fund's primary investment objective is to seek a high level of current
income with a secondary objective of capital preservation. The Fund pursues its
objectives by investing primarily in mortgage-backed securities representing
part ownership in a pool of either residential or commercial mortgage loans
that, in the opinion of the FIDAC, offer an attractive combination of credit
quality, yield and maturity. The Fund purchases securities issued by government
agencies or by private originators or issuers, generally in the form of
pass-through certificates, collateralized mortgage obligations, residential
mortgage-backed securities or commercial mortgage-backed securities. The Fund
may use leverage to an aggregate amount of up to 33-1/3% of the Fund's Managed
Assets,1 primarily through the use of reverse repurchase agreements.

MARKET RECAP

Economic data over the previous 6 to 12 months has generally shown a
deceleration in the recovery that began in mid-2009. Inflation rates are low and
have continued to trend down, with the headline Consumer Price Index ("CPI")
decelerating to 1.1% year-over-year in September and core CPI declining sharply
to 0.8%. Employment data has been weak considering that most economists believe
that the U.S. is roughly 15 months into an expansion. October's nonfarm payroll
release featured a stronger than expected establishment survey (151,000 jobs vs.
60,000 expected), but a weaker household survey (-330,000 jobs). The
unemployment rate rose to 9.64% and has remained stubbornly close to 10%.

The two data points mentioned above make up the Fed's mandate: to promote
maximum employment and stable prices. Various Fed speakers have lamented the
high unemployment rate, calling it "unacceptable," and characterized inflation
as too low. In response, the Fed has engaged in a strategy called Quantitative
Easing ("QE") in which it purchases longer-dated Treasury securities with the
goal of lowering borrowing rates and spurring economic activity. The Fed engaged
in the first round of QE beginning in January of 2010. The charts below show how
ineffective this brand of monetary policy has been.

[QE vs INFLATION CHART OMITTED] [QE vs UNEMPLOYMENT CHART OMITTED]

[DATA POINTS REPRESENTED IN CHARTS]

Federal Reserve:
Securities Core Unemployment
Date Held Outright Inflation Rate

Jan-06 $ 746,588 2.1% 4.7%
$ 752,549 2.1% 4.8%
$ 758,529 2.1% 4.7%
$ 759,683 2.3% 4.7%
$ 762,411 2.5% 4.6%
Jun-06 $ 766,349 2.7% 4.6%
$ 764,763 2.7% 4.7%
$ 766,738 2.8% 4.7%
$ 768,915 2.9% 4.5%
$ 768,422 2.8% 4.4%
Nov-06 $ 772,610 2.6% 4.5%
$ 778,938 2.6% 4.4%
$ 778,863 2.6% 4.6%
$ 780,793 2.7% 4.5%
$ 780,890 2.5% 4.4%
Apr-07 $ 787,149 2.4% 4.5%
$ 790,260 2.2% 4.4%
$ 790,497 2.2% 4.6%
$ 790,714 2.2% 4.6%
$ 784,637 2.1% 4.6%
Sep-07 $ 779,633 2.1% 4.7%
$ 779,586 2.2% 4.7%
$ 779,693 2.3% 4.7%
$ 754,612 2.4% 5.0%
$ 718,371 2.5% 5.0%
Feb-08 $ 713,355 2.3% 4.8%
$ 612,305 2.4% 5.1%
$ 548,692 2.3% 5.0%
$ 491,091 2.3% 5.4%
$ 478,796 2.4% 5.5%
Jul-08 $ 479,206 2.5% 5.8%
$ 479,642 2.5% 6.1%
$ 486,578 2.5% 6.2%
$ 490,089 2.2% 6.6%
$ 488,628 2.0% 6.9%
Dec-08 $ 495,629 1.7% 7.4%
$ 510,871 1.7% 7.7%
$ 581,726 1.8% 8.2%
$ 761,295 1.8% 8.6%
$ 983,358 1.9% 8.9%
May-09 $1,107,447 1.8% 9.4%
$1,217,044 1.7% 9.5%
$1,344,561 1.6% 9.4%
$1,485,134 1.4% 9.7%
$1,592,701 1.5% 9.8%
Oct-09 $1,690,228 1.7% 10.1%
$1,783,726 1.7% 10.0%
$1,844,722 1.8% 10.0%
$1,910,020 1.5% 9.7%
$1,975,641 1.3% 9.7%
Mar-10 $2,014,390 1.2% 9.7%
$2,042,037 1.0% 9.9%
$2,057,164 1.0% 9.7%
$2,059,878 1.0% 9.5%
$2,053,876 1.0% 9.5%
Aug-10 $2,044,167 1.0% 9.6%

If we benchmark the effectiveness of QE by using the Fed's dual mandate, it's
very difficult to call round one a success. We should also recognize the obvious
counterfactual: things could have been worse if nothing was done.

Whatever its effect on the economy, QE had a dramatic effect on asset prices.
The 10-year Treasury Note has enjoyed the spoils of a flight to quality bid with
the yield dropping to 2.599% on October 29, 2010 from a near 3.653% six months
earlier. The equity market, as measured by the Standard & Poor's 500 Index ("S&P
500"), is up in recent months, and spreads on most fixed-income products have
tightened substantially. More specifically in the mortgage market, performance
in agency and non-agency residential mortgage-backed securities ("MBS") has been
resilient as investors have turned to mortgages as a way to pick up yield.

Mortgage rates have been in a secular decline and currently are near record
lows. Prepayment activity has picked up in recent months as many borrowers have
moved to take advantage of lower rates; however, not to the magnitude one might
expect. High unemployment, negative equity, and tighter credit standards still
prevent a significant number of borrowers from refinancing. Agency MBS has
benefited from the rally in treasuries as slow prepays provide investors with
more yield without giving up the relative liquidity and safety of Treasuries.
The longer we stay in this low rate environment, we may see increasing concerns

Page 4

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PORTFOLIO COMMENTARY - (Continued)
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that government intervention, favorable buying conditions or a slight
improvement in the labor market could help prepayment speeds increase going
forward. Fears of a spike in prepayments could cause a widening of MBS spreads,
especially in higher-coupon securities where borrowers have the most to gain
from refinancing.

Another topic that has captured the attention of MBS investors is the news that
further stalling of the foreclosure process is coming due to a wave of
litigation related to the mishandling of foreclosure documents by major banks.
Attorneys General from several states are filing their own suits, which allege
that banks have mishandled mortgage documents and have not been validating the
accuracy of the foreclosure affidavits being sent to the homeowners. This should
slow the already snail-like pace of homes moving through the foreclosure
process, which will have the near-term effect of keeping Real Estate Owned Loans
("REO") inventories lower than they would otherwise have been, and possibly
keeping home prices higher. However, the long-run effect will be to delay the
release of the growing shadow inventory, possibly increasing loss severities,
and delaying the eventual recovery in the housing market. This has had a limited
effect on valuations in residential MBS ("RMBS") so far, but this story will
likely garner plenty of headlines in the coming weeks. We will continue to look
at the potential effects it could have on housing and non-agency pricing.

FUND PERFORMANCE

For the twelve-month period ended October 31, 2010, the Fund had a total net
asset value ("NAV") return2 of 9.01% and a market value return2 of 26.18%. As of
October 31, 2010, the Fund traded at $20.70, a 5.67% premium to its NAV. The
Fund's benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index,
had a return of 6.12% over the same period.

For the twelve-month period ended October 31, 2010, the Fund paid $1.65 in
dividends and the Fund's NAV declined slightly (by 0.20%) to $19.59 from $19.63.
Although prepayment speeds have been below the street's expectations, speeds
have increased in recent months, negatively impacting the prices and income on
the Interest-Only (IO) Securities in the portfolio. The decrease in IO prices
was the main contributor to the decline in NAV, outweighing any positives from
the run up in Agency and Non-Agency prices.

