Edgar Filing: FIRST TRUST MORTGAGE INCOME FUND

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-21727
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First Trust 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, 2012
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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. ss. 3507.

ITEM 1. REPORTS TO STOCKHOLDERS.

The Report to Shareholders is attached herewith.

FIRST TRUST BROOKFIELD

FIRST TRUST
MORTGAGE INCOME FUND

ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2012

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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2012

Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 12
Statement of Operations...................................................... 13
Statements of Changes in Net Assets.......................................... 14
Statement of Cash Flows...................................................... 15
Financial Highlights......................................................... 16
Notes to Financial Statements................................................ 17
Report of Independent Registered Public Accounting Firm...................... 24
Additional Information....................................................... 25
Board of Trustees and Officers............................................... 29
Privacy Policy............................................................... 31

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 Brookfield Investment Management Inc.
("Brookfield" 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 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 the
Brookfield 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 MORTGAGE INCOME FUND (FMY)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2012

Dear Shareholders:

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

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 period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust.

First Trust remains committed to being a long-term investor and investment
manager and to bringing you quality financial solutions regardless of market ups
and downs. We have always believed, as I have written previously, that there are
two ways to attain success in reaching your financial goals: staying invested in
quality products and having a long-term investment horizon. We are committed to
this approach in the products we manage or supervise and offer to investors.

As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.

First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the New Year and to the next edition of your Fund's report.

Sincerely,

/s/ James A. Bowen

James A. Bowen
Chairman of the Board of Trustees of First Trust Mortgage Income Fund and Chief
Executive Officer of First Trust Advisors L.P.

Page 1

FIRST TRUST MORTGAGE INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2012 (UNAUDITED)

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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $19.00
Common Share Net Asset Value ("NAV") $17.91
Premium (Discount) to NAV 6.09%
Net Assets Applicable to Common Shares $75,438,617
Current Monthly Distribution per Common Share (1) $0.160
Current Annualized Distribution per CommonShare $1.920
Current Distribution Rate on Closing Common Share Price (2) 10.11%
Current Distribution Rate on NAV (2) 10.72%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/31/2011 18.94 18.43
18.87 18.37
19.09 18.33
18.71 18.01
11/25/2011 18.36 17.87
18.54 17.86
18.71 17.95
18.98 17.80
18.88 17.90
12/30/2011 19.07 17.53
19.12 17.56
19.42 17.65
19.28 17.77
1/27/2012 19.80 17.84
19.78 17.72
19.07 17.70
19.38 17.74
2/24/2012 19.53 17.81
19.72 17.72
19.47 17.73
19.53 17.80
19.30 17.90
3/30/2012 19.62 17.95
19.68 17.82
19.67 17.72
19.74 17.73
4/27/2012 19.77 17.73
19.74 17.62
19.76 17.59
18.90 17.43
5/25/2012 19.58 17.50
19.50 17.22
19.59 17.37
19.65 17.28
19.70 17.39
6/29/2012 19.81 17.40
19.60 17.24
19.42 17.31
19.55 17.45
7/27/2012 19.76 17.59
19.85 17.53
19.95 17.69
19.80 17.97
19.92 18.00
8/31/2012 20.02 17.92
20.07 17.92
20.20 18.11
20.23 18.03
9/28/2012 20.52 17.99
20.49 17.93
20.15 17.92
20.17 17.91
18.70 17.90
10/31/2012 19.00 17.91

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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (5/25/2005)
10/31/2012 10/31/2012 to 10/31/2012

FUND PERFORMANCE (3)
NAV 8.30% 8.58% 7.43%
Market Value 11.86% 12.85% 7.61%

INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency
Fixed Rate MBS Index 3.56% 6.17% 5.62%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 1.05
Weighted Average Life (Years) 5.42
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 64.3%
U.S. Government Agency Mortgage-Backed Securities 35.3
Asset-Backed Securities 0.4
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Fixed Rate Securities 55.3%
Adjustable Rate Securities 33.3
Interest Only Securities 11.4
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 58.7%
AA+ 4.0
AA 5.6
AA- 1.3
A+ 6.5
A 1.0
BBB- 1.3
BB+ 1.1
BB 0.1
B+ 0.8
B- 2.2
CCC+ 3.9
CCC 9.7
CCC- 0.8
CC 0.6
D 2.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 10/31/2012. Subject to
change in the future. The distribution was decreased subsequent to
10/31/12. See Note 8 - Subsequent Events in the Notes to Financial
Statements.

(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 10/31/2012. 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), including Standard & Poor's Ratings Group, a division of the
McGraw Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and the ratings are not equivalent, the
highest ratings are used. Sub-investment grade ratings are those rated
BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or
higher.

Page 2

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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2012

SUB-ADVISOR

BROOKFIELD INVESTMENT MANAGEMENT INC.

Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $168 billion
in assets under management as of September 30, 2012. The firm has over a
100-year history of owning and operating assets with a focus on property,
renewable power, infrastructure and private equity. They offer a range of public
and private investment products and services. On behalf of their clients,
Brookfield is also an active investor in the public securities markets.

Through their registered investment advisor, Brookfield Investment Management,
their public market activities complement the firm's core competencies as a
direct investor. These activities encompass global listed real estate and
infrastructure equities, corporate high yield investments, opportunistic credit
strategies and a dedicated insurance asset management division. Headquartered in
New York, NY, Brookfield maintains offices and investment teams in Toronto,
Chicago, Boston and London.

PORTFOLIO MANAGEMENT TEAM

ANTHONY BREAKS, CFA
DIRECTOR

Mr. Breaks is a Portfolio Manager on the Securitized Products Investments Team.
Mr. Breaks is one of four team leaders in mortgage-backed securities ("MBS") and
asset-backed securities ("ABS") and is a member of the team's securities
analysis committee. In his role, Mr. Breaks is one of the team's portfolio
managers. Mr. Breaks also has managed securitized product vehicles, such as
structured investment vehicles ("SIV"), asset-backed commercial paper ("ABCP")
and collateralized debt obligations ("CDOs") for Brookfield and has experience
in insurance company asset management. Mr. Breaks earned a Bachelor of Science
degree in Electrical Engineering from the Massachusetts Institute of Technology.
He holds the Chartered Financial Analyst designation.

CHRIS WU
DIRECTOR

Mr. Wu is a Portfolio Manager on the Securitized Products Investment Team
focusing on agency MBS. He is responsible for the firm's agency MBS exposures.
He develops quantitative tools to formulate research and develop trading
strategies for agency MBS exposures. Mr. Wu holds an MBA from New York
University as well as a Master of Science degree in Computer Science from
University of Saskatchewan. He also earned a Bachelor of Economics from Huazhong
University of Science and Technology in China.

COMMENTARY

FIRST TRUST MORTGAGE INCOME FUND

The First Trust Mortgage Income Fund's (the "Fund") 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 its objectives by investing
primarily in MBS representing part ownership in a pool of either residential or
commercial mortgage loans that, in the opinion of the Fund's Sub-Advisor, offer
an attractive combination of credit quality, yield and maturity. These
securities may be 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 ("RMBS") or
commercial mortgage-backed securities ("CMBS"). The Fund may leverage to an
aggregate amount of up to 33.33% of the Fund's Managed Assets. The Fund uses
leverage primarily through the use of repurchase agreements.

MARKET RECAP AND OUTLOOK

Securitized products had a tough start in November 2011. Three issues weighed on
investor sentiment: weakening U.S. economic data, anticipation of higher capital
requirements along with tighter regulation for financial institutions, and the
threat of a European financial crisis. The market was worried about forced
selling of securitized products and weakening performance for securitized assets
such as home loans and commercial real-estate loans. From the market's previous
high in March 2011, the subprime securities index (Markit ABX.HE Index) fell an
average of 12%, the prime jumbo mortgage securities index (Markit PrimeX Index)
fell an average of 1% and the commercial mortgage securities index (Markit CMBX
Index) fell an average of 6%. The Markit ABX.HE Index is a synthetic tradeable
index referencing a basket of 20 subprime

Page 3

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PORTFOLIO COMMENTARY - (CONTINUED)
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mortgage-backed securities. The Markit PrimeX Index is a synthetic credit
default swap index referencing a basket of prime mortgage-backed securities. The
Markit CMBX Index is a synthetic tradeable index referencing a basket of 25
commercial mortgage-backed securities.

At the start of 2012, U.S. economic activity increased and fears over the crisis
in Europe were allayed by policy action. On the U.S. economic front, we saw the
typical "Spring Thaw" occur early due to unusually warm weather and investors
seized on the improving economic data to credit and risk-oriented assets.
Trading activity was brisk for the period as large amounts of supply met strong
demand from insurance companies and money managers. A notable seller during this
period was the Federal Reserve, which began selling assets from its bailout of
AIG and Bear Stearns. Although issuance of RMBS continued to be light, there
were three new issue deals announced in the first quarter of 2012 and $4 billion
of CMBS.