Nevertheless, the Fund outperformed its benchmark, the Barclays Capital U.S.
MBS: Agency Fixed Rate MBS Index which is attributed to the income paid during
the period. The Fund had an income return of 9.12%, exceeding the benchmark's
income return of 3.43% by 569 basis points. The outperformance generally
reflects better-than-expected performance of the Fund's non-agency bonds, as
losses have not occurred at the pace we had originally anticipated.

MARKET AND FUND OUTLOOK

Looking forward to 2011, we see plenty of uncertainty surrounding the mortgage
market and the broader economy. The issues we have discussed above paint the
picture of a fragile recovery, and continued weakness in the housing market
highlights the risk of more government intervention, which is creating spread
volatility across all mortgage products. In addition, with increased government
involvement in the capital markets, volatility of interest rates is a risk that
could increase, along with the spread volatility. Further, if rates continue to
stay low and higher prepayments become the norm, we may see more widening on IO
spreads. If this scenario does materialize, we may look to sell or swap bonds to
maximize long-term results. We still are evaluating the commercial MBS sector as
a possible investment, since yields of certain investment-grade bonds in this
sector remain attractive for buy and hold investors. That being said, we remain
careful and opportunistic managers of the portfolio, looking to pick up
securities where we believe value exists, and taking profits where prudent.

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(1) The Fund's Managed Assets are the average daily total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal
amount of borrowings or reverse repurchase agreements, if any.

(2) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common share price for market value returns.
Total return does not reflect sales load and is not annualized for periods
less than one year. Past performance is not indicative of future results.

Page 5

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
OCTOBER 31, 2010

PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------------------- ------ -------- --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 34.3%

Federal National Mortgage Association (FNMA)
$ 4,210,431 Pool 256182 ............................... 6.00% 03/01/36 $ 4,545,668
4,115,294 Pool 256328 (b)............................ 6.50% 07/01/36 4,496,969
4,559,841 Pool 831145 (b)............................ 6.00% 12/01/35 5,000,914
4,955,272 Pool 843971 (b)............................ 6.00% 11/01/35 5,477,567
2,551,385 Pool 872303 ............................... 6.00% 05/01/36 2,779,643
4,624,755 Pool 880203 ............................... 6.00% 02/01/36 4,987,200
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ..................... 27,287,961
(Cost $25,002,094) --------------

U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS - 80.6%
Adjustable Rate Mortgage Trust
548,132 Series 2004-5, Class 1A1 (c)............... 3.36% 04/25/35 503,507
Banc of America Funding Corp.
1,100,742 Series 2005-F, Class 4A1 (c)............... 3.15% 09/20/35 883,077
Banc of America Mortgage Securities
113,819 Series 2002-L, Class 1A1 (c)............... 3.42% 12/25/32 87,085
186,314 Series 2004-K, Class 4A1 (c)............... 5.23% 12/25/34 178,980
3,469,536 Series 2007-3, Class 2A3 .................. 7.00% 09/25/37 1,088,879
Bear Stearns Adjustable Rate Mortgage Trust
1,149,473 Series 2004-10, Class 12A3 (c)............. 3.24% 01/25/35 972,712
1,339,370 Series 2004-9, Class 12A3 (c).............. 3.32% 11/25/34 1,190,716
Chase Mortgage Finance Corp.
955,584 Series 2007-A3, Class 3A1 (c).............. 5.95% 2/25/37 886,461
Countrywide Alternative Loan Trust
633,798 Series 2004-14T2, Class A6 ................ 5.50% 08/25/34 639,834
355,157 Series 2004-1T1, Class A1 ................. 5.00% 02/25/34 356,290
1,798,073 Series 2005-J1, Class 2A1 ................. 5.50% 02/25/25 1,721,915
Countrywide Home Loans
374,870 Series 2004-HYB1, Class 2A (c)............. 3.26% 05/20/34 325,304
231,173 Series 2005-20, Class A7 .................. 5.25% 12/25/27 200,670
1,933,390 Series 2005-J4, Class A4 .................. 5.50% 11/25/35 1,652,975
Credit Suisse First Boston Mortgage Securities Corp.
2,721,449 Series 2004-AR2, Class 1A1 (c)............. 3.34% 03/25/34 2,169,622
Federal Home Loan Mortgage Corp.
2,256,911 Series 2641, Class SC (d).................. 13.39% 07/15/33 2,406,434
2,040,392 Series 2676, Class IK, IO ................. 5.00% 02/15/20 20,751
44,232 Series 2716, Class CI, IO ................. 5.00% 05/15/19 309
795,111 Series 2737, Class IG, IO ................. 5.00% 08/15/27 11,273
102,082 Series 2772, Class CS (d).................. 21.73% 04/15/34 104,451
8,545,624 Series 2807, Class SB, IO (d).............. 7.20% 11/15/33 1,507,706
2,314,782 Series 2870, Class JI, IO ................. 5.00% 10/15/27 48,436
430,586 Series 2888, Class OI, IO ................. 5.00% 01/15/27 7,573
1,357,260 Series 2921, Class IQ, IO ................. 5.00% 01/15/29 44,951
627,238 Series 2938, Class PI, IO ................. 5.00% 11/15/28 18,581
255,687 Series 2961, Class IP, IO ................. 5.50% 07/15/28 2,334

Page 6 See Notes to Financial Statements

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2010

Federal Home Loan Mortgage Corp. (Continued)
$ 600,863 Series 3000, Class SU (d).................. 22.34% 04/15/35 $ 655,416
811,923 Series 3069, Class LI, IO ................. 5.50% 08/15/32 60,916
110,146 Series 3171, Class CS (d).................. 37.76% 06/15/36 120,074
407,471 Series 3195, Class SX (d).................. 44.48% 07/15/36 565,885
3,402,020 Series 3562, Class KI, IO ................. 4.50% 11/15/22 304,627
184,104 Series 3569, Class SN (d).................. 13.36% 08/15/39 189,122
446,276 Series 3570, Class SB (d).................. 9.49% 08/15/39 450,255
2,862,924 Series 3593, Class IP, IO ................. 5.00% 06/15/36 218,674
13,076,699 Series 3619, Class EI, IO ................. 4.50% 05/15/24 1,349,096
9,951,024 Series 3726, Class KI, IO ................. 3.50% 04/15/25 1,123,828
Federal Home Loan Mortgage Corp., STRIP
16,933,253 Series 227, Class IO, IO .................. 5.00% 12/01/34 2,612,291
6,096,328 Series 232, Class IO, IO .................. 5.00% 08/01/35 896,841
Federal National Mortgage Association
2,444,956 Series 2005-122, Class SN (d).............. 27.58% 01/25/36 3,345,948
525,661 Series 2005-39, Class BI, IO .............. 5.00% 06/25/28 12,169
410,341 Series 2005-91, Class SH (d)............... 22.89% 05/25/33 554,486
4,882,497 Series 2008-50, Class AI, IO .............. 5.50% 06/25/23 341,219
10,124,294 Series 2009-56, Class PI, IO .............. 5.00% 11/25/30 289,916
17,353,697 Series 2010-40, Class MI, IO .............. 4.50% 08/25/24 1,448,338
1,843,675 Series 2010-5, Class DS (d)................ 13.73% 02/25/40 1,870,504
Federal National Mortgage Association, STRIP
6,383,623 Series 360, Class 2, IO ................... 5.00% 08/01/35 949,007
First Horizon Mortgage Trust
2,968,498 Series 2005-8, Class 1A5 .................. 5.75% 02/25/36 2,838,078
GMAC Mortgage Corporation Loan Trust
405,063 Series 2004-AR1, Class 22A (c)............. 3.17% 06/25/34 353,976
Government National Mortgage Association
3,643,882 Series 2009-65, Class NJ, IO .............. 5.50% 07/20/39 528,426
GSR Mortgage Loan Trust
308,915 Series 2004-5, Class 3A2 (c)............... 4.67% 05/25/34 309,111
344,383 Series 2005-AR2, Class 5A1 (c)............. 2.93% 04/25/35 299,086
3,777,204 Series 2007-1F, Class 3A10, IO ............ 6.00% 01/25/37 403,969
Harborview Mortgage Loan Trust
332,077 Series 2004-1, Class 2A (c)................ 2.90% 04/19/34 281,140
1,388,953 Series 2004-6, Class 3A1 (c)............... 2.95% 08/19/34 1,088,857
JP Morgan Mortgage Trust
3,061,560 Series 2005-ALT1, Class 4A1 (c)............ 5.59% 10/25/35 2,693,455
JP Morgan Re-REMIC
3,642,876 Series 2009-7, Class 12A1 (c) (e).......... 6.25% 01/27/37 3,747,608
Merrill Lynch Mortgage Investors Trust
1,854,666 Series 2005-A7, Class 2A1 (c).............. 5.33% 09/25/35 1,706,844
Morgan Stanley Mortgage Loan Trust
284,313 Series 2004-7AR, Class 2A6 (c)............. 2.81% 09/25/34 266,634
Provident Funding Mortgage Loan Trust
581,273 Series 2005-1, Class 1A1 (c)............... 3.02% 05/25/35 452,451

See Notes to Financial Statements Page 7

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2010

Residential Accredit Loans, Inc.
$ 148,757 Series 2002-QS18, Class A1 ................ 5.50% 12/25/17 $ 151,362
1,328,487 Series 2004-QS2, Class CB ................. 5.75% 02/25/34 1,332,353
Residential Funding Mortgage Securities I
592,690 Series 2005-S5, Class A5 .................. 5.25% 07/25/35 599,422
Sequoia Mortgage Trust
3,502,280 Series 2007-1, Class 2A1 (c)............... 5.34% 02/20/47 2,894,738
Wachovia Mortgage Loan Trust, LLC
1,338,562 Series 2006-A, Class 3A1 (c)............... 5.19% 05/20/36 1,232,373
Washington Mutual Msc Mortgage Pass-Through
946,631 Series 2004-RA1, Class 2A ................. 7.00% 03/25/34 1,008,106
Wells Fargo Mortgage Backed Securities Trust
788,043 Series 2005-AR16, Class 1A1 (c)............ 2.94% 10/25/35 790,605
883,082 Series 2006-16, Class A18 ................. 5.00% 11/25/36 861,119
1,601,792 Series 2006-9, Class 1A32 ................. 6.00% 08/25/36 1,399,295
357,445 Series 2006-AR10, Class 5A2 (c)............ 5.43% 07/25/36 304,566
2,332,934 Series 2007-16, Class 1A1 ................. 6.00% 12/28/37 2,427,022
1,695,053 Series 2007-8, Class 2A7 .................. 6.00% 07/25/37 1,715,920
--------------
TOTAL U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS ....................................................... 64,075,954
(Cost $61,149,828) --------------

TOTAL INVESTMENTS (f) - 114.9% ............................................. 91,363,915
(Cost $86,151,922)

PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------------ --------------
REVERSE REPURCHASE AGREEMENTS - (16.3%)

$ (12,976,000) With UBS Securities 0.30% dated 10/29/10, to be repurchased at
$12,976,324 on 11/01/10 .................................................... (12,976,000)

NET OTHER ASSETS AND LIABILITIES - 1.4% .................................... 1,106,605
--------------
NET ASSETS - 100.0% ........................................................ $ 79,494,520
==============

--------------------------------------------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.

(b) This security or a portion of this security is segregated as collateral
for the reverse repurchase agreement.

(d) Inverse floating rate security. The interest rate shown reflects the rate
in effect at October 31, 2010.

(e) The Fund may invest in restricted securities. This security is restricted
and cannot be offered for public sale without first being registered under
the Securities Act of 1933, as amended. Prior to registration, restricted
securities may only be resold in transactions exempt from registration.
The Fund does not have the right to demand that this security be
registered. This security is valued according to the valuation procedures
as stated in the Portfolio Valuation footnote (Note 2A) and is not
expressed as a discount to the carrying value of a comparable unrestricted
security. This security was acquired on September 9, 2009, has a current
carrying cost of $3,477,293, a carrying value per share of $1.03 and
represents 4.71% of net assets.

(f) Aggregate cost for federal income tax purposes is $88,501,920. As of
October 31, 2010, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$9,323,553 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$6,461,558.

Page 8 See Notes to Financial Statements

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2010

IO Interest-Only Security -- Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities

VALUATION INPUTS

A summary of the inputs used to value the Fund's investments as of October 31,
2010 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):

LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2010 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------

U.S. Government Agency Mortgage-Backed
Securities....................................... $ 27,287,961 $ -- $ 27,287,961 $ --
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations.............. 64,075,954 -- 60,328,346 3,747,608
------------ ------------ ------------ ------------
TOTAL INVESTMENTS.................................. $ 91,363,915 $ -- $ 87,616,307 $ 3,747,608
============ ============ ============ ============

The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.

INVESTMENTS AT FAIR VALUE USING BALANCE AS OF TRANSFERS IN (OUT) BALANCE AS OF
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) OCTOBER 31, 2009 OF LEVEL 3 OCTOBER 31, 2010

U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations $ -- $ 3,747,608 $ 3,747,608
-----------------------------------------------------------
TOTAL INVESTMENTS $ -- $ 3,747,608 $ 3,747,608
===========================================================

Net change in unrealized appreciation from Level 3 investments held as of
October 31, 2010 was $180,248 and is included in "Net change in unrealized
appreciation (depreciation) on investments" on the Statement of Operations.

See Notes to Financial Statements Page 9

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2009

ASSETS:

Investments, at value
(Cost $86,151,922)......................................................................... $ 91,363,915
Cash.......................................................................................... 421,679
Prepaid expenses.............................................................................. 10,093
Interest receivable........................................................................... 846,665
-------------
Total Assets............................................................................ 92,642,352
-------------

LIABILITIES:
Reverse repurchase agreements................................................................. 12,976,000
Payables:
Investment advisory fees................................................................... 79,035
Audit and tax fees......................................................................... 45,200
Printing fees.............................................................................. 15,003
Interest on reverse repurchase agreements.................................................. 11,608
Administrative fees........................................................................ 8,333
Trustees' fees and expenses................................................................ 3,357
Legal fees................................................................................. 2,623
Transfer agent fees........................................................................ 2,546
Custodian fees............................................................................. 2,356
Other liabilities............................................................................. 1,771
-------------
Total Liabilities....................................................................... 13,147,832
-------------
NET ASSETS.................................................................................... $ 79,494,520
=============

NET ASSETS CONSIST OF:
Paid-in capital............................................................................... $ 76,855,706
Par value..................................................................................... 40,569
Accumulated net investment income (loss)...................................................... 4,493,077
Accumulated net realized gain (loss) on investments........................................... (7,106,825)
Net unrealized appreciation (depreciation) on investments..................................... 5,211,993
-------------
NET ASSETS.................................................................................... $ 79,494,520
=============

NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share).............. $ 19.59
=============

Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)... 4,056,945
=============

Page 10 See Notes to Financial Statements

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2010

INVESTMENT INCOME:

Interest...................................................................................... $ 9,963,079
-------------
Total investment income................................................................. 9,963,079
-------------

EXPENSES:
Investment advisory fees...................................................................... 970,212
Excise tax expense............................................................................ 224,558
Administrative fees........................................................................... 99,997
Audit and tax fees............................................................................ 46,256
Interest expense on reverse repurchase agreements............................................. 40,527
Trustees' fees and expenses................................................................... 39,536
Printing fees................................................................................. 38,147
Transfer agent fees........................................................................... 33,261
Legal fees.................................................................................... 20,142
Custodian fees................................................................................ 14,557
Other......................................................................................... 69,196
-------------
Total expenses.......................................................................... 1,596,389
-------------
NET INVESTMENT INCOME......................................................................... 8,366,690
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments................................................. (1,453,923)
Net change in unrealized appreciation (depreciation) on investments..................... (354,361)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)....................................................... (1,808,284)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.............................. $ 6,558,406
=============