Also notable were those not selling bonds during the period. European banks did
not need to sell their structured finance bonds due to policy actions by the
European Central Bank ("ECB") to provide financing for these assets. The
financing helped keep (euro)200 billion in assets that otherwise would have
risked a fire sale-type liquidation. Taken together with the ECB's commitment to
cure sovereign ills with its "Open Market Transactions" policy, a European
meltdown was forestalled, if not averted.

The Federal Reserve was also engaged in market operations during the period. The
Federal Reserve committed to a $40 billion purchase of agency MBS per month in a
new quantitative easing ("QE") program with no set termination date. The
pay-down from previous holdings (approximately $1 trillion in the Federal
Reserve's balance sheet) will also be reinvested into agency MBS. With these two
sources combined, the Federal Reserve is purchasing approximately $65 to $70
billion of mortgages a month. As the gross issuance of agency MBS is only
approximately $120 billion a month, the Federal Reserve will be buying more than
50% of the gross issuance over the foreseeable future.

This QE policy will meaningfully affect the supply and demand balance and lower
mortgage rates. It is likely that the purchase will last through the 2013
calendar year and the Federal Reserve is expected to add $500 billion in agency
MBS to its balance sheet. This action has lifted traditional agency MBS prices,
while also lifting prepayment speed expectations and lowering yields. These
policies lowered mortgage rates from 4.07% in October 2011 to 3.38% in October
2012. Lower interest rates and the active agency MBS purchase program helped
support home prices by making home purchase more affordable and encourages
refinancing of existing borrowers in a lower rate mortgage.

Lower interest rates and a stronger economy helped improve home prices for the
year. Higher home prices increase the performance of the Fund's RMBS exposure in
a number of ways, including better recoveries on defaulted loans, decreased loan
delinquency and increased prepayments. Prior to October 2011, most investors
expected a further 5% to 10% decline in home prices. Instead, we saw price
increases handily beating expectations during the spring home buying season.
While these gains will likely slip as winter approaches, we expect the year to
end with a small net gain, which should help mark an official bottom for the
housing market.

In our last report, we posted positive returns in securitized products on
improving forecasts for collateral performance and lower required yields from
investors. These dynamics remain intact as the 2012 calendar year comes to a
close. With a contraction in the premium for risk, we remain focused on
stability and income. We believe bonds with these characteristics will be the
first choice for more conventional investors expanding their allocation to MBS.
In addition, we will add securities which we believe will benefit the most from
a housing recovery. For these reasons, we continue to emphasize various types of
private label RMBS and CMBS.

PERFORMANCE ANALYSIS

For the 12 months ended October 31, 2012, the Fund had a total return1 of 8.30%
based on net asset value ("NAV"). For the period, the Fund traded from a premium
to NAV of 2.71% to a premium to NAV of 6.09%, resulting in a total return1 of
11.86%, based on market price. During the period, the Fund's benchmark, the
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index, returned 3.56%. The
Fund's outperformance relative to the benchmark is attributed to the Fund's
allocation to non-agency MBS which are not included in the benchmark. The Fund's
allocation to non-agency MBS has had returns substantially greater than agency
MBS.

Over the course of the period, the primary purchases for the Fund were
investment grade fixed-coupon CMBS and hybrid coupon non-agency RMBS. We swapped
a portion of the Fund's exposure to agency MBS derivatives as we repositioned to
reduce prepayment risk as interest rates fell. The purchases were funded with
existing cash, repaid principal on existing holdings and sales. Net of sales, we
added approximately $10.2 million in senior non-Agency RMBS, $7.1 million in
senior CMBS and $2.4 million of agency derivatives to the Fund's portfolio.

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1 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
and does not reflect sales load. Past performance is not indicative of
future results.

Page 4

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PORTFOLIO COMMENTARY - (CONTINUED)
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With the portfolio close to the limit of below "A" grade allocation, we mostly
purchased bonds above the "A" grade during the past six months. In seeking bonds
with stable yield profiles, a sector we find particularly attractive is senior
prime RMBS and super-senior RMBS backed by Option-ARM loans.

We also prefer the most senior bonds in CMBS purchases as these bonds tend to
have considerable credit enhancement to avoid losses, and consequently have high
investment-grade ratings. When spreads on these bonds widen, we see an
opportunity to pick up spread to Agencies with more price upside potential.
Manufactured housing is similarly remote from principal loss and with higher
spreads, although it is slower to find price appreciation in an improving
market.

As of October 31, 2012, the Fund's leverage was relatively low at approximately
24.30% of Managed Assets given that the Fund may utilize leverage in an amount
up to 33.33% of Managed Assets. Leverage contributed positively to the Fund's
performance during the reporting period. Where our overall budget for risk
warrants it and when the return opportunities are compelling, we are likely to
increase leverage in an attempt to improve returns. In periods of stability,
this may be an especially important tool. Please note that the Fund's benchmark
does not utilize leverage.

An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. The Fund uses leverage because its managers believe that, over time,
leverage provides opportunities for additional income and total return for
common shareholders. However, the use of leverage also can expose common
shareholders to additional volatility. For example, as the prices of securities
held by the Fund decline, the negative impact of the valuation changes on common
share net asset value and common shareholder total return is magnified by the
use of leverage. Conversely, leverage may enhance common share returns during
periods when the prices of securities held by the Fund generally are rising.

Page 5

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2012

PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ------------ --------------
MORTGAGE-BACKED SECURITIES - 86.1%

COLLATERALIZED MORTGAGE OBLIGATIONS - 57.7%

Adjustable Rate Mortgage Trust
$ 231,912 Series 2004-5, Class 1A1 (a)............... 3.13% 04/25/35 $ 228,561
Banc of America Mortgage Securities
106,185 Series 2002-L, Class 1A1 (a)............... 2.78% 12/25/32 96,455
1,436,970 Series 2007-1, Class 1A26.................. 6.00% 03/25/37 1,351,845
Bear Stearns Adjustable Rate Mortgage Trust
1,039,128 Series 2004-9, Class 12A3 (a).............. 3.08% 11/25/34 1,034,036
Countrywide Alternative Loan Trust
48,624 Series 2004-14T2, Class A6................. 5.50% 08/25/34 48,651
879,421 Series 2006-41CB, Class 2A17............... 6.00% 01/25/37 683,608
106,070 Series 2007-11T1, Class A37 (b)............ 38.76% 05/25/37 209,417
Countrywide Home Loan Mortgage Pass
Through Trust
1,017,858 Series 2006-21, Class A8................... 5.75% 02/25/37 897,318
122,810 Series 2007-15, Class 2A2.................. 6.50% 09/25/37 102,166
Countrywide Home Loans
281,859 Series 2004-HYB1, Class 2A (a)............. 2.88% 05/20/34 278,173
Credit Suisse First Boston Mortgage
Securities Corp.
1,963,981 Series 2004-AR2, Class 1A1 (a)............. 2.93% 03/25/34 1,755,016
DSLA Mortgage Loan Trust 2007-Ar1
626,461 Series 2007-AR1, Class 2A1A (a)............ 0.35% 04/19/47 460,344
GMAC Mortgage Corporation Loan Trust
336,906 Series 2004-AR1, Class 22A (a)............. 3.62% 06/25/34 331,403
GSAMP Trust
913,435 Series 2007-HE1, Class A2B................. 0.31% 03/25/47 686,455
144,681 Series 2007-NC1, Class A2A................. 0.26% 12/25/46 64,638
279,967 Series 2007-NC1, Class A2B................. 0.31% 12/25/46 125,085
3,118,935 Series 2007-NC1, Class A2C................. 0.36% 12/25/46 1,390,452
Harborview Mortgage Loan Trust
279,410 Series 2004-1, Class 2A (a)................ 2.86% 04/19/34 278,038
1,096,768 Series 2004-6, Class 3A1 (a)............... 3.01% 08/19/34 971,223
JP Morgan Mortgage Trust
2,516,588 Series 2005-ALT1, Class 4A1 (a)............ 5.21% 10/25/35 2,196,104
924,984 Series 2006-A2, Class 4A1 (a).............. 3.01% 08/25/34 937,359
JP Morgan Re-REMIC
2,196,488 Series 2009-7, Class 12A1 (a) (c) (d)...... 6.25% 01/27/37 2,271,304
Lavendar Trust
1,270,482 Series 2010-RR2A, Class A4 (e)............. 6.25% 10/26/36 763,260
MASTR Asset Securitization Trust
275,238 Series 2006-HE5, Class A2.................. 0.31% 11/25/36 141,577
1,415,513 Series 2006-HE5, Class A3.................. 0.37% 11/25/36 735,643
1,952,545 Series 2006-NC2, Class A3.................. 0.32% 08/25/36 866,180
891,243 Series 2006-NC2, Class A5.................. 0.45% 08/25/36 405,603
1,039,052 Series 2006-2, Class 1A10 (a).............. 6.00% 06/25/36 979,081
Mellon Residential Funding Corp.
488,953 Series 2001-TBC1, Class A1 (a)............. 0.91% 11/15/31 478,822
Morgan Stanley Capital, Inc.
437,570 Series 2005-HE6, Class A2C (a)............. 0.53% 11/25/35 423,573