See Notes to Financial Statements Page 11

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS

YEAR YEAR
ENDED ENDED
10/31/2010 10/31/2009
------------- -------------
OPERATIONS:

Net investment income (loss)....................................................... $ 8,366,690 $ 6,359,057
Net realized gain (loss)........................................................... (1,453,923) (1,849,267)
Net change in unrealized appreciation (depreciation)............................... (354,361) 7,481,465
------------- -------------

Net increase (decrease) in net assets resulting from operations.................... 6,558,406 11,991,255
------------- -------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (6,682,196) (5,545,693)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- --
------------- -------------

Total distributions to shareholders................................................ (6,682,196) (5,546,693)
------------- -------------

CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. 156,220 60,901
------------- -------------

Net increase (decrease) in net assets resulting from capital transactions.......... 156,220 60,901
------------- -------------

Total increase (decrease) in net assets............................................ 32,430 6,506,463

NET ASSETS:
Beginning of period................................................................ 79,462,090 72,955,627
------------- -------------

End of period...................................................................... $ 79,494,520 $ 79,462,090
============= =============

Accumulated net investment income (loss) at end of period.......................... $ 4,493,077 $ 1,237,794
============= =============

CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,048,993 4,045,236
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 7,952 3,757
------------- -------------

Common Shares at end of period..................................................... 4,056,945 4,048,993
============= =============

Page 12 See Notes to Financial Statements

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2010

CASH FLOWS FROM OPERATING ACTIVITIES:

Net increase (decrease) in net assets resulting from operations................. $ 6,558,406
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Purchases of investments.................................................. (33,997,155)
Sales, maturities and paydowns on investments............................. 35,474,420
Net amortization/accretion of premiums/discounts on investments........... 4,702,916
Net realized gain/loss on investments..................................... 1,453,923
Net change in unrealized appreciation/depreciation on investments......... 354,361
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable........................................... (34,001)
Decrease in prepaid expenses.............................................. 215
Decrease in interest payable on reverse repurchase agreements............. (167,402)
Decrease in investment advisory fees payable.............................. (8,854)
Decrease in audit and tax fees payable.................................... (5,011)
Decrease in legal fees payable............................................ (4,392)
Decrease in printing fees payable......................................... (1,495)
Decrease in administrative fees payable................................... (45)
Increase in custodian fees payable........................................ 398
Increase in transfer agent fees payable................................... 125
Decrease in Trustees' fees and expenses payable........................... (103)
Decrease in other liabilities............................................. (864)
---------------

CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 14,325,442
-------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares reinvested...................................... 156,220
Distributions to Common Shareholders from net investment income........... (6,682,196)
Repurchases of reverse repurchase agreements.............................. (4,315,766,000)
Reverse repurchase agreements borrowings.................................. 4,303,624,000
---------------

CASH USED IN FINANCING ACTIVITIES............................................... (18,667,976)
-------------
Decrease in cash................................................................ (4,342,534)
Cash at beginning of period..................................................... 4,764,213
-------------

CASH AT END OF PERIOD........................................................... $ 421,679
=============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 207,929
=============

See Notes to Financial Statements Page 13

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD

YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
10/31/2010 (b) 10/31/2009 10/31/2008 10/31/2007 10/31/2006
-------------- ---------- ---------- ---------- ----------

Net asset value, beginning of period... $ 19.63 $ 18.03 $ 18.66 $ 18.41 $ 19.02
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............ 2.06 1.57 1.49 1.04 1.03
Net realized and unrealized gain (loss).. (0.45) 1.40 (1.00) 0.23 (0.58)
---------- ---------- ---------- ---------- ----------
Total from investment operations........ 1.61 2.97 0.49 1.27 0.45
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income................... (1.65) (1.37) (1.12) (1.02) (1.06)
Net realized gains...................... -- -- -- -- --
Return of capital....................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total from distributions................ (1.65) (1.37) (1.12) (1.02) (1.06)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period......... $ 19.59 $ 19.63 $ 18.03 $ 18.66 $ 18.41
========== ========== ========== ========== ==========
Market value, end of period............ $ 20.70 $ 17.91 $ 15.71 $ 16.32 $ 16.58
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (a) 9.01% 18.21% 3.38% 7.80% 3.30%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (a).. 26.18% 23.91% 2.94% 4.69% 7.89%
========== ========== ========== ========== ==========

------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)... $ 79,495 $ 79,462 $ 72,956 $ 75,487 $ 74,458
Ratio of total expenses to average net assets 2.00% 2.07% 2.69% 3.24% 3.10%
Ratio of net expenses to average net assets 2.00% 2.07% 2.69% 3.24% 3.06%
Ratio of net expenses to average net assets
excluding interest expense............ 1.95% 1.99% 1.83% 1.71% 1.69%
Ratio of net investment income (loss) to
average net assets.................... 10.50% 9.01% 7.93% 5.70% 5.55%
Portfolio turnover rate................. 36% 39% 10% 22% 76%
------------------------------------------------------------

(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for net
asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.

(b) On September 20, 2010, the Fund's Board of Trustees approved an interim
investment management agreement with First Trust Advisors L.P. and an
interim investment sub-advisory agreement with Fixed Income Discount
Advisory Company, and on December 6, 2010, the shareholders voted to approve
both agreements. (See footnote 3 in the Notes to Financial Statements.)

Page 14 See Notes to Financial Statements

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

1. FUND DESCRIPTION

First Trust/FIDAC Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FMY on the New York Stock Exchange
("NYSE").

The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing in mortgage-backed securities that, in the
opinion of Fixed Income Discount Advisory Company ("FIDAC" or the
"Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.

A. PORTFOLIO VALUATION:

The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.

The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. Securities for which market quotations are readily available are
valued using the last reported sale price on the business day as of which such
value is being determined. If no sales are reported on such business day (as in
the case of some securities traded over-the-counter), the last reported bid
price is used, except that certain U.S. Government securities are valued at the
mean between the last reported bid and asked prices. Mortgage-backed securities
("MBS") and other debt securities not traded in an organized market are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's Board of
Trustees, which may use the following valuation inputs when available:

1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.

Debt securities having a remaining maturity of sixty days or less when purchased
are valued at cost adjusted for amortization of premiums and accretion of
discounts.

In the event that market quotations are not readily available, the pricing
service or dealer does not provide a valuation, or the valuations received are
deemed unreliable, the Fund's Board of Trustees has designated First Trust
Advisors L.P. ("First Trust") to use a fair value method to value the Fund's
securities. Additionally, if events occur after the close of the principal
markets for certain securities (e.g., domestic debt and foreign securities) that
could materially affect the Fund's NAV, First Trust may use a fair value method
to value the Fund's securities. The use of fair value pricing is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act. As a general principle, the fair value of a
security is the amount which the Fund might reasonably expect to receive for the
security upon its current sale. Fair valuation of a security is based on the
consideration of all available information, including, but not limited to, the
following:

1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which these
securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;

Page 15

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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing the
security;
10) the business prospects of the issuer, including any ability to obtain
money or resources from a parent or affiliate and an assessment of the
issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that industry;
and
12) other relevant factors.

In light of the judgment involved in fair valuations, there can be no assurance
that a fair value assigned to a particular security will be the amount which the
Fund might be able to receive upon its current sale.

The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:

o Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency
and volume to provide pricing information on an ongoing
basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar securities in active markets.
o Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, the prices are
not current, or price quotations vary substantially
either over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may
reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
security.

The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of October 31, 2010, is
included with the Fund's Portfolio of Investments.

B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:

Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.

The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted on a prospective basis over
the remaining life of the security. Debt obligations may be placed on
non-accrual status and related interest income may be reduced by ceasing current
accruals and writing off interest receivables when the collection of all or a
portion of interest has become doubtful based on consistently applied
procedures. A debt obligation is removed from non-accrual status when the issuer
resumes interest payments or when collectability of interest is reasonably
assured.

Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At October 31, 2010, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.

C. REVERSE REPURCHASE AGREEMENTS:

Reverse repurchase agreements are utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in

Page 16

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back to the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.

Information for the year ended October 31, 2010:

Maximum amount outstanding during the period.................. $25,118,000
Average amount outstanding during the period*................. $17,321,833
Average Common Shares outstanding during the period........... 4,050,025
Average debt per Common Share outstanding during the period... $4.28

* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the year ended October 31, 2010.

During the year ended October 31, 2010, interest rates ranged from 0.08% to
0.55%, with a weighted average interest rate of 0.24%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$40,527.

D. INVERSE FLOATING-RATE SECURITIES:

An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
held in the Fund, are identified in the Portfolio of Investments.

E. STRIPPED MORTGAGE-BACKED SECURITIES:

Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only or IO security and
all of the principal is distributed to holders of another type of security known
as a principal-only or PO security. These securities, if held in the Fund, are
identified in the Portfolio of Investments.

F. INTEREST-ONLY SECURITIES:

An interest-only security ("IO Security") is the interest-only portion of a MBS
that receives some or all of the interest portion of the underlying MBS and
little or no principal. A reference principal value called a notional value is
used to calculate the amount of interest due to the IO Security. IO Securities
are sold at a deep discount to their notional principal amount. Generally
speaking, when interest rates are falling and prepayment rates are increasing,
the value of an IO Security will fall. Conversely, when interest rates are
rising and prepayment rates are decreasing, generally the value of an IO
Security will rise. These securities, if held in the Fund, are identified in the
Portfolio of Investments.

G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.

Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains/losses on various investment securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund. Permanent differences incurred during the fiscal
year ended October 31, 2010, resulting in book and tax accounting differences,
have been reclassified at year end to reflect an increase in accumulated net
investment income (loss) by $1,570,789, a decrease in accumulated net realized
gain (loss) on investments by $1,347,646 and a decrease to paid-in capital of
$223,143. Net assets were not affected by this reclassification.

The tax character of distributions paid during the fiscal years ended October
31, 2010 and October 31, 2009 was as follows:

Distributions paid from: 2010 2009
Ordinary income......................... $ 6,682,196 $ 5,545,693

Page 17

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

As of October 31, 2010, the components of accumulated earnings (loss) on a tax
basis were as follows:

Undistributed ordinary income...................... $ 6,843,075
Undistributed capital gains........................ --
-------------
Total undistributed earnings....................... 6,843,075
Accumulated capital and other losses............... (7,106,825)
Net unrealized appreciation (depreciation)......... 2,861,995
-------------
Total accumulated earnings (losses)................ 2,598,245
Paid-in capital.................................... 76,896,275
-------------
Net Assets......................................... $ 79,494,520
=============

H. INCOME AND OTHER TAXES:

The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.

The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry realized capital losses forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in-losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2010, the
Fund had a capital loss carryforward for federal income tax purposes of
$7,106,825, with $3,756,953, $1,927,985 and $1,421,887 expiring on October 31,
2014, 2017 and 2018, respectively.

The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2007, 2008,
2009 and 2010 remain open to federal and state audit. As of October 31, 2010,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.

I. EXPENSES:

The Fund pays all expenses directly related to its operations.

J. ACCOUNTING PRONOUNCEMENT:

In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU No. 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on the Fund's financial statement disclosures, if any.

3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS

First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund. For these investment management services, First Trust is entitled to a
monthly fee calculated at an annual rate of 1.00% of the Fund's Managed Assets
(the average daily total asset value of the Fund minus the sum of the Fund's
liabilities other than the principal amount of borrowings or reverse repurchase
agreements, if any).

FIDAC serves as the Fund's sub-advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee of 0.50% of Managed Assets that is paid monthly by First Trust from its
investment advisory fee.

James A. Bowen, the President of First Trust, on October 12, 2010, acquired 100%
of the voting stock of The Charger Corporation, the general partner of First
Trust (the "Transaction"). The consummation of the Transaction was deemed to be
an "assignment" (as defined in the 1940 Act) of the Fund's investment management

Page 18

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

agreement and investment sub-advisory agreement and resulted in the automatic
termination of the agreements. The Transaction is not expected to impact the
day-to-day operations of the Fund.

The Board of Trustees of the Fund approved an interim investment management
agreement with First Trust and an interim investment sub-advisory agreement,
which were entered into effective upon the closing of the Transaction and would
be in effect for a maximum period of 150 days absent shareholder approval. A new
investment management agreement with First Trust and a new investment
sub-advisory agreement have been approved by the Board of Trustees of the Fund
and were submitted to shareholders of the Fund as of the record date (September
30, 2010) for approval to take effect upon such shareholder approval. A special
shareholder meeting of the Fund to vote on a proposal to approve the new
investment management agreement and the new investment sub-advisory agreement
was held on December 6, 2010, at which time the new investment management
agreement and new investment sub-advisory agreement were approved by the Fund's
shareholders. Until December 6, 2010, advisory fees payable to First Trust and
FIDAC were held in escrow. See Submission of Matters to a Vote of Shareholders,
in the Additional Information section of this report, for the results.

BNY Mellon Investment Servicing (US) Inc. (formerly PNC Global Investment
Servicing (U.S.) Inc.) serves as the Fund's Administrator, Fund Accountant and
Transfer Agent in accordance with certain fee arrangements. PFPC Trust Company,
which will be renamed BNY Mellon Investment Servicing Trust Company effective
July 1, 2011, serves as the Fund's Custodian in accordance with certain fee
arrangements.

Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustee") is paid an annual retainer of
$10,000 per trust for the first 14 trusts of the First Trust Fund Complex and an
annual retainer of $7,500 per trust for each subsequent trust in the First Trust
Fund Complex. The annual retainer is allocated equally among each of the trusts.
No additional meeting fees are paid in connection with board or committee
meetings.

Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $2,500 annually to serve in such capacities, with such compensation paid
by the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee chairman will serve two-year terms before
rotating to serve as chairman of another committee or as Lead Independent
Trustee. The officers and "Interested" Trustee receive no compensation from the
Fund for serving in such capacities.

4. PURCHASES AND SALES OF SECURITIES

The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the year ended October 31,
2010 were $13,683,593 and $20,313,562, respectively. The proceeds from sales and
paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the year ended October 31, 2010 were
$18,014,561 and $17,459,859, respectively.

5. INDEMNIFICATION

The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.

6. RISK CONSIDERATIONS

Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.

INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Advisor or Sub-Advisor may take
temporary defensive positions.

Page 19

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010

SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.

PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.

Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.

INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, interest-only ("IO") securities and principal-only
("PO") securities. Generally speaking, when interest rates are falling and
prepayment rates are increasing, the value of a PO security will rise and the
value of an IO security will fall. Conversely, when interest rates are rising
and prepayment rates are decreasing, generally the value of a PO security will
fall and the value of an IO security will rise.

LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.

FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.

7. SUBSEQUENT EVENTS

Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were subsequent events as follows:

On November 22, 2010, the Fund declared a dividend of $0.16 per share to Common
Shareholders of record on December 3, 2010, payable December 10, 2010.

On December 20, 2010, the Fund declared dividends totaling $0.27 per share to
Common Shareholders of record on December 31, 2010, payable January 14, 2011. Of
this amount, $0.16 per share represents the Fund's regular monthly dividend and
$0.11 per share represents a special distribution.