Page 6 See Notes to Financial Statements

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (Continued)
OCTOBER 31, 2012

COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)

Morgan Stanley Mortgage Loan Trust
$ 228,464 Series 2004-7AR, Class 2A6 (a)............. 2.78% 09/25/34 $ 225,728
Nationstar Home Equity Loan Trust
1,731,000 Series 2006-B, Class AV4................... 0.49% 09/25/36 1,270,182
Natixis Real Estate Capital Trust
1,322,928 Series 2007-HE2, Class A1.................. 0.34% 07/25/37 391,240
1,394,563 Series 2007-HE2, Class A2.................. 0.46% 07/25/37 423,366
139,364 Series 2007-HE2, Class A3.................. 0.51% 07/25/37 42,764
286,112 Series 2007-HE2, Class A4.................. 0.61% 07/25/37 89,664
Option One Mortgage Loan Trust
363,000 Series 2005-4, Class M1 (a)................ 0.65% 11/25/35 300,825
Park Place Securities, Inc.
637,635 Series 2004-MHQ1, Class M1 (a)............. 0.91% 12/25/34 635,494
Provident Funding Mortgage Loan Trust
386,777 Series 2005-1, Class 1A1 (a)............... 2.97% 05/25/35 384,041
Residential Accredit Loans, Inc.
1,044,514 Series 2004-QS2, Class CB.................. 5.75% 02/25/34 1,056,921
Residential Funding Mortgage Securities I
379,149 Series 2005-S5, Class A5................... 5.25% 07/25/35 384,381
Securitized Asset Backed Receivables LLC
1,349,308 Series 2007-BR2, Class A2.................. 0.44% 02/25/37 563,548
Thornburg Mortgage Securities Trust
1,273,965 Series 2004-3, Class A (a)................. 0.95% 09/25/44 1,250,191
Wachovia Mortgage Loan Trust, LLC
875,827 Series 2006-A, Class 3A1 (a)............... 3.14% 05/20/36 830,113
WaMu Mortgage Pass Through Certificates
1,229,639 Series 2004-AR10, Class A1B (a)............ 0.67% 07/25/44 1,145,453
1,537,168 Series 2005-AR11, Class A1A (a)............ 0.53% 08/25/45 1,405,914
1,709,585 Series 2005-AR19, Class A1A2 (a)........... 0.50% 12/25/45 1,556,412
791,801 Series 2005-AR9, Class A1A (a)............. 0.53% 07/25/45 750,478
1,428,290 Series 2006-AR5, Class A1A (a)............. 1.14% 06/25/46 1,110,039
730,956 Series 2007-OA1, Class A1A (a)............. 0.85% 02/25/47 505,663
Washington Mutual Alternative Mortgage
Pass-Through Certificates
64,339 Series 2007-5, Class A11 (b)............... 38.22% 06/25/37 114,555
Washington Mutual MSC Mortgage Pass-Through
612,369 Series 2004-RA1, Class 2A.................. 7.00% 03/25/34 648,478
Wells Fargo Mortgage Backed Securities Trust
1,120,104 Series 2004-A, Class A1 (a)................ 4.88% 02/25/34 1,158,728
531,867 Series 2005-AR16, Class 1A1 (a)............ 2.75% 08/25/33 548,468
495,000 Series 2006-AR1, Class 2A5 (a)............. 5.36% 03/25/36 491,674
1,408,401 Series 2006-AR10, Class 5A2 (a)............ 2.61% 07/25/36 1,214,491
1,575,966 Series 2007-10, Class 1A18................. 6.00% 07/25/37 1,586,517
1,096,321 Series 2007-16, Class 1A1.................. 6.00% 12/28/37 1,132,615
920,137 Series 2007-2, Class 1A13.................. 6.00% 03/25/37 865,008
232,084 Series 2007-8, Class 2A2................... 6.00% 07/25/37 229,929
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS................................ 43,504,270
--------------

See Notes to Financial Statements Page 7

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (Continued)
OCTOBER 31, 2012

Banc of America Commercial Mortgage
Trust 2006-6
$ 1,000,000 Series 2006-6, Class AJ.................... 5.42% 10/10/45 $ 810,127
Banc of America Merrill Lynch Commercial
Mortgage, Inc.
1,000,000 Series 2006-6, Class A4.................... 5.36% 10/10/45 1,153,888
1,000,000 Series 2007-2, Class A4 (a) (d)............ 5.63% 04/10/49 1,169,942
Citigroup/Deutsche Bank Commercial
Mortgage Trust
1,000,000 Series 2007-CD4, Class A4.................. 5.32% 12/11/49 1,154,779
Credit Suisse Mortgage Capital Certificates
820,000 Series 2007-C2, Class A3 (a)............... 5.54% 01/15/49 931,580
Greenwich Capital Commercial Funding Corp.....
2,980,000 Series 2007-GG11, Class A4 (d)............. 5.74% 12/10/49 3,530,629
1,000,000 Series 2007-GG9, Class A4 (d).............. 5.44% 03/10/39 1,158,197
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (a)............. 5.79% 08/10/45 1,153,968
JP Morgan Chase Commercial Mortgage
Securities Corp.
905,000 Series 2007-CB18, Class A4................. 5.44% 06/12/47 1,052,061
1,500,000 Series 2007-LD12, Class A4................. 5.88% 02/15/51 1,784,057
LB-UBS Commercial Mortgage Trust
1,200,000 Series 2007-C7, Class A3 (a) (d)........... 5.87% 09/15/45 1,447,679
Merrill Lynch/Countrywide Commercial
Mortgage Trust
1,200,000 Series 2007-7, Class A4 (a) (d)............ 5.73% 06/12/50 1,378,415
Wachovia Bank Commercial Mortgage Trust
1,000,000 Series 2007-C30, Class A5 (d).............. 5.34% 12/15/43 1,153,523
1,000,000 Series 2007-C31, Class A4.................. 5.51% 04/15/47 1,163,079
1,000,000 Series 2007-C32, Class A3 (a).............. 5.75% 06/15/49 1,154,993
1,000,000 Series 2007-C33, Class A4 (a).............. 5.92% 02/15/51 1,194,285
--------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES.............................. 21,391,202
--------------
TOTAL MORTGAGE-BACKED SECURITIES......................................... 64,895,472
(Cost $61,056,791) --------------

U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 47.2%

COLLATERALIZED MORTGAGE OBLIGATIONS - 18.9%
Federal Home Loan Mortgage Corp.
422,000 Series 2641, Class SC (b).................. 13.47% 07/15/33 434,954
4,202,859 Series 2807, Class SB, IO (b).............. 7.24% 11/15/33 597,080
272,763 Series 3069, Class LI, IO.................. 5.50% 08/15/32 4,408
134,831 Series 3195, Class SX (b).................. 44.76% 07/15/36 213,315
1,358,774 Series 3562, Class KI, IO.................. 4.50% 11/15/22 60,188
1,151,739 Series 3593, Class IP, IO.................. 5.00% 06/15/36 44,812
5,830,629 Series 3619, Class EI, IO.................. 4.50% 05/15/24 438,633
3,907,913 Series 3692, Class PS, IO (b).............. 6.39% 05/15/38 425,603
999,009 Series 3702, Class SK (b).................. 14.06% 08/15/40 1,037,265
8,395,333 Series 3726, Class KI, IO.................. 3.50% 04/15/25 618,960
4,574,482 Series 3870, Class WS, IO (b).............. 6.39% 06/15/31 697,972

Page 8 See Notes to Financial Statements

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (Continued)
OCTOBER 31, 2012

COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)