Page 20

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/FIDAC MORTGAGE
INCOME FUND:

We have audited the accompanying statement of assets and liabilities of First
Trust/FIDAC Mortgage Income Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2010, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for the periods presented. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
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, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2010, by correspondence with the Fund's
custodian. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/FIDAC Mortgage Income Fund as of October 31, 2010, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
December 23, 2010

Page 21

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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

DIVIDEND REINVESTMENT PLAN

If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.

If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:

(1) If Common Shares are trading at or above net asset value ("NAV")
at the time of valuation, the Fund will issue new shares at a
price equal to the greater of (i) NAV per Common Share on that
date or (ii) 95% of the market price on that date.

(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer
shares than if the dividend or distribution had been paid in
Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common
Shares in the open market within 30 days of the valuation date
except where temporary curtailment or suspension of purchases is
necessary to comply with federal securities laws. Interest will
not be paid on any uninvested cash payments.

You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.

The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.

There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.

Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.

If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.

The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.

________________________________________________________________________________

PROXY VOTING POLICIES AND PROCEDURES

A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.

Page 22

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ADDITIONAL INFORMATION - (Continued)
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

PORTFOLIO HOLDINGS

The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.

TAX INFORMATION

Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2010, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.

NYSE CERTIFICATION INFORMATION

In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of June 14, 2010, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.

SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Strategic High
Income Fund III, First Trust Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2010. At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust/FIDAC Mortgage Income Fund as Class III
Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2013. The number of votes cast in favor of Mr. Bowen was
3,634,991, the number of votes against was 46,279 and the number of abstentions
was 367,723. The number of votes cast in favor of Mr. Nielson was 3,634,552, the
number of votes against was 46,718 and the number of abstentions was 367,723.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.

A special meeting of shareholders of the Fund was held on December 6, 2010. At
the meeting, shareholders approved a new investment management agreement between
the Fund and First Trust and a new investment sub-advisory agreement between the
Fund, First Trust and FIDAC. 2,072,030 (51.11%) of the outstanding voting
securities were voted at the meeting. The number of votes cast in favor of the
new investment management agreement was 1,975,124, the number of votes against
was 34,869, and the number of abstentions was 62,237. The number of votes cast
in favor of the new investment sub-advisory agreement was 1,976,966, the number
of votes against was 33,964, and the number of abstentions was 61,318. The terms
of the new investment management agreement and new investment sub-advisory
agreement are substantially similar to the terms of the previous agreements.

INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS

BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS

The Board of Trustees of First Trust/FIDAC Mortgage Income Fund (the "Fund"),
including the Independent Trustees, approved the Interim Investment Management
Agreement and the New Investment Management Agreement (collectively, the
"Advisory Agreements") between the Fund and First Trust Advisors L.P. (the
"Advisor") and the Interim Investment Sub-Advisory Agreement and New Investment
Sub-Advisory Agreement (collectively, the "Sub-Advisory Agreements" and together
with the Advisory Agreements, the "Agreements") among the Fund, the Advisor and
Fixed Income Discount Advisory Company (the "Sub-Advisor"), at a meeting held on
September 20, 2010. The Board determined that the terms of the Agreements are
fair and reasonable and that the Agreements are in the best interests of the
Fund. The Board also determined that it believes that the scope and quality of
services to be provided to the Fund under the Agreements will be at least
equivalent to the scope and quality of services provided under the current
Investment Management Agreement with the Advisor and the current Investment
Sub-Advisory Agreement among the Fund, the Advisor and the Sub-Advisor
(collectively, the "Original Agreements").

Page 23

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ADDITIONAL INFORMATION - (Continued)
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

On August 25, 2010, the Independent Trustees were informed that James A. Bowen,
the President of the Advisor and a Trustee and Chairman of the Board of the
Fund, had entered into an agreement to acquire 100% of the common stock of The
Charger Corporation, the general partner of the Advisor (the "Transaction"), the
consummation of which would constitute a "change of control" of the Advisor and
would result in the "assignment" and termination of the current Investment
Management Agreement and may also result in the "assignment" and termination of
the current Investment Sub-Advisory Agreement pursuant to their terms and in
accordance with Section 15 of the Investment Company Act of 1940, as amended
(the "1940 Act"). On August 31, 2010, counsel to the Independent Trustees
forwarded to Mr. Bowen and the Advisor a request for information regarding the
Transaction. In anticipation of the consummation of the Transaction, the Board
at its meeting held on September 20, 2010, considered the information provided
by Mr. Bowen and the Advisor in response to the Independent Trustees' request
for information and considered the approval of the Agreements.

To reach its determination, the Board considered its duties under the 1940 Act,
as well as under the general principles of state law in reviewing and approving
advisory contracts; the requirements of the 1940 Act in such matters; the
fiduciary duty of investment advisors with respect to advisory agreements and
compensation; the standards used by courts in determining whether investment
company boards have fulfilled their duties; and the factors to be considered by
the Board in voting on such agreements. In connection with its deliberations
regarding the Agreements, the Board noted the Advisor's representation that
apart from their effective and termination dates and any provisions of the
Interim Investment Management Agreement and Interim Investment Sub-Advisory
Agreement required by Rule 15a-4 under the 1940 Act, the Advisory Agreements and
Sub-Advisory Agreements were the same in all material respects as the Original
Agreements. The Board noted that it had recently considered the Advisor's and
Sub-Advisor's capabilities and the terms of the Original Agreements at a meeting
held on March 21-22, 2010 and had determined to renew the Original Agreements
for an additional one-year term (the "2010 Renewal"). The Board considered that
in connection with the 2010 Renewal, it had received a report from each of the
Advisor and the Sub-Advisor that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory fees for the Fund as compared to fees charged to other clients of
the Advisor and the Sub-Advisor and as compared to fees charged by investment
advisors and sub-advisors to comparable funds; expenses of the Fund as compared
to expense ratios of comparable funds; the nature of expenses incurred in
providing services to the Fund and the potential for economies of scale, if any;
financial data on the Advisor and the Sub-Advisor; any fall-out benefits to the
Advisor and the Sub-Advisor; and information on the Advisor's and the
Sub-Advisor's compliance programs. Prior to the September meeting, the Advisor
represented to the Board that there had been no material changes to the
information provided in March 2010 and that the Board could continue to rely on
such information. In addition, the Sub-Advisor represented to the Board that
there had been no material changes to the information provided in March 2010 and
that the Board could continue to rely on such information.

Because the Board determined that any differences between the Original
Agreements and the Agreements were immaterial, the Board determined that much of
its previous analysis in connection with the 2010 Renewal applied to its review
and consideration of the Agreements. Accordingly, the Board took note of such
prior analysis and supplemented it with the additional considerations noted
below. The Independent Trustees also met separately with their independent legal
counsel to discuss the Transaction and their consideration of the Agreements.

In reviewing the Agreements, the Board considered the nature, quality and extent
of services to be provided by the Advisor and the Sub-Advisor under the
Agreements. The Board noted that the Transaction was not expected to result in
any changes to the personnel of the Advisor and Sub-Advisor responsible for
providing services to the Fund. The Board also considered the representations of
both the Advisor and the Sub-Advisor that there will be no diminution in
services provided under the Agreements. In light of the information presented
and the considerations made at the September meeting, including the
considerations made in connection with the 2010 Renewal, the Board concluded
that the nature, quality and extent of services to be provided to the Fund by
the Advisor and the Sub-Advisor under the Agreements are expected to be
satisfactory.