$ 2,944,008 Federal Home Loan Mortgage Corp., STRIP
Series 232, Class IO, IO................... 5.00% 08/01/35 $ 412,708
Federal National Mortgage Association
2,036,201 Series 2005-122, Class SN (b).............. 27.76% 01/25/36 3,181,091
196,320 Series 2005-91, Class SH (b)............... 23.06% 05/25/33 218,514
1,360,055 Series 2008-50, Class AI, IO............... 5.50% 06/25/23 72,444
5,472,560 Series 2010-103, Class ID, IO.............. 5.00% 09/25/40 1,005,372
8,529,523 Series 2010-139, Class KI, IO.............. 1.09% 12/25/40 499,376
2,902,184 Series 2010-142, Class PS, IO (b).......... 5.84% 05/25/40 281,768
2,246,906 Series 2010-145, Class TI, IO.............. 3.50% 12/25/20 159,986
6,961,341 Series 2010-40, Class MI, IO............... 4.50% 08/25/24 452,909
Federal National Mortgage Association, STRIP..
3,269,612 Series 360, Class 2, IO.................... 5.00% 08/01/35 446,267
5,281,304 Series 406, Class 6, IO (a)................ 4.00% 01/25/41 524,367
Government National Mortgage Association
2,256,022 Series 2009-65, Class NJ, IO............... 5.50% 07/20/39 265,686
4,798,330 Series 2010-115, Class IQ, IO.............. 4.50% 11/20/38 657,871
3,740,877 Series 2011-69, Class CI, IO............... 5.00% 03/20/36 268,087
12,142,656 Series 2011-131, Class EI, IO.............. 4.50% 08/20/39 1,228,377
--------------
14,248,013
--------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 3.1%
Government National Mortgage Association
9,076,172 Series 2012-100, Class IO, IO (d).......... 0.89% 08/16/52 670,135
12,226,622 Series 2012-70, Class IO, IO (d)........... 0.96% 08/16/52 842,995
7,562,952 Series 2012-78, Class IO, IO (d)........... 1.05% 06/16/52 586,843
2,692,881 Series 2012-95, Class IO, IO (d)........... 1.05% 02/16/53 248,402
--------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES.............................. 2,348,375
--------------
PASS-THROUGH SECURITIES - 25.2%
Fannie Mae REMICs
1,815,864 Series 2005-83, Class LZ (d)............... 5.50% 10/25/35 1,923,218
356,144 Series 2010-110, Class WG (d).............. 5.50% 09/25/40 356,762
Federal Home Loan Mortgage Corp.
5,000,000 Gold Pool.................................. 3.50% 11/01/42 5,316,406
2,479,770 Pool A94738 (d)............................ 4.50% 11/01/40 2,665,297
1,291,801 Pool K36017 (d)............................ 5.00% 09/01/47 1,388,912
Federal National Mortgage Association
3,202,900 Pool 831145 (d)............................ 6.00% 12/01/35 3,614,095
3,330,188 Pool 843971 (d)............................ 6.00% 11/01/35 3,771,255
--------------
19,035,945
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES.................. 35,632,333
(Cost $36,555,158) --------------

See Notes to Financial Statements Page 9

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (Continued)
OCTOBER 31, 2012

PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ------------ --------------
ASSET-BACKED SECURITIES - 0.50%

Green Tree Financial Corp.

$ 105,324 Series 1997-2, Class A6 (a)................ 7.24% 06/15/28 $ 113,136
117,851 Series 1997-3, Class A6.................... 7.32% 03/15/28 130,147
146,283 Series 1997-7, Class A6.................... 6.76% 07/15/28 157,226
--------------
TOTAL ASSET-BACKED SECURITIES............................................ 400,509
(Cost $389,892) --------------
TOTAL INVESTMENTS - 133.8%............................................... 100,928,314
(Cost $98,001,841) (f) --------------

PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- --------------------------------------------------------------------------- --------------

REVERSE REPURCHASE AGREEMENTS - (32.2%)

(2,168,000) With JP Morgan 0.72% dated 10/01/12, to be repurchased at
$2,169,344 on 11/01/12................................................. (2,168,000)
(702,000) With JP Morgan 1.07% dated 10/05/12, to be repurchased at
$702,646 on 11/05/12................................................... (702,000)
(1,773,000) With JP Morgan 1.72% dated 10/05/12, to be repurchased at
$1,775,624 on 11/05/12................................................. (1,773,000)
(5,758,500) With Credit Suisse 1.55% dated 10/09/12, to be repurchased at
$5,766,186 on 11/09/12................................................. (5,758,500)
(1,863,675) With Credit Suisse 1.55% dated 10/23/12, to be repurchased at
$1,865,039 on 11/09/12 ................................................ (1,863,675)
(700,000) With JP Morgan 1.06% dated 10/11/12, to be repurchased at
$700,683 on 11/13/12................................................... (700,000)
(495,000) With JP Morgan 1.06% dated 10/25/12, to be repurchased at
$495,467 on 11/26/12................................................... (495,000)
(6,953,000) With JP Morgan 0.45% dated 10/12/12, to be repurchased at
$6,958,302 on 12/12/12................................................. (6,953,000)
(3,847,000) With JP Morgan 0.46% dated 10/17/12, to be repurchased at
$3,849,999 on 12/17/12................................................. (3,847,000)
--------------
TOTAL REVERSE REPURCHASE AGREEMENTS...................................... (24,260,175)

NET OTHER ASSETS AND LIABILITIES - (1.6%)................................ (1,229,522)
--------------
NET ASSETS - 100.0%...................................................... $ 75,438,617
==============

Page 10 See Notes to Financial Statements

FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (Continued)
OCTOBER 31, 2012

(a) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2012.

(b) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at October 31, 2012.

(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), and may be resold in transactions
exempt from registration, normally to qualified institutional buyers. 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 in the Notes to Financial
Statements) 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 $2,175,609, a carrying value per
share of $1.03 and represents 3.01% of net assets.

(d) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.

(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), and may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be liquid by Brookfield Investment
Management Inc., the Fund's sub-advisor. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At October 31, 2012,
securities noted as such amounted to $763,260, or 1.01% of net assets.

(f) Aggregate cost for federal income tax purposes is $100,200,348. As of
October 31, 2012, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$6,599,854 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$5,871,888.

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,
2012 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):

ASSETS TABLE

LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2012 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------

Mortgage-Backed Securities.......................... $ 55,575,923 $ -- $ 55,575,923 $ --
U.S. Government Agency Mortgage-Backed Securities... 35,632,333 -- 35,632,333 --
Asset-Backed Securities............................. 9,720,058 -- 9,720,058 --
-------------- -------------- -------------- --------------
TOTAL............................................... $ 100,928,314 $ -- $ 100,928,314 $ --
============== ============== ============== ==============

LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2012 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Reverse Repurchase Agreements....................... $ (24,260,175) $ -- $ (24,260,175) $ --
============== ============== ============== ==============

All transfers in and out of the Levels during the period are assumed to be on
the last day of the period at their current value. There were no transfers
between Levels at October 31, 2012.

See Notes to Financial Statements Page 11

FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2012

ASSETS:

Investments, at value
(Cost $98,001,841).......................................................................... $ 100,928,314
Cash........................................................................................... 3,090,044
Restricted cash................................................................................ 867,000
Prepaid expenses............................................................................... 123,516
Interest receivable............................................................................ 610,573
-------------
Total Assets................................................................................ 105,619,447
-------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 24,260,175
Payables:......................................................................................
Investment securities purchased............................................................. 5,726,985
Investment advisory fees.................................................................... 83,243
Audit and tax fees.......................................................................... 47,836
Printing fees............................................................................... 15,474
Interest on reverse repurchase agreements................................................... 13,629
Administrative fees......................................................................... 7,500
Legal fees.................................................................................. 6,308
Transfer agent fees......................................................................... 4,871
Custodian fees.............................................................................. 4,092
Trustees' fees and expenses................................................................. 1,660
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 8,286
-------------
Total liabilities........................................................................... 30,180,830
-------------
NET ASSETS.................................................................................. $ 75,438,617
=============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 79,323,130
Par value...................................................................................... 42,111
Accumulated net investment income (loss)....................................................... (1,191,667)
Accumulated net realized gain (loss) on investments............................................ (5,661,430)
Net unrealized appreciation (depreciation) on investments...................................... 2,926,473
-------------
NET ASSETS..................................................................................... $ 75,438,617
=============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.91
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,211,129
=============

Page 12 See Notes to Financial Statements

FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2012

INVESTMENT INCOME:

Interest....................................................................................... $ 7,102,116
-------------
Total investment income..................................................................... 7,102,116
-------------
EXPENSES:
Investment advisory fees....................................................................... 949,581
Excise tax expense............................................................................. 229,244
Interest expense on reverse repurchase agreements.............................................. 198,703
Administrative fees............................................................................ 89,997
At the market offering costs................................................................... 65,893
Audit and tax fees............................................................................. 48,635
Transfer agent fees............................................................................ 41,801
Printing fees.................................................................................. 41,361
Trustees' fees and expenses.................................................................... 22,859
Legal fees..................................................................................... 19,858
Custodian fees................................................................................. 15,618
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 66,537
-------------
Total expenses.............................................................................. 1,799,337
-------------
NET INVESTMENT INCOME.......................................................................... 5,302,779
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):.......................................................
Net realized gain (loss) on investments..................................................... (1,903,304)
Net change in unrealized appreciation (depreciation) on investments......................... 2,616,211
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 712,907
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 6,015,686
=============

See Notes to Financial Statements Page 13

FIRST TRUST MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS

YEAR YEAR
ENDED ENDED
10/31/2012 10/31/2011
------------- -------------
OPERATIONS:

Net investment income (loss)....................................................... $ 5,302,779 $ 6,873,389
Net realized gain (loss)........................................................... (1,903,304) 1,524,527
Net change in unrealized appreciation (depreciation)............................... 2,616,211 (4,901,731)
------------- -------------
Net increase (decrease) in net assets resulting from operations.................... 6,015,686 3,496,185
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (8,321,681) (8,244,891)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- --
------------- -------------
Total distributions to shareholders................................................ (8,321,681) (8,244,891)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through at the market offerings................... 2,403,089 --
Proceeds from Common Shares reinvested............................................. 327,282 268,427
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions.......... 2,730,371 268,427
------------- -------------
Total increase (decrease) in net assets............................................ 424,376 (4,480,279)

NET ASSETS:
Beginning of period................................................................ 75,014,241 79,494,520
------------- -------------
End of period...................................................................... $ 75,438,617 $ 75,014,241
============= =============
Accumulated net investment income (loss) at end of period.......................... $ (1,191,667) $ 3,958,078
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,070,832 4,056,945
Common Shares sold through at the market offerings................................. 122,655 --
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 17,642 13,887
------------- -------------
Common Shares at end of period..................................................... 4,211,129 4,070,832
============= =============

Page 14 See Notes to Financial Statements

FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2012

CASH FLOWS FROM OPERATING ACTIVITIES:

Net increase (decrease) in net assets resulting from operations ................... $ 6,015,686
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments..................................................... (47,642,447)
Sales, maturities and paydowns on investments................................ 43,446,845
Net amortization/accretion of premiums/discounts on investments.............. 3,543,813
Net realized gain/loss on investments........................................ 1,903,304
Net change in unrealized appreciation/depreciation on investments............ (2,616,211)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable.............................................. 191,767
Increase in prepaid expenses................................................. (115,358)
Increase in restricted cash.................................................. (377,000)
Decrease in interest payable on reverse repurchase agreements................ (5,729)
Increase in investment advisory fees payable................................. 333
Increase in audit and tax fees payable....................................... 2,652
Increase in legal fees payable............................................... 4,332
Increase in printing fees payable............................................ 3,872
Increase in custodian fees payable........................................... 207
Increase in transfer agent fees payable...................................... 1,165
Decrease in Trustees' fees and expenses payable.............................. (1,632)
Increase in other liabilities payable........................................ 4,364
-------------

CASH PROVIDED BY OPERATING ACTIVITIES........................................ $ 4,359,963
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares sold............................................... 2,403,089
Proceeds of Common Shares reinvested......................................... 327,282
Distributions to Common Shareholders from net investment income.............. (8,321,681)
Repurchases of reverse repurchase agreements................................. (112,000,350)
Reverse repurchase agreements borrowings..................................... 113,266,775
-------------

CASH USED BY FINANCING ACTIVITIES.................................................. (4,324,885)
-------------
Increase in cash................................................................... 35,078
Cash at beginning of period........................................................ 3,054,966
-------------
CASH AT END OF PERIOD.............................................................. $ 3,090,044
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................... $ 204,432
=============

See Notes to Financial Statements Page 15

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

YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
10/31/2012 10/31/2011 (b) 10/31/2010 (a) 10/31/2009 10/31/2008
-------------- -------------- -------------- -------------- --------------

Net asset value, beginning of period........ $ 18.43 $ 19.59 $ 19.63 $ 18.03 $ 18.66
-------------- -------------- -------------- -------------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.28 1.69 2.06 1.57 1.49
Net realized and unrealized gain (loss)..... 0.17 (0.82) (0.45) 1.40 (1.00)
-------------- -------------- -------------- -------------- --------------
Total from investment operations............ 1.45 0.87 1.61 2.97 0.49
-------------- -------------- -------------- -------------- --------------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (2.03) (2.03) (1.65) (1.37) (1.12)
-------------- -------------- -------------- -------------- --------------
Total from distributions.................... (2.03) (2.03) (1.65) (1.37) (1.12)
-------------- -------------- -------------- -------------- --------------
Premium from shares sold in at the market
offering................................. 0.06 -- -- -- --
-------------- -------------- -------------- -------------- --------------
Net asset value, end of period.............. $ 17.91 $ 18.43 $ 19.59 $ 19.63 $ 18.03
============== ============== ============== ============== ==============
Market value, end of period................. $ 19.00 $ 18.94 $ 20.70 $ 17.91 $ 15.71
============== ============== ============== ============== ==============
TOTAL RETURN BASED ON NET ASSET VALUE (c)... 8.30% 4.60% 9.01% 18.21% 3.38%
============== ============== ============== ============== ==============
TOTAL RETURN BASED ON MARKET VALUE (c)...... 11.86% 1.68% 26.18% 23.91% 2.94%
============== ============== ============== ============== ==============

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

RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 75,439 $ 75,014 $ 79,495 $ 79,462 $ 72,956
Ratio of total expenses to average
net assets .............................. 2.47% 2.23% 2.00% 2.07% 2.69%
Ratio of total expenses to average net
assets excluding interest expense........ 2.20% 2.14% 1.95% 1.99% 1.83%
Ratio of net investment income (loss) to
average net assets........................ 7.28% 8.74% 10.50% 9.01% 7.93%
Portfolio turnover rate..................... 52% 47% 36% 39% 10%

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

(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.

(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc. ("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.

(c) 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.

Page 16 See Notes to Financial Statements

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NOTES TO FINANCIAL STATEMENTS
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FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

1. FUND DESCRIPTION

First Trust 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 primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" 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. Please refer to
Note 8 - Subsequent Events for a change in certain Fund investment strategies.

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 ("U.S. GAAP") 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. The Fund's securities will be valued as follows:

U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities 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 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. 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. 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;

Page 17

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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

3) the type, size and cost of a security;

4) the financial statements of the issuer;

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.

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 investments. An active market is a market in which
transactions for the investment 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 investments in active markets.

o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, 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
investment (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
investment.

The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2012, 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. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. 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, 2012, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.

Page 18

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

C. REVERSE REPURCHASE AGREEMENTS:

Reverse repurchase agreements were 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
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, 2012:

Maximum amount outstanding during the period .................. $24,261,775
Average amount outstanding during the period* ................. $22,156,588
Average Common Shares outstanding during the period ........... 4,106,189
Average debt per Common Share outstanding during the period ... $5.40

* 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, 2012.

During the year ended October 31, 2012, the interest rates ranged from 0.31% to
1.97%, with a weighted average interest rate of 0.87%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$198,703.

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 are
identified on 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 ("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 any, are identified on
the Portfolio of Investments.

F. INTEREST-ONLY SECURITIES:

An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security 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 any, are identified on 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 of any net long-term capital
gains earned by the Fund are distributed at least annually. 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 net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some point in the future.
Permanent differences incurred during the fiscal year ended October 31, 2012,
primarily as a result of differing book/tax treatment on recognition of
amortization/accretion on portfolio holdings, have been reclassified at year end
to reflect a decrease in accumulated net investment income (loss) by $2,130,843,
an increase in accumulated net realized gain (loss) on investments by $2,451,050
and a decrease to paid-in capital of $320,207. Net assets were not affected by
this reclassification.

Page 19

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

The tax character of distributions paid during the fiscal year ended October 31,
2012 and October 31, 2011 was as follows:

Distributions paid from: 2012 2011
Ordinary income................................. $ 8,321,681 $ 8,244,891
Capital gain.................................... -- --
Return of capital............................... -- --

As of October 31, 2012, the distributable earnings and net assets on a tax basis
were as follows:

Undistributed ordinary income................... $ 1,006,840
Undistributed capital gains..................... --
-----------
Total undistributed earnings.................... 1,006,840
Accumulated capital and other losses............ (5,661,430)
Net unrealized appreciation (depreciation)...... 727,966
-----------
Total accumulated earnings (losses)............. (3,926,624)
Other........................................... --
Paid-in capital................................. 79,365,241
-----------
Net assets...................................... $75,438,617
===========

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 approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.

Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses recognized after December 31, 2010, may be carried forward
indefinitely, and their character is retained as short-term and/or long-term
losses. Previously, net capital losses were carried forward up to eight years
and treated as short-term losses. As a transition rule, the Act requires that
post-enactment net capital losses be used before pre-enactment net capital
losses. At October 31, 2012, the Fund had pre-enactment net capital losses for
federal income tax purposes of $5,661,430 expiring as follows:

EXPIRATION DATE AMOUNT
October 31, 2014 $ 2,311,558
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887

During the taxable year ended October 31, 2012, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $620,694.

The Fund is subject to certain limitations under the 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.

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 2009, 2010,
2011, and 2012 remain open to federal and state audit. As of October 31, 2012,
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 will pay all expenses directly related to its operations.

J. ACCOUNTING PRONOUNCEMENT:

In April 2011, the Financial Accounting Standards Board ("FASB") released
Accounting Standards Update ("ASU") No. 2011-03, "Reconsideration of Effective
Control for Repurchase Agreements." This ASU amends FASB Accounting Standards
Codification ("ASC") Topic 860, "Transfers and Servicing"; specifically the
criteria required to determine whether a repurchase agreement and similar
agreements should be accounted for as sales of financial assets or secured
borrowing with commitments. This ASU is effective for fiscal years and interim
periods beginning on or after December 15, 2011. Management has concluded that
the adoption of ASU No. 2011-03 is not expected to have a material impact on the
Fund's financial statements and the accompanying notes, net assets or results of
operations.