The Board considered the advisory and sub-advisory fees payable under the
Agreements, noting that they would be the same as the fees payable under the
Original Agreements. The Board considered that in connection with the 2010
Renewal it had reviewed the advisory fees charged by the Advisor to similar
funds and other non-fund clients, and had noted that the Advisor does not
provide advisory services to other clients with investment objectives and
policies similar to the Fund's. The Board also considered that it had reviewed
information provided by the Sub-Advisor as to the fees it charges to other
similar clients, noting that the Sub-Advisor does not provide advisory services
to any other clients with investment objectives and policies similar to the
Fund's. The Board also considered performance information for the Fund,
including the Fund's quarterly performance report, which is part of the process
that the Board has established for monitoring the Fund's performance and
portfolio risk on an ongoing basis. In light of the information presented on the
fees and performance of the Fund and the considerations made at the September
meeting, including the considerations made in connection with the 2010 Renewal,
the Board concluded that the advisory and sub-advisory fees were reasonable and
appropriate in light of the nature, quality and extent of services expected to
be provided by the Advisor and Sub-Advisor under the Agreements.

Page 24

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ADDITIONAL INFORMATION - (Continued)
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
continues to reflect an appropriate level of sharing of any economies of scale
at current asset levels. The Board noted that in connection with the 2010
Renewal it had reviewed the costs of the services provided and profits realized
by the Advisor from serving as investment manager to the Fund for the twelve
months ended December 31, 2009. The Board considered its prior conclusion that
the Advisor's profitability appeared to be not excessive in light of the
services provided to the Fund. The Board considered whether the Advisor derives
any ancillary benefits from its relationship with the Fund and noted that the
typical fall-out benefits to the Advisor such as soft dollars are not present.
The Board noted that the Advisor will receive compensation from the Fund for
providing fund reporting services. The Board concluded that any other fall-out
benefits received by the Advisor or its affiliates would appear to be limited.

The Board considered the Sub-Advisor's representation in connection with the
2010 Renewal that its business is scalable and that it believes the sub-advisory
fee is appropriate. The Board considered that the sub-advisory fee rate was
negotiated at arm's length between the Advisor and the Sub-Advisor, an
unaffiliated third party. The Board noted that the Sub-Advisor does not maintain
any soft-dollar arrangements and that the Sub-Advisor had previously indicated
that it does not receive any material fall-out benefits from its relationship to
the Fund.

Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements are fair and reasonable and that the approval of the Agreements is in
the best interests of the Fund. No single factor was determinative in the
Board's analysis.

Page 25

--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

NUMBER OF
PORTFOLIOS IN
THE FIRST OTHER
TRUST TRUSTEESHIPS OR
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
POSITION WITH THE FUND SERVICE(2) DURING PAST 5 YEARS TRUSTEE TRUSTEE

------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------

Richard E. Erickson, Trustee o Three Year Physician; President, Wheaton 64 None
c/o First Trust Advisors L.P. Term Orthopedics; Co-owner and Co-Director
120 E. Liberty Drive, (January 1996 to May 2007), Sports
Suite 400 Med Center for Fitness; Limited
Wheaton, IL 60187 o Since Fund Partner, Gundersen Real Estate
D.O.B.: 04/51 Inception Limited Partnership; Member,
Sportsmed LLC

Thomas R. Kadlec, Trustee o Three Year President (March 2010 to Present), 64 Director of ADM
c/o First Trust Advisors L.P. Term Senior Vice President and Chief Investor
120 E. Liberty Drive, Financial Officer (May 2007 to March Services, Inc.
Suite 400 o Since Fund 2010), Vice President and Chief and ADM
Wheaton, IL 60187 Inception Financial Officer (1990 to May 2007), Investor
D.O.B.: 11/57 ADM Investor Services, Inc. (Futures Services
Commission Merchant) International

Robert F. Keith, Trustee o Three Year President (2003 to Present), 64 None
c/o First Trust Advisors L.P. Term Hibs Enterprises (Financial and
120 E. Liberty Drive, Management Consulting)
Suite 400 o Since June
Wheaton, IL 60187 2006
D.O.B.: 11/56

Niel B. Nielson, Trustee o Three Year President (June 2002 64 Director of
c/o First Trust Advisors L.P. Term to Present), Covenant Covenant
120 E. Liberty Drive, College Transport Inc.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 03/54

------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------

James A. Bowen, Trustee, o Three Year President, First Trust Advisors L.P. 64 Trustee of
President, Chairman of the Board Trustee and First Trust Portfolios L.P.; Wheaton College
and CEO(1) Term and Chairman of the Board of Directors,
120 E. Liberty Drive, Indefinite BondWave LLC (Software Development
Suite 400 Officer Company/Investment Advisor) and
Wheaton, IL 60187 Term Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
o Since Fund
Inception

---------------------

(1) Mr. Bowen is deemed an interested person of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2012 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2013 annual meeting of shareholders. Officers of the Fund have an
indefinite term. The term "officer" means the president, vice president,
secretary, treasurer, controller or any other officer who performs a
policy making function.

Page 26

--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS - (Continued)
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

TERM OF OFFICE
NAME, ADDRESS AND POSITION AND OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
DATE OF BIRTH WITH FUND SERVICE DURING PAST 5 YEARS

-----------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES (3)
-----------------------------------------------------------------------------------------------------------------------------------

Mark R. Bradley Treasurer, Chief o Indefinite term Chief Financial Officer,
120 E. Liberty Drive, Financial Officer First Trust Advisors L.P.
Suite 400 and Chief Accounting o Since Fund and First Trust Portfolios
Wheaton, IL 60187 Officer Inception L.P.; Chief Financial
D.O.B.: 11/57 Officer, BondWave LLC
(Software Development
Company/Investment Advisor)
and Stonebridge Advisors LLC
(Investment Advisor)

Erin E. Chapman Assistant Secretary o Indefinite term Assistant General Counsel
120 E. Liberty Drive, (October 2007 to Present),
Suite 400 o Since June 2009 Associate Counsel (March
Wheaton, IL 60187 2006 to October 2007), First
D.O.B.: 08/76 Trust Advisors L.P. and
First Trust Portfolios L.P.;
Associate Attorney (November
2003 to March 2006), Doyle &
Bolotin, Ltd.

James M. Dykas Assistant Treasurer o Indefinite term Senior Vice President (April
120 E. Liberty Drive, 2007 to Present), Vice
Suite 400 o Since Fund President (January 2005 to
Wheaton, IL 60187 Inception April 2007), First Trust
D.O.B.: 01/66 Advisors L.P. and First
Trust Portfolios L.P.

Christopher R. Fallow Assistant Vice o Indefinite term Assistant Vice President
120 E. Liberty Drive, President (August 2006 to Present),
Suite 400 o Since Fund Associate (January 2005 to
Wheaton, IL 60187 Inception August 2006), First Trust
D.O.B.: 04/79 Advisors L.P. and First
Trust Portfolios L.P.

W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer Advisors L.P., First Trust
Suite 400 o Since Fund Portfolios L.P. and BondWave
Wheaton, IL 60187 Inception LLC (Software Development
D.O.B.: 05/60 Company/Investment Advisor);
Secretary of Stonebridge
Advisors LLC (Investment Advisor)

Daniel J. Lindquist Vice President o Indefinite term Senior Vice President
120 E. Liberty Drive, (September 2005 to Present),
Suite 400 o Since Fund First Trust Advisors L.P. and
Wheaton, IL 60187 Inception First Trust Portfolios L.P.
D.O.B: 02/70

Coleen D. Lynch Assistant Vice o Indefinite term Assistant Vice President
120 E. Liberty Drive, President (January 2008 to Present),
Suite 400 o Since July 2008 First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.;
DOB: 07/58 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Management

Kristi A. Maher Assistant Secretary o Indefinite term Deputy General Counsel (May
120 E. Liberty Drive, and Deputy Chief 2007 to Present), Assistant
Suite 400 Compliance Officer o Assistant General Counsel (March 2004 to
Wheaton, IL 60187 Secretary since May 2007), First Trust
D.O.B.: 12/66 Fund Inception Advisors L.P. and First Trust
Portfolios L.P.
o Deputy Chief
Compliance
Officer since
November 2009

---------------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.

Page 27

--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------

FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2010 (UNAUDITED)

The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining our relationship. We are committed to protecting the
security and confidentiality of your personal information.