Page 20

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

In May 2011, the FASB issued ASU 2011-04 "Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," modifying
Topic 820, "Fair Value Measurements and Disclosures." At the same time, the
International Accounting Standards Board ("IASB") issued International Financial
Reporting Standard ("IFRS") 13, "Fair Value Measurement." The objective of the
FASB and IASB is convergence of their guidance on fair value measurements and
disclosures. Specifically, the ASU requires reporting entities to disclose (i)
the amounts of any transfers between Level 1 and Level 2, and the reasons for
the transfers, (ii) for Level 3 fair value measurements, quantitative
information about significant unobservable inputs used, (iii) a description of
the valuation processes used by the reporting entity, and (iv) a narrative
description of the sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs might result in a significantly
higher or lower fair value measurement. The effective date of the ASU is for
interim and annual periods beginning after December 15, 2011, and it is
therefore not effective for the current fiscal year. Management is in the
process of assessing the impact of the updated standards on the Fund's financial
statements, 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. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. 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). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.

Brookfield 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.

BNY Mellon Investment Servicing (US) Inc. serves as the Fund's Administrator,
Fund Accountant and Transfer Agent in accordance with certain fee arrangements.
The Bank of New York Mellon serves as the Fund's Custodian in accordance with
certain fee arrangements.

Effective January 23, 2012, James A. Bowen resigned from his position as the
President and Chief Executive Officer of the Fund. He will continue as a
Trustee, the Chairman of the Board of Trustees and a member of the Executive
Committee. The Board elected Mark R. Bradley to serve as the President and Chief
Executive Officer of the Fund and James M. Dykas to serve as the Treasurer,
Chief Financial Officer and Chief Accounting Officer of the Fund.

Effective January 1, 2012, each Trustee who is not an officer or employee of
First Trust, any sub-advisor or any of their affiliates ("Independent Trustees")
is paid a fixed annual retainer of $125,000 per year and an annual per fund fee
of $4,000 for each closed-end fund or other actively managed fund and $1,000 for
each index fund in the First Trust Fund Complex. The fixed annual retainer is
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Prior to January 1, 2012, each Independent Trustee received 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 additional trust in
the First Trust Fund Complex. The annual retainer was allocated equally among
each of the trusts.

Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Prior to January 1, 2012, the annual amounts paid were $10,000, $5,000
and $2,500, respectively. Trustees are reimbursed 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 until December 31, 2013 before
rotating to serve as chairman of another committee or as Lead Independent
Trustee. After December 31, 2013, the Lead Independent Trustee and Committee
chairmen will rotate every three years. The officers and "Interested" Trustee
receive no compensation from the funds for acting 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,
2012 were $14,785,971 and $38,575,278, 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, 2012 were
$15,938,055 and $30,499,271, respectively.

Page 21

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

5. COMMON SHARE OFFERING

On June 21, 2012, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services, LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares. Sales
of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Fund's Common Shares at the time such Common Shares are initially
sold. The Fund has used the net proceeds from the sale of the Common Shares in
accordance with its investment objectives and policies. Transactions for the
year ended October 31, 2012 related to offerings under such sales agreement are
as follows:

Common Net Proceeds
Shares Net Proceeds Net Asset Value Received in
Sold Received of Shares Sold Excess of Net Asset Value
--------- -------------- --------------- -------------------------
122,655 $ 2,403,089 $ 2,163,307 $ 239,782

Additionally, offering costs of $182,203 related to this offering have been
recorded as a prepaid asset and are being amortized to expense by the Fund on a
straight line basis over the lesser of one year or until the Fund sells
1,000,000 Common Shares related to this offering.

6. 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.

7. 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.

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, IO securities and 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.

Page 22

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012

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.

8. 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 the following subsequent events:

On October 22, 2012, the Fund declared a dividend of $0.14 per share to Common
Shareholders of record on November 5, 2012, payable November 15, 2012. This is a
decrease from the prior month's distribution paid on October 15, 2012, of $0.16
per share.

On November 20, 2012, the Fund declared a dividend of $0.14 per share to Common
Shareholders of record on December 5, 2012, payable December 10, 2012.

On December 20, 2012, the Fund declared a dividend of $0.14 per share to Common
Shareholders of record on December 31, 2012, payable January 15, 2013.

CHANGE IN CERTAIN INVESTMENT STRATEGIES

On December 10, 2012, the Fund's Board of Trustees approved a change to certain
of the Fund's investment strategies. The Fund's investment strategies are
non-fundamental policies of the Fund and require 60 days' prior written notice
to shareholders before they can be changed by the Board without receiving
shareholder approval. As such, on or about March 8, 2013, the following Fund
investment strategy will become effective:

o The Fund may invest up to 10% of its Managed Assets in Other MBS (as
defined in the Fund's Prospectus) and ABS securities, including
non-mortgage ABS securities.

Page 23

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MORTGAGE INCOME FUND:

We have audited the accompanying statement of assets and liabilities of First
Trust Mortgage Income Fund ("the Fund"), including the portfolio of investments,
as of October 31, 2012, 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 each of the
five years in the period then ended. 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, 2012 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. 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 the
First Trust Mortgage Income Fund as of October 31, 2012, 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 each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Chicago, Illinois
December 24, 2012

Page 24

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

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (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.

Page 25

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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

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.

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.

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 May 8, 2012, 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.

TAX INFORMATION

Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2012, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.

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, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund, First Trust High Income
Long/Short Fund and First Trust Energy Infrastructure Fund was held on April 18,
2012 (the "Annual Meeting"). At the Annual Meeting, Thomas R. Kadlec and Richard
E. Erickson were elected by the Common Shareholders of the First Trust Mortgage
Income Fund as Class II Trustees for three-year terms expiring at the Fund's
annual meeting of shareholders in 2015. The number of votes cast in favor of Mr.
Kadlec was 3,627,290, the number of votes against was 46,868 and the number of
abstentions was 401,919. The number of votes cast in favor of Mr. Erickson was
3,612,890, the number of votes against was 61,268 and the number of abstentions
was 401,919. James A. Bowen, Niel B. Nielson and Robert F. Keith are the other
current and continuing Trustees.

BOARD CONSIDERATIONS

The Board of Trustees of First Trust Mortgage Income Fund (the "Fund"),
including the Independent Trustees, approved the continuation of the Investment
Management Agreement (the "Advisory Agreement") between the Fund and First Trust
Advisors L.P. (the "Advisor") and the Investment Sub-Advisory Agreement (the
"Sub-Advisory Agreement" and together with the Advisory Agreement, the
"Agreements") among the Fund, the Advisor and Brookfield Investment Management
Inc. (the "Sub-Advisor"), at a meeting held on June 10-11, 2012. The Board
determined that the continuation of the Agreements is in the best interests of
the Fund in light of the extent and quality of the services provided and such
other matters as the Board considered to be relevant in the exercise of its
reasonable business judgment.

To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (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. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, 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

Page 26

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ADDITIONAL INFORMATION - (CONTINUED)
--------------------------------------------------------------------------------

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

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. Following receipt of this information, counsel to the Independent
Trustees posed follow-up questions, and the Independent Trustees and their
counsel then met separately to discuss the information provided by the Advisor
and the Sub-Advisor, including the supplemental responses. The Board applied its
business judgment to determine whether the arrangements between the Fund and the
Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable
business arrangements from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund. The Board also considered that the Advisory
Agreement was approved by shareholders of the Fund at a meeting held in December
2010. The Board noted that shareholders had approved the Sub-Advisory Agreement
at a meeting held on July 25, 2011, and that the Sub-Advisor had begun serving
as such on April 29, 2011.

In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. With respect to the Sub-Advisory Agreement,
the Board received a presentation from representatives of the Sub-Advisor
discussing the services that the Sub-Advisor provides to the Fund and how the
Sub-Advisor manages the Fund's investments. The Board noted changes made to the
Fund's portfolio by the Sub-Advisor subsequent to its taking over day-to-day
management of the Fund's investments in April 2011. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of services provided to the Fund by the Advisor and the
Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objectives and policies.

The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts with investment objectives and policies similar to the Fund's. The
Board noted that the Advisor charges a lower advisory fee rate to the separately
managed accounts, as well as the Advisor's statement that the nature of the
services provided to the separately managed accounts is not comparable to those
provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other closed-end funds it manages, noting that the Fund's sub-advisory fee rate
is lower than the fees charged by the Sub-Advisor to the other funds it manages.
In addition, the Board received data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the advisory fees and expense ratios of the Fund as
compared to the advisory fees and expense ratios of a peer group selected by
Lipper and similar data for a separate peer group selected by the Advisor. The
Board noted that the Lipper and Advisor peer groups included only two
overlapping peer funds. The Board discussed with representatives of the Advisor
the limitations in creating a relevant peer group for the Fund, including that
(i) the Fund is unique in its composition, which makes assembling peers with
similar strategies and asset mix difficult; (ii) peer funds may use different
types of leverage which have different costs associated with them; (iii) most
peer funds do not employ an advisor/sub-advisor management structure; and (iv)
many of the peer funds are larger than the Fund, which causes the Fund's fixed
expenses to be higher on a percentage basis as compared to the larger peer
funds. The Board took these limitations into account in considering the peer
data. In reviewing the peer data, the Board noted that the Fund's contractual
advisory fee was above the median of both the Lipper and Advisor peer groups.

The Board also considered performance information for the Fund, noting that the
performance information included 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. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to the Lipper peer
group, as well as to a larger peer universe and to a benchmark. In reviewing the
Fund's performance as compared to the performance of the Lipper peer group and
Lipper peer universe, the Board took into account the limitations described
above with respect to creating a relevant peer group for the Fund. The Board
also considered the Fund's dividend yield as of March 30, 2012 and an analysis
prepared by the Advisor on the continued benefits provided by the Fund's
leverage. In addition, the Board compared the Fund's premium/discount over the
past eight quarters to the average and median premium/discount of the Advisor
peer group over the same period, noting that the Fund's premium/discount was
generally indicative of the asset class and market events.

Page 27

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ADDITIONAL INFORMATION - (CONTINUED)
--------------------------------------------------------------------------------

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.

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 noted the Advisor's statement that
economies of scale in providing services to the Fund are not available at
current asset levels. The Board determined that due to the Fund's closed-end
structure, the potential for realization of economies of scale as Fund assets
grow was not a material factor to be considered. The Board also considered the
costs of the services provided and profits realized by the Advisor from serving
as investment advisor to the Fund for the twelve months ended December 31, 2011,
as set forth in the materials provided to the Board. The Board noted the
inherent limitations in the profitability analysis, and concluded that the
Advisor's estimated profitability appeared to be not excessive in light of the
services provided to the Fund. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund, including the Advisor's compensation for fund reporting services
pursuant to a separate Fund Reporting Services Agreement.

The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it does not expect
economies of scale to be present in connection with its provision of services to
the Fund. The Board noted that the Sub-Advisor did not provide information with
respect to the profitability of the Sub-Advisory Agreement to the Sub-Advisor;
however, 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 considered that the profitability analysis for the Advisor was
more relevant. The Board noted that the Sub-Advisor does not maintain any
soft-dollar arrangements and that the Sub-Advisor indicated that it does not
anticipate 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, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.

Page 28

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

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.

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

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

Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton Orthopedics; 96 None
c/o First Trust Advisors L.P. Co-Owner and Co-Director (January 1996
120 East Liberty Drive, o Since Fund to May 2007), Sports Med Center for
Suite 400 Inception Fitness; Limited Partner, Gundersen Real
Wheaton, IL 60187 Estate Limited Partnership; Member,
D.O.B.: 04/51 Sportsmed LLC

Thomas R. Kadlec, Trustee o Three Year Term President (March 2010 to Present), Senior 96 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), Vice President Inc. and ADM
Suite 400 Inception and Chief Financial Officer (1990 to May Investor Services
Wheaton, IL 60187 2007), ADM Investor Services, Inc. (Futures International
D.O.B.: 11/57 Commission Merchant)

Robert F. Keith, Trustee o Three Year Term President (2003 to Present), Hibs 96 Director of
c/o First Trust Advisors L.P. Enterprises (Financial and Management Trust Company
120 East Liberty Drive, o Since Fund Consulting) of Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56

Niel B. Nielson, Trustee o Three Year Term President and Chief Executive Officer (June 96 Director of
c/o First Trust Advisors L.P. 2012 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2012), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54

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

James A. Bowen(1), Trustee, o Three Year Term Chief Executive Officer (December 2010 96 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)

-----------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer 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 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Neil B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2013 annual meeting of shareholders.

Page 29

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

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

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

------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------

Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)

James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to January 2011), Vice
Suite 400 Accounting Officer o Since January 2012 President (January 2005 to April 2007), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust Portfolios L.P.
D.O.B.: 01/66

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

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

Kristi A. Maher Assistant Secretary and o Indefinite Term Deputy General Counsel (May 2007 to Present)
120 E. Liberty Drive, Chief Compliance Officer
Suite 400 o Assistant Secretary
Wheaton, IL 60187 Since Fund Inception
D.O.B.: 12/66
o Chief Compliance
Officer since
January 2011

-----------------------
(3) 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 30

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

FIRST TRUST MORTGAGE INCOME FUND
OCTOBER 31, 2012 (UNAUDITED)

First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.

Sources of Information

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

o Information we receive from you and 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 under 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, proxy
services, solicitors 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 within First Trust.

PRIVACY ONLINE

We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when youvisit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.

CONFIDENTIALITY AND SECURITY

With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).

Page 31

This Page Left Blank Intentionally.

FIRST TRUST

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

INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
3 World Financial Center
200 Vesey Street, 10th Floor
New York, NY 10281

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

CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286

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

[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 $40,000 for the fiscal year ended October 31, 2011 and $42,000
for the fiscal year ended October 31, 2012.

(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, 2011 and $0 for the fiscal year ended October 31, 2012.

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 $3,000 for the fiscal year
ended October 31, 2011 and $0 for the fiscal year ended October 31, 2012.

(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, 2011 and $0 for the fiscal year
ended October 31, 2012. 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, 2010 and $0 for the fiscal year ended
October 31, 2011.

(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, 2011 and $0 for the fiscal year ended October 31, 2012.

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, 2011 and $0 for the fiscal year ended October 31, 2012.

(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, 2011 were
$5,200 for the Registrant and $3,720 for the Registrant's investment
adviser and for the Registrant's fiscal year ended October 31, 2012 were
$0 for the Registrant and $6,600 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.

BROOKFIELD INVESTMENT MANAGEMENT INC.
PORTFOLIO PROXY VOTING POLICIES AND PROCEDURES
JULY 2010

BROOKFIELD INVESTMENT MANAGEMENT INC. PORTFOLIO PROXY VOTING
POLICIES AND PROCEDURES JULY 2010

The Portfolio Proxy Voting Policies and Procedures (the "Policies and
Procedures") set forth the proxy voting policies, procedures and guidelines to
be followed by Brookfield Investment Management Inc. and its subsidiaries
(collectively, "BIM") in voting portfolio proxies relating to securities that
are held in the portfolios of the investment companies or other clients
("Clients") for which BIM has been delegated such proxy voting authority.

A. PROXY VOTING COMMITTEE

BIM's internal proxy voting committee (the "Committee") is responsible for
overseeing the proxy voting process and ensuring that BIM meets its regulatory
and corporate governance obligations in voting of portfolio proxies.

The Committee shall oversee the proxy voting agent's compliance with these
Policies and Procedures, including any deviations by the proxy voting agent from
the proxy voting guidelines ("Guidelines").

B. ADMINISTRATION AND VOTING OF PORTFOLIO PROXIES

1. FIDUCIARY DUTY AND OBJECTIVE

As an investment adviser that has been granted the authority to vote on
portfolio proxies, BIM owes a fiduciary duty to its Clients to monitor corporate
events and to vote portfolio proxies consistent with the best interests of its
Clients. In this regard, BIM seeks to ensure that all votes are free from
unwarranted and inappropriate influences. Accordingly, BIM generally votes
portfolio proxies in a uniform manner for its Clients and in accordance with
these Policies and Procedures and the Guidelines.

In meeting its fiduciary duty, BIM generally view proxy voting as a way to
enhance the value of the company's stock held by the Clients. Similarly, when
voting on matters for which the Guidelines dictate a vote be decided on a
case-by-case basis, BIM's primary consideration is the economic interests its
Clients.

2. PROXY VOTING AGENT

BIM may retain an independent third party proxy voting agent to assist BIM in
its proxy voting responsibilities in accordance with these Policies and
Procedures and in particular, with the Guidelines. As discussed above, the
Committee is responsible for monitoring the proxy voting agent.

In general, BIM may consider the proxy voting agent's research and analysis as
part of BIM's own review of a proxy proposal in which the Guidelines recommend
that the vote be considered on a case-by-case basis. BIM bears ultimate
responsibility for how portfolio proxies are voted. Unless instructed otherwise
by BIM, the proxy voting agent, when retained, will vote each

portfolio proxy in accordance with the Guidelines. The proxy voting agent also
will assist BIM in maintaining records of BIM's portfolio proxy votes, including
the appropriate records necessary for registered investment companies to meet
their regulatory obligations regarding the annual filing of proxy voting records
on Form N-PX with the Securities and Exchange Commission ("SEC").

3. MATERIAL CONFLICTS OF INTEREST

BIM votes portfolio proxies without regard to any other business relationship
between BIM and the company to which the portfolio proxy relates. To this end,
BIM must identify material conflicts of interest that may arise between a Client
and BIM, such as the following relationships:

o BIM provides significant investment advisory or other services to a
portfolio company or its affiliates (the "Company") whose management
is soliciting proxies or BIM is seeking to provide such services;

o BIM serves as an investment adviser to the pension or other
investment account of the Company or BIM is seeking to serve in that
capacity; or

o BIM and the Company have a lending or other financial-related
relationship.

In each of these situations, voting against the Company management's
recommendation may cause BIM a loss of revenue or other benefit.