SOURCES OF INFORMATION

We may collect nonpublic personal information about you from the following
sources:

o Information we receive from you or your broker-dealer, investment
advisor or financial representative through interviews, applications,
agreements or other forms;

o Information about your transactions with us, our affiliates or others;

o Information we receive from your inquiries by mail, e-mail or
telephone; and

o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.

INFORMATION COLLECTED

The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.

DISCLOSURE OF INFORMATION

We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required by law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:

o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians and
trustees, or that assist us in the distribution of investor materials
such as trustees, banks, financial representatives and printers.

o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).

In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.

CONFIDENTIALITY AND SECURITY

With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.

POLICY UPDATES AND INQUIRIES

As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at (800)
621-1675 (First Trust Portfolios) or (800) 222-6822 (First Trust Advisors).

Page 28

[LOGO OMITTED] First Trust

INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187

INVESTMENT SUB-ADVISOR
Fixed Income Discount Advisory Company
1211 Avenue of the Americas, Suite 2902
New York, NY 10036

ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809

CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606

LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603

Inside Back Cover

[BLANK BACK COVER]

ITEM 2. CODE OF ETHICS.

(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party.

(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code
of ethics description.

(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, that relates to one or more of the items set
forth in paragraph (b) of this item's instructions.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for
those fiscal years were $45,000 for the fiscal year ended October 31,
2009 and $45,000 for the fiscal year ended October 31, 2010.

(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item were $0 for the fiscal year ended
October 31, 2009 and $0 for the fiscal year ended October 31, 2010.

Audit-Related Fees (Investment Advisor) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance
of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for the fiscal year
ended October 31, 2009 and $0 for the fiscal year ended October 31,
2010.

(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $5,200
for the fiscal year ended October 31, 2009 and $5,200 for the fiscal
year ended October 31, 2010. These fees were for tax return
preparation.

Tax Fees (Investment Advisor) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning
were $0 for the fiscal year ended October 31, 2009 and $0 for the
fiscal year ended October 31, 2010.

(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2009 and $0 for the fiscal year ended
October 31, 2010.

All Other Fees (Investment Adviser) The aggregate fees billed in each
of the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2009 and $0 for the fiscal year ended
October 31, 2010.

(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.

The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.

(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:

(b) 0%

(d) 0%

(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.

(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for the Registrant's fiscal year ended October 31,
2009 were $5,200 for the Registrant and $36,000 for the Registrant's
investment adviser and for the Registrant's fiscal year ended October
31, 2010 were $5,200 for the Registrant and $6,000 for the Registrant's
investment adviser.

(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.

ITEM 6. INVESTMENTS.

(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.

(b) Not applicable.

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.

The Proxy Voting Policies are attached herewith.

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.

INFORMATION PROVIDED AS OF JANUARY 3, 2011.

There is no one individual primarily responsible for portfolio management
decisions for the Registrant. Fixed Income Discount Advisory Company ("FIDAC")
serves as the Registrant's investment sub-adviser, making investment decisions
for the Registrant. Investments are made under the direction of a team of FIDAC
professionals led by the individuals described below. Investment decisions are
made in a consultative manner following discussions among some or all of the
individuals described below.

Length of
Name Title with FIDAC Service Business Experience Past 5 Years

1. Wellington Denahan-Norris Chief Investment Officer 16 years Been with FIDAC since its inception in 1994

FIDAC since 2004; Times Square Capital
2. Eric Szabo MD, Chief Risk Officer 6 years Management from 2001-2004

MD, FIDAC Chief Investment
3. Rose-Marie Lyght Officer 11 years FIDAC since 1999

4. Nancy Murtha SVP, Portfolio Manager 8 years FIDAC since 2002

5. James Fortescue MD, Head of Liabilities 14 years FIDAC since 1996

(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST

INFORMATION PROVIDED AS OF OCTOBER 31, 2010.

# of Accounts Total Assets
Managed for for which
Total # of which Advisory Advisory Fee is
Name of Portfolio Manager or Accounts Total Fee is Based on Based on
Team Member* Type of Accounts* Managed Assets Performance Performance

1. Wellington Registered Investment 0 $0 0 $0
Denahan-Norris Companies:
Other Pooled Investment 4 $3.4 bill 0 $0
Vehicles:

Other Accounts: 0 $0 0 $0

2. Eric Szabo Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 4 $3.4 bill 0 $0
Vehicles:
Other Accounts: 0 $0 0 $0

3. Rose-Marie Lyght Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 4 $3.4 bill 0 $0
Vehicles:
Other Accounts: 0 $0 0 $0

4. Nancy Murtha Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 0 $0 0 $0
Vehicles:
Other Accounts: 0 $0 0 $0

5. James Fortescue Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 3 $2.03 bill 0 $0
Vehicles:
Other Accounts: 0 $0 0 $0

* Each of the Portfolio Managers set forth in the above table also have
responsibility for the day-to-day management of Annaly Capital Management,
Inc., a New York Stock Exchange-listed real estate investment trust.

POTENTIAL CONFLICTS OF INTERESTS

As shown in the table above, certain Portfolio Managers may manage other
accounts with investment strategies similar to the Registrant. Fees earned by
FIDAC may vary among these accounts. Such management of other accounts could
create conflicts of interest if a Portfolio Manager identified a limited
investment opportunity that may be appropriate for more than one account, but
the Registrant is not able to take full advantage of that opportunity due to
the need to allocate that opportunity among multiple accounts. In addition,
the Portfolio Manager may execute transactions for another account that may
adversely impact the value of securities held by the Registrant. However,
FIDAC believes that these risks are mitigated by the fact that: (i) accounts
with like investment strategies managed by a particular Portfolio Manager are
generally managed in a similar fashion, subject to exceptions to account for
particular investment restrictions or policies applicable only to certain
accounts, differences in cash flows and account sizes, and similar factors;
(ii) the securities in which the Registrant will invest are typically highly
rated liquid securities; and (iii) these Portfolio Managers do not invest
personally in any of these accounts. In addition, pursuant to FIDAC's
policies, Portfolio Managers cannot invest in a FIDAC-managed account other
than, with the permission of FIDAC's chief compliance officer. Moreover,
FIDAC has adopted trade allocation procedures that require equitable
allocation of trade orders for a particular security among participating
accounts.

(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBERS

INFORMATION PROVIDED AS OF OCTOBER 31, 2010.

The Portfolio Managers receive all of their compensation from FIDAC and its
parent company, Annaly Capital Management, Inc. ("Annaly"). Compensation is paid
in the form of base salary as well as, subject to the approval of Annaly's
compensation committee, an annual bonus. The sum of the base salary plus the
bonus, if approved, is intended to be an amount equal to a multiple of Annaly's
book value.

The base salary and potential bonus is determined pursuant to employment
contracts. Any discretionary bonuses are determined by Annaly's compensation
committee after consideration of several factors including but not necessarily
limited to:

(a) Individual performance;

(b) Annaly's overall performance; and

Any discretionary bonuses are determined by Annaly's compensation committee
after consideration of several factors including but not necessarily limited to:

(a) Individual performance;

(b) Annaly's overall performance; and

(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP

INFORMATION PROVIDED AS OF OCTOBER 31, 2010.

Dollar Range of Fund Shares
Name Beneficially Owned

Wellington Denahan-Norris $0
Eric Szabo $0
Rose-Marie Lyght $0
Nancy Murtha $0
James Fortescue $0

(b) Not applicable.

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.

ITEM 11. CONTROLS AND PROCEDURES.

(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.

ITEM 12. EXHIBITS.

(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.

(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

(a)(3) Not applicable.

(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

(registrant) First Trust/FIDAC Mortgage Income Fund

By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)

Date December 21, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date December 21, 2010

By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)

Date December 21, 2010

* Print the name and title of each signing officer under his or her
signature.