BIM generally seeks to avoid such material conflicts of interest by maintaining
separate investment decision-making and proxy voting decision-making processes.
To further minimize possible conflicts of interest, BIM and the Committee employ
the following procedures, as long as BIM determines that the course of action is
consistent with the best interests of the Clients:

o If the proposal that gives rise to a material conflict is
specifically addressed in the Guidelines, BIM will vote the
portfolio proxy in accordance with the Guidelines, provided that the
Guidelines do not provide discretion to BIM on how to vote on the
matter (i.e., case-by-case); or

o If the previous procedure does not provide an appropriate voting
recommendation, BIM may retain an independent fiduciary for advice
on how to vote the proposal or the Committee may direct BIM to
abstain from voting because voting on the particular proposal is
impracticable and/or is outweighed by the cost of voting.

4. CERTAIN FOREIGN SECURITIES

Portfolio proxies relating to foreign securities held by Clients are subject to
these Policies and Procedures. In certain foreign jurisdictions, however, the
voting of portfolio proxies can result in additional restrictions that have an
economic impact to the security, such as "share-blocking." If BIM votes on the
portfolio proxy, share-blocking may prevent BIM from selling the shares of the
foreign security for a period of time. In determining whether to vote portfolio
proxies subject to such restrictions, BIM, in consultation with the Committee,
considers whether the vote, either in

itself or together with the votes of other shareholders, is expected to affect
the value of the security that outweighs the cost of voting. If BIM votes on a
portfolio proxy and during the "share-blocking period," BIM would like to sell
the affected foreign security, BIM, in consultation with the Committee, will
attempt to recall the shares (as allowable within the market time-frame and
practices).

C. FUND BOARD REPORTING AND RECORDKEEPING

BIM will prepare periodic reports for submission to the Boards of Directors of
its affiliated funds (the "Helios Funds") describing:

o any issues arising under these Policies and Procedures since the
last report to the Helios Funds' Boards of Directors and the
resolution of such issues, including but not limited to, information
about conflicts of interest not addressed in the Policies and
Procedures; and

o any proxy votes taken by BIM on behalf of the Helios Funds since the
last report to the Helios Funds' Boards of Directors that deviated
from these Policies and Procedures, with reasons for any such
deviations.

In addition, no less frequently than annually, BIM will provide the Boards of
Directors of the Helios Funds with a written report of any recommended changes
based upon BIM's experience under these Policies and Procedures, evolving
industry practices and developments in the applicable laws or regulations.

BIM will maintain all records that are required under, and in accordance with,
the Investment Company Act of 1940, as amended, and the Investment Advisers Act
of 1940, which include, but not limited to:

o these Policies and Procedures, as amended from time to time;

o records of votes cast with respect to portfolio proxies, reflecting
the information required to be included in Form N-PX;

o records of written client requests for proxy voting information and
any written responses of BIM to such requests; and

o any written materials prepared by BIM that were material to making a
decision in how to vote, or that memorialized the basis for the
decision.

D. AMENDMENTS TO THESE PROCEDURES

The Committee shall periodically review and update these Policies and Procedures
as necessary. Any amendments to these Procedures and Policies (including the
Guidelines) shall be provided to the Board of Directors of BIM and to the Boards
of Directors of the Helios Funds for review and approval.

E. PROXY VOTING GUIDELINES

Guidelines are available upon request.

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, 2013.

Anthony Breaks, CFA, Director
Mr. Breaks is a Portfolio Manager on the Securitized Products Investments team
and has worked for the firm since May 2002. Mr. Breaks is one of four team
leaders in mortgage-backed securities ("MBS") and asset-backed securities
("ABS") and is a member of the team's securities analysis committee. In his
role, Mr. Breaks is one of the team's portfolio managers. Mr. Breaks also has
managed securitized product vehicles, such as SIV, ABCP and CDOs for Brookfield
and has experience in insurance company asset management. Mr. Breaks earned a
Bachelor of Science degree in Electrical Engineering from the Massachusetts
Institute of Technology. He holds the Chartered Financial Analyst designation.

Chris Wu , Director
Mr. Wu is a Portfolio Manager on the Securitized Products Investment Team
focusing on agency MBS. He has worked for the firm since March 2007 and is
responsible for the firm's agency MBS exposures. He develops quantitative tools
to formulate research and develop trading strategies for agency MBS exposures.
Mr. Wu holds an MBA from New York University as well as a Master of Science
degree in Computer Science from University of Saskatchewan. He also earned a
Bachelor of Economics from Huazhong University of Science and Technology in
China.

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

Information provided as of October 31, 2012.

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

1. Anthony Breaks Registered Investment Companies: 1 $27M 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $0 0 $ 0
---------------------------------
Other Accounts: 2 $446M 0 $ 0
---------------

2. Chris Wu Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 0 $ 0 0 $ 0
---------------

PORTFOLIO MANAGER POTENTIAL CONFLICTS OF INTERESTS

Potential conflicts of interest may arise when a fund's portfolio manager has
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Fund. These
potential conflicts may include:

Allocation of Limited Time and Attention. A portfolio manager who is responsible
for managing multiple funds and/or accounts may devote unequal time and
attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.

Allocation of Limited Investment Opportunities. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a client's ability to take full advantage of
the investment opportunity.

Pursuit of Differing Strategies. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds
and/or accounts for which he or she exercises investment responsibility, or may
decide that certain of the funds and/or accounts should take differing positions
with respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.

Variation in Compensation. A conflict of interest may arise where the financial
or other benefits available to the portfolio manager differ among the funds
and/or accounts that he or she manages. If the structure of the investment
adviser's management fee and/or the portfolio manager's compensation differs
among funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain or raise assets under
management or to enhance the portfolio manager's performance record or to derive
other rewards, financial or otherwise, could influence the portfolio manager to
lend preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.

Related Business Opportunities. The investment adviser or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of
funds or accounts than for others. In such cases, a portfolio manager may
benefit, either directly or indirectly, by devoting disproportionate attention
to the management of fund and/or accounts that provide greater overall returns
to the investment manager and its affiliates.

Brookfield Investment Management Inc. ("Brookfield") has adopted compliance
policies and procedures that are designed to address the various conflicts of
interest that may arise for it and the individuals that it employs. For example,
Brookfield seeks to minimize the effects of competing interests for the time and
attention of portfolio managers by assigning portfolio managers to manage funds
and accounts that share a similar investment style. Brookfield also has adopted
trade allocation procedures that are designed to facilitate the fair allocation
of limited investment opportunities among multiple funds and accounts.

(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS

PORTFOLIO MANAGER COMPENSATION

Information provided as of October 31, 2012.

The Fund's portfolio managers are compensated by the sub-advisor. Brookfield
compensates its portfolio managers based on the scale and complexity of their
portfolio responsibilities, the total return performance of funds and accounts
managed by the portfolio manager on an absolute basis and versus appropriate
peer groups of similar size and strategy, as well as the management skills
displayed in managing their subordinates and the teamwork displayed in working
with other members of the firm. Since the portfolio managers are responsible for
multiple funds and accounts, investment performance is evaluated on an aggregate
basis almost equally weighted among performance, management and teamwork. Base
compensation for Brookfield's portfolio managers varies in line with a portfolio
manager's seniority and position. The compensation of portfolio managers with
other job responsibilities (such as acting as an executive officer of Brookfield
or supervising various departments) includes consideration of the scope of such
responsibilities and the portfolio manager's performance in meeting them.
Brookfield seeks to compensate portfolio managers commensurate with their
responsibilities and performance, and competitive with other firms within the
investment management industry. Salaries, bonuses and stock-based compensation
also are influenced by the operating performance of Brookfield and its parent
company, Brookfield Asset Management Inc. While the salaries of Brookfield's
portfolio managers are comparatively fixed, cash bonuses and stock-based
compensation may fluctuate significantly from year to year. Bonuses are
determined on a discretionary basis by the senior executives of Brookfield and
measured by individual and team-oriented performance guidelines. The amount of
the Long Term Incentive Plan (LTIP) is approved by the board of directors
annually and there is a rolling vesting schedule to aid in retention of key
people. A key component of this program is achievement of client objectives in
order to properly align interests with our clients. Further, the incentive
compensation of all investment personnel who work on each strategy is directly
tied to the relative performance of the strategy and its clients.

(4) DISCLOSURE OF SECURITIES OWNERSHIP

Information provided as of October 31, 2012

DOLLAR RANGE OF FUND
SHARES BENEFICIALLY
NAME OWNED

Anthony Breaks $ 0
Chris Wu $ 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 Mortgage Income Fund
-----------------------------------------------

By (Signature and Title)* /s/ Mark R. Bradley
-----------------------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)

Date December 24, 2012
----------------------

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.

By (Signature and Title)* /s/ Mark R. Bradley
-----------------------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)

Date December 24, 2012
----------------------

By (Signature and Title)* /s/ James M. Dykas
-----------------------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)

Date December 24, 2012
----------------------

